Sports Products Inc.
Question 1: The first and foremost goal of the management of Sports Products Inc. should be to maximize shareholders’ value because the goal of every firm, and therefore of all employees and mangers, is to maximize the wealth of the owners for whom it is being operated. The share price of the stock is the measure of wealth of the corporate owners and it is based on the cash flows (timing of returns), their magnitude and their risk.
Even though the management of Sports Products Inc. has every right to broaden its focus to include the interests of stakeholders as well as shareholders but this view should not alter its primary goal of maximizing shareholders’ value.
Question 2: Looking at the evidence provided, an agency problem indeed exists in Sports Products Inc. Managers seem unbothered about the falling share price and only interested in increasing the profits of the firm because all managers are partially compensated on the basis of the firm’s profits. The managers of the company have also never sanctioned payment of dividends because it shrinks the profits of the company. Thus, any rise in company profits only benefits the managers of the company.
Question 3: The approach of Sports Products Inc. towards pollution control is very unethical because
1. The actions of the firm do not conform to accepted moral standards.
2. Alternative courses of action that are less likely to cause actual or potential harm do exist and the company is not implementing them in order to save money.
Incurring the expense to control pollution might be in the best interests of Sports Products Inc’s owners despite its negative effect on profits because businesses that uphold high moral and ethical standards actually strengthen their competitive positions.
Question 4: On the basis of the evidence provided in the case, the corporate governance structure seems to be totally ineffective because a corporate governance structure ensures against dishonest acts of management and provides financial incentives to the managers to maximize share price[Law09]. But at Sports Products Inc. managers are not fulfilling their duties towards shareholders. The share price has fallen by nearly $2 per share over the past 9 months and the managers are still not doing anything to concern themselves with the price of the company’s stock.
The managers are also guilty of engaging in the unethical act of polluting the environment which is clear indication that the corporate governance structure of Sports Products Inc has proven totally ineffective.
Question 5: Sports Products Inc. should:
Look to restructure its corporate governance structure to make it more effective and to ensure that
The primary aim of the managers is to maximize shareholders’ wealth.
Managers stop abusing the environment and make sure the company does all it can to contribute to environment protection.
Introduce incentive plans to minimize agency costs. Incentive plans are effective because they tie management compensation to share price[Law09]. Such incentives might include:
Providing stock options to managers.
Alternately, the firm can also introduce performance plans. They might include:
Granting performance shares to managers as reward for meeting stated performance goals.[Law09]
Payment of cash bonuses as reward for achievement of EPS and other growth ratio related performance goals.[Law09]
Lawrence J. Gitman. The Role and Environment of Managerial Finance. Prentice Hall, Inc. 2009.
Sports Products Inc.