Al Dunlap

1. Al Dunlap Prepared by: Julian Bongo Alexander Nagornov Ekaterina Kouznetsova November 29th, 2007 Corporate Finance and Valuation

2. Executive Summary • Creative accounting: • Fill warehouses, book revenue • Scale back development • Postpone maintenance Stock price Impress the analysts! “we will be successful because I say we will be” Market perception of the value Boost profit (observable) Value of the company Reduce the value (not observable) Even focus on stockholders is not a focus on LT value of the company.

3. 1. Shareholders vs. Stakeholders The following stakeholders are identified: Employees/ Management Business partners Customers Government Bondholders All stakeholders have one main interest: growth and prosperity of the firm According to Al Dunlap “stakeholders don’t pay a penny for their stake” Not true: all stakeholders help company grow in one way or the other

4. What stakeholders give to Sunbeam? Even though some of these stakeholders do not “pay a penny“ , they still stimulate the company’s growth Employees/ Management Business partners Customers Government Bondholders Competitive payment terms Guaranteed delivery arrangements Competitive interest rates Uncollateralized loans Delayed legal actions in case of default Not executing cross- default provision Preferred brand Loyalty Source for new product ideas Workforce R&D for new products Increasing efficiency Expansion of business Commitment Tax benefits Regulations and changes in law Government spending

5. Consequences for stakeholders as a result of Al Dunlap’s actions Business partners Customers Government Bondholders Employees/ Management Damaging the sale of all business partners, thus affecting more businesses than Sunbeam Potential risk shifting Shortened R&D may lead to lower quality or inconsistency in quality. Customers may switch to another brand name. Layoffs leading to low job security Low motivation Increasing unemployment

6. Compensation design Should be related to performance TO PRODUCE RIGHT INCENTIVES Salary Bonus Options Stocks Based on market information Fixed More accounting inf. • only upside exposure • upside and downside risk • provides with a rent even for poor performance • provides with a lower rent than shares Long term incentives? Not necessarily…

7. Compensation design : case of Dunlap First package: probably a bit excessive, but provides incentives • Options: vested in three parts over two years (but 10 years term?) • Exercise price almost at the level of current price (history is stable) • Stock Awards are restricted! (vested in two years) • Stocks purchased – a good signal. Second package: too excessive, highly limited incentives • Options: deep in money!!! • Stock Grants without any restrictions • Stocks purchased – NONE

8. Corporate governance The firm’s objective in the decision making • Managers focus • The shareholders • The price of stock may not reflect the long -term value • The extensive social Cost Sunbeam Corporate governance issues: Separation of ownership and control Moral hazard (Enrichment Strategies) Managers manipulate performance measures to look good Accounting manipulations Compensation Package linked to Implicit incentives

9. Corporate governance Board of Directors • Monitors management on behalf of shareholders • Operate through committees such as compensation, nominating and audit • Lack of independence • Insufficient attention

10. Corporate governance The role of corporate governance Poor corporate governance ! Board was captured Inventory stuffing Inside trading The Sarbanes-Oxley Act of 2002 (SOX) Key objectives of the SOX.

11. Thank you for attention!