Case Study Al Dunlap at Sunbeam
In light of agents’ obligations to principals, managers are supposed act in the best interest of the company’s shareholders, the major capital providers, when making decisions; however, as shareholders and stakeholders interests are to a large extent compatible, especially from a long-term perspective, managers should also take into inconsideration the interests of multiple constituencies when operating a company.
For example, both shareholders and customers may benefit from a company’s successful research and development projects on cutting-edge products as customers can have high-value products while shareholders may profit considerably from the sales. Meanwhile, like shareholders, stakeholders also have their rights that managers should not treat with negligence.
Below are some examples: customers have the right to receive safe products that they purchase; lenders have the right to receive interests at a negotiated rate and principal at maturity; employees have the right to Nor in a safe environment and be treated with respect for their dignity and human rights; competitors have the right to be treated fairly without groundless slanders or dilation of their intellectual properties. Some of stakeholders’ rights are stated clearly in different laws and regulations, which aim to protect stakeholders and reinforce a business entity’s accountability to its multiple constituencies.
Comments on Dunlap first compensation package offered by Sunbeam Upon Dunlap arrival at Sunbeam in 1996, he received a large compensation package Inch consists of a base salary of $507,054, no bonus, and substantial stock options and awards. How well a CEO compensation package is designed tends to be evaluated by how effectively it retain and motivate the CEO to enhance the company’s ‘ales for shareholders by aligning the Coo’s personal interests with the company’s performance.
In this sense, Dunlap first compensation package was well-designed because it provided a moderate base salary and no gratuitous bonus; furthermore, the great portion of equity-based compensation manifested Dunlap determination ND confidence in improving Sunbeam’s performance as how much Dunlap could receive was heavily dependent upon Sunbeam’s stock price. Obviously, the most significant strength of the package is that it provides great motivation for the CEO to enhance the company’s performance and thereby boost the Sunbeam’s stock price.
Meanwhile, it helps cement the Coo’s loyalty and commitment to the company by providing additional benefit without using precious cash, and it reduces the agency costs by motivating the ink like the owners and operate the company in an effective and frugal way. Moreover, the stock options may also bring the CEO as well s the company some tax benefits as long as it qualifies as an “incentive stock option” for IRS purposes.
However, the compensation package is not perfect Introit weaknesses; a noteworthy weakness of it is that it may motive the Coo’s dangerous behaviors like aggressively manipulating earnings of the company or even fraudulently reporting the company’s performance, ultimately leading to the company’s collapse.
Comments on Dunlap second compensation package offered by Sunbeam Immediately after Sunbeam’s $2. Billion new acquisitions of three other appliance companies in 1998, Dunlap received a new compensation package, which bubbled his base salary and granted him 300,000 Sunbeam shares worth $11 on the grant day. It was reasonable for a Coo’s compensation to increase as the company expanded and became a larger entity, and the newly-granted shares and increasing stock options further aligned the Coo’s personal interests with those of the company and shareholders. In this sense, the second compensation package was also well-structured and not excessive.
Seeing Sunbeam’s revenue rising and stock price climbing steeply upwards, Sunbeam’s shareholders and directors were fully convinced by Dunlap leadership, so they might perceive the increase in insemination amount necessary to retain and better motivate Dunlap to enhance the company’s value.
Nonetheless, they neglected the fact that the increased portion of the equity-based compensation also further motivated the Coo’s dangerous behaviors pertaining to improper earnings management.
Opinions on Sunbeam’s corporate governance From my perspective, Sunbeam’s board made a wise decision in firing AY Dunlap, and t was an example of effective corporate governance as the decision stopped Dunlap to further impair tone at the top in Sunbeam and further generate agency cost within Sunbeam. According to SEC litigation release No. 17001, during Dunlap tenure in Sunbeam, Dunlap was involved in applying improper earning management such as channel stuffing and “cookie Jar” reserves to inflate revenues and earnings.
These Nerve red-flags indicating the weak tone at the top within Sunbeam, and it would put Sunbeam’s long term health and prosperity at risk if the board didn’t fire Dunlap in timely basis and allowed Dunlap to continue leading and operating Sunbeam in his Nay. Besides, Sunbeam’s acquisitions of the three troublesome companies didn’t add ales to the company for Sunbeam’s shareholders, and it actually incurred agency costs between Sunbeam’s shareholders and Dunlap as the CEO.
As Dunlap expressed his intent to leave in the board meeting, the directors conducted an investigation over this matter and found out Sunbeam’s serious financial trouble under Dunlap leadership. Based on the case and the discussion above, it was clear that Sunbeam directors’ challenging question for Dunlap in the meeting, their serious investigation after meeting, and final decision in firing Dunlap combined reflected effective corporate governance within Sunbeam.
