Business Law: Fiduciary Duty Analysis of CEO's Pill Decision

This case study explores the fiduciary duty of a CEO towards shareholders, particularly in the context of deciding whether to withdraw a potentially harmful weight loss pill from the market. The analysis considers both short-term financial gains from continued sales and the long-term implications of potential lawsuits, reputational damage, and regulatory repercussions. It argues that while keeping the pill on the market might yield immediate profits, the long-term costs associated with negative publicity, legal settlements, and damage to brand equity would outweigh these gains. The study concludes that withdrawing the pill, though potentially leading to short-term losses, is the more prudent decision as it protects the company's reputation, maintains customer trust, and allows for the development of a safer alternative, ultimately maximizing shareholder wealth in the long run. Therefore, the recommended course of action aligns with the CEO's fiduciary duty to act in the best interests of the shareholders.

BUSINESS LAW
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One of the key fiduciary duties that agents have towards their principal is to act in a manner
which furthers the interest of the principal and hence is beneficial for the principal.
Considering that the CEO is the agent of the shareholders who eventually own the company ,
hence the CEO must act in a manner which tends to maximise the returns for shareholders. It
is imperative to note that since the company essentially has a perpetual life, hence decision
making by CEO should assist wealth creation not only in the short run but also the long run.
Further, it has been seen in that excessive focus on the short run essentially tends to lead to
lapses in the long term wealth creation.
With regards to the situation at hand, keeping the weight loss pill on the shelf would result in
short term gains for the shareholders in terms of dividends. But the lawsuits and subsequent
growth in incidence of sufferers would bring about bad press for the company and would
have an adverse impact on the reputation and brand equity. Besides, the company may have
to spend incremental money in settling various potential lawsuits. Additionally, the decision
to continue the pills in the market could have adverse regulatory impact which would have
future implications in terms of launch of new drugs going forward.
The above analysis clearly highlights that if as the CEO, I decide now to withdraw the pills,
then the short gains in the form of dividend would have significant adverse impact in the near
future. This is especially relevant considering the nature of the business where customer trust
is of utmost importance especially when the drug lacks FDA approval. Hence, as the CEO, it
makes sense to decide to take the faulty weight loss pill off the shelf. This might lead to loss
of profits in the short term but would ensure that the brand is not adversely impacted.
Besides, the customer trust would not be broken. Also, withdrawing the drug in the present
would an opportunity to replace the existing drug with a superior version which does not
have side effects. This option would not be available in case there is widespread incidence of
side effects related to the pill. Hence, maximisation of shareholder wealth in the long run is

supported by the decision to withdraw the pill from the market. Therefore, this is the
recommended course of action in order to comply with fiduciary duty towards shareholders.