Case 1

The Recalcitrant Director at Byte Products, Inc.:

Corporate Legality Versus Corporate Responsibility
Dan R. Dalton, Richard A. Cosier, and Cathy A. Enz
BYTE PRODUCTS, INC. IS PRIMARLY INVOLVED IN THE PRODUCTION 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 largest1
%olue suppliers o" speciali2ed coponents and is easily the industry leader, #ith soe 3)-
ar4et share. /n"ortunately "or Byte, any ne# "irs1doestic and "oreign1ha%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 #ell1is %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 throughout the /nited 0tates. 8ach o" these plants operates three 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%ity o" the proble. I" Byte Products cannot continue to anu"acture coponents 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 long1ter
solution to this proble, the Board o" Directors unaniously authori2ed the construction o" a
ne#, state1o"1the1art 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"ortunately, an estiated three years #ill be re$uired to
coplete the plant and bring it online.
>i 8lliot belie%es %ery strongly that this three1year period is "ar too long and has insisted
that there also be a shorter1range, stopgap solution #hile the plant is under construction. The
instability o" the ar4et and the pressure to aintain leader status are to# "actors contributing to
8lliot5s insurance on a ore iediate solution. =ithout such a o%e, Byte anageent
belie%es that it #ill lose ar4et share and, again, attract copetitors into the ar4et.
1
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 product and process technology to other
anu"acturers in the short run to eet iediate deand #as possible. This licensing
authori2ation #ould be short ter, or 7ust until the ne# plant could coe online. 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, ob%iously, #ould a4e Byte5s o#n 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, Byte5s "ounders had decided that its anu"acturing "acilities #ould be
doestic. 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 that, ho#e%er, top anageent #as reluctant to "oreign licenseAor a4e
a%ailable by any eans the technologies "or others to produce Byte products1as the could not
then properly control patents. Top anageent "eared that "oreign licensing #ould 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
$uality, ho#e%er brie", #ould threaten Byte5s share o" this sensiti%e ar4et.
The 0olutionB
,ne recoendation that has coe to the attention o" the Chie" 8'ecuti%e ,""icer could help
sol%e Byte5s proble in the short run. Certain ebers o" his sta"" ha%e odi"ied hi that an
abandoned plant currently is a%ailable in Plain%ille, a sall to#n in the northeastern /nited
0tates. Be"ore its closing #ith years be"ore, this plant #as used priarily "or the anu"acture o"
electronic coponents. !s is, it could not possible be used to produce Byte products, but it could
be ine'pensi%ely, re"itted to do so in a "e# as three onths. .oreo%er, this plant is a%ailable at a
%ery attracti%e price. In "act, discreet in$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 long1ter 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
)
hands, and 93; an increase in the product price #ill be unnecessary. The teporary plant, then,
#ould be used "or 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 ):CC p.. >i 8lliott has
been re%ie#ing his notes and agenda "or the eeting ost o" the orning. The issue o" the
teporary plant is clearly the ost iportant agenda ite. Re%ie#ing his detailed 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 underscores his contention that the teporary plant in
Plain%ille is the only responsible solution to the deand proble. @o other option o""ers the
sae lo# le%el o" ris4 and ensures Byte5s statues as industry leader.
!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 111eber 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 capacity "ro the teporary plant to the ne# one #hen it is operational. De 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'cellent1e%en
inspired1stopgap 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 dissenter1T. Ee%in =illias, an outside director1is, ho#e%er, stead"ast in his
ob7ections. De #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
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 the reaining board ebers into silence. The "ollo#ing e'cerpt captures the ensuing,
essentially one1on1one con%ersation bet#een =illias and 8lliott:
Williams: Do# ay #or4ers do your people estiate #ill be eployed in the teporary plantH
Elliott: Roughly 1,)CC, possible a "e# ore.
Williams: I presue it #ould be "air, then, to say that, including spouses and children,
soething on the order o" :,CCC 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
Elliott: Ies, it #as "ar and a#ay the a7ority eployer.
Williams: !nd ost o" these people ha%e le"t the counity, presuably to "ind eployent
else#here.
Elliott: De"initely, there #as a drastic decrease in the area5s population.
3
Williams: !re you concerned, then, our copany can attract the 1,)CC 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,)CC1e%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, 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,)CC people. !gain, this eans the in"usion
o" o%er :,CCC 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, the proposal siply #on5t #or4. =hen the ne# people arri%e the counity, there
#ill be a need "or ore schools, instructors, utilities, housing, restaurants, and so "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.
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: @oB 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.
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 and not endorse this proposal. Byte 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 licensing1doestic or
"oreign1is not in our long1ter interest "or any nuber o" reasons, soe o" #hich ha%e been
discussed here. ,n the other hand, I don not #ant to ta4e this pro7ect "or#ard on the strength o"
:
a i'ed %ote. ! %ote o" *1+ or <1:, "or e'aple, does not indicate that the board is reotely close
to being o" one ind. .r. =illias, is there a coproise to be reachedH
Williams: Respect"ully, I ha%e to say no. I" #e tell the truth1naely, the teporary nature o" our
operations1the 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@DIL 1+.!
R80,/RC80 ?,R C!08 R808!RCD
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