Assessing the Goal of Sports Products, Inc.

Loren Seguara and Dale Johnson both work for Sports Products, Inc., a major producer of boating equipment and accessories. Loren works as a clerical assistant in the Accounting Department, and Dale works as a packager in the Shipping Department. During their lunch break one day, they began talking about the company. Dale complained that he had always worked hard trying not to waste packing materials and efficiently and cost-effectively performing his job. In spite of his efforts and those of his co-workers in the department, the firms stock price had declined nearly $2 per share over the past 9 months. Loren indicated that she shared Dales frustration, particularly because the firms profits had been rising. Neither could understand why the firms stock price was falling as profits rose. Loren indicated that she had seen documents describing the firms profit sharing plan under which all managers were partially compensated on the basis of the firms profits. She suggested that maybe it was profit that was important to management, because it directly affected their pay. Dale said, That doesnt make sense, because the stockholders own the firm. Shouldnt management do whats best for stockholders? Somethings wrong! Loren responded, Well, maybe that explains why the company hasnt concerned itself with the stock price. Look, the only profits that stockholders receive are in the form of cash dividends, and this firm has never paid dividends during its 20-year history. We as stockholders therefore dont directly benefit from profits. The only way we benefit is for the stock price to rise. Dale chimed in, That probably explains why the firm is being sued by state and federal environmental officials for dumping pollutants in the adjacent stream. Why spend money for pollution control? It increases costs, lowers profits, and therefore lowers managements earnings! Loren and Dale realized that the lunch break had ended and they must quickly return to work. Before leaving, they decided to meet the next day to continue their discussion. a. On the basis of the above information, why does profit maximization fail?

b. Can you explain Loren indicated that she shared Dales frustration, particularly because the firms profits had been rising. Neither could understand why the firms stock price was falling as profits rose.?