Text case study analysis and findings

Business

What should the management of Sports Products, Inc., pursue as its overriding goal? Why?

The management of Sports Products, Inc. should pursue paying out dividends and/or increasing share prices. The reason that they need to do this is because this company is a corporation that is owned by its stockholders. Control of the corporation is structured as a democracy. The stockholders vote periodically to elect members of the board directors and to decide other issues that need to be addressed. The board of directors is typically responsible for developing strategic goals and plans, setting general policy, guiding corporate affairs, approving major expenditures, and monitoring key officers and executives. Management needs to make sure that they are carrying out the directions of the board of directors while keeping the best interests of the shareholders in mind. This will allow Sport Products, Inc. To stay in business.

B. Does the firm appear to have an agency problem? Explain.

Yes, the firm appears to have an agency problem. Due to the fact that the company's profit sharing plan enables management to be partially compensated on the basis of the firm's profits, it appears that profitability is the main goal. The company seems to turn a profit each year, but does not seem to be able to get the stock prices to the point where dividends would be paid to the stockholders. The employees that work on the front lines always seem to work hard and cannot understand why things don't seem to going in the right direction. It appears that the management may not have their priorities in order and certainly do not have the stakeholders best interests at heart. The wants and needs of the stakeholders should always have the top spot on a company's agenda, since they are the owner's of the company and do ultimately call all the shots.

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 it negative effect on profits?

The firms approach to pollution control seems to be a lack of an approach all together. Instead of having a pollution control plan, they are contributing to the pollution problem by dumping pollutants into a nearby stream. Their approach to pollution control is definitely not ethical. This is probably why they are currently being sued by both state and federal environmental officials. It would be in the best interest of the company to expense out for pollution control. Even though spending money for pollution control would increase costs, lower profits and lower managements earnings, continuing to do things they way that they are will have these same consequences. Defending lawsuits and paying out any fines that are imposed will also increase costs, lower profits and lower management's earnings. So doing the right thing and being an ethical company would be the best choice for Sports Products, Inc. To make. Making the right choice will in the end will help the company to be more successful.

D. Does the firm appear to have an effective corporate governance structure?

No, it does not appear that Sports Products, Inc. has an effective governance structure. If the stakeholders are the owners of the corporation and have the power to elect a board of directors to run the company, then the company should be running in the shareholders' best interests. During the 20 years that this company has never paid out a dividend to its shareholders. This raises a large red flag that points to the mismanagement that is going on.

The profits of the company are increasing while the stock prices continue to fall. This leads one to question whether the stakeholders are being given correct information about the affairs of the company and its finances.

E. On the basis of the information provided, what specific recommendations would you offer the firm?

The firm should take an approach of balancing the company's profits with the best interests of the stakeholders in order for everyone to realize success. Their primary goal should be to maximize the wealth of the owners, in this case that would be the shareholders. Value at any time is reflected in the price of the stock. "Management should only act on those alternatives or opportunities that are expected to create value for the owners by increasing stock prices" (Gitman, 2006). In order to accomplish this goal management should consider the returns and the risk of each business decisions that they make and their combined effect on value. In this case Sports Products, Inc. does not seem to have a problem being profitable, but they have a problem running an ethical business, which affects the stock prices negatively. This in turn does not work towards the ultimate goal of the company which it to maximize the wealth of the owners.