Its business involves production of both stock items and custom pieces for doctors at research hospitals. At the end of the third quarter of 2011, it became clear to Ed Walters, chief operating officer, and Robin Smith, chief financial officer, that the company would not make the aggressive annual earnings target specified by the board of directors. In consequence, Ed and Robin would not receive bonuses, which historically had averaged about 35 percent of their base compensation. The two devised the following strategy.
Required:
Are the proposed actions of Ed and Robin ethical? What is the likely effect of their actions on shareholder value?