C11-64. Assessing Stock Buybacks, Corporate Accountability, and Managerial Ethics Liz Plummer, vice president and general counsel, chairs the Executive Compensation Committee for Sunlight Corporation. Four and one-half years ago, the compensation committee designed a performance bonus plan for top management that was approved by the board of directors. The plan provides an attractive bonus for top management if the firm's earnings per share grows each year over a five-year period. The plan is now in its fifth year; for the past four years, earnings per share has grown each year. Last year, earnings per share was $1.95 (net income was $7,800,000 and the weighted average common shares outstanding was 4,000,000). Sunlight Corporation has no preferred stock and has had 4,000,000 common shares outstanding for several years. Plummer has recently seen an estimate that Sunlight's net income this year will decrease about 5% from last year because of a slight recession in the economy. Plummer is disturbed by an item on the agenda for the board of directors meeting on June 20 and an accompanying note from Rob Lundy. Lundy is vice president and chief financial officer for Sunlight. Lundy is proposing to the board that Sunlight buy back 600,000 shares of its own common stock on July 1. Lundys explanation is that the firm's stock is undervalued now and that Sunlight has excess cash available. When the stock subsequently recovers in value, Lundy notes, Sunlight will reissue the shares and generate a nice increase in contributed capital. Lundy's note to Plummer merely states, Look forward to your support of my proposal at the board meeting. REQUIRED Why is Plummer disturbed by Lundy's proposal and note? What possible ethical problem does Plummer face when Lundy's proposal is up for a vote at the board meeting? C11-64. Assessing Stock Buybacks, Corporate Accountability, and Managerial Ethics Liz Plummer, vice president and general counsel, chairs the Executive Compensation Committee for Sunlight Corporation. Four and one-half years ago, the compensation committee designed a performance bonus plan for top management that was approved by the board of directors. The plan provides an attractive bonus for top management if the firm's earnings per share grows each year over a five-year period. The plan is now in its fifth year; for the past four years, earnings per share has grown each year. Last year, earnings per share was $1.95 (net income was $7,800,000 and the weighted average common shares outstanding was 4,000,000). Sunlight Corporation has no preferred stock and has had 4,000,000 common shares outstanding for several years. Plummer has recently seen an estimate that Sunlight's net income this year will decrease about 5% from last year because of a slight recession in the economy. Plummer is disturbed by an item on the agenda for the board of directors meeting on June 20 and an accompanying note from Rob Lundy. Lundy is vice president and chief financial officer for Sunlight. Lundy is proposing to the board that Sunlight buy back 600,000 shares of its own common stock on July 1. Lundys explanation is that the firm's stock is undervalued now and that Sunlight has excess cash available. When the stock subsequently recovers in value, Lundy notes, Sunlight will reissue the shares and generate a nice increase in contributed capital. Lundy's note to Plummer merely states, Look forward to your support of my proposal at the board meeting. REQUIRED Why is Plummer disturbed by Lundy's proposal and note? What possible ethical problem does Plummer face when Lundy's proposal is up for a vote at the board meeting