Youth cell phones compasny - Essay Example

?Questions to the Youth Cell Phones Company Case Why do you think the YCP Company had been able to grow in just over five years? The first five years of YCP were marked by strong growth for a number of reasons. An important factor is the strong growth of the market for mobile and internet technology, as this was the period of commercial introduction and fast development in these areas, so the rise in demand was strong, particularly in its chosen niche (young mobile and internet customers) and the industry still generally open to new entrants. Based on data provided, the following information was computed: YCP performance for the last five years Year ended Revenues (MUSD) No. of Subscribers Ave. rev. per subscriber 1998 80.0 100,000 800.00 1999 200.0 195,000 1,025.64 2000 270.0 330,000 818.18 2001 380.0 680,000 558.82 2002 750.0 1,970,000 380.71 The first three columns were data provided, form which the average revenue per subscriber was computed in the last column. It was evident that from the third year onwards, the sales growth achieved by YCP was on the basis of attracting new volume by lowering prices. While the cost figures are not given for us to compute the breakeven point, it is sufficient to note that by 2001, the firm was offering its services for prices below its introductory rates in 1998, which may indicate that the company is operating at below breakeven prices. 2) What impression have you formed of corporate governance in YCP Company? For the first two years, there appeared to be no indication of major lapses in corporate governance. However, stock market speculation towards the last two years and large bonuses paid to co-administrators are classic signs of poor corporate governance and absence of any compliance with ethical principles. Stock market gains on investments are not inherently bad or illegal, but to do so in a highly speculative manner as to incur huge losses is a repudiation of the agency or caretaker responsibilities of executive management towards its stockholders, putting personal interest before shareholders’ welfare. The approval of a high risk, low yield strategy is negligence on the part of the board to steward the business interest, while awarding themselves huge bonuses despite the firm’s business failure, is irregular in the case of YCP because the bonuses are explicitly stated to be based on the appreciation of the company’s stock value rather than on its earnings, which is an untenable basis on which to compute executive compensation. Executive pay and bonuses are anchored on the firm’s earnings, not its market capitalization; therefore, this is a matter to be investigated by the Securities and Exchange Commission. 3) What is your opinion of the ownership structure in YCP, in light of the fact co-administrators Kong and Watson retain 60% of the voting equity. Can group of small shareholders make a significant contribution to the governance of the company? What about large shareholders? As far as ownership structure is concerned, there is no legal or ethical problem in Kong and Watson holding 60% of the equity. A strong controlling interest properly discharged can even articulate business strategy more clearly and create a stronger business (Ozer, et al., 2010, p. 18). It is clear that based on voting rights, Kong and Watson clearly have controlling ownership of the firm. There should be no conflict of interest, however, in their being members of the board, as the board represents the shareholders’ interests which is their own. Being members of the board, however, they are charged with the duty of due diligence and of acting in the interests of all shareholders, not only their own. This does not mean that groups of small shareholder or even large (though minority) shareholders are powerless against decisions but the majority shareholders that are patently inimical to the corporation’s interests. They still are entitled to a full disclosure and complete information about how the company is run, violation of which could be the basis for litigation. SEC rules allow for minority shareholders to file cases in these instances, which shall be investigated upon by the SEC for either administrative, civil and possible criminal prosecution. In certain jurisdictions, laws allowing for whistleblowing, or to compel the majority shareholders to be called to account, empower the small or large minority shareholders. 4) What is your opinion of the structure of the board in YCP right after the company went public? The YCP board was legally structured from the point of view of corporate governance (i.e., for most legal frameworks). Out of the seven members, three are executive members and four are executive members, all of whom hold interests in the YCP. The number of non-executive directors outnumbers executive directors, which is pursuant to the normal expectation. There may be a provision for non-shareholder board members representing regulatory authorities, although this is usually done for large corporations with substantial public interest, something which is not specified in the case of YCP. There appears to be nothing irregular about the board structure per se, nor may it be inferred at the time of the board’s constitution that the members may act in a manner contrary to their fiduciary duties. 5) What information should the board have had before approving the construction of the private telephone network for YCP? The board should have commissioned a full market and feasibility study before approving of the construction of the private telephone network. The study should have been conducted by a research firm with a good reputation for accurate assessments, and it should contain market projections, cost assessments, and evaluation of both the economic and political environments. Had this been done, the emergence of strict regulations imposed by European network providers and the collapse of the dotcom venture in the USA would not have come as complete surprises – at least, the company would have contingency plans ready. The dotcom bubble was forecast by analysts long before it happened, and the European regulations would have been deliberated long before it was approved and implemented, thus YCP should have been aware of them. Also, the commissioning of a market study would have included a study of competitors. Therefore it would have been apparent to YCP that a market containing a significant number of established European and USA mobile network providers would have raised the question of market saturation, or the difficulty of competing against large firms with greater economies of scale. 6) What role did the board members played in the case of YCP collapse? Refer to each member’s role separately. Joe Kong and Jeff Watson are accountable for their misleading announcements and declarations; persons in their position cannot reason out that they misunderstood the facts, because it is their responsibility to ascertain them and their implications. Whether the cause of the misleading declarations was prompted by malice or mere negligence, Kong and Watson have a legal and moral responsibility, by virtue of their position, to ascertain the truth and veracity in all their pronouncements because they speak with authority. They are likewise responsible, by command responsibility, of the failure of the company which was foreseeable and preventable with due diligence, but which they failed to address, and appear to have even exacerbated. As a large shareholder with sufficient resources, Mr. Park and Mr. Johnson should have knowledge of the facts and exercised some measure of fiscal prudence by calling for an audit earlier than they did. They should have looked beyond Mr. Kong’s assurances and required evidence to be provided. Merely relying on Kone’s and Watson’s assurances renders them remiss in their duties to the parties they represent. As for executive compensation and bonuses, all four non-executive board members (Park, Johnson, Bell and March) should not have approved the bonuses in light of the losses sustained by the business for the year 2002. The self-written clauses should have been disallowed if it was within their power at the time the contract was written; in any case, such clauses are usually held contingent upon the circumstances of the business and should be interpreted in that manner, with the interests of the shareholders upheld before executive compensation could be paid as a matter of right. The fact that the four non-executive board members were alerted that something was wrong with the company’s business (related to faulty billing) should have been sufficient for them to take action, invite an independent auditor to conduct due diligence investigation, as well as to disallow the executive bonuses, Kong’s personality notwithstanding. 7) Do you believe that the role of the Financial controller had a decisive impact on the outcomes and how do you suggest he could have had avoided them? Yes, the role of controller has a significant effect on the degree of control and compliance a company achieves. In the case, YCP’s controller Mark Michael was aware of the liquidity problem faced by YCP, certainly as well as the speculative losses the company had suffered in the stock market as well as the other unjustified risks the company was taking. Michael could have helped the company avoid the problems by simply not conniving with Watson and Kong in some activities he participated in. These included deferring payments to suppliers and repatriating money from subsidiaries by use of a pool account, particularly without disclosing these activities. By “deferring payments” this is taken to mean irregular deferments, such that the risk of exposure of the company is increased to the detriment of the shareholders. Also, repatriation of money from subsidiaries may likewise be to the disadvantage of shareholders if what is involved is repatriation of capital money, not receipt of dividend payments, because the former is tantamount to erosion of the value of ownership of the shareholders in an investment. These matters should have been disallowed by the controller as being contrary to the interest of the business and the shareholders. 8) What is your opinion of the statement made in the case that: “The accounting function is a joke. There are no rules, no directives no job descriptions and you can see segregation of duties everywhere. The concept of control seems to be forgotten as there is no accounting system” The statement is misplaced. The accounting system involves the internal financial reporting and auditing functions, but does not have a significant role in the job descriptions or segregation of duties. Accounting facilitates control, but control is still exercised by management. The statement is more a commentary on the managerial aspect rather than the accounting function. Even when the absence of rules per se makes it difficult to assess the accounting system, this does not mean there is no effective accounting system. In the absence of specifically formulated rules and directives within the company, the general rules (generally accepted accounting principles, the labor law, provisions in the corporate code as well as the charter of the corporation, and industry customs and common practices where the general laws are deficient) provide the framework by which a business operates. The absence of internal rules does not discount the fact that a working accounting system is in place; what is necessary for the audit to determine is whether that system sufficiently complied with the general law, and whether it protected shareholder interests or jeopardized them. 9) What is your opinion of the external auditors? Do you think the outcome in YCP Company suggest that they performed their duties according to the auditing standards? Do you think that auditing firms in their struggle to secure contracts or lose a client are entitled to act more as consultants and less as auditors? Please justify your views. I believe the external auditors did not perform their duties pursuant to the auditing standards. External auditors, in their auditing function, must act according to the rules of their profession and raise material issues such acts inimical to the interest of the shareholders and breach of SEC regulations. When accounts show that the firm has a real tendency to approach insolvency and, in this case, bankruptcy, the auditor has a clear duty to inform all parties, particularly in its filing of its professional report with the SEC. Auditing firms must not prioritise its interests as the firm’s consultants, to the point of sacrificing its duties as auditor. In the case of YGC as a company filing for bankruptcy, clearly the auditor should have been issuing opinions already to this effect for preceding auditing periods, as a company does not become bankrupt overnight. 10) Do you believe there are issues (breaches) in the case leading to inappropriate management compensation; creative accounting; failure of directors and managers to exercise due diligence; lack of adequate regulation; and lack of independence in auditfunction? If yes how all these could have been avoided? Please justify your answers. As evident in the answers to the preceding questions, the answer to whether a breach of good governance has occurred in these areas is in the affirmative. Some measure of creative accounting has been undertaken by the controller, Mark Michael, in deferring some payments and repatriating some investments in subsidiaries, and to enable the risky speculative practices of the executives in the stock market, for such to have evaded detection by regulators. There is prima facie failure of directors and managers to discharge their fiduciary duties and exercise due diligence, because they had allowed, among other things: the payment of bonuses during a period of loss, and in the approval of risky strategies, most especially the telephone network expansion project which had not undergone diligent study. As for adequate regulation, where regulation refers to external or government regulation, then there appears to be little evidence of that in the study except in the matter of insider trading, when certain persons such as the likelihood of the significant sale of shares possibly by Kong, Watson, and CFO Cat Chris as cases of insider trading prior to the resignation of Kong and Watson, which were presented in the case as unsubstantiated rumors. Finally, there is also lack of independence of audit function because of the implied consultancy relationship between the firm and the external auditor. All of these could have been avoided only by greater vigilance on the part of the government regulating authority, and the regulation among auditors by their peers. There is also a need to strengthen regulation that empowers whistleblowers and the smaller investors whose interests are compromised by such incidents. 11) How a successful entrepreneurial character like Kong and Watson be controlled to protect shareholders? Minority shareholders may be empowered by special regulations in the corporate code of the country where the company is registered. In some jurisdictions, small shareholders have recourse to file petitions or charges with the SEC or regulatory body for corporate activity against majority shareholders acting against the interest of the business and small shareholders, or engaging in activities in violation of the corporate code. In any case, shareholder disputes, particularly in cases where class action suits are viable, is one means by which abusive majority shareholder-executives such as Kong and Watson may be controlled. 12) In your views, should the neighbor country’s governmental authorities have had arranged a bail-out program for YCP and why? No. The neighbouring country has no right to interfere in the activity and status of a foreign corporation, because that corporation is principally governed by the country in which it is registered. What the neighbouring country can do is make diplomatic representation in the home country of YCP in order to negotiate measures for the protection of its own citizen-shareholders, and to protect its own stock market from contagion. The neighbouring country may provide support to suppliers, shareholders and customers of YCP who are its citizens, but only to arrest any further negative repercussion in its own economy. References: Calder, A 2008 Corporate Governance: A Practical Guide to the Legal Frameworks and International Codes of Practice. Kogan Page Ltd., London Monks, R A G & Minow, N 2011 Corporate Governance, 5th ed.. John Wiley & Sons, Chichester, West Sussex Ozer, M; Alakent, E; & Ahsan, M 2010 “Institutional Ownership and Corporate Political Strategies: Does Heterogeneity of Institutional Owners Matter?” Strategic Management Review, vol. 4, issue 1, pp. 18-29 Shim, J K; Siegel, J G; & Dauber, N 2008 Corporate Controller’s Handbook of Financial Management 2008-2009. CCH Wolters Kluwer. Read More