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Assignment 2: Balancing Act You are speaking for the executive board of a small oil company, Future Fuel, in Colorado. Your CEO and founder, Tom Bennet, is very avid supporter of sustainability and innovation. He insists that money invested now will pay off in big dividends down the road. You all have a legitimate concern for the environment and share and support Bennet in his personal and business philosophy. You are all also very aware of the momentum of the growing “green” movement. Your R&D (research and development) budget for seeking new renewable and viable alternative sources of energy has traditionally been between 22-24% of your operations revenue. You have decided to increase that budget line item to 35% for the next fiscal year on the strong recommendation of Bennet. Additionally, you have also decided to equip your headquarters and other 8 sites in the west with active solar energy systems and wind power generators. You are a publicly held company and your stock has been less than stellar in its last 3 quarters’ performance. Your third quarter just ended, and you are about to hold your earnings meeting. Your earnings after operating costs are modest. You are announcing your numbers and your plans to increase the R&D budget and installation of renewable energy systems. Discuss the above scenario as the executive board of Future Fuel and in 5-pages answer these questions How do you balance the needs of the shareholders and the need to innovate?
Expert Answer
The petroleum industry has been undergoing some changes over the past few years. it is susceptible to the calamities of nature. Not to mention it is non-renewable. With increasing restrictions on the industry, the situation just gets more rigid. The world is looking some massive changes to reduce the carbon footprint and its consequence. The industry is being hated and loved – hated for the petrol being a major cause of environmental pollution. The industry thrives because no better alternative in terms of efficiency and effectiveness have been brought to the market.
Research and development in this sector have boomed over the past few years and other players are seriously considering for new alternatives to protect the company, the planet, and the people.
Our company under the leadership of Mr. Bennet has always been environmentally conscious and supported innovation. As a company, we are always on the path for creating sustainability so that our shareholders get a constant stream of a trustworthy dividend.
As we have seen over the past few years technology changes especially digital technology and innovation have been accelerating but at a very rapid pace in the history of mankind. What is the fashion now is obsolete tomorrow? And our industry is not an exception to this. It is just a matter of time before a single disruptive innovation changes the dynamics and economics of the whole industry .consider how the internet of things and smartphones changed the way we received information.
We understand our fiduciary responsibility to maintain and progress in terms of returns to shareholders. So we are in a position to secure our future with investments in innovation. The board has always been on the lookout for embracing new opportunities in this sector and now we find a huge opportunity to invest in R&D. It is not just an opportunity but also a necessity in keeping the pace with competitors. The investment we make is geared towards the long run. Especially in an industry like this investments are naturally bet upon long-run returns. The board sincerely believes that shareholders also stand by this view of looking out to protect and secure us.
Our returns have been quite modest in the third quarter. Returns have been stable over the past few quarters. Though macroeconomic conditions are the primary reason and situation will move to positive growth in the future, the board does not want to be complacent and hence intends to use this as an opportunity to look for bigger and diversified organic growth in allied areas through investments in new technologies and renewable sources.
Hence the board has decided to increase the 22-24% to 35% of operating revenue to further R&D projects. It has also been unanimously decided to equip the headquarters and other 8 sites in the west with renewable sources of power – solar energy systems and wind power generators. The board has taken this decision after meticulous research, thorough discussion about the future – both short term & long term along with the shareholders/ stakeholders in mind.
As a socially responsible company, we have always been looking at the triple bottom line- people, planets, and profits .the board strongly believe that we need to balance all three and the current investments will help us reap greater benefits in the years to come by.
‘ If we are not progressing, we are deteriorating’ – Kurt Cobain
