Scenario: Starting a company. My product is a software platform that integrates

Question

Scenario:

Starting a company. My product is a software platform that integrates a wide range of media devices, including laptop computers, desktop computers, digital video recorders, and cell phones. My initial market is the student body at your university. At some point, hopefully sooner rather than later, I plan to go public with an IPO and then to buy a yacht and take off for the South Pacific. With these issues in mind, I need to answer for yourself, and potential investors, the following questions:

1. Suppose your company is very successful and you cash out most of your stock and turn the company over to an elected board of directors. Neither you nor any other stockholders own a controlling interest (this is the situation at most public companies). List six potential managerial behaviors that can harm a firm’s value.

2. What is corporate governance? List five corporate governance provisions that are internal to a firm and are under its control.

Explanation / Answer

1) Six potential managerial behaviors that can harm a firm’s value:

a) Managers might not expand the time and effort required to maximize the firm value. Rather on focusing on corporate tasks they might spend too much time on external activities.

b) Managers might use corporate resources on activities that might benefit themselves rather than shareholders and stakeholders.

c) Managers might avoid making difficult but vaue enhancing decisions that harm friends in the company.

d) Managers might take on too much risk or they might not take enough risk.

e) If a company is generating free cash flow a manager might stockpile in the form of marketable securities.

f) Managers might not release all the information that investors desire.

2) Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

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