Stockholders in Comparison to Stakeholders Essay

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Stockholders vs. Stakeholders

United States HotFeet is an important manufacturer of footwear, with most of its manufacturing operations outsourced to various regions. One of its manufacturing subsidiaries is located in Sri Lanka, where is has successfully been operating for two decades now, having registered incontestable benefits for the local economy, the well-being of the Sri Lanka population as well as profits for the parent company.

During the past recent years however, several factors have come in play to jeopardize the profitability of Asia HotFeet. For instance, the wage rates in the island country have increased significantly, therefore increasing the cost of operations and decreasing overall profitability. Then, the interest rates in the country have also increased and the value of the U.S. dollar has weakened, all further contributing to a decreased profitability of AHF (Asia HotFeet).

In such a context, a question is being posed regarding the future of AHF. On the one hand, there is the possibility of closing down the facility, which would produce some immediate capital through the selling of the assets, which would further be used to satisfy the shareholders and purchase new technologies in preparation of opening a new facility in a more cost-effective region. The second option is that of continuing the operations of AHF for another six moths, as a trial period, during which costs would be decreased to a maximum, and the long-term profitability of the Asian subsidiary would be assessed. The current project advices on closing down the Asian subsidiary of HotFeet as a business decision.

Part A: Business or ethical decision making. Shareholder wealth

A first question that is posed in the conundrum regarding the Asian subsidiary of HotFeet is that of whether the decision to close down the facility or maintain it open for another six months as trial period is a business decision or an ethical decision. The business side of the problem is rather clear, and best summarized through the following:

The wage rates in Sri Lanka have increased significantly

The exchange rates and the interest rates are unfavorable

The costs of operations have significantly increased

The profitability of AHF is severely diminished

The parent company has to invest its own funds in order to salvage the Asian subsidiary

The company is unable to maintain its current spending levels, inducing the payment of wages or the contribution to charities such as the Red Cross

The parent company shareholders are dissatisfied with the economic condition of AHF and the negative effect it has on USHF.

A simple look at these straightforward factors reveals that the analysis of the continued operations of Asia HotFeet is to be made from a business standpoint. Still, the uncertainty exists due to some morality issues involved in the decision. For instance, the Chief Operating Officer of AHF has dedicated the last twenty years of his life to that subsidiary. He has married a local and he has established a solid family foundation in Sri Lanka. He has managed to create a strong position within the local community and the decision to close down the facility wold severely affect his entire life. Yet, while this is unfortunate, it does not constitute reason to affect the business decision.

Another aspect to be considered as a potential ethical element is represented by the impact the closing of AHF would have upon the local community and economy. Throughout the past two decades, the living standards in Sri Lanka had increased significantly and this was due to AHF, as well as other foreign corporation which provided employment for the local communities. Living standards improved, education levels rose and the use of children as labor force has also decreased. These societal advantages are important and notable, as well as sensitive to corporate downsizing in the region. And this matter could constitute an ethical aspect of the decision. Nevertheless, from a theoretical standpoint, the parent company should employ the ethnocentric approach. This virtually means that the corporate decisions will be made in full accordance with the morality in the home country rather than the ethical considerations in the host country. In other words, the business laws of capitalism from the United States would be employed in assessing the situation in Sri Lanka and the decision would be made in order to best serve the interests of the corporation and its shareholders.

Ultimately then, the decision that the champion of AHF is faced with in this particular case study is a business decision, made based on the profits and business goals of the organization, and not that of the socio-economic climate in Sri Lanka -- which has become unprofitable for the company.

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One may argue that most business decisions involve ethics, particularly those that directly affect the livelihood of its employees. However, USHF is not a charity organization. It is a business organization that is attempting to make a profit. In that regard, the decision of whether or not to discontinue AHF immediately or to allow it to continue with serious reductions to its workforce for the next couple of months is purely based on business concerns and outcomes.

Although AHF has produced some value, it is not sufficient profits at a rate fast enough to satisfy its stockholders. Moreover, it is negatively impacting the profits of its parent company, USHF. USHF created AHF and located it in Sri Lanka because it believed that doing so would help it further its own goals. If the opposite effect is being produced, that AHF's operations are actually draining USHF's profits, which they are, then the decision to shut this operation and restart it again elsewhere that is simply good business. As such, this decision is primary about business, and hardly involves ethics.

The goal of shareholder wealth certainly factors into the decision of whether to shut down AHF immediately or to allow it to continue for another six months. From a purely business perspective, the company (UHSF) is actually owned by the stockholders. They have the individual shares in the company that collectively grants them ownership. As such, the impact of the business decision on them and their stocks is of primary importance in this particular case. All parties involved in this decision must be aware of that fact that in actually, they are working for those individuals who own stock in this company.

Part B: Personal decision

The Chief Operating Officer in Sri Lanka is currently faced with a difficult decision to make, one which not only reflects and affects the life he has created for himself and the community, but also the very future and sustainability for himself, his family, is job and the community in Sri Lanka. Given these factors then, the recommendation at this stage is that of closing down the operations as soon as possible, since prolonging the current situation would only consume capitals and it does not have the potential for long-term growth and sustainability due to the numerous forces previously mentioned, coupled also with the fact that the technology in the subsidiary is outdated and ineficient in production.

If the decision in this case study were up to me then, I would not hesitate to shut down operations in Sri Lanka at the present time instead of waiting another six months. The reason for this decision is two-fold. Firstly, it is quite clear that there are numerous other members of this company that are in favor of abandoning its operations in Sri Lanka and conducting them elsewhere, with lower costs and with higher expectations and projections of corporate profitability. Perhaps the most eminent supporter of this plan is Landon who, as a member of upper level management, has a viewpoint that should considerably affect all employees who hope to have a future with this company; this also brings into light the matter of the COO's future career, as now a new job is provided for him, whereas a failure to rebuild AHT would likely lead to his termination with USHT.

Then, it is clear that people in finance are unwilling to prolong operations in Sri Lanka. Moreover, the reality that the company would have to cease contributing to some of its preferred charity organizations (such as Red Cross) in order to persist in Sri Lanka is indicative of the severity of such a situation -- for the company itself. Lastly, leaving Sri Lanka would also please the stockholders.

The second reason I would discontinue AHF is because of the conditions in which it would find itself if it were to continue. Specifically, continuity for this organization would result in serious slashing of the wages of the employees, by as much as 50% in some cases. Doing so would certainly not produce the desired favorable impact on their livelihoods, nor of the country's altogether. In other words, such a measure would jeopardize the social and economic advances Sri Lanka had made throughout the previous past decades -- advances which are impressive and laudable for the island state, but which also make it impossible for USHF to continue….....

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