Assessing the Goal of Sports Products, Inc.

Mona and Hamad both work for Sports Products, Inc., a major producer of boating equipment and accessories. Mona works as a clerical assistant in the accounting department, and Hamad works as a packager in the shipping department. During their lunch break one day, they began talking about the company. Hamad 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 firm's stock price had declined nearly US$2 per share over the past 9 months. Mona indicated that she shared Hamad's frustration, particularly because the firm's profits had been rising. Neither could understand why the firm's stock price was falling as profits rose.

Mona indicated that she had seen documents describing the firm's profit-sharing plan under which all managers were partially compensated on the basis of the firm's profits. She suggested that maybe it was profit that was important to management, because it directly affected their pay. Hamad said, "That doesn't make sense, because the stockholders own the firm. Shouldn't management do what's best for stockholders? Something's wrong!" Mona responded, "Well, maybe that explains why the company hasn't 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 stakeholders therefore do not directly benefit from profits. The only way we benefit is for the stock price to rise." Hamad chimed in, "That probably explains why the firm is being sued by national environmental officials for dumping pollutants in the adjacent stream. Why spend money for pollution control? It increases costs, lowers profits, and therefore lowers management's earnings!" Questions

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

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

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 its negative effect on profits?

d. Does the firm appear to have an effective corporate governance structure? Explain any shortcomings.

e. Based on the information provided, what specific recommendations would you offer the firm?