Assessing the Goal of Sports Products, Inc.

Loren Seguara and Dale Johnson are employees at Sports Products Inc. which is a major producer of boating equipment and accessories for the last 20 years. Loren is a clerical assistant in the company’s accounting department and Dale is a packager in the company’s shipping department. While having lunch one day Dale and Loren discussed their concerns over the company’s declining stock prices even though profits have been rising. Dale pointed out that the packaging department works hard to be efficient and cost-effective, despite their efforts stock price dropped by $2 per share in a 9 month period.

Loren added that she has seen documents that describe the company’s profit sharing plan and the only people benefiting from increased profits were the managers and that is not right considering the company has never paid-out dividends to its stockholders. That makes sense on why Sports Products Inc. is getting sued by the state and federal environmental officials. They are saving money on pollution control by dumping pollutants in the nearby stream in an effort to keep profits up. With all of these facts coming out, questions on the company’s priorities and values have come up.

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The first question in the Sports Products, Inc. case is: What should the management of Sports Products, Inc. , pursue as its overriding goal? It is apparent to investors due to the decline in stock prices even though experiencing an increase in profits that Sports Products, Inc. is not focusing on maximizing shareholders wealth. Instead their focus on profits to the benefits of managers through performance bonuses has led them to make unethical decisions that have given them a reputation of not being environmentally friendly and has scared off potential investors.

If the company is not managed properly to maximize the shareholders wealth, investors will have no desire to accept the risks for that business to succeed. Investors will not risk investing into a company that is not focused on maximizing the shareholders wealth and that has contributed to the decline in overall stock prices. By focusing on increasing share price of the company will attract investor and contribute to the company’s future cash flows and over-all profitability of the company. Does the firm appear to have an agency problem? Yes the firm does have an agency problem.

The agency relationship is currently between stockholders and management and they have a conflict of interest. The managers are running the day-to-day operations of the company and making decisions in their best interest by saving money on pollution control in an effort to increase profits that has no benefit to shareholder and only benefits the managers. Instead the focus should be on paying out dividends which have never been paid out. The result of these actions is a decline in stock prices by $2 per share over the last nine months. Is the firm’s approach to pollution control ethical?

Yes, the company is making deliberate decision to increase profits at the expense of the stock prices and the environment. Just for arguments sake let’s assume that they were unaware that they were polluting the local water source, upon being sued by the state and federal environmental officials they should have taken accountability for their actions by making a public statement ensuring the local people that they were taking the necessary actions to get it cleaned up and taking the necessary steps to make sure that it never happens again.

Their actions suggest that they were only looking out for their best interest at the expense of the shareholders, environment and the people living in the local vicinity and this is morally unethical. By incurring the expense to control pollution would create goodwill towards the company by being a good corporate citizen and would have favorable long-term results even if it has an immediate negative effect on profits. Does the firm appear to have an effective corporate governance structure? The company does not appear to have an effective corporate governance structure.

According to BusinessDictionary. com “the corporate governance framework consists of (1) explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards, (2) procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and (3) procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances” (Corporate Governance, 2012).

It does not appear that there are any explicit or implicit contracts between management and the stakeholders outlining responsibilities, rights, or distribution of profits and there does not seem to be any checks and balances, or procedures for reconciling conflicts. Conclusion

In conclusion, I would recommend that the company implement checks and balances through a corporate governance structure that outlines responsibilities, shareholders rights, and procedures for reconciling conflicts, and start paying out dividends. In addition, I would recommend that the company start focusing on being a good corporate citizen by being accountable to the environment and the community in which it does business.

References

Corporate Governance. (2012). Retrieved November 2012, from BusinessDictionary.com: http://www.businessdictionary.com/definition/corporate-governance.html

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