Question

(Treasury Stock—Ethics) Lois Kenseth, president of Sycamore Corporation, is concerned about several large stockholders who have been very vocal lately in their criticisms of her leadership. She thinks they might mount a campaign to have her removed as the corporation’s CEO. She decides that buying them out by purchasing their shares could eliminate them as opponents, and she is confident they would accept a “good” offer. Kenseth knows the corporation’s cash position is decent, so it has the cash to complete the transaction. She also knows the purchase of these shares will increase earnings per share, which should make other investors quite happy. (Earnings per share is calculated by dividing net income available for the common shareholders by the weighted-average number of shares outstanding. Therefore, if the number of shares outstanding is decreased by purchasing treasury shares, earnings per share increases.)

Instructions

Answer the following questions.

1. Who are the stakeholders in this situation?
2. What are the ethical issues involved?
3. Should Kenseth authorize the transaction?

Short answer

Lois Kenseth must use ethical issues when control of a corporation is at stake.

Step-by-step solution

Meaning of Treasury stock

Shares that are repurchasedby a company sometime after the issue for some specific reason are known as treasury stock. It is measured aspart of the equity section of the balance sheet.

The stakeholders are

The stakeholders are disgruntled shareholders, other shareholders,potential speculators, creditors, and Kenneth.

Explaining the ethical issues in the transaction

Ethical issues are credibility, work security, and personal obligations to others. That is, by using her insider knowledge and her expertise to make the buy-in, she can leverage herself at the potential cost of other partners.

Explaining the authorization of the transaction.

It is important for Kenseth to consider that what is good for the organization is not suitable for her(in back framing, an organization issue). Kenseth should consider answering the questions: (1) Are there better jobs for the money? (2) Can she win over the dissidents in any other way? (3) Will this business be best for all parties in the long run?