Question

Donald Lennon is the president, founder, and majority owner of Wichita Medical Corporation, an emerging medical technology products company. Wichita is in dire need of additional capital to keep operating and to bring several promising products to final development, testing, and production. Donald, as owner of 51% of the outstanding stock, manages the company's operations. He places heavy emphasis on research and development and long-term growth. The other principal stockholder is Nina Friendly who, as a nonemployee investor, owns 40% of the stock. Nina would like to deemphasize the R & D functions and emphasize the marketing function to maximize short-run sales and profits from existing products. She believes this strategy would raise the market price of Wichita's stock.

All of Donald's personal capital and borrowing power is tied up in his 51% stock ownership. He knows that any offering of additional shares of stock will dilute his controlling interest because he won't be able to participate in such an issuance. But, Nina has money and would likely buy enough shares to gain control of Wichita. She then would dictate the company's future direction, even if it meant replacing Donald as president and CEO.

The company already has considerable debt. Raising additional debt will be costly, will adversely affect Wichita's credit rating, and will increase the company's reported losses due to the growth in interest expense. Nina and the other minority stockholders express opposition to the assumption of additional debt, fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to preserve the direction of “his” company, Donald is doing everything to avoid a stock issuance and is contemplating a large issuance of bonds, even if it means the bonds are issued with a high effective-interest rate.

Instructions

(a)  

Who are the stakeholders in this situation?

(b)  

What are the ethical issues in this case?

(c)  

What would you do if you were Donald?

Answer 1

Requirement a

The stakeholders in this state of affairs are: Donald Lennon the president, founder and majority owner. Nina Friendly, minority owner. The most obvious stakeholders are employees, owners and customers.

Requirement b

The ethical issue with this state of affairs is Donald Lennon is more anxious with what is in his best interest instead of being anxious about what is best for the company.

Requirement c

If I was Donald I don’t believe I would do what’s best for the company. I would do everything in my power to keep governing interest, as I would not want someone to tell me how to run my company. I would offer the large issuance of bonds with the high effective interest rate. The pay off can be just as good with bonds as with stocks. Bonds are basically a loan to the company, the ‘loan’ will mature anywhere from 5 to more than 12 years with a fixed interest rate. A down side to bonds is there isn’t any availability of the money when it is tied up in bonds. In order to keep control and my position of CEO in Wichita Medical Corporation bonds would be decision I would make to raise capital. If I were Donald I would put my self interest aside or the company may not survive. Then it wouldn’t matter who was majority stakeholder as there would no longer be Wichita.