PLEASE HELP!! Loren Seguara and Dale Johnson both work for Southern Semiconducto

Question

PLEASE HELP!!

Loren Seguara and Dale Johnson both work for Southern Semiconductor Corporation (SSC), a major producer of computer components. Loren works as a clerical assistant in the Accounting Department, and Dale works as a packager in the Shipping Department. During their lunch break one day, they began talking about the company. Dale complained that he had always worked hard trying not to waste packing materials and efficiently and cost-effectively performing his job. In spite of his efforts and those of his co-workers in the department, the firm’s stock price had declined nearly $2.00 per share over the past nine months. Loren indicated that he shared Dale’s frustration, particularly because the firm’s profits had been rising. Neither could understand why the firm’s stock price was falling as profits rose. Loren indicated that he had seen documents describing the firm’s profit-sharing plan under which all managers were partially compensated on the basis of the firm’s profits. He suggested that maybe it was profit that was important to management, because it directly affected their pay. Dale said, “That doesn’t make sense, because the stockholders own the firm. Shouldn’t management do what’s best for stockholders? Something’s wrong!” Loren responded, “Well, maybe that explains why the company hasn’t concerned itself with the stock price. Look, the only profits that stockholders receive are in the form of cash dividends, and this firm has never paid dividends during its 20-year history. We as stockholders therefore don’t directly benefit from profits. The only way we benefit is for the stock price to rise.” Dale chimed in, “That probably explains why the firm is being sued by state and federal environmental officials for dumping pollutants in the adjacent stream. Why spend money for pollution control? It increases costs, lowers profits, and therefore lowers management’s earnings!” Loren and Dale realized that the lunch break had ended and they must quickly return to work. Before leaving, they decided to meet the next day to continue their discussion.

Please answer the following questions:

1) What should the management of Southern Semiconductor Corporation pursue as its overriding goal? Why?

2) Does the firm appear to have an “agency problem?” Explain.

3) Evaluate the firm’s approach to pollution control. Does it seem to be ethical? a. Why might incurring the expense to control pollution be in the best interests of the firm’s owners despite its negative effect on profits?

4) Does the firm appear to have an effective “corporate governance structure?” Explain any shortcomings.

5) On the basis of the information provided, what specific recommendations would you offer the firm?

Appreciate your help in advance!

Explanation / Answer

1)

The Management of the southern semiconductor should pursue the rise in the wealth of shareholder. They should think of long term benefit that affects the stock price and not the short term profit. Currently it looks that the management is concerned about short term benefit as their pay is linked to the profit of the firm at the expense of long term benefit. The stock price of a firm reflects the expected earning of the firm in future. Thus, if firm work in right direction so that investor has confidence in the growth of the firm in future, the price of the stock will rise.

2)

Yes the firm has the agency problem. Agency problem reflects the conflict of company management interest to the company stockholder interest. The firm is currently making profit which is good in term of management interest but at the same time the stock value is decline which is against the interest of the company stakeholder. The management is believes in short term profit as their pay is linked to the profit and have tendency to take risk as the loss is not shared by the management. Ultimately stock price declining reflects negative long term growth for the firm.

3)

Firm approach to pollution control is really not ethical. The firm management approach is to cut cost and increase current profit. They don’t want to put some cost on pollution control. This is not even good for society. Ultimately in the long term firm might faces penalty by the government, which will affect firm future profit. The firm will also not score on CSR activity which is negative for the firm growth. The firm will lose confidence from customer for such activity. Thus in long term it has negative impact on the growth of the firm and thus negative impact on the shareholder.

4)

No the firm does not have the effective corporate governance structure. Corporate governance requires balancing interest between various stake holder to the firm which include, shareholder, customer, management, employee, government and the society. The firm is working only in the favour of the management. The activity of the firm is negatively impacting the shareholder, the employees of the firm and the society

5)

On the information above, the firm needs a restructuring and defining the corporate governance, corporate social responsibility and the ethical issue. The firm need a panel to scrutinize each and every activity of the firm and the decision making by the management. The firm ultimate goal should be to maximize the wealth of the shareholder.

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