Over the past few years, the number of start-up companies attracted to either do
ID: 2727216 • Letter: O
Question
Over the past few years, the number of start-up companies attracted to either doing business themselves in the cloud, or specifically creating applications for others to use in the cloud, has grown significantly. A few but very promising enterprises have launched applications in “container” technology, which enables companies, programmers, or other enterprises to both launch and run applications solely in the cloud. There is still a lot of room in this emerging marketplace, and you are diving in. The product you’ve developed has a unique angle to tap into the local-grown/local-made/local-paid movement that’s also growing larger every day. Your initial market is your own small city, which operates independently but which is linked economically and via public safety provision to another small city sitting directly across a river separating the two. Once you’ve been able to launch your company in your city, you plan to approach the “sister city” leaders, then the county, state, and eventually go national. It’s too soon now, but your future plans entail an IPO offering to accomplish all this. Eventually, you hope to be able to re-imagine your product to go global. You have big plans, are close to being tapped out financially and you now need to plan for additional investors. Address the following considerations as they apply to your product launch. 5. Another consideration you feel you need to address at this point, now that your firm’s stock is publicly traded, is how to sustain the high ethical standards you’ve fostered thus far as you move into the firm’s future. What strategies can your management team implement to conduct your business with both personal and professional integrity? What steps can you take to ensure that ethical considerations for financial and other management decisions are embedded into the firm’s culture? 6. Congratulations - you are now at Year One, and everything is moving along faster than you anticipated. While this is great, you are at the point where you need to raise additional capital from outside lenders. With this decision, what type of agency costs might the company incur? How might a lender mitigate any agency costs? 7. Year Two rolls around. Your company has been able to expand beyond your local communities and into to localities and governments in half the counties of the state. The stakes are getting bigger and you welcome the idea of high-level input to ensure the company keeps growing and expanding. You cash out the majority of your stock and turn the company over to an elected board of directors. Neither you nor any other stockholders own a controlling interest (which is also the situation at most public companies). List six potential managerial behaviors the new board might take that could harm your company’s value, and what steps overall can put into place to avoid or mitigate these. 8. You are also aware from your prior career and from your research, that corporate governance can affect shareholder value. This greatly concerns you, as you still have lofty plans for your company’s growth and eventual global trajectory. Questions you’ve identified that need to be addressed at this stage include: a) What is corporate governance?; b) What five corporate governance provisions are internal to a firm and are under its control?; c) What characteristics of the board of directors usually lead to effective corporate governance?; d) What characteristics of the board of directors signal ineffective or problematic governance practices?; e) How can regulatory agencies and legal systems affect corporate governance? If there are differences in local versus national levels, expand upon these.
Explanation / Answer
Answer:a) Corporate governance is the set of laws, rules, and procedures that influence a company’s operations and the decisions made by its managers.
Answer:b) The provisions under a firm’s control are: (1) monitoring and discipline by the board of directors; (2) charter provisions and bylaws that affect the likelihood of hostile takeovers; (3) compensation plans; (4) capital structure choices; and (5) accounting control systems.
Answer:c) (1) The CEO is not also the chairman of the board and does not have undue influence over the nominating committee; (2) the board has a majority of true outsiders who bring some type of business expertise to the board (and he board is not an interlocked board); (3) the board is not too large; and (4) board members are compensated appropriately (not too high, and some compensation is linked to company’s performance).
Answer:d)
Managers might:
1. Expend too little time and effort.
2. Consume too many nonpecuniary benefits.
3. Avoid difficult decisions (e.g., close plant) out of loyalty to friends in company.
4. Reject risky positive NPV projects to avoid looking bad if project fails; take on risky negative NPV projects to try and hit a home run.
5. Avoid returning capital to investors by making excess investments in marketable securities or by paying too much for acquisitions.
6. Massage information releases or manage earnings to avoid revealing bad news.
Answer:e) Companies in countries with strong protection for investors tend to have better access to financial markets, a lower cost of equity, increased in market liquidity, and less noise in stock prices.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.