For Business Ethics Class. Need a Case Study Ethics Case, "Sunbeam Corporation Chainsaw Al." The story Arthur Andersen failed stop "Chainsaw Al" Dunlap hoodwinked BOD intimidated accounting staff, turn manipulated financial reports.
Sunbeam Corporation and Chainsaw Al
Sunbeam Corporation while on the verge of bankruptcy, appointed Albert "Chainsaw Al" Dunlap to steer them to success. Chainsaw Al had been successful in turning around other financially troubled companies which was why he was given the job as the CEO and Chair of Sunbeam's board. However, Chainsaw Al engaged in illegal and unethical accounting practice which gave a false representation of the company's turnaround. Investors sued the company for this and when other board members discovered that Dunlap was actively involved in these unethical practices, he was let go. This paper looks at the problems that arose as a result of Dunlap's behavior and an evaluation of alternative solutions. It also gives recommendations for publicly traded companies to follow.
Sunbeam Corporation had been successful for years but after being acquired by Allegheny International in 1981, it was forced into bankruptcy 7 years later in 1988. Two years later, in 1990, three investors purchased Sunbeam from Allegheny International and changed the name to Sunbeam-Oster Company but after acquiring Rubbermaid's outdoor furniture division, it changed the name back to Sunbeam Corporation in 1995. Albert "Chainsaw Al" Dunlap was hired as the CEO and chairman of the board in 1996 after the investors had tried to sell the company to no avail. Dunlap was hired to try to save Sunbeam from continuing in the trend of extensive layoffs and huge cuts in their operating expenditure Daniels Fund Ethics Initiative, 2010.
He got the nickname "Chainsaw Al" from his reputation as one of the toughest executives in the country. He eliminated thousands of jobs while helping financially troubled companies to restructure. He reckoned that by making extreme cuts in operation expenditure, it was possible to streamline a business and make it profitable Dunlap & Aldeman, 1997()
On the day Al Dunlap was named as the CEO, the stock price of Sunbeam Corporation increased from $12.12 to $18.58. It continued to increase over the years till it reached a record high of $52 in March 1998. Although Dunlap's reputation had helped to increase the bottom-line of the company greatly, he knew well that this was not enough to sustain the growth. He thus implemented his four strategies. The first was to get the right management team where he changed the management team only retaining one senior executive. His new management team constituted of 25 people who he had worked with at other companies. He believed that these people shared in his vision and were capable of helping the company restructure. The second was to cut back to the lowest possible costs. Dunlap lay off close to 1,000 employees and reduced the number of SKUs from 12,000 to 1,500. This helped him close a number of factories and warehouses thus helping the company save costs. The third strategy was to focus on the core business. Here, Dunlap defined the core business of Sunbeam as the electrical appliances. He also identified five categories around the core business. Any other products that did not fit the core business were eliminated. The last strategy was to get a real strategy. Here, Dunlap was involved in product differentiation, moving into new global markets and market entry Dunlap & Aldeman, 1997()
Under the management of Dunlap and his team, Sunbeam was able to purchase three consumer products companies: Coleman which dealt with camping gear, Signature Brands which was known for Mr. Coffee and First Alert which dealt with smoke and gas alarms. Soon after these purchases, rumors began surfacing that the purchase of these three companies was made to disguise losses made through write-offs. Andrew Shore who was an analyst for Paine Webber, Inc. began to notice irregularities in Sunbeam's financial statements and raised alarm. He noted that sales figures did not represent industry trends and the company was using the bill-and-hold strategy to shift sales from future quarters into the current quarter. In light of this information, in April of 1998, shareholders of Sunbeam filed a lawsuit against the company and Albert Dunlap for misrepresentation and omitting of material information in their financial reports Byrne, 1998()
Chainsaw Al attempted to regain investor confidence by reassuring them of increased earnings in the next quarter despite the $44 million loss the company had announced. He also announced plans to lay off a further 5,000 employees. However, this did not manage to regain investor confidence. When Dunlap was asked to project the company's second quarter earnings, he stated that sales were soft and that he wanted a settlement agreement with the company's board. This led the board members to become suspicious of Dunlap's activities. They began to review Dunlap's practices behind his back Daniels Fund Ethics Initiative, 2010()
The board members were able to reveal that the second-quarter sales were far below the forecast that Dunlap had given to shareholders. The actual numbers showed that the company would incur a loss of close to $60 million. The comptroller of Sunbeam also revealed that Dunlap insisted that accounts should be pushed to the limit and not to be done in accordance to generally accepted accounting principles (GAAP). These unethical accounting practices at Sunbeam led to the company's income being inflated by close to $60 million in 1997 which gave shareholders and investors a false picture of the company's turnaround. Dunlap had reported net income of $109.4 million while the true value was $38.3 million Schifrin, 1998()
Dunlap was fired from Sunbeam but he was paid $5.5 million in unpaid salary, $58,000 worth of accrued vacation, $150,000 in benefits and given stock options at the price of $7 per share. He also received $1.4 million being compensation for defending himself in lawsuits that alleged securities fraud. However, he had to pay $500,000 to the SEC to settle charges of defrauding investors, and $15 million to settle the lawsuit filed by Sunbeam shareholders Roland, Matthewson, & Schmidt, 2002()
The problems that faced Sunbeam Corporation were as a result of the company and its management team acting unethically and defying GAAPs. Though the management team was intimidated by Dunlap into agreeing with his queer motives, this created huge problems that later led to the company filing for insolvency as a result of decreased shareholder confidence as well as the company's inability to pay its debt. Dunlap also himself suffered greatly since he had to agree to never take up any position in a public corporation as well as paying huge fines for these inappropriate behaviors. He was named as the sixth worst CEO of all time by Conde Nast portfolio.
Arthur Andersen LLP who were the company's external auditors were also part of the problem since they insisted and assured the board of directors and shareholders that Sunbeam's 1997 financial statements were in line with the GAAP while they were well aware that the figures had been doctored.
Dunlap had encouraged the company to use a bill-and-hold strategy with their retailers. This is where retailers are given huge discounts thus allowing them to purchase products but instead the products are held in third-party warehouses while scheduling delivery for later dates. Therefore Sunbeam was able to report higher revenues as accounts receivable while the actual sales and shipment to retails were months ahead. Though this practice was not illegal and follows the GAAP of financial reporting, Dunlap did not disclose this to investors which led to the action lawsuit filed by shareholders.
Evaluation of alternative solutions and recommendations
Dunlap and his management team should have focuses on giving investors the real image of Sunbeam's turnaround rather than falsifying this by…