Assessing the Goal of Sports Products, Inc.
a. What should the management of Sports Products, Inc., pursue as its overriding goal? Why?
Answer: Moyer, McGuigan, Rao, & Kretlow (2012, p. 6) had emphasized that the main objective of any organization must be to increase/maximize the wealth of its major stakeholders- mainly the investors who had invested their money in the firm. This improvement in their wealth will be reflected in current price (market price) of the organization’s stock. The price of the share would be a sign of size, risk and timing of the cash that would be generated over a certain time according to shareholders anticipations. Therefore, Moyer et al. (2012) had suggested that financial managers must make such decisions that will bring an increase in the organization’s expected cash flow that would ultimately result in accomplishing the main goal of increase in shareholders’ wealth.
b. Does the firm appear to have an agency problem? Explain.
Answer: Yes. As in the case “Assessing the Goal of Sports Products, Inc., it has been mentioned that there had been a decrease of approximately $2 in the share price of Sports Products, Inc. during the past three quarters. But on the other hand, the revenues were increasing. Cash dividend is what the investors would receive as a return on their investment but they had not been given any dividend for the last twenty years. Therefore, the firm appears to have an agency problem. The salary that executives got did not link at all to the market price of the company’s stock, but it was linked with the revenues directly. Another aspect is that environmental issues (it has been mentioned in the case that certain pollutants were dumped in the adjacent stream) were clearly neglected by the company and the management was entirely focusing on just maximization of revenues and therefore the state and federal environmental officials had sued it for environmental degradation.
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?
Answer: the company’s approach to control pollution was entirely unethical. Not only the company had violated environmental laws but this action ultimately had lead to extra burden of expense. On the other hand, if the company had incurred the expense to control the pollution, it would have avoided the legal action and the amount sued, it would have a good image and credibility in the eyes of society and its users. Therefore, the firm should develop a firm ethics policy and implement standards of moral conduct for all the employees of the firm.
d- Does the firm appear to have an effective corporate governance structure? Explain any shortcomings.
Answer: Certainly not. Corporate Governance is s framework that controls, manages and directs an organization. This framework explains what would be the responsibilities and jobs of all the members of a corporation. These members would include both the internal and external stakeholders such as board of directors, employees, managers, shareholders and others. This framework would also define the laws and regulations for making strategic or day to day decisions. As I have explained the framework of corporate governance, unfortunately this system had not been applied by the Sports Products, Inc. Therefore, the weakness was that the firm had not defined the responsibilities and rights of the executives and the workers. Also the BoD (Board of directors) was not running the company in a way aligned to the established mission, objectives, and policies. Another weakness was that the management actions were not closely monitored which led to that environmental issue (it has been mentioned in the case that certain pollutants were dumped in the adjacent stream) and a strict action was taken by state and federal authorities.
e. On the basis of the information provided, what specific recommendations would you offer the firm?
Answer: One most important recommendation would be that there must be a bonding between the employees and the management of the company as both are the most important resource of the firm. Another recommendation would be to motivate its employees through compensation plans and link increase in compensation with the work and target achieved. One way of doing this could be to issue bonus shares to employees so they would feel valued and a member (who has a stake in the firm). And if both decisions are implemented together, employees would be definitely motivated to perform better and achieve their individual targets and ultimately the revenues and share price of the firm will increase. Apart from focusing on employees, the company must take care of the environment too and follow the rules and regulations. This act will increase the credibility of the firm in the eyes of its consumers and society and management will get more respect from the workers. Lastly, a firm ethics policy must be established by the management that would be posted on main notice boards and will be signed and read by every employee including the executives.
References
Gitman, L. J. (2011). Principles of Managerial Finance (13rd ed.).
Moyer, R. C., McGuigan, J. R., Rao, R. P., & Kretlow, W. J. (2012). The Role and Objective of Financial Management. In Contemporary Financial Management (12th ed., p. 6). South Western, USA: Cengage Learning.
