Al Dunlap at Sunbeam

Topics: Stock market, Stock, Option Pages: 6 (1920 words) Published: December 1, 2008
Q1. The business of business is business:
Does the maximaization of shareholder value reward socially destructive actions by corporations?Certainly not.A company is not an instrument of shareholders, but a coalition between various resource suppliers, with the intention of increasing their common wealth and hence is contradictory to Mr Al Dunlaps view of share holder primancy.

Through out his tenure at Sunbeam,Al Dunlap’s advocated profit by firing many employees and shutting down many factories.If we look at it in the short term ,this approach seems very attractive as it brings in quick short term gains.In the long term ,however, such a decision would not ensure the sustainability of the company. Profitability and responsibility can and should be combined in an ideal world, however it is clear that they are at least partially contradictory. Shareholder pressure should not force a company to make short-term decisions that might be detrimental to the long-term profitability of the company.

On one hand, businesses must be profitable to survive and corporations must earn a higher return on the shareholders equity than would be realized if the money were deposited on a no-risk bank account. The profits that are made create trust from investors and are usually reflected in higher stock-prices, which makes it easier to grow the company further towards its goals. The profits are not only a result, but also a source of corporate competitive health and wealth. On the other hand, companies are networks of parties and people working together towards a shared goal and not merely 'economic machines'.

Even though stakeholders do not invest any money the employees are the valuable resources which contribute to the company’s success. Sure hypothetically speaking we can say that by firing few employees he protected the jobs of other employees.But an employee working under the fear of losing his job is likely to work less efficiently. Employees nowadays represent a major part of the value of any company perhaps also customers (who rely upon the business for goods/services).They qualitatively contribute to the company as intellectual capital which is not auditable. In order to motivate people to work hard for the interests of the company, a level of trust must be built with them. Likewise it is important for trust to develop between the organization and its external environment (customers, suppliers, government, and interest groups). Such trust can only grow from the perceived security that the interests of all individuals and stakeholders are taken into account.

In general ,the stakeholder approach may be more conducive to balancing a wide variety of corporate interests and thereby discouraging impropriety.Executives and boards should take the perceptions of both shareholders and stakeholders into account when formulating strategy and enunciate their stance in all organizational communications. Only within that kind of clearly delineated context, can managers be expected to make appropriate decisions. Indeed, some of the most successful businesses are those which have embraced stakeholder values for example Bodyshop. However, we see that generally, shareholder value prevails as in the case of ExxonMobil, which, despite being heavily critisised by its stakeholders, is the world's most profitable company.

Q2. According to Dunlap’s notion that management’s behavior should be directly connected to his performance, Sunbeam designed the compensation mainly into three parts:

1.Cash Salary: $507,054 in 1996 and $1,115,385 in 1997.
2.Stock Options: 2,500,000 shares with grant date value of $16,621,000 (1/3 were immediately vasted and 2/3 would vest over next 2 years. Exercise price: $12.25) 3.Restricted Stock Award: 1,000,000 shares with grant date value of $12,500,000 (1/3 vested on the grant date and 2/3 would vest over next 2 years)

On one hand, the package seemed to be reasonable because it provided no cash bonus to...
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