Reference no: EM132826422

Wyndham Myrtle Beach Resort & Arcadian Shores Golf Club: An ethical dilemma A crisis at Wyndham International:

According to the Wall Street Journal, "Patriot American was the epitome of the 1990s real-estate company. With former New York lawyer Paul Nussbaum at the helm, the company financed a 450-hotel buying spree with the proceeds from the sale of stock, mountains of short-term debt and unusual securities called "equity forward contracts," which represented bets that the company's stock would rise. When the stock began falling [in 1998], Patriot faced a liquidity crisis that brought it to the brink of insolvency, even though its hotels remained profitable." As a result of this insolvency crisis, a group of investors headed by New York-based Apollo Advisors, Inc. purchased a significant, preferred interest in the company for what would, over time, become the equivalent to less than $5 per share of common stock following the payout of required 9.75% preferred dividends (Pacelle & Templin, 1999). Yet, despite the fact that the value of the company's real estate portfolio of hotels exceeded the company's stock market valuation, the company's stock price continued to fall, closing at $2.8125 per share on November 2, 1999. At this point, the company's stock had lost nearly 98% of its value after peaking less than two years earlier at over $90.00 per share. New company leadership had been brought in and the company was in crisis mode-the only way to end the crisis was to generate more cash-flow. And the only way the company could generate more cash-flow was for the hotels to be operated more profitably. A unique paired-share structure-a Real Estate Investment Trust (REIT) operating in partnership with a branded hotel management company-had allowed Wyndham International, which was formed when the Patriot American hotel REIT merged with Dallas-based Wyndham Hotels & Resorts, to expand its portfolio of hotels at an exponential pace due to its preferred tax structure. Prior to the merger, Patriot American owned hotel real estate and earned its income by collecting rent from hotel management firms that managed the day-to-day operations of the hotels; Patriot American did not manage or brand hotels. As a result, as much as 6 - 8% of each hotel's revenues were paid, right off the top, to the management companies and parent companies that branded the hotels in the form of management and franchise fees, respectively. Through this unique paired-share structure, Wyndham International was able to retain these fees within the organization since Wyndham managed and branded the hotels- immediately increasing the profitability of REIT's portfolio of hotel real estate.

Property-level view:

Wyndham's management team was charged with the task of assuming the management of dozens of hotels owned or acquired by Patriot American Hotels and then re-branding the hotels as Wyndham properties. Prior to the merger, the hotels were operated by various hotel management firms and operated under a variety of flags-including Hilton, Marriott, Sheraton, Holiday Inn, and more. Once Patriot American purchased a hotel, Wyndham management would evaluate the hotel's performance, market, and potential to identify the operational and personnel changes needed to be made at the hotel; a Property Improvement Plan (PIP) was also created that identified the capital investments that needed to be made to bring the hotel up to Wyndham standards and to ensure that the property was competitive within its market. A detailed renovation and operational budget was then developed for each hotel and a management team put in place to execute the plan. The rapid expansion of the number of hotels under Wyndham management placed a tremendous burden on the company, particularly in terms of human capital. The company simply did not have an adequate number of property-level managers to staff the newly acquired hotels. As a result, Wyndham retained many managers at the property level and utilized task forces comprised of experienced Wyndham managers and employees to implement Wyndham systems and processes in newly acquired hotels, only replacing managers that did not demonstrate an ability to adapt to Wyndham's corporate culture. Since the company had grown from less than 100 hotels to over 450 hotels in less than three (3) years, the hotel literally had dozens of hotels in various stages of renovation when Wyndham International's stock price began following what Wall Street referred to as a stock market 'correction' in August of 1998. While many stocks recovered following the correction, Wyndham's stock continued on a precipitous drop as investors became weary of Wyndham's ability to fulfill its short-term debt obligations-let alone continue its aggressive growth strategy, while simultaneously completing the millions of dollars in renovation projects that were underway at the time. From the property perspective, many hotels were in various stages of renovation. And, due to increasing cash-flow concerns, many renovations were either delayed or severely curtailed since the company simply did not have the funds available to complete the renovation projects. Meanwhile, corporate executives are calling on hotel-level executives to improve their property's financial performance, although many of these hotels are at a disadvantage within their marketplace since their PIP had not been fully completed. In addition, market conditions were deteriorating in many markets with the increase of Revenue Per Available Room (RevPAR), a key measure of hotel performance, expected to slow to 2.8% in 1999, after falling to 3.5% in 1998, following an increase of 6.3% as recently as 1996. As a result of the increased pressure corporate leadership was under to turnaround the financial performance of the company, considerable pressure was being put on everyone within the organization to do 'whatever was necessary' to generate the cash-flow that was needed to fulfill short-term debt obligations, which was critical to stabilizing the stock price. Only then could the company move forward with its plan to complete the necessary renovations and hotel brand conversions to the Wyndham brand, which was essential to re-establishing Wyndham International as an effective branded hotel management firm and its paired-share REIT as a successful, financially sound owner of hospitality real estate.

One hotel manager's dilemma:

Cameron Garcia had joined Wyndham International like many General Managers-as the result of the acquisition of a hotel that he was managing by Patriot American Hotels. He had arrived two-years prior to Patriot American's acquisition of the Doubletree Hotel in Salt Lake City shortly after the former Holiday Inn property had been acquired out of bankruptcy, renovated, and re-flagged as a Doubletree Hotel. Under Mr. Garcia's leadership, the hotel flourished. The 400-room hotel was running over 80% occupancy, the Average Daily Rate was improved by over $40 per night, and the hotel was generating over $4 million of cash-flow annually. Consequently, Patriot American offered the owners over $40 million to purchase the hotel-a hotel in which the owners had approximately $22 million invested-an offer the owners could simply not turn down. Following Patriot American's acquisition of the hotel, they converted the hotel to the Wyndham brand and Cameron Garcia was transferred to the Wyndham Palm Springs Hotel where he would serve as Hotel Manager and work directly with the Regional Vice President for the company's hotels in Southern California whose office was in the Palm Springs property. Although it was apparent that Mr. Garcia performed well at the Salt Lake City hotel, it was customary for a hotel management firm to orient a newly hired property executive by having him/her work directly under a Regional Vice President for 12 - 18 months. The plan was to get Mr. Garcia acclimated to the company-and for the company to get to know him-after which he would be transferred to another hotel location. After 12-months in Palm Springs, during which Mr. Garcia completed a couple of special projects for the Regional Vice President at hotels in Los Angeles and West Hollywood, California, the Regional Vice President actually left the company and followed his mentor that had also left Wyndham to go to work with Starwood Hotels-owner of the Westin, Sheraton, and several other brands-to establish their new 'W' brand. The Regional Vice President actually offered Mr. Garcia the opportunity to join him with Starwood; however, he was happy with Wyndham and wanted to maintain his loyalty to the company since the company had employed him following the acquisition of the property in Salt Lake City. Quite frankly, at the time, he was excited about Wyndham's future!

The move to Myrtle Beach:

Shortly after the Regional Vice President change in Southern California, Cameron Garcia was offered the opportunity to transfer to the 400-room Wyndham Myrtle Beach Resort and Arcadian Shores Golf Club in September of 1998 from the Wyndham Bel Age Hotel, located in West Hollywood, California, where he was on a temporary assignment. The young, enthusiastic General Manager welcomed the opportunity to manage an oceanfront hotel and golf resort. Following nearly 20-years in the industry, he was looking forward to continuing the re-branding effort at the hotel, which had been converted from a Hilton flag. In addition, he embraced the opportunity to learn more about the golf industry since he would also oversee the adjacent Arcadian Shores Golf Course-an 18-hole championship course designed by Rees Jones. In addition, Mr. Garcia would reside with his family, wife and two young children, in a company-owned home located between the golf course and hotel, allowing him to replace his one-hour commute on a Los Angeles freeway each day to work with a five-minute ride on a golf cart. At the time, Garcia thought it was strange that his former Regional Vice President from Southern California called him, after he was offered the transfer, to discourage him from making the move. His former boss explained that he had heard about the potential move from his contacts with the company and he really did not think that the move would be a good fit for Garcia-"I'm not certain that you will enjoy working with the Regional Vice President that oversees that property," was how he put it. When Mr. Garcia arrived at the property, the resort was in the midst of a $20+ million renovation and had just been converted to the Wyndham brand from Hilton. During the renovation and brand conversion, the property was impacted by two hurricanes just one year apart in September of 1998 and again in September of 1999. Hurricane Floyd, the second of the two storms, occurred following the precipitous drop in the Wyndham share price over the previous year. The storm caused significant damage to the resort's golf course, due to over 40 fallen trees and extensive flooding on the course; damage to the hotel itself was relatively minor; however, Mr. Garcia now faced the challenge of 'maximizing the insurance claim' according to his boss' instructions. 

Leading up to the storm:

Just prior to the arrival of Hurricane Floyd, Cameron Garcia received two telephone calls with conflicting instructions. The first call came from the Vice President of Risk Management to ensure that the General Manager was following the appropriate storm damage mitigation activities, which were clearly outlined in the company's operating procedures. The second call came from his direct supervisor, the Regional Vice President, encouraging him to allow the storm to 'wreak havoc' on the hotel in order to cover some of the renovation expenses. When Mr. Garcia asked his Vice President to send him an email with the instructions, he was told, "I just gave you appropriate verbal instructions, why would I need to confirm them via email-don't you speak English?" While Mr. Garcia's telephone call from the Regional Vice President caused him some concern, he was too busy preparing for the storm to give it too much thought. Garcia took his responsibilities seriously and prepared for the storm. The Governor of South Carolina had called for an evacuation of the coastal areas, including the Myrtle Beach area, and there was an immense amount of work to be done to secure the hotel and to ensure the safety of the resort's 300+ employees and their families. So, without hesitation, he and his Executive Operating Committee executed the company's storm preparation protocols to minimize damage to the hotel and resort's assets. Following the complete and thorough implementation of the instructions received from Risk Management, Garcia and the Director of Engineering for the hotel secured all of the exterior doors of the hotel with chains and locks. Since hotels operate 24-hours-per-day, 7-days-per-week, the hotel did not actually have locks on some of its exterior doors!

The storm following the storm:

Following the storm, the Regional Vice President arrived at the hotel unannounced to personally express his disappointment that Mr. Garcia had failed to follow his instructions. He indicated to Mr. Garcia that he was easily replaceable and asked Cameron if he had understood his instructions or not. Mr. Garcia told his boss that he could not believe that he was serious about not following the storm mitigation protocols. He informed his boss that he felt he did what was in the best interest of the company. The Regional Vice President reminded Garcia of the dire financial challenges currently facing Wyndham International. He then informed Mr. Garcia that he needed to ensure that the company maximized the insurance claim. In other words, he let Garcia know in no uncertain terms that he expected him to get as much money as possible from the insurance company for the damages that occurred at the hotel and golf course. He also stressed the need to get as many of the planned renovation expenses as possible charged against the insurance claim as 'storm damage,' particularly since the company did not have the funds available to complete the renovation of the hotel, which was underway as Hurricane Floyd arrived. The Regional Vice President emphasized that if he could not count on Garcia to properly maximize the insurance claim, then he should plan on leaving the company. As a matter of fact, he actually offered Garcia an alternative to maximizing the insurance claim when he stated, "If you do not feel that you can maximize the claim, then I am prepared to offer you three-months of severance pay and you can resign and find another job." While Mr. Garcia did not want to leave the company and to relocate his family again, he also did not want to commit insurance fraud! In addition, he felt he was easily employable-finding another job would not be a problem. So, perhaps he should just leave. He also thought about calling someone in the corporate office; however, what if the Regional Vice President was actually receiving instructions from his boss-the Executive Vice President of Operations. After all, everyone in corporate office was under such stress and all that was heard at the property level was to do 'whatever it takes' to generate more cash-flow..

1. What was the General Manager asked to do by his supervisor that caused him concern? Identify the ethical dilemma encountered as a result of the request and explain the basis of each concern. 
2. Outline the General Manager's options. Explain the possible consequence for each option.
3. Which option do you feel that you would be most likely to choose, if placed in a similar situation, and why?