Stockholders vs. Stakeholders: HotFeet Asia Case Study

Introduction: The Asia HotFeet Dilemma

United States HotFeet (USHF) is an important manufacturer of footwear, with most of its manufacturing operations outsourced to various regions. One of its manufacturing subsidiaries is located in Sri Lanka, where it has successfully been operating for two decades, having generated incontestable benefits for the local economy, the well-being of the Sri Lankan population, and profits for the parent company.

During recent years, however, several factors have emerged to jeopardize the profitability of Asia HotFeet (AHF). Wage rates in the island country have increased significantly, raising the cost of operations and decreasing overall profitability. Interest rates have also increased, and the value of the U.S. dollar has weakened, further contributing to AHF's declining financial performance.

In this context, a question arises regarding the future of AHF. One option is to close down the facility, which would generate immediate capital through the sale of assets — capital that could then be used to satisfy shareholders and invest in new technologies for a more cost-effective location. The second option is to continue AHF's operations for another six months as a trial period, during which costs would be reduced to a maximum and the long-term profitability of the Asian subsidiary would be assessed. This paper recommends closing down the Asian subsidiary of HotFeet as the sound business decision.

Business vs. Ethical Decision Making

A central question in the AHF case is whether the decision to close the facility or maintain it for another six months constitutes a business decision or an ethical one. The business side of the problem is clear, and can be summarized through the following factors:

A straightforward review of these factors confirms that the continued operations of Asia HotFeet must be evaluated from a business standpoint. Nevertheless, some moral considerations introduce uncertainty into the decision. For instance, the Chief Operating Officer of AHF has dedicated the last twenty years of his life to that subsidiary. He has married a local resident and established a solid family foundation in Sri Lanka, as well as a strong position within the local community. The decision to close the facility would severely affect his entire life. While this is regrettable, it does not constitute sufficient reason to override a business decision.

Another potential ethical element is the impact that closing AHF would have on the local community and economy. Over the past two decades, living standards in Sri Lanka improved significantly, in part because of AHF and other foreign corporations that provided employment for local communities. Education levels rose and the use of child labor decreased. These societal gains are important and notable, and they are sensitive to corporate downsizing in the region. This matter could legitimately be characterized as an ethical dimension of the decision.

Nevertheless, from a theoretical standpoint, the parent company should employ the ethnocentric approach. This means that corporate decisions are made in accordance with the moral and commercial norms of the home country rather than the ethical considerations of the host country. In other words, the business laws of capitalism from the United States would govern the assessment of the Sri Lanka situation, and the decision would be made to best serve the interests of the corporation and its shareholders. As Helen Deresky notes in International Management: Managing Across Borders and Cultures, the ethnocentric orientation shapes how multinationals frame and resolve exactly these kinds of cross-border dilemmas.

Ultimately, the decision facing AHF is a business decision, made on the basis of the organization's profits and goals — not the socioeconomic climate of Sri Lanka, which has become unprofitable for the company. One may argue that most business decisions involve ethics, particularly those that directly affect the livelihoods of employees. However, USHF is not a charitable organization; it is a business organization attempting to make a profit. In that regard, the decision of whether to discontinue AHF immediately or to allow it to continue with serious workforce reductions is driven by business concerns and outcomes.

Although AHF has produced some value, it has not generated sufficient profits at a rate fast enough to satisfy its stockholders. Moreover, it is negatively impacting the profits of its parent company, USHF. USHF created AHF and located it in Sri Lanka because it believed doing so would further its own goals. If the opposite effect is being produced — if AHF's operations are actually draining USHF's profits — then shutting down this operation and restarting it elsewhere is simply good business. This decision is primarily about business and hardly involves ethics.

Shareholder Wealth and Corporate Ownership

The goal of shareholder wealth is central to the decision of whether to shut down AHF immediately or allow it to continue for another six months. From a purely business perspective, USHF is owned by its stockholders. They hold the individual shares that collectively grant them ownership of the company. As such, the impact of any business decision on them and their stocks is of primary importance. All parties involved in this decision must recognize that, in practice, they are working for the individuals who own stock in this company.

The shareholder primacy principle holds that corporate managers are obligated to act in the best financial interests of shareholders. Given AHF's deteriorating financial performance and its drag on USHF's overall profitability, continuing to fund the subsidiary works against this obligation. Closing AHF, recovering capital through asset sales, and redirecting investment toward a more cost-effective location directly serves the shareholders' interests and aligns with the fiduciary responsibilities of USHF's leadership.

Conclusion: Recommending Closure

Reducing wages by as much as 50 percent or more would surely impact employee morale and motivation in a negative way, which would further degrade the quality of labor and generate an inability among workers to support the company's long-term objectives of efficiency and profitability. The management of multinational corporations requires difficult choices when subsidiaries become financially unsustainable, and AHF represents precisely such a situation.

The final conclusion is that the Asia HotFeet subsidiary has outlived its profitable years and should be closed as soon as possible in order to minimize financial losses and redirect salvageable resources toward the greater benefit of United States HotFeet and the totality of its shareholders and stockholders.

References

Deresky, H. International Management: Managing Across Borders and Cultures, Text and Cases (8th ed.). Prentice Hall.