Principled Leadership and Ethics C3

BUS500 Principled Leadership & Ethics

Case Study #3 Preparation

Golden Rule

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Case Study: When the Golden Rule Yields No Gold

Michael Zigarelli Messiah College [email protected]

Gary Page Page & Associates, LLC [email protected]

ABSTRACT: Zach Jordan (a real person but not his real name), the owner of a small business in

Connecticut, may not be able to compete any longer in the spring manufacturing industry. Overseas

competition has put him at a significant cost disadvantage, and the losses continue to mount year

after year. At the same time, he’s deeply committed to care for his handful of employees — people

who are dependent on him and who he considers “family.” Now at a crossroads, he faces an

apparent dilemma: (1) gamble $200,000 on rent to extend the jobs of his employee family or (2)

liquidate the business while it’s still worth something, sending his employees to the unemployment

line during a bad economy. There may be other, more attractive options and identifying them and

selecting from among them is largely what this case is about. Framed from a Christian worldview, the

case comes down to this: In an intensely competitive environment, how can we faithfully serve

employee needs while effectively stewarding the business?

The Case

Zach Jordan sat at his desk seeking the high road. It had been his approach from day one.

Now, though, on day 10,001, that road was obscure. Or perhaps this time there were two or three

high roads. Metaphors aside, this much was apparent: If he sold his ailing company, several people —

good people whom he had embraced as family over the years — would lose their jobs in a bad

economy. But if he didn’t sell and if business didn’t improve, he could lose hundreds of thousands

of dollars in rent.

He looked at the pictures adorning the walls, pictures of his three girls, pictures of his

employees, a photo of him doing his magic act (Zach’s favorite hobby) for mesmerized school

children. Zach had a zest for life and an authentic love for everyone around him.

Throughout his career, his priorities made that abundantly clear. Zach had often worked

from home during his 30s and 40s, sacrificing business growth so that he could help raise his girls.

He had adopted a “Golden Rule” approach to management, paternalistically caring for his

employees’ needs, maintaining integrity in every deal, insisting on quality, respect, and timely

delivery for every customer, treating all of his stakeholders as he would want to be treated.

The fruit of that management style was a fiercely loyal workforce — hardly any turnover in

twenty years of business — as well as an equally loyal customer base. One of Zach’s eleven employees

summed it up well: “Zach’s the glue that holds everything together around here. And he’s a great

boss, too. He treats us better than anyone’s ever treated us in our other jobs. I’ll give you an

example: In good times and in bad, he’s always given a big Christmas bonus. One time he even had

to borrow the money to do it!”

BUS500 Principled Leadership & Ethics

Case Study #3 Preparation

Golden Rule

2 | P a g e

There was financial fruit as well — lots of profit, at least through the first ten years. His New

England Spring Company (NES) in Connecticut earned a great return throughout the 1980s. But

international competition and a sputtering economy began to take their toll, and in the 1990s, many

of Zach’s customers began to import their springs, primarily from manufacturers in Asia whose costs

were a fraction of Zach’s. Profit evaporated and eventually turned to losses. The past five years had

been particularly difficult, almost all of which culminated in red ink (see Exhibit 1 for NES financial

information).

As he wiped some dust from the photo of the NES family celebrating an employee’s birthday

(Zach commemorated every employee birthday with a card and a $30 check), in walked his two

invited guests for the day. Steve, his accountant and longtime friend, and Charles, a professor (now

emeritus), from Zach’s business school days. This was a bittersweet occasion. Zach embraced each

but then had to share with the professor his reason for the invitation: He needed advice about

whether to sell his beloved company.

Zach closed the door. “Thanks so much for coming, you guys. I really appreciate your

willingness to give me some candid advice.”

His expression turned somber, as did his tone. Zach looked squarely at the septuagenarian

professor and repented: “Charles, this place is bleeding, and it has been for years. I’m seriously

thinking about getting out rather than signing off on another two-year, $200,000 lease for the

building. Steve tells me I can get at least $750,000 for the customers, the inventory, the receivables,

and the equipment, but the problem is this: with my financials, nobody is going to buy the business

itself. So if I sell, it has to be by parceling it off. But then NES won’t exist anymore and my people

would lose their jobs. And in this economy, they’re not going to find jobs anytime soon, certainly not

much beyond minimum wage. I could take a chance and try to keep it afloat, but I’m on the verge of

losing my biggest account to India – twenty percent of my business! If that happens, I probably

couldn’t survive more than two months, and the selling price of the business would drop a whole lot

more. But even if I keep this account, there’s no guarantee that things are going to turn around. I just

can’t compete with Asia’s dollar-an-hour labor.”

That was a lot of information in sixty seconds, but Charles zeroed in on what he considered a

critical issue. “What’s the chance of losing that account?”

“Probably about 50/50 next year,” Zach replied. “Maybe even 60/40. India’s come out with a

stainless steel spring that weighs fifty percent more than ours — much better quality — for the same

price, and my customer is genuinely considering making the switch.”

“And can you get back the lease money if the business fails?”

“No. I’m on the hook for that regardless,” Zach sighed.

“I’ve told you this before, pal,” his accountant gently offered. “You’ve gotta get out. Either

that or cut your sevenfigure salary.”

Zach smiled at the welcome levity — and the irony. Two years ago he had cut his own pay to

$31,000, less than what some of his employees were earning.

BUS500 Principled Leadership & Ethics

Case Study #3 Preparation

Golden Rule

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“Funny you should mention that,” Zach returned with a grin. “The SEC is stopping by this

afternoon. I thought I’d give ‘em your card.”

“Remind me, my friend,” Charles interjected with a chuckle, “what your product line looks

like. And tell me how you’ve been pursuing new business lately.”

“We manufacture and sell several types of springs,” Zach began, “everything from specialty

stainless steel springs to springs for navy jets and helicopters to common springs you’d find in a

hardware store. And over the years, I’ve tried to grow the business through a combination of in-

house sales reps and advertising in the standard industry newspapers, both in print and on the web.

Quite frankly, though, it’s been years since either approach has paid off, so I’ve recently dropped

them. Bids are so tight that a sales rep’s five percent commission required me to bid at my cost to

remain competitive. I was taking jobs just to cover overhead! And the hundred grand I dropped in

advertising over the past decade has returned almost no business. So basically, I’m left with no sales

force and essentially no advertising.”

“Sounds like you could use some fresh ideas,” the professor observed thoughtfully. He was

often brilliant, Zach thought, but now he was simply stating the obvious.

“That would be nice.” Zach was eager for a few hot tips from the good doctor, but he knew

those were probably a few days off. “And there might actually be some new business out there. But

my ‘fresh idea’ file is freshly depleted. I’ve also thought about re-tooling as an option — you know,

create other products that might have a niche — but I’d need about a quarter-million for equipment,

even used equipment, and I have no customer list for whatever that new product would be.”

“Let me give the marketing piece some thought,” Charles replied with characteristic

circumspection. “But in the meantime, tell me just how bad things are financially. Do you have some

income statements handy?”

Zach buzzed his secretary. “Mandy, can you please bring me the binder of financials?”

Mandy, as always, responded promptly, smiling at the gentlemen on her way out. As she closed the

door, Zach shared with his guests that Mandy, his secretary for twenty years, was recently widowed,

having psychological problems from the loss and in critical need of the health insurance benefits he

provides. “My other office gal,” he explained, shaking his head, “has a disabled husband and is the

sole support for a family of five. And the guy who runs the plant has four kids, two of them getting

ready for college. If he lost his job at age fifty, I don’t know what he’d do.”

The professor nodded; the accountant flipped pages in the binder. “It’s not terrible,” Steve

said as he opened the books for Charles, “but it’s not sustainable either. We’ve been losing money

for years. Costs are inching up, mostly because of health care, workers’ comp, and raw material

prices. Salaries are exactly at market — anywhere from $10 to $26 an hour. But we’ve cut everything

else to the bare bones. And as far as sales goes, we’ve been flat for a long time, and we have no

expectation for new sources of revenue.”

Charles adjusted his glasses as he reviewed the statements. His grimace told Zach that there

was no quick fix forthcoming.

BUS500 Principled Leadership & Ethics

Case Study #3 Preparation

Golden Rule

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“I’m telling ya, Zach, cut and run,” Steve recommended, preempting the professor’s analysis.

“I know you care about these people, but they’re big boys and girls now. They can take care of

themselves. Believe me, they’ll be fine.”

Zach didn’t know whether to be irritated at or grateful for the counsel. Maybe Steve’s was the

only rational response, but Steve was also ignoring the fact that Zach didn’t want to sell out his

employees. Irritation trumped gratitude for the moment.

“Would you be ‘fine’ if your income were cut in half and if you lost your health insurance?”

Zach retorted softly but firmly. “Would your family be ‘fine’? I know you’re looking out for me,

Steve, but I simply can’t operate that way.”

“All right,” his accountant back-peddled with a shrug. “So spend $175,000 to give them six

months’ severance. And spend another twenty-five grand to maintain their health benefits. Will that

help you to sleep at night?”

Zach pondered the idea, but it seemed a bit excessive. “I’m getting too old for this kind of

stress,” he said leaning back in his chair and rubbing his eyes. “I’m 62 now Charles, which I know

sounds like a spring chicken to you. But the spring business is taking all the spring out of this spring

chicken.”

Deep down, Zach desperately wanted his company to bounce back. But that seemed unlikely

without some bold new strategy. And he wasn’t sure he had either the energy to pursue it or the

gumption to roll the dice on another $200,000 lease. “Cut and run” seemed like a logical course of

action, but what about his people? This “Golden Rule” spring manufacturer recoiled at the thought

of repaying their loyalty with a trip to the unemployment line.

BUS399-01 Management Leadership

Case Study #2

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New England Spring Company

Income Statements ($ in thousands)

2012 2011 2010 2009 2008

Sales $ 1,211 $ 1,282 $ 1,256 $ 1,294 $ 1,308

Cost of Sales

Materials 403 396 375 349 353

Production wages 390 375 362 395 399

Overhead & other 51 135 65 49 84

Total Cost of Sales 844 906 802 793 836

Gross Margin 367 376 454 501 472

Operating Expenses

Rent 100 100 100 100 100

Admin salaries 66 98 145 152 168

Employee benefits 63 59 52 49 44

Office & supplies 32 42 38 42 31

Utilities & phone 52 57 54 51 49

Depreciation 46 46 46 58 61

Other & miscellaneous 22 18 26 47 26

Total operating expenses 381 420 461 499 479

Net Income (Loss) $ (14) $ (44) $ (7) $ 2 $ (7)

New England Spring Company

Balance Sheets ($ in thousands)

Assets 2012 2011 2010 2009 2008

Current assets

Cash $ 98 $ 142 $ 121 $ 92 $ 119

Accounts receivable 22 19 27 38 41

Inventories 98 106 89 95 42

Other 3 6 4 9 12

Total current assets 221 273 241 234 214

Fixed assets (net of depreciation) 382 416 462 508 566

Total Assets $ 603 $ 689 $ 703 $ 742 $ 780

Liabilities & Equity

Current liabilities $ 284 $ 356 $ 326 $ 294 $ 314

Long-term debt - - - 64 84

Common stock 300 300 300 300 300

Retained earnings 19 33 77 84 82

Total Liabilities & Equity $ 603 $ 689 $ 703 $ 742 $ 780