Jack Wright Case 8 Analysis

Corporate Governance

Jack Wright Analysis - Case 8

Key Issues
The first key issue in the case is the CFOs suggestion that Mega buyback shares.
Companies repurchase shares when they want to transfer the excess funds to the shareholders,
send a positive message to the financial market, re-leverage the company, and to defend against
takeover attempts. The CFO is suggesting a buyback plan to re-leverage the company and
increase earnings per share. The CFO has previous experience working for a much larger
corporation than Mega. A corporation that is described as sophisticated in financial and
governance matters. However, Bond is no longer with the larger corporation and Im curious as
to why. Is it possible Bond was discharged for taking too many risky or left voluntarily because
he wasnt allowed to take bigger risk? Bond, though knowledgeable in the area of finance, is an
ambitious risk-taker and his suggestions may be overly influenced by pressure to improve
earnings. His ideas may look good on paper, and may have a positive effect on earnings, but is
this a short-term fix and will the risk outweigh the reward in the long run?
The second key issue is Bonds suggestion for Mega to change its state of incorporation to
Virginia. If Mega seek to reincorporate wouldnt Delaware be a more advantageous state?
Virginia law is different from Delaware because it holds the directors less accountable for the
outcome of their decisions. Bond has firsthand knowledge of the boards willingness to not
adhere to company bylaws when they made the decision to look past his violation of the
companys hedging policy. Bond knows the suggestion to buy back shares is a risky move for
Mega, but is banking the fact that the directors may be more open to taking risk if their exposure
to legal liabilities is reduced. Reincorporating to a state that is more pro-director coupled with a

Jack Wright Case 8 Analysis

Corporate Governance

share buyback plan may send a message to the shareholders that Mega isnt sure of its strategy
and is taking steps to protect themselves if it doesnt work. It appears, once again, Bond would
like to gamble with Megas resources. The difference, this time around, is that Bond is also
gambling with the shareholders trust in the board of directors if they move forward with this
decision.
Another key issue in the case is Bonds suggestion to streamline Megas organizational
structure. Bond suggest eliminating subsidiaries unless there were a strong financial or
operational advantage. Eliminating subsidiaries after creating debt may result in Mega being
over leveraged. In addition, Bond suggested terminating the boards at the subsidiaries and
appointing Megas CEO as the one and only director. Rock is already struggling to perform
above a threshold that is below Megas cost of capital. With Megas current CEOs performance
being average at most, adding to his responsibilities would not be beneficial to Mega in the long
run. The existing boards have greater knowledge of the inner workings of the subsidiaries than
Megas CEO would have. Replacing the current boards with one person who is less
knowledgeable is not in the best interest of the shareholders.
Critical Issues
A critical issue in the case is the focus of the CFO appears to be primarily on short-term
payoffs and not taking into consideration the long term effects. Rock described Bond as being a
good treasurer but not an effective controller. Treasurers place their focus outward and on cash
management and risk management whereas controllers focus on the internal workings of the
company by way of analysis and reporting. CFOs have three principle responsibilities;
controllership duties, treasury duties, and responsibility for economic strategy as well as future
forecasting and planning. Bonds failure to focus internally may be the reason Rock stated he was

Jack Wright Case 8 Analysis

Corporate Governance

unable to produce numbers that were diagnostic and drove action. Controller duties include
presenting and reporting accurate and timely historical financial information. If Bond is derelict
in his duties, as a controller, he hinders the boards ability to conduct an efficient and productive
board meeting.
Recommendation
I do not recommend the board moving forward with any of the CFOs suggestions at this
time. There isnt any real oversight or accountability of the CFO from the board. In addition, the
CFO is neglecting his duties as a controller which has further added to the ineffectiveness of
Megas board of directors. The Mega board should not make decisions of this magnitude until
they are able to recognize their failure to effectively govern the organization and willingness to
commit to their roles as directors.