the manufacture and sale of electrical cables. As a public limited company the organization was performing reasonably well, earning steady profits and declaring a stable dividend of 12-15%.
The CEO was feeling the urge to expand the business and taste the growth of business operations and profits. He started addressing various options and shortlisted 2 options namely manufacture of LED bulbs and solar panels.
He called the Gen Mgr. - Finance for a discussion in this regard to probe the matter further. He also went on to share his dream of making the company a larger one and his belief in people like the GM who needs to stay and grow with the organization.
The GM felt excited at this prospect and started making a project report. He decided in his own mind the solar panel project with a larger profit margin looked to be a better one than LED bulbs which was dealer intensive and lesser in terms of unit margin.
Feeling the need to expand rapidly on the investment of the company and make it bigger and become a CFO in the bargain, he chose the solar panel project which was more capital intensive. An assumption about a capital structure and cost congruent to the existing structure was assumed and the projected financials were prepared.
The board of directors representing the majority of shareholders believing in the recommendations of the report adopted it for implementation. The project faced various hurdles in its implementation such delay in signing collaboration agreements, inflated cost due to poor supply of money in the market, downturn of the economy and so on. The project cost started spiraling up and to fund the expansion the funds of the existing business line were inducted into the new project since no further borrowing could be made. The company slipped into the red and reached a stage of bankruptcy without the new project even taking off.
Questions:
Trace the conflict between the management and the shareholders in this case study.
Is the act of the GM Finance an error or sin?
Where do you think the CEO went wrong?
What according to you is the approach the CEO should have taken?
Answers
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This is one of the CEO's most important roles. Furthermore, a CEO may help the senior management team build plans for the business – as necessary. The Management Board can advise the CEO or even ask him to re-examine the business strategy. A business plan can be approved by stakeholders. But at the end of the day, the CEO sets the course of the business.
Explanation:
(i) There are various conflicts of interest that can impact manager's decisions to act in shareholders' interests. In corporate governance, the dispute between shareholders and directors is a big problem. The principal function of the managing directors is to boost the company's value for the shareholders. All strategies or actions taken by the managers must also be made always such that the company's value is increased. The company belongs to the shareholder and the company is owned by the shareholder. However, the management is the responsibility of the company. Conflict is possible because of competing interests between those who own and manage the business.
(ii) Sin. Managers who are focused on their own hidden agendas lose sight of the bigger picture make bad decisions on complicated issues with the intention of advancing their own agendas and career ambitions first. The ineffective use and understanding of the resources at your disposal makes it difficult to be a good decision maker. Managers who leap back into the job instead of taking the time to get acquainted with their resources would find it difficult to take care of their positions and responsibilities.
(iii) When the CEO went on to share his dream of making the company a bigger one and his belief in people such as the GM who needs to stay and grow with the organization. A CEO who relies blindly on his team develops a general lack of knowledge of what is happening in the company. When this occurs, the CEO will find himself aloof, or indifferent, resulting in CEO leaders losing faith and waiving their goals and strategy. The strategic direction of a organization can include its principles, mission, vision, leadership and overall strategy. In keeping with its overall philosophy, it is the CEO's duty to decide how to implement a plan and oversee the operation of the organization, in accordance with its overarching strategy.
(iv) While CEOs must be opportunistic and can take calculated risks, they should be vigilant to avoid leading the company to a downfall. While it will seem to be clear, the market changes over time. It is necessary to think outside of the box because there are often better ways of achieving business objectives. Often it doesn't work the same tried and tested methods. When a CEO thinks beyond the box, he and his organization stand out for their clients and opportunities. A CEO can not be impulsive however, and every move must be taken after due consideration and study. A CEO must be able not only to formulate strategies to tackle change effectively, but also be able to execute them in a manner that increases company profitability. A CEO must be able to include others in decision-making and promote a community in which all staff function as a team in order to achieve a common goal. The CEO must express their insight into the decision-making process to fellow peers and subordinates as being highly significant. The final decision must be made only after a full financial and non-financial analysis of the decision is carried out and the decision is considered on how the team will achieve its corporate goals.