It is January 2, 2016. Farah Jennings has worked for several years at UMB Manufa

Question

It is January 2, 2016. Farah Jennings has worked for several years at UMB Manufacturing Company. Yesterday, the CEO informed Jennings that he would be retiring, effective immediately, and the Board of Directors has appointed Jennings the new CEO. After a brief celebration, she arrives work today ready to accept her responsibilities. Jennings is immediately confronted with a number of investment and corporate finance decisions.

Jennings suggests to the board of directors an increase in its dividend by knowing the poor future prospect of her company. She explains to the board that investors may then believe that the company has positive future prospects, leading to an increase in stock price and shareholder wealth. Briefly justify whether such imitation is likely to achieve the CEO’s objective over long term.

Explanation / Answer

Answer –

Farah Jennings had worked for long time for the UMB Company. The CEO told Jennings that he would be retiring immediately and the board of director has appointed Jennings as new CEO of the UMB Company. Jennings joined as CEO and had involved in multiple financial decisions.

Jennings suggested the board of directors the increase in its dividend by even knowing the poor future prospects of the Company. This approach looks to be non-appropriate as a CEO of the organization.

The Jennings clearly knows the poor future prospect of the organization. Then she had a good visibility for the reason of the poor future prospects of the organization. So needs to understand these factors in detail for the poor future prospects of the organization. As a CEO, Jennings needs to present these findings to the board of directors. Let the board of directors need to understand the reason or the poor future prospects of the organization. Upon adequate reviewing the factors with the board of directors team, she can propose her plan for improvements and she needs to get the buying from the board of directors for the same.

Upon having proper inputs and buying from the board of directors, the Jennings can plan for the actions so that she can try to achieve the positive impacts in the financial returns of the Company.

So the approach of showing better financial results instead of looking for poor future prospects of the organization is not right approach as it will have adverse impact on the board of directors and the investors also. The board of director and investor may lose their confidence on the Jennings as CEO, upon her unrealistic statement on improving the financials though knowing the poor future prospects.

Jennings as CEO needs to develo; and shwo the strategic initiatives which can help the organization to move from current condition to the proposed new position in log run. This approach will help the board of directors and investor to get the better confidence in Jenings.

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