Circon Harvard Case Solution & Analysis

Circon Case Study Solution

Question 1

Richard Auhll who was the CEO, Chairman and the founder of the medical device company, Circon Corporation was proud and passionate about his company. He was also proud about the professional achievements that he had achieved through 1969 to 1996 and also through his current job position. He enjoyed a good job, with a good office and a good income. He also had very loyal friends that were always attached to him like George Cloutier and was very much attached and loyal to him.

His view about the interests of the shareholders of the company was clear and he did not to make any decisions that were not in the medium to long term interests of the shareholders. He had once stated that capitalism is not only the focus of Wall street for the short term shareholder value, but it is also about the government, employees, customers, innovation and the hard work of the people that make the products and also build their companies. It was evident that the focus of Auhll was on the long term shareholder value but there were a number of actions that were opposite to this view.

He was the member of the compensation committee of Circon Corporation and his compensation along with the compensation of the CFO Thompson was composed of the base salary and the bonus percentage which was based on the salary. Moreover, the percentage of the base salary was increasing each year as we can see in the table below:

Looking at the above percentage increases and the proportion of the bonuses of the bonuses of the total salaries it is evident that these financial incentives are not aligned with the long term interest of the shareholders and they did not have any strong long term incentives. This could have resulted in the managerial myopia within the company and this is highly possible given the fact that Richard holds a small stake in the equity of the company and thus he would strive to make decisions that would only increase the accounting earnings rather than the stock price or the value of the company.

Managerial myopia can also occur when managers and the owners make mistakes or take those decisions that are not congruent with the forces that determine the value of the stock of the company. During the first two decades, Richard was able to run the company by generating good results but later on the industry had started to move ahead rapidly and Richard was not able to keep up the pace of the industrial changes. This is evident by the fact that the share value that has been gained by the peers of Circon Corporation was 5 to 10 times during the 116-1998 period while Circon was not able to achieve this much value and the board of directors along with Auhll failed to realize this.

Question 2

The defense mechanism that had been planned by Circo to the hostile takeover of the US Surgical Corporation was through the poison pill instrument and through this Auhll had taken several actions such as the creation of the staggered board that comprised of the one third of the directors that stood for the re-election at the annual general meeting, development of the employee retention plan, extending the minimum period of the 2 years for gaining the control of the board. The retention plan would be triggered by the changes in the control of Circon. This change would occur if US Surgical would acquire the stake of more than 15% in the company without the approval of the board.

All of these actions were legal and these would also be considered as ethical because Circon and the management of the company had changed the state of incorporation of the company from the California to the Delaware when the company had gone public in the year 1983. Within the Delaware the arbitrageurs, takeover artists and speculators were not the primary interest but the primary interest was the medium to the long term benefit of the shareholders and this was also considered as the state level Antitakeover law.

From the perspective of the director’s duty of care and loyalty, Auhll had started to work with Bear Stearns and Co to guide and also represent the management of Circon during the hostile takeover. They had played a very important role however; the role was more instructed by Auhll for instance the fairness opinion letter that was forwarded to the shareholders of the company did not state about why the offer of US Surgical was inadequate from a financial point of view. The letter did not also state any offer that was considered to be fair and adequate and neither the shareholders were provided by any numbers that could be analyzed by them. At this point of time, Circon lacked behind its peers within the industry and this was one of the factor due to which Leon wanted to take the advantage and the board of Circon should also have thought about this.................

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