Exam 18: Organization Structure and Corporate Governance

Excessive Risk Taking. In 2005, The Wall Street Journal reported that two founders of Amerindo Investment Advisors Inc., a money-management firm that makes outsized bets in technology stocks, were charged with stealing millions of dollars from investors to make charitable donations and buy thoroughbred racehorses. Alberto Vilar and Gary Tanaka were charged with fraud and arrested by U.S. Postal inspectors. Vilar and Tanaka made names for themselves by betting big on biotechnology and technology stocks. Their fund was an early investor in Web portal Yahoo Inc. and generated huge returns for its early investors, including many institutions and high net-worth individuals. The duo later created a mutual fund, which in 1999 reported a 249% return to investors. After amassing a huge fortune in the late 1990s, Vilar pledged hundreds of millions of dollars to charities, including New York's Metropolitan Opera, Washington's Kennedy Center and New York University. Hurt by the bursting of the technology bubble and an exodus of investors, the firm's assets under management dropped from $8 billion in March 2000 to about $1.5 billion in 2005. A. As a potential investor, what aspects of Amerindo's corporate governance system would you scrutinize to assure yourself that the firm's risk-seeking behavior was appropriate? B. Explain why both Amerindo's insiders and outside investors might both share blame for this fiasco.

Corporate Governance. Empirical studies show a negative stock-price reaction for firms mentioned in Wall Street Journal announcements of law enforcement activities of three federal agencies: the Department of Justice (DOJ), Federal Trade Commission (FTC), and Securities and Exchange Commission (SEC). Evidence of negative stock market wealth effects exist for a variety of enforcement activities including: informal investigations, formal investigations, lawsuits and settlements. A. Explain how actual or threatened legal action can act as a type of external corporate control mechanism. B. Explain how the valuation effects of federal law enforcement actions can be expected to differ across firms according to the relative importance of intangible factors in firm valuation.

Nature of the Firm. Amazon.com is a leading online retailer of books. The company also sells CDs, videotapes, audiotapes and other products over the Internet, and on proprietary online services like America Online. Amazon.com has a limited operating history upon which to base an evaluation of its business and prospects. The company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as online commerce. A. Critics of Amazon.com allege that the company is "merely" an information processing device for bringing together book wholesalers and customers. Would Ronald Coase agree that this is a shortcoming of Amazon.com? B. In what way must Amazon.com be efficient if it is to enjoy long-term success?

Horizontal and Vertical Relations. International Business Machines (IBM) develops, manufactures and sells advanced information processing products, including computers and microelectronic technology, software, networking systems and information technology-related services. The company offers value through its worldwide sales and service units in North America, Europe/Middle East/Africa, Asia Pacific and Latin America by providing comprehensive and competitive product choices. Microsoft Corp. develops, manufactures, licenses, sells, and supports a wide range of software products, including operating systems for personal computers and servers; server applications for client/server environments, business and consumer productivity applications; interactive media programs; and Internet platform and development tools. Microsoft also offers online services, sells personal computer books and input devices, and researches and develops advanced technology software products. A. Describe how IBM and Microsoft share important elements of a vertical relationship. B. Describe how IBM and Microsoft have important elements of a horizontal relationship.

The relationship between McDonalds and Coca-Cola is:

A business connection between companies at different points in the production-distribution chain is called a:

The fiduciary responsibility of institutional investors can cause mutual funds to act like:

Coase Theorem. One of the traditional arguments in favor of government intervention in the market economy is that unregulated market activity can sometimes lead to failures, like pollution. Critics of government failures to deal with pollution problems effectively argue that there exist private-market solutions to the pollution problem. A. What is the Coase Theorem? B. Use the Coase Theorem to explain how the private sector might efficiently deal with pollution problems.

Horizontal and Vertical Relations. Intel Corp. designs, manufactures and markets microcomputer components and related products at various levels of integration. Intel's principal components consist of silicon-based semiconductors etched with complex patterns of transistors. Microsoft Corp. develops, manufactures, licenses and supports a range of software products, including scalable operating systems, server applications, business and consumer productivity applications, software development tools and Internet software and technologies. Together, Intel and Microsoft Corp. are sometimes described as comprising the "Wintel" monopoly. A. Describe how Intel and Microsoft share important elements of a vertical relationship. B. Describe how Intel and Microsoft have important elements of a horizontal relationship.

Agency Problem. In 2005, Qwest Communications International Inc. ended its pursuit of MCI Inc. While the Denver-based company had worked hard to win Virginia-based MCI, Qwest walk away from a bidding war with Verizon Communications Inc., a large New York-based phone company, when Qwest's increasingly expensive effort seemed futile. Ending a furious three-month bidding war, long-distance phone titan MCI turned down a $9.74 billion takeover offer from Qwest, a local and long-distance phone company, in favor of a $8.44 billion offer from the more financially secure Verizon. At the time, some of MCI's largest shareholders criticized MCI's board for taking the lower bid and urged Qwest to persist, but Qwest declined. A. What is the potential agency problem at Qwest? B. What is the source of agency problems within Qwest and similar companies?