Read the "Reluctant Director" case and answer/discuss the following"

1. If you were one of the board members, how would you have initially voted for the proposal? What would your vote be after the recess in the meeting? Why?

2. Should the High Tech executives tell the town administrators, and potential employees that this is a temporary plant for three years?

3. How does a plant closing affect a small town like Plainville? What impact does the closing have on the employees?

4. Can you suggest any compromise for the present impasse?

5. If you were Stanley, would you call for a vote on your proposal or postpone the vote until the next meeting?

COMPANY: LEGALITY VERSUS RESPONSIBILITY HIGH TECH COMPANY is primarily involved in the production of electronic components that are used in personal computers. Although such components might be found in a few computers in home use, High Tech products are found most frequently in computers used for sophisticated business and engineering applications. Annual sales of these. Products have been steadily increasing over the past several years; High Tech Company currently has total sales of approximately $265 million. Over the past six years, increases in yearly revenues have consistently reached 12%. High Tech Company., headquartered in the Midwestern United States, is regarded as one of the largest-volume suppliers of specialized components and is easily the industry leader, with some 32\% market share. Unfortunately for High Tech, many new firms-domestic and foreign have entered the industry. A dramatic surge in demand, high profitability, and the relative ease of a new firm's entry into the industry explain in part the increased number of competing firms, Although High Tech management-and presumably shareholders as well-is very pleased about the growth of its markets, it faces a major problem: High Tech simply cannot meet the demand for these components. The company currently operates three manufacturing facilities in various locations throughout the United States. Each of these plants operates three production shifts ( 24 hours per day), 7 days a week. This activity constitutes virtually all of the comnanv's nroduction canacity Without an additional manufacturino nlant Hioh all of the company's production capacity. Without an additional manufacturing plant, High Tech simply cannot increase its output of components. Bob Stanley, Chief Executive Officer, and Chairman of the Board, recognizes the gravity of the problem. If High Tech Products cannot continue to manufacture components in sufficient numbers to meet the demand, buyers will go elsewhere. Worse yet is the possibility that any continued lack of supply will encourage others to enter the market. As a long-term solution to this problem, the Board of Directors unanimously authorized the construction of a new, state-of-the-art manufacturing facility in the southwestern United States. When the planned capacity of this plant is added to that of the three current plants, High Tech should be able to meet demand for many years to come. Unfortunately, an estimated three years will be required to complete the plant and bring it online. Bob Stanley believes very strongly that this three-year period is far too long and has insisted that there also be a shorter-range, stopgap solution while the plant is under construction. The instability of the market and the pressure to maintain leader status are two factors contributing to Stanley's insistence on a more immediate solution. Without such a move, High Tech management believes that it will lose market share and, again, attract competitors into the market. A number of suggestions for such a temporary measure were offered by various staff specialists but rejected by Stanley. For example, licensing High Tech's product and process technology to other manufacturers in the short run to meet immediate demand was possible. This licensing authorization would be short term, or just until the new plant could come online. Top management, as well as the board, was uncomfortable with this solution for several reasons. They thought it unlikely that any manufacturer would shoulder the fixed costs of producing appropliate components for such a short term. Any manufacturer that would do so would charge a premium to recover its costs. This suggestion, obviously, would make High Tech's own products available to its customers at an unacceptable price. Nor did passing any plice increase to its customers seem sensible, for this too would almost certainly reduce High Tech's' market share as well as encourage further competition. Overseas facilities and licensing also were considered but rejected. Before it became a publicly traded company, High Tech's founders had decided that its manufacturing facilities would be domestic. Top management strongly felt that this strategy had served High Tech well; moreover, High Tech's majority stockholders (initial owners of the then privately held High Tech) were not likely to endorse such a move. Beyond that, however, top management was reluctant to foreign license-or makes available by any means the technologies for others to produce High Tech products-as they could not then properly control patents. Top management feared that foreign licensing would essentially give away costly proprietary information regarding the company's highly efficient means of product development. There also was the potential for initial low product auality-whether produced domestically or otherwise- Overseas facilities and licensing also were considered but rejected. Before it became a publicly traded company, High Tech's founders had decided that its manufacturing facilities would be domestic. Top management strongly felt that this strategy had served High Tech well; moreover, High Tech's majority stockholders (initial owners of the then privately held High Tech) were not likely to endorse such a move. Beyond that, however, top management was reluctant to foreign license-or makes available by any means the technologies for others to produce High Tech products-as they could not then properly control patents. Top management feared that foreign licensing would essentially give away costly proprietary information regarding the company's highly efficient means of product development. There also was the potential for initial low product quality-whether produced domestically or otherwiseespecially for such a sh01t run operation. Any reduction in quality, however brief, would threaten High Tech's share of this sensitive market. THE RECOMMENDATION One recommendation that has come to the attention of the Chief Executive Officer could help solve High Tech's problem in the short run. Certain members of his staff have notified him that an abandoned plant currently is available in Anywhere, a small town in the noltheastem United States. Before its closing eight years before, this plant was used primarily for the manufacturer of electronic components. As is, it could not possible be used to produce High Tech products, but it could be inexpensively refitted to do so in as few as three months. Moreover, this plant is available at a very attractive price. In fact, discreet inquiries by Stanley's staff indicate that this plant could probably be leased immediately from its present owners because the building has been vacant for some eight years. All the news about this temporary plant proposal, however, is not nearly so positive. Stanley's staff concedes that this plant will never be efficient, and its profitability will be low. In addition, the Anywhere location is a poor one in terms of high labor costs (the area is highly unionized), warehousing expenses, and inadequate transportation links to High Tech's major markets and suppliers. Anywhere is simply not a candidate for a long-term solution. Still, in the short run, a temporary plant could help meet the demand and might forestall additional competition. The staff is persuasive and notes that this option has several advantages: (I) there is no need for any licensing, foreign or domestic, (2) quality control remains firmly in the company's hands, and (3) an increase in the product price will be unnecessary. The temporary plant, then, would be used for three years or so until the new plant could be built. Then the temporary plant would be immediately closed. CEO Stanley is convinced. TAKING THE PLAN TO BOARD The quarterly meeting of the Board of Directors is set to commence at 2:00 P.M. Bob Stanley has been reviewing his notes and agenda for the meeting most of the morning. The issue of the temporary plant is clearly the most important agenda item. Reviewing his detailed presentation of this matter, including the associated financial analyses, has occupied much of his time for several days. All the available information underscores his contention that the temporary plant in Anywhere is the only responsible solution to the demand problems. No other option offers the same low level of risk and ensures High Tech's status as industry leader. At the meeting, after the board has dispensed with a number of routine matters, Bob Stanley turns his attention to the temporary plant. In short order, he advises the 12-member board (himself, 3 additional inside members, and 8 outside members) of his proposal to obtain and refit the existing plant to ameliorate demand All the board members except one are in favor of the proposal. In fact, they are most enthusiastic; the overwhelming majority agrees that the temporary plant is an excellent-even inspired--stopgap measure. Eleven Of the twelve board members seem relieved because the board was most reluctant to endorse any of the other alternatives that had been mentioned. The single dissenter--R.C. Clairborne, an outside director-is, however, steadfast in his objections. He will not, under any circumstances, endorse the notion of the temporary plant and states rather strongly that "I will not be party to this nonsense, not now, not ever." R.C. Clairborne, the senior executive of a major nonprofit organization, is normally a reserved and really quite agreeable person. This sudden, uncharacteristic burst of emotion clearly startles the remaining board members into silence. The following excerpt captures the ensuing, essentially one-on-one conversation between Clairborne and Stanley: 3 Clairborne: How many workers do your people estimate will be employed in the temporary plant? Stanley: Roughly 1,200 , possibly a few more. Clairborne: I presume it would be fair, then, to say that, including spouses and children, something on the order of 4,000 people will be attracted to the community. Clairborne: How many workers do your people estimate will be employed in the temporary plant? Stanley: Roughly 1,200 , possibly a few more. Clairborne: I presume it would be fair, then, to say that, including spouses and children, something on the order of 4,000 people will be attracted to the community. Stanley: I certainly would not be surprised. Clairborne: If I understand the situation correctly, this plant closed just over eight years ago, and that closing had a catastrophic effect on Anywhere. Isn't it true that a large portion of the community was employed by this plant'? Stanley: Yes, it was far and away the majority employer. Clairborne: And most of these people have left the community, presumably to find employment elsewhere. Stanley: Definitely, there was a drastic decrease in the area's population. Clairborne: Are you concerned, then, that our company can attract the 1,200 employees to Anywhere from other parts of New England'? Stanley: Not in the least. We are absolutely confident that we will attract L200--even more, for that matter virtually any number we need. That, in fact, is one of the chief advantages of this proposal. I would think that the community would be very pleased to Stanley: Definitely, there was a drastic decrease in the area's population. Clairborne: Are you concerned, then, that our company can attract the 1,200 employees to Anywhere from other parts of New England'? Stanley: Not in the least. We are absolutely confident that we will attract L200--even more, for that matter virtually any number we need. That, in fact, is one of the chief advantages of this proposal. I would think that the community would be very pleased to have us there. Clairborne: On the contrary, I would suspect that the community will rue the day we arrived. Beyond that, though, this plan is totally unworkable if we are candid. On the other hand, if we are less than candid, the proposal will work for us, but only at great cost to Anywhere. In fact. quite frankly, the implications are appalling. Once again, I must enter my serious objections. Stanley: I don't follow you. Clairborne: The temporary plant would employ some 1,200 people. Again, this means the infusion of over 4,000 to the community and surrounding areas. High Tech Products, however, intends to close this plant in three years or less. If High Tech informs the community or the employees that the jobs are temporary, the proposal simply won't work When the new people arrive in the community, there will be a need for more schools, instructors, utilities, housing, restaurants, and so forth. Obviously, if the banks and local government know that the plant is temporary, no funding will be made available for these projects and certainly no credit for the new employees to buy homes, appliances, automobiles, and so f0lih. If on the other hand, High Tech Products does not tell the community of its "temporary" plans, the project can go on. But, in several years when the plant closes (and we here have agreed today that it will close), we will have created a ghost town. The tax base of the community will have been destroyed; property values will decrease precipitously; practically the whole town will be unemployed. This proposal will place High Tech Products in an untenable position and in extreme jeopardy. Stanley: Are you suggesting that this proposal jeopardizes us legally? If so, it should be noted that the legal department has reviewed this proposal in its entirety and has indicated no problem. Clairborne: No! I don't think we are dealing with an issue of legality here. In fact, I don't doubt for a minute that this proposal is altogether legal. I do, however, resolutely believe that this proposal constitutes gross irresponsibility. Think this decision has captured most of my major concerns. These along with a host of collateral problems associated with this project lead me to strongly suggest that YOU and the balance of the board reconsider and not endorse this proposal. High Tech Products must find another way. After a short recess, the board meeting reconvened. Presumably because of some discussion during the recess, several other board members indicated that they were no longer inclined to support the proposal. After a short period of rather heated discussion, the following exchange took place. Stanley: It appears to me that any vote on this matter is likely to be very close. Given the gravity of our demand capacity problem, I must insist that the stockholders' equity be protected. We cannot wait three years; that is clearly out of the question. I still feel that licensing -domestic or foreign-is not in our long-term interests for any number of reasons, some of which have been discussed here. On the other hand, I do not want to take this project forward on the strength of a mixed vote. A vote of 6-5 or 7-4, for example, does not indicate that the board is remotely close to being of one mind. Mr. Clairborne, is there a compromise to be reached? Clairborne: Respectfully, I have to say no. if we tell the truth-namely, the temporary nature of our operations-the proposal is simply not viable. If we are less than candid in this respect, we do grave damage to the community as well as our image. It seems to me that we can only go one way or the other. I don't see a middle ground