Reference no: EM132582061

Part A - Goal of the firm, compensation for management and ethics

• During your first week at the company, while having lunch, you listened to a conservation between Mary (who works as a clerical assistant in the Accounting Department) and John ( who works as a packager in the Logistics Department). During the conversation, John complained that he had always worked hard to not waste packing materials and perform his job efficiently and cost-effectively. In spite of his efforts and those of his co-workers in the department, the firm's share (stock) price had declined nearly $2 per share over the past year. Mary indicated that she shared John's frustration, particularly because the firm's profits had been rising consistently. Neither could understand why the firm's share price was falling as profits rose. Mary indicated that she 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. She suggested that maybe it was profit that was important to management as it directly affected their pay. John stated, "That doesn't make sense, because the shareholder's own the firm. Shouldn't management do what's best for shareholder's? Something's wrong!"
• Mary responded, "Well, maybe that explains why the company hasn't concerned itself with the share price. Look, the only profits that shareholders receive are in the form of cash dividends, and this company has never paid dividends during its 20-year history. Shareholders therefore don't directly benefit from profits. The only way we benefit is for the share price to rise."
• John chimed in, "That probably explains why the firm is being sued by state and federal environmental officials for dumping pollutants in the adjacent river near the manufacturing plant. Why spend money for pollution control? It increases costs, lowers profits, and therefore lowers management's earnings!" You are required to:

Question 1) Briefly explain what should the management of Leisure Products Ltd, pursue as its overriding goal?

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

Question 3) Evaluate the firm's approach to pollution control. Does it seem to be ethical? Why might incurring the expense to control pollution be in the best interests of the firm's owners in spite of its negative impact on profits?

Question 4) On the basis of the information provided, what specific recommendations would you offer the firm?