BYP 15-7 Ethics Case ( Note: This case is from Chapter 15. ) Ken Iwig is the pre
ID: 2492474 • Letter: B
Question
BYP 15-7 Ethics Case (Note: This case is from Chapter 15.)
Ken Iwig is the president, founder, and majority owner of Olathe Medical Corporation, an emerging medical technology products company. Olathe is in dire need of additional capital to keep operating and to bring several promising products to final development, testing, and production. Ken, as owner of 51% of the outstanding stock, manages the company's operations. He places heavy emphasis on research and development and on long-term growth. The other principal stockholder is Barb Lowery who, as a nonemployee investor, owns 40% of the stock. Barb would like to deemphasize the R&D functions and emphasize the marketing function, to maximize short-run sales and profits from existing products. She believes this strategy would raise the market price of Olathe's stock.
All of Ken's personal capital and borrowing power is tied up in his 51% stock ownership. He knows that any offering of additional shares of stock will dilute his controlling interest because he won't be able to participate in such an issuance. But, Barb has money and would likely buy enough shares to gain control of Olathe. She then would dictate the company's future direction, even if it meant replacing Ken as president and CEO.
The company already has considerable debt. Raising additional debt will be costly, will adversely affect Olathe's credit rating, and will increase the company's reported losses due to the growth in interest expense. Barb and the other minority stockholders express opposition to the assumption of additional debt, fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to preserve the direction of “his” company, Ken is doing everything to avoid a stock issuance. He is contemplating a large issuance of bonds, even if it means the bonds are issued with a high effective-interest rate.
Instructions
(a)
Who are the stakeholders in this situation?
(b)
What are the ethical issues in this case?
(c)
What would you do if you were Ken?
Explanation / Answer
a) The stake holders are Ken with 51% shareholding ,Barb Lowery with 40% shareholding and balance 9% other minority shareholers.
b) Whether it be emphasis on research and development as per Ken or on the marketing function , to maximize short-run sales and profits from existing products so as to raise the market price of Olathe's stock as per Barb Lowery- both should be taken as an unanimous decision, in the best interest of the organisation- so as to maximise shareholders' wealth.It should not be taken with a deliberate view to further the interests of one section or a few people.
By issuing bonds, interest expenses may go up - despite tax advantages , even if there be profits, may jeopardise the existence of the company itself- leave alone Ken's controlling interets. Ethics demand that minority interests (as they have no say in day to day managemet of the company) should be safeguarded , in any major decisions such as stock or bond issuance by a company.That which is fool-proof from their perspective only can be adopted by the controlling people.
(c) If I were Ken , at the maximum I will do to maintain my controlling interests , is to suggest rights issue , to the extent funds required , whereby rights shares are issued on pro-rata basis -as per collective decision. This will bring funds to the company ,without losing control and also with no further interest obligations.
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