P
rofessor Kenneth A. Merchant wrote this teaching note as an aid to instructors using the Vector Aeromotive Corporation case.
Marshall School of Business
University of Southern California
Vector Aeromotive Corporation
Teaching Note
Purpose of Case
This case introduces students to the role of boards of directors and to the inherent difficulties
boards often face. The case asks students to think about what should be the composition of a
board and what functions a board should perform. Specifically, it highlights the trade-off
between the board of directors expertise, commitment, independence, and access to information.
Students like this case because Vector Aeromotive is a small company that they can comprehend
Suggested Assignment Questions
1. Why did Vector Aeromotive have a board of directors because it went public? How (if at
all) do the legal and moral obligations of private-company directors differ from those of
directors of publicly held companies?
362
2. Evaluate the board composition and actions. All things considered, did the board act
properly? Did the board members choose the optimal time to terminate Gerry Wiegert?
3. What should the board members do now (March 22, 1993)?
4. What could have prevented or minimized the problems that Vector faced?
Case Analysis and Discussion Questions
1. In general, what functions should a board of directors perform?
Students answers should include the following:
Help develop company objectives and strategy
Approve the business plan and hold managers accountable for it (compensation,
termination)
2. Are the functions of Vectors board unique?
3. What caused the conflict between Vectors board and its president?
4. Evaluate the Composition of the Board
Students will have strong (mostly negative) opinions about the composition of the board.
After they have spent a few minutes voicing their opinions, help them answer the question
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
363
Table 1
The 1992 Board
Wiegert Pope Fencl Dorpi
Independence none little little strong
The purpose of this exercise is to help students recognize the trade-offs between some director
qualities, particularly independence, access to information, and expertise. In general, inside
directors are not independent from the influence of the CEO, but they have complete access to
the information necessary to make good decisions. Outside directors are much more
Students should also note that as chairman of the board, Wiegert arguably had too much control.
When the company went public, Wiegert owned 70% of the company, so he had significant
control. (After the Indonesian investment, Wiegert owned 35%.) He called the shareholders
5. Over and above composition, evaluate the board. Did they act appropriately?
This big question can be posed directly to the students, or the question can be
disaggregated as follows:
a. Should the board have terminated Wiegert at Harnetts bidding (early 1992)? If so, what
kept them from doing so? If not, how should they have dealt with the situation?
Most students initial response is that Wiegert should have been terminated at this point.
But their response if affected by hindsight biasknowledge of what happened
subsequently. The reasons Wiegert was not terminated at that time are given in the case
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
364
The directors thought that when Wiegert did something illegal, that was totally different
than just not making good management decisions. This makes an interesting discussion
point. In a case like this, can poor performance be grounds for termination, or only
dishonesty? Without the authority to terminate the CEO, the board has very little
control. On the other hand, students should recognize the consequences of terminating a
b. When it finally acted, was the board correct in its decision to terminate Wiegert?
Considering Wiegerts reaction, and the toll it will likely take on the company, was
firing Wiegert really in the best interest of shareholders?
Students might note that at this point the board still did not have what it wantedan
Act II. Students will rightly argue that business will probably suffer since the CEO of
the company is barricaded inside of the building and the directors are locked out. It
6. What was the boards major failure?
In retrospect, the board members concluded their major failure was their inability to get the
right information. If they had had the right information, they would have acted on it. But
they also felt that to a large degree, boards have to assume theyre getting the right
information. If boards are not being given the right information, then they obviously do not
have the right top management group in place.
How did Vectors directors access information? It was fed to them during boardroom
365
7. Suggest improvements that would make the board more effective
Students suggestions should include the following:
Split the job of CEO and Chairman of the Board
Add independent directors to the board (not the CEOs friends or employees)
Provide information to the directors prior to the board meetings
detriment to shareholder value, even if his actions are not illegal
8. What happened?
It was not easy to get Wiegert out of the company building. The police would not act. They
were not convinced Wiegert had committed a crime. They knew just that he was having a
conflict with his board.
The board members sought a restraining order from a judge. This order would have forced
the police to act. But the judge assigned to the case said he did not know who was right.
(The board has an absolute right to fire a CEO, but the judge did not understand this.)
Time Management for Class
1. Show movie clip 10 minutes
366
3. What actions can the board of directors take to protect 10 minutes
shareholders interests?
4. Did Vectors board act in the best interest of the shareholders?