Case Analysis: Assessing the Goal of Sports Products, Inc. Submitted by: Group 1 Acebedo, Gladys Bandiola, Penuel Bautista, Jherwienne Cruz, Abbie Inojales, Geraldine Miguel, Gen Pili, Lian Reyes, Alyssa Susaya, Jennylyn Tondo, Elma Submitted to: Prof. Jenely P. Sabio-Almirol December 5, 2011 a. What should the management of Sports Products Inc. pursue as its overriding goal? Why? The management of Sports Products Inc. should pursue maximization of shareholders’ wealth as its paramount goal. As far as we know, the stockholders are the owners of the firm and the ones bearing the most risk in running it.
In line with this, the board of directors and/or the management is elected to take charge of the resources of the aforementioned party. As you see, it is plausible for the shareholders to benefit from the firm – the only way they gain is for the stock price to rise. As per the case, the firm has never paid dividends during its 20-year history. Furthermore, the stock price had declined nearly $2 per share over the past 9 months which doesn’t favor the shareholders at all. Our team deems it necessary to modify the company’s goal. b. Does the firm appear to have an agency problem? Explain.
The firm appears to have an agency problem in this case. The conflict of the contractual relationship between the shareholders and the board of directors is so obvious that even the subordinates began to question the decision-making ability of the financial managers. Manipulations such as the vile treatment to the environment and the so-called pollution control can hardly explain how profit rise and stock price decline at the same period. It appears that [the nature of the agency contract cannot fully prevent the parties from pursuing self-interest upon the expense of the other. ] [Shareholders’ preferences are to maximize the value of the firm’s equity; Managers prefer to engage in activities that maximize their own return. 2] As of current result, the managers’ interest seems to overrule. Therefore neglecting what they are bound to do – to perform service. [1] c. Evaluate the firm’s approach to pollution control. Does it seem to be ethical? Why might incurring the expense to control pollution be in the best interests of the firm’s owners despite its negative effect on profits?
With limited information on hand, the team can hardly evaluate the firm’s approach to pollution control. Despite of that, the firm’s desperate measure to save what was left for the community doesn’t appear to be voluntary at all. It actually takes legal actions before the business entity comply with the law. Nevertheless, it seems that they were spending much resource that naturally affects their profitability. The company’s manner doesn’t look to be ethical. Intended dumping pollutants aside, it violated the law, Presidential Decree 979: Marine Pollution Decree of 1976 [3] in particular.
Disposal of wastes that creates a hazard on human health and marine life is the subject of the mentioned decree which is being debased by the firm. Moreover, a life being at stake is lawlessness after all. A business cannot claim to be ethical if it ignores environmental standards. Incurring the expense to control pollution is in the best interests of the firm’s owners because it guarantees the firm’s long term profits and stock price aggressiveness. It is clear that the shareholders are the risk-averter in this case.
They do not seek the government’s and the environmental officials’ attention for it cause very high risk to their business. Being watched by the authorities is the last thing that a business entity would want for it means so much more than the taxes, court cases, other legal appointments and invitations. It means that the life of the business is at stake. Considering this, if the firm doesn’t take the necessary actions there would be too much risk for an investor to accept and the business to succeed. All of these laid out, compliance to the law and incurring costs is necessary to free the firm from such threat.
Such decisions may affect the company’s profitability today but judging from the fact that high risk means low stock price and vice-versa, high return waits in the future. [2] d. Does the firm appear to have an effective corporate governance structure? Explain any shortcomings. The firm doesn’t appear to have an effective corporate governance structure. An effective corporate governance regime includes prosecution for individuals who conduct unethical or illegal acts in the name of the enterprise [4]. Why so that there were no discussions in regards to the person/s responsible for dumping pollutants in the adjacent stream?
Wasn’t the disposal unethical enough to violate the name of the enterprise? The management’s failure to recognize that such action ruins the reputation of the company is ineffective itself. The most important shortcoming of the firm is the management or the managers who failed to amend the paramount goal of the company. Yes, it is reasonable to focus on profit maximization for the first few years of the business but keeping that as overruling per se for 20years isn’t healthy at all. The shareholders are the true owners of the business and the ones bearing the most risks, let alone being the principals who are the residual claimants.
Maximizing shareholders’ wealth should always be one of the top priorities for not only their resources run the business but the means concerning the stock price benefit the business in the long-run. e. On the basis of the information provided, what specific recommendations would you offer the firm? Our team suggests modification of the company’s overriding goal: Maximization of shareholders’ wealth. The owners deserve to benefit from the firm. It is true that the management should do what’s best for the stockholders – that’s why they were hired.
That is the explanation behind the agency relationships. In addition, corporate problems are primarily rooted from the unsatisfied principals (owners) or agents (managers). There would have been no complains if the shareholders are receiving dividends, might as well satisfied with the progress of the stock price. Speaking of unsatisfied stakeholder/s, the firm should develop a new system that aims to compensate employees and managers proportional to their performance. This is a good try to increase productivity and promote equality in the firm.
It is might as well good to tie this system to the share price to concern the management of its current condition. [3] On top of it all, the company should promote social responsibility. The environment plays a vital role to the business life. It does not only indicate its existence but also its profitability. As a matter of fact, that is the purpose of the environmental awareness projects of some businesses. The firm should have seen that today’s pollution control costs will result to long term profit. Aside from that, the business might as well succeed if it is not being sued by environmental officials. –End–
