Case Study 7.1
Suppose you decide 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. At some point, you plan to go public with an IPO. 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?
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?