1 Case 1
The Recalcitrant Director at Byte Products, Inc.: Corporate Legality Versus Versus Corporate Responsibility Dan R. Dalton, Richard A. Cosier, Cosier, and Cathy A. Enz
BYTE BYTE PRODUC PRODUCTS, TS, INC. INC. IS PRIMAR PRIMARL LY INVOL INVOLVED VED IN THE PRODUC PRODUCTIO TION N OF ELECTRONIC coponents that are used in personal coputers. !lthough such coponents ight be "ound in a "e# coputers in hoe use, Byte products are "ound ost "re$uently in coputers used "or sophisticated business and engineering applications. !nnual sales o" these products ha%e been steadily increasing o%er the past se%eral years& Byte Products, Inc., currently has total sales o" appro'iately ()*+ illion. %er the past si' years, increases in yearly re%enues ha%e consistently reached 1)-. Byte Products, Inc., head$uarters in the id#estern /nited 0tates, is regarded as one o" the largest %olue suppliers o" speciali2ed coponents and is easily the industry leader, #ith soe 3)ar4et share. /n"ortunately "or Byte, any ne# "irsdoestic and "oreignha%e entered the industry. ! draatic surge in deand, high pro"itability, and the relati%e ease o" a ne# "ir5s entry into the industry e'plain in part the increased nuber o" copeting "irs. !lthough Byte anageent 6and presuably shareholders as #ellis %ery pleased about the gro#th o" its ar4ets, it "aces a a7or proble: Byte siply cannot eet the deand "or these coponents. The copany currently operates three anu"acturing "acilities in %arious locations locations throughout throughout the /nited 0tates. 8ach o" these plants operates three production production shits 9) hours per day;, < days a #ee4. This acti%ity constitutes %irtually all o" the copany5s production capacity. =ithout an additional anu"acturing plant, Byte siply cannot increase its output o" coponents. >aes . 8lliot, Chie" 8'ecuti%e ""icer and Chairan o" the Board, recogni2es the gra%it gra%ity y o" the proble proble. . I" Byte Byte Produc Products ts cannot cannot continu continuee to anu"a anu"actu cture re copone coponents nts in su""icient nubers to eet the deand, buyers #ill go else#here. =orse yet is the possibility that any continued lac4 o" supply #ill encourage others to enter the ar4et. !s a longter solution to this proble, the Board o" Directors unaniously authori2ed the construction o" a ne#, stateo"theart anu"acturing "acility in the south#estern /nited 0tates. =hen the planned capacity o" this plant is added to that o" the three current plants, Byte should be able to eet deand "or any years to coe. /n"ortunate /n"ortunately ly,, an estiated estiated three years #ill #ill be re$uired to coplete the plant and bring it online. >i 8lliot belie%es %ery strongly that this threeyear period is "ar too long and has insisted that there also be a shorterrange shorterrange,, stopgap solution solution #hile the plant is under construction construction.. The instability o" the ar4et and the pressure to aintain leader status are to# "actors contributing to 8lliot5 8lliot5ss insurance insurance on a ore iediate solution. solution. =ithout =ithout such a o%e, Byte anageent belie%es that it #ill lose ar4et share and, again, attract copetitors copetitors into the ar4et.
)
0e%eral 0olutions ! nuber o" suggestions "or such a teporary easure #ere o""ered by %arious sta"" specialist but re7ected by 8lliot. ?or e'aple, licensing Byte5s Byte5s product and process technology to other anu"a anu"actu cturer rerss in the sho short rt run to eet iediat iediatee deand deand #as pos possib sible. le. This This licens licensing ing auth author ori2 i2at atio ion n #oul #ould d be shor shortt ter ter,, or 7ust 7ust until until the the ne# ne# plant plant coul could d coe coe onli online ne.. Top anageent, as #ell as the board, #as unco"ortable #ith this solution "or se%eral reasons. They thought it unli4ely that any anu"acturer #ould shoulder the "i'ed costs o" producing appropriate coponents "or such a short ter. !ny anu"acturer that #ould do so #ould charge a preiu to reco%er its costs. This suggestion, suggestion, ob%iously ob%iously,, #ould a4e Byte5s Byte5s o#n products products a%ailable to its custoers at the unacceptable price. @or did passing any price increase to its custoers see sensible, "or this too #ould alost certainly reduce Byte5s ar4et share as #ell as encourage "urther copetition. %erseas "acilities and licensing also #ere considered but re7ected. Be"ore it becae a publicity traded copany copan y, Byte5s "ounders had decided that its anu"acturing "acilities #ould be doestic. Top Top anageent strongly "elt that this strategy had ser%ed Byte #ell& oreo%er, Byte5s a7ority stoc4holders 9initial o#ners o" the then pri%ately held Byte; #ere not li4ely to endorse such a o%e. Beyond Beyond that, ho#e%er, ho#e%er, top anageent #as reluctant to to "oreign licenseAor a4e a%ailable by any eans the technologies "or others to produce Byte productsas the could not then properly control control patents. Top anageent "eared that "oreign licensing licensing #ould essentially essentially gi%e a#ay costly proprietary in"oration regarding the copany5s highly e""icient eans o" product de%elopent. There also #as the potential "or initial lo# product $ualityA#hether produced doestically or other#iseAespecially "or such a short run operation. !ny reduction in $uality, $uality, ho#e%er brie", b rie", #ould threaten Byte5s share o" this sensiti%e ar4et.
The 0olution ne recoendation that has coe to the attention o" the Chie" 8'ecuti%e ""icer could help sol%e Byte5 Byte5ss proble in the short run. Certain Certain ebers o" his sta"" sta"" ha%e odi"ied odi"ied hi that an abandoned plant currently is a%ailable in Plain%ille, a sall to#n in the northeastern /nited 0tates. Be"ore its closing #ith years be"ore, this plant #as used priarily "or the anu"acture o" electronic coponents. !s is, it could not possible be used to produce Byte products, but it could be ine'pensi%ely, re"itted re"itted to do so in a "e# as three onths. oreo%er, this plant is a%ailable at a %ery attracti%e price. In "act, discreet in$uires by 8lliott5s sta"" indicate that his plant could probably be leased iediately "ro its present o#ners because the building has been %acant "or soe eight years. !ll the ne#s about this teporary plant proposal, ho#e%er, is not nearly so positi%e. 8lliott5s sta"" concedes that this plant #ill ne%er be e""icient and its pro"itability #ill be lo#. In addition, the Plain%ille location is a poor one in ters o" high labor costs 9the area is highly unioni2ed;, #arehousing e'penses, and inade$uate transportation lin4s to Byte5s a7or ar4ets and suppliers. Plain%ille is siply not a candidate "or a longter solution. 0till, in the short run, a teporary plant could help eet the deand and ight "orestall additional copetition. The sta"" is persuasi%e and notes that this option has se%eral ad%antages: 91; there is no need "or any licensing, "oreign or doestic, 9); $uality control reains "irly in the copany5s
3 hands, and 93; an increase increase in the product product price #ill be unnecessary unnecessary.. The teporary teporary plant, then, #ould be used "or three three years or so until the ne# plant could be built. Then the teporary plant #ould be iediately closed C8 8lliott is con%inced.
Ta4ing the Plant to the Board The $uarterly eeting o" the Board o" Directors is set to coence at ): p.. >i 8lliott has been re%ie#ing his notes and agenda "or the eeting ost o" the orning. The issue o" the teporary teporary plant is clearly the ost iportant iportant agenda ite. Re%ie#ing Re%ie#ing his detailed presentation presentation o" this atter, including the associated "inancial analyses, has occupied uch o" his tie "or se%eral days. !ll the a%ailable in"oration in"oration underscores his contention that the teporary plant in Plain%ille Plain%ille is the only responsibl responsiblee solution solution to the deand proble. proble. @o other option o""ers o""ers the sae lo# le%el o" ris4 and ensures Byte5 B yte5ss statues as industry leader lead er.. !t the eeting, a"ter the board has dispensed #ith a nuber o" routine atters, >i 8lliot turns his attention to the teporary plant. In short order, he ad%ised the 11eber board 9hisel", 3 additional inside ebers, and < outside ebers; o" his proposal to obtain an re"it the e'isting plant to aeliorate deand probles in the short run, authori2es the construction o" the ne# plant 9the copletion o" #hich is estiated to ta4e soe three years;, and plans to s#itch s#itch capacity "ro the teporary teporary plant to the ne# one #hen it is operational operational.. e also brie"ly re%ie#s additional details concerning the costs in%ol%ed, ad%antages o" this proposal %ersus doestic or "oreign licensing, and so on. !ll the board ebers e'cept on are in "a%or o" the proposal. In "act, they are ost enthusiastic& the o%er#heling a7ority agrees that the teporary plant is an e'cellente%en inspiredstopgap easure. Ten o" the ele%en board ebers see relie%ed because the board #as ost reluctant to endorse any o" the other alternati%es that had been entioned. The single dissenterT. Ee%in =illias, an outside directoris, ho#e%er, stead"ast in his ob7ections. e #ill not, under any circustances, endorse the notion o" the teporary plant and states rather strongly that FI #ill not be party to this nonsense, not no#, not e%er.G e%er.G T. Ee%in =illias, the senior e'ecuti%e o" a a7or nonpro"it organi2ation, is norally a reser%ed and really $uite agreeable person. This sudden, uncharacteristic burst o" eotion clearly startles startles the reaining reaining board ebers ebers into silence. The "ollo#ing e'cerpt captures the ensuing, ensuing, essentially oneonone con%ersation bet#een =illias =illias and 8lliott: p eople estiate #ill be eployed in the teporary plantH Williams: o# ay #or4ers do your people Elliott: Roughly 1,), possible a "e# ore. presu uee it #oul #ould d be "air "air,, then, then, to say that, that, incl includi uding ng spou spouse sess and child childre ren, n, Williams: I pres soething on the order o" , people #ill be attracted to the counity. Elliott: I certainly #ould not be surprised. Williams: I" I understand the situation correctly, this plant closed 7ust o%er eight years ago, and that closing had a catastrophic e""ect on Plain%ille. Isn5t it true that a large portion o" the counity #as eployed by this plantH es, it #as "ar and a#ay the a7ority eployer. Elliott: es, Williams: !nd ost o" these people ha%e le"t the counity, presuably to "ind eployent else#here. De"initely, there #as a drastic decrease in the area5s population. Elliott: De"initely,
Williams: !re you concerned, then, our copany can attract the 1,) eployees to Plain%ille "ro other parts o" @e# 8nglandH Elliott: @ot in the least. =e are absolutely con"ident that #e #ill attract 1,)e%en ore, "or that atter %irtually any nuber #e need. That, in "act, is one o" the chie" ad%antages o" this proposal. I #ould thin4 that the counity #ould be %ery pleased to ha%e us there. Williams: n the contrary, I #ould suspect the counity #ill rue the day #e arri%ed. Beyond that, though, this plan is totally un#or4able i" #e are candid. n the other hand, i" #e are less than candid, the proposal #ill #or4 "or us, but only at great cost to Plain%ille. In "act, $uite "ran4ly, "ran4ly, the iplications are appalling. nce again, I ust enter y serious ob7ections. Elliott: I don5t "ollo# you. Williams: The teporary plant #ould eploy soe 1,) people. !gain, this eans the in"usion o" o%er , to the counity and surrounding areas. Byte Products, ho#e%er, intends to close this plant in three years or less. I" Byte in"ors the counity or the eployees that the 7obs are teporary teporary,, the proposal siply #on5t #or4. =hen the ne# people arri%e arri%e the counity, counity, there #ill #ill be a need "or ore ore school schools, s, instr instruct uctors ors,, utilit utilities ies,, hous housing ing,, restau restaurant rants, s, and so "orth. "orth. b%iously, i" the ban4s and local go%ernent 4no# that the plant is teporary, no "unding #ill be ade to a%ailable "or these pro7ects and certainly no credit "or the ne# eployees to buy hoes, appliances, autoobiles and so "orth. I", on the other hand, Byte Products does not tell the counity o" its JteporaryG plans, the pro7ect can go on. But, in se%eral years #hen the plant closes 9and #e here ha%e agreed today that it #ill close;, #e #ill ha%e created a ghost to#n. The ta' base o" the counity #ill ha%e been destroyed: property %alues #ill decrease precipitously& practically the #hole to#n #ill be uneployed. This proposal #ill place Byte Products in an untenable position and in e'tree 7eopardy. 7eopardy. Elliott: !re you suggesting that this proposal 7eopardi2ed us legallyH I" so, it should be noted that the legal departent has re%ie#ed this proposal in its entirely and had indicated no proble. Williams: @o I don5t thin4 #e are dealing #ith an issue o" legality here. In "act, don5t doubt "or a inute that his proposal is altogether legal. I do, ho#e%er, resolutely belie%e that this proposal constitutes gross responsibility. responsibility. I thin4 this decision has captured ost o y a7or concerns. These along #ith a host o" collateral probles associated #ith this pro7ect lea e to strongly suggest that you and the balance o" the board reconsider recon sider and a nd not endorse this proposal. Byte B yte Products ust "ind another #ay.
The Dilea !"ter a short recess, the board eeting recon%ened. Presuably because o" soe discussion during the recess, se%eral other board ebers indicated that they #ere no longer inclined to support the proposal. !"ter a short period o" rather heated discussion, the "ollo#ing e'change too4 place. Elliott: It appears to e that any %ote on this atter is li4ely to be %ery close. Ki%en the gra%ity o" our deand capacity proble. I ust insist that the stoc4holders5 e$uity be protected. =e cannot #ait three years: that is clearly out o" the $uestion. I still "eel that licensingdoestic or "oreignis not in our longter interest "or any nuber o" reasons, soe o" #hich ha%e been discussed here. n the other hand, I don not #ant to ta4e ta4e this pro7ect "or#ard "or#ard on the strength strength o"
+ a i'ed %ote. ! %ote o" *+ or <, "or e'aple, does not indicate that the board is reotely close to being o" one ind. r. =illias, =illias, is there a coproise to be reachedH Williams: Respect"ully, I ha%e to say no. I" #e tell the truthnaely, the teporary nature o" our operationsthe proposal is siply not %iable. I" #e are less than candid in this pro7ect, #e do gra%e daage to the counity as #ell as to our iage. It sees to e that #e can only go one #ay or the other. I don5t see a iddle ground.
!PP8@DI 1+.! R80/RC80 ?R C!08 R808!RC Coma!" I!#o$matio! 1. !nnu !nnual al repor eports ts ). oody5s Manuals on Investment 9listing 9listing o" copanies #ithin certain industries that contains a brie" history and a "i%eyear "inancial stateent o" each copany; 3. 0ecurities 0ecurities and and 8'change Cois Coission sion Report Report ?ors ?ors 1E 9annually 9annually;; and 1M 9$uarterly; . 0tan 0tanda dard rd N Poor Poor55s Register of Corporations, Directors, and 8'ecuti%es +. Value alue Line Line55s Investment Survey *. ?inde'5s '5s Directory of Maret Research Research Reports, 0tudies and 0ur%eys 9a listing by ar4et Research.co o" ore than 11, studies conducted by leading research "irs; <. Copustat, Copustat, Copact Copact Disclosur Disclosure, e, CDOInternat CDOInternational ional and oo%er5 oo%er5ss nline Corporat Corporatee Directory 9coputeri2ed operating and "inancial in"oration on thousands o" publicity held corporations; . 0hareholders 0hareholders eeting eeting notices notices in 08C 08C ?or 1! 9pro'y notices; notices; E%o!omi% I!#o$matio! 1. Regional Regional statist statistics ics and and local "orecast "orecast "ro "ro large large ban4s ). !usiness Cycle Development 9Departent 9Departent o" Coerce; 3. Chase 8conoetric 8conoetric !ssociates !ssociates55 publication publicationss . /.0. Census Census Bureau Bureau publicat publications ions on on population, population, transpor transportatio tation n and housing housing +. Current !usiness Reports 9/.0. Departent o" Coerce; *. Economic Indicators 9/.0. >oint 8conoic Coittee; <. Economic Report of the "resident to Congress Congress . #ong$%erm #ong$%erm Economic &ro'th 9/.0 Departent o" Coerce; Q. Monthly #a(or Revie' 9/.0. Departent o" Labor; 1. Monthly !ulletin of Statistics 9/nited @ations; 11. Statistical A(stract of the )nited States 9/.0. Departent o" Coerce; 1). Statistical *ear(oo 9/nited 9/nited @ations; 13. Survey of Current !usiness 9/.0. Departent o" Coerce; 1. ).S. Industrial +utloo 9/.0. 9/.0. Departent o" De"ense;
