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The Board would also like a recommendation of how you would structure the financial structure of the company (debt, equity, etc.). What premium do you think is necessary to stockholders to tender their shares and what to do with any debt remaining on the balance sheet.

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Sixta Kovacek
Sixta KovacekLv2
22 Apr 2019

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Jane Smith, CFA, has recently joined Zero Asset Management, Inc. (Zero) as a board member. Since Smith is also outside council for Zero, she is already very familiar with Zero’s operations and expects to begin contributing good ideas right away. Zero is a publicly traded investment management firm that historically focused on mutual fund management. Although there is current market opportunity to add a new type of mutual fund, the board recently decided against adding the fund. Instead, the board decided to expand its business to include a hedge fund operation within the existing corporation. Bill Week, CEO of Zero, has publicly stated that he is willing to bet the company’s future on hedge fund management. Week is the founder of Zero, as well as chairman of the board, and maintains a controlling interest in the company. Like the rest of Zero, the firm’s new hedge fund is quantitatively driven and index based. The fund has been set up in a separate office with new systems so that the analysts and managers can create a unique hedge fund culture. Trading and execution are the only operations that remain with Zero. The fund is run by one of Zero’s most successful portfolio managers. Smith learns that although none of the board members sit on other companies’ boards, most have at one point or another worked at Zero and so they are very familiar with Zero’s operations. A board member has attempted to make the health insurance and retirement concerns of the board members an agenda item, without success to date. Smith eagerly anticipates the next board meeting as they are always in a luxurious setting. At the board meeting, Smith asks a number of questions about Zero’s corporate gov- ernance system. The board becomes concerned by Smith’s questions and decides to hire an independent consultant to review their corporate governance responsibilities. The consultant starts his analysis by stating that a corporate governance systetem relies upon checks and bal- ances among managers, directors, and investors. Smith asks if Zero has the proper systems in place. The consultant says that he has looked at conflicts of interest and has one more area to review in order to verify that the board is meeting its major objectives. Concerned about the company’s stock price, Smith asks the consultant what work he has done concerning Zero’s corporate disclosures for investment professionals. The consultant indicates that he has reviewed Zero’s regulatory filings for clear and complete information, as well as the com-pany’s policies regarding related party transactions.

9. All of the following indicate Zero’s board’s lack of independence except:

A. personal relationships.

B. service of the outside counsel as a board member.

C. lack of interlocking directorships.

10. Which of the following is the most effective action for the board to take to address their oversight responsibilities concerning the hedge fund’s proxy voting?

A. Establish corporate values and governance structure for the company.

B. Establish long-term strategic objectives that are met and fully complied with.

C. Perform adequate training so that employees are able to perform their duties.

11. Which of the following omissions best describes a corporate governance shortcoming of Zero’s board of directors? The board’s failure to:

A. address the potential conflicts of interest between managing the firm’s hedge fund and its mutual fund business.

B. meet the market opportunity for a new kind of mutual fund.

C. establish the hedge fund operation in a separate corporation.

12. Given that Zero’s directors all previously worked at the company, which of the following would you recommend for a more effective system of corporate governance?

A. Ensure that assets are used efficiently and productively and in the best interests of investors and stakeholders.

B. Eliminate or mitigate conflicts of interest among stakeholders, particulularly between managers and shareholders

. C. Identify and measure accountabilities for the performance of the board’s responsibilities.

13. Which of the following best describes the objectives of Zero’s board that the consultant has not yet reviewed? The board should ensure:

A. that the assets of the company are used efficiently and productively and in the best interests of the investors and other stakeholders.

B. that material foreseeable risk factors are addressed and considered.

C. compliance with applicable laws and take into account the interest of stakeholders.

14. Which of the following is the most critical activity that an analyst can engage in to assess the quality of the corporate governance system at Zero, among those that the consultant did not review?

A. Look for vague references to off-balance-sheet or insider information.

B. Identify the responsiveness of the board to shareholder proxy votes.

C. Evaluate the quality and extent of financial information provided to investors.

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. 1.Describe an agency relationship and how it may/will take shape for your small company. As the sole employee and investor in your startup, what agency conflicts might arise? 2.Six months have transpired, and you’ve been able to add two employees. In this new arrangement, what agency disputes might now develop that need to be addressed, and how might you address them? What resources do you need to use or consider? 3.Another three months have passed. You are now ready to expand to your sister city and you need more capital. You decide the wisest path is to sell some stock to outside investors, but you will maintain control over your company by holding onto the majority of the stock. In this new scenario, what type of agency conflict might occur? How can you address this in advance? 4.The IPO was a success, and you have a robust number of shareholders. With board support, you determine it is time to hire a financial manager to help your firm achieve current goals and set new ones appropriate to the firm’s growth strategy. What professional strengths and skills will an individual seeking this position need to possess? 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. 9.Lastly, one of your new board members is very concerned with “blockholders.” What is block ownership? How does it affect corporate governance? Explain the pros and cons.

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. Describe an agency relationship and how it may/will take shape for your small company. As the sole employee and investor in your startup, what agency conflicts might arise? Six months have transpired, and you’ve been able to add two employees. In this new arrangement, what agency disputes might now develop that need to be addressed, and how might you address them? What resources do you need to use or consider? Another three months have passed. You are now ready to expand to your sister city and you need more capital. You decide the wisest path is to sell some stock to outside investors, but you will maintain control over your company by holding onto the majority of the stock. In this new scenario, what type of agency conflict might occur? How can you address this in advance? The IPO was a success, and you have a robust number of shareholders. With board support, you determine it is time to hire a financial manager to help your firm achieve current goals and set new ones appropriate to the firm’s growth strategy. What professional strengths and skills will an individual seeking this position need to possess? 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? 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? 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.

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