Suppose you decide (as did Steve Jobs and Mark Zuckerberg) to start a company. Y

Question

Suppose you decide (as did Steve Jobs and Mark Zuckerberg) to start a company. Your product is a software platform that integrates a wide range of media devices, including laptop computers, desktop computers, digital video recorders, and cell phones. Your initial market is the student body at your university. Once you have established your company and set up procedures for operating it, you plan to expand to other colleges in the area and eventually to go nationwide. At some point, hopefully sooner rather than later, you plan to go public with an IPO and then to buy a yacht and take off for the South Pacific to indulge in your passion for underwater photography. With these issues in mind, you need to answer for yourself, and potential investors, the following questions. What is an agency relationship? When you first begin operations, assuming you are the only employee and only your money is invested in the business, would any agency conflicts exist? Explain your answer If you expanded and hired additional people to help you, might that give rise to agency problems? Suppose you need additional capital to expand and you sell some stock to outside investors. If you maintain enough stock to control the company, what type of agency conflict might occur? Suppose your company raises funds from outside lenders. What type of agency costs might occur? How might lenders mitigate the agency costs? 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. What is corporate governance? List five corporate governance provisions that are internal to a firm and are under its control. What characteristics of the board of directors usually lead to effective corporate governance? List three provisions in the corporate charter that affect takeovers. Briefly describe the use of stock options in a compensation plan. What are some potential problems with stock options as a form of compensation? What is block ownership? How does it affect corporate governance? Briefly explain how regulatory agencies and legal systems affect corporate governance.

Explanation / Answer

Agency relationship: agency relationship arises when a person or entity authorised the other(may be his employee) to act on his behalf.

Block ownership means that majority of shares are hold by a single person and he has major voting rights, then he can influence the company's decision on policies or rules etc. This is the risk of block ownership.

When I first begin my business or operation by myself, I would not have any chance fo ownership r having agency relationship. But if I hire a manager or a employee to take care of the operations, then I might face agency relationships. When an employee takes high risk to show short term profits, but in the long run stakeholders (in this case, I am a stakeholder/owner) will not be willing to face a lose due to huge risk. When a employee show huge profit, he might get incentives or bonus but later when the firm faces lose for taking risk, that employee would have gained his promotions, bonus or might left the job. This is called agency risk.

When you raise capital through stocks, the investor will expect high return. In this case if there might not be any agency risk. But if there are debt portion in the capital, and if the manager takes huge risk to show profit, there might be agency risk because banks don't prefer company to take huge risk.

Corporate governance is necessary to have set of rules and policies to take care of the interest of all the stakeholders such as shareholders, debt holders, suppliers, customers etc.

Due to many accounting scandals, sarbanes oxleys act was invented and this helps in performing internal audit controls and to check if the reporting is done accurately and and there are no information missing in the reporting. This is also a part of corporate governance, CFO and other auditors to check before publishing the report. CFO taking ownership and responsibility of the reporting (about its accuracy and whether there is no information missing intentionally or due to carelessness) brings effective corporate governance.

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