Dunlap Case

INTRODUCTION
This memo evaluates the decisions of the Sunbeam Board of Directors during Al Dunlap’s tenure as Chairman and Chief Executive Officer. Important elements of this assessment include an overview of Sunbeam’s goals, an evaluation of the 1996-1997 compensation package, an evaluation of the 1998 compensation package, the decision to fire Al Dunlap, and the governance of the Board of Directors.
SUNBEAM’S GOALS
Sunbeam’s goals explicitly showed when they hired Al Dunlap July of 1996. Sunbeam struggled in the business world, and faced thick competition. They saw that they needed a big change if their company wanted to stay in business. Al Dunlap had a reputation for turning failing companies into prospering ones. They cared about
becoming profitable fast and Al Dunlap seemed to be suitable for the job. Sunbeam knew the reputation he had, which consisted of ruthlessly laying off thousands of employees and downsizing. The Board of Directors did not exhibit social responsibility due to Dunlap’s supportive stance on shareholders wealth. Stakeholders should be valued in a company. Stakeholders still have interest in the company and contribute to a company’s wealth. If the focus is all on shareholders wealth, then ethics, quality of a product, and a loyal customer base are all important aspects of a company that are sacrificed. Sunbeam should have incorporated a balance between shareholder and stakeholder wealth to align different perspectives.
EVALUATION OF 1996-1997 COMPENSATION PACKAGE
Al Dunlap’s 1996-1997 compensation package consisted of a salary a little above $500,000, no signing bonus, and millions of dollars in stock options and awards.
The compensation package achieved Sunbeam’s goals of maximizing shareholders wealth. It motivated Dunlap to drive up the price of the stock. Although the short term profits benefited shareholders, no incentives to create a long term, profitable company existed. In fact, it gave Dunlap an even bigger incentive to sell the company once the stock price reached a high, favorable value. Dunlap’s compensation package consisted of little to no risk and had a ten year term. The restricted stock rewards became vested in two years. His purchase of 244,898 shares indicated that profits would drastically increase. Dunlap’s compensation package affected thousands of employees at Sunbeam. The compensation package favored shareholders but disfavored employees. They had no value in this model. The compensation package only protected shareholders wealth. The structure of Dunlap’s compensation package was aligned his views of shareholder primacy. He sacrificed values for a boost in stock price and economic efficiency. The stockholders of Sunbeam greatly profited, and Dunlap reaped a majority of the benefits. The compensation package should relate to performance in order to produce the right incentives. The compensation package provided Dunlap with an excessive amount of shares of stock and stock rewards, but at least it provided an
incentive to drive the stock price up.
EVALUATION OF 1998 COMPENSATION PACKAGE
The 1998 compensation package differed from the 1996-1997 package in a sense that it provided limited incentives.
His salary nearly doubled to 2,000,000 dollars. He received a grant of shares that valued over 15,000,000 dollars. He also received 3,750,000 new options. This compensation package provided Dunlap with excessive perks. The salary seemed equivalent to how much compensation a CEO received during this time, but the excessive stock options and awards given to him proved to be problematic. All of the stock awards and grants increased tremendously in value from 1996-1998. Dunlap did not purchase any stock in 1998. The Board of Directors gave Dunlap too many benefits in the 1998 compensation package, leading to Sunbeam’s
demise.
FIRING DECISION
The Board of Directors made the right decision to fire Al Dunlap. He took advantage of Sunbeam through free stock, and focused on the short term value of the company rather than the long term. He underestimated the state of serious financial trouble that Sunbeam resided in, and seemed only concern about his payroll.
GOVERNANCE
The Board of Directors exhibited poor corporate governance during Dunlap’s tenure. The Board of Directors failed to recognize that inventory stuffing occurred during Dunlap’s term. The Board of Directors needed to pay closer attention to Sunbeam’s activities. The financial sheets were manipulated to look more profitable than they really were. This type of moral hazardous behavior was carelessly overlooked. The Board of Directors also made a mistake by not having separation of ownership and control. Dunlap owned a decent portion of the shares and had so much control over the company that he hid his fraudulent behavior. If the Board of Directors focused on the longevity of Sunbeam, some of these problems may not have occurred.
CONCLUSION
The Board of Directors decision to give Dunlap an excessive amount of stock and power led to Sunbeam’s demise. If the Board of Directors recognizes these mistakes and implements the recommendations I made, they will overcome this devastating matter and prosper under new leadership. Please send any questions regarding this memorandum to my gmail account.