Problem Solution: McBride Financial Services

Problem Solution: McBride Financial Services Matt Wetherell University of Phoenix MMPBL/570 Corporate Governance Carol Parker

Problem Solution: McBride Financial Services Problem Solution: McBride Financial Services McBride Financial Services is at a cross road. They are expanding and have found that they needed outside funding to make this happen. Beltway Investments decided to invest in McBride because they liked the business plan and the timing of the entry into the marketplace. Beltway wanted some assurances from McBride that sound corporate governance would be

implemented and Mr. McBride made it clear to internal stakeholders that he would not allow the money men dictate how he would run his company. Exploring this option is something that Mr. McBride needs to accomplish, in this paper I will identify several areas that Mr. McBride needs to explore while keeping the company his and the money men off his back as he navigates his company into the future. Situation Analysis Issue and Opportunity Identification McBride Financial Services has many different issues facing the company. They are just beginning operations and they have a great vision, the problem is that Mr. McBride has great vision and knows where he wants his company to be, but he does not have a full understanding of the requirements of a public company. In such a situation there are many opportunities also, these opportunities have to be seized or they could be lost forever. Mr. McBride has admitted that he does not fully understand all the reporting requirements, and he knows they are important referring to them as the Enron laws (Phoenix Scenario). While knowing that he needs to be compliant, he is forcing the issue to his controller and telling him that he would sign off on whoever he chose. While this is an issue, it is also an opportunity for the controller to educate Mr. McBride on his responsibilities as the owner and

Problem Solution: McBride Financial Services CEO of the company. He also has the opportunity to learn that the Board of Directors (BOD) is more than just a figure head but they can help him lead the company into the future. Mr. McBride also feels that he should not let anyone dictate how he runs the company. This is an issue because when someone is set on a single track, many things can and will be missed. The biggest in this scenario is the SOX reporting requirements. Mr. McBride is

delegating to his controller, and delegation is good but when you do not understand the reporting requirements as a manager then you are leaving yourself open to some pretty major consequences. The opportunity that Mr. McBride has are tremendous, he has the ability to learn the reporting requirements along with the BOD, and with that they can all be on the same page and understand what the company is attempting to accomplish. Mr. McBride is a man that is determined to run his company as he sees fit and is not big on allowing others dictate what he will do as a manager and owner. He has determined how he wants the company to proceed and is not interested in having the money people or the BOD tell him the direction of the company. This action is an issue, but one that can become a very big opportunity. Oversight is an area that Mr. McBride apparently struggles. Oversight is about making sure, in the event of a wound, a manager has thought about Band-Aids, has the necessary quantity in stock, and has the skills to apply them. It does not mean having board members roll up their own sleeves to lie on the gauze. Fundamentally, for many it is about refining ones questioning skills (McCarthy, Flynn & Brownstein, 2004, p. 182-183). If oversight is about band-aids and asking questions then Mr. McBride would do well to allow people to question his ideas, as this will make him a better business owner and manager. Stakeholder Perspectives/Ethical Dilemmas

Problem Solution: McBride Financial Services As with any venture there are different perspectives and dilemmas to consider. Mr. McBride does have some perspectives that he needs to look at in order to become the type of company that he envisions. The biggest stakeholder is Beltway Investments; they have invested what may be considered a great deal of capital in order for Mr. McBride to open his doors. They are asking

that Mr. McBride have the proper oversight and that he meets the reporting requirements, as they do not want to lose their investment. Another group that Mr. McBride needs to be cognizant of is the common shareholder, as they do not want to see their investment lose money, they want to make money and without the common investor the company will not have the proper capital to move the company forward. Another group that needs to be considered is the employees. The employee is the backbone of any organization and as such they make it go. Mr. McBride by not understanding the reporting requirements could be putting his employees livelihoods at risk and if employees are unhappy they tend to leave their current employment and also do not speak well of past employers if they departed on bad terms. While this may seem like a trivial matter, to those involved it is not. The final group to consider is the BOD themselves. They may want this position to sound good on a resume, but they may also want to help lead the company forward so the business can become an industry leader. This takes strong leadership and an understanding of the regulations and laws of that particular industry. Overall most perspectives and dilemmas can be mitigated with some communication and basic understanding on each side and the want to find success even in difficult situations. Problem Statement

Problem Solution: McBride Financial Services

McBride Financial Services will become an industry leader in corporate governance and compliance by creating solid Board of Directors that understand the reporting requirements, and the importance of these requirements as they pertain to the day to day operations of the company. End-State Vision McBride Financial Services will put into place a Board of Directors that will be ethical in all matters as it pertains to the reporting requirements of the company and in business dealings. Ensure that Board members are knowledgeable in reporting requirements and that the composition of the board lends itself to being productive on internal and external dealings. The size of the board will be based on best practice from research in the corporate governance field.

Alternative Solutions As McBride begins expansion they have to look at many different things or alternatives in order to ensure long term stability. The company has to hire and place a Board of Directors so they are in compliance with reporting requirements of a public company. The board has been selected but the knowledge of that board has to be questioned. Is the board in place to rubber stamp everything that Mr. McBride brings to them or are they going to ask the tough questions. While Mr. McBride does not have the in depth knowledge needed to find success he can learn these things as they are important in moving the company forward. He has made it clear that he does not want the money people interfering with the way his company is run and that is acceptable, but the money people do not want to lose their investment. The investors liked his business model and the direction he wants to take the company; they just want to make sure that he is in compliance with the applicable laws. Mr. McBride needs to educate himself in these laws or hire people that will ensure compliance.

Problem Solution: McBride Financial Services The second thing that Mr. McBride will do is hire a Board of Directors; while he has approached prospective members he is asking his staff to write the biographies of the board.

While this is not a bad thing, he needs to know what they know about compliance and if they are ethical business people. There is little information regarding these individuals other than their names, we do not know what type of experience they bring or if they have a background in this industry. While being an industry outsider has benefits, having some knowledge of the industry can help move the company forward. While board members need to be compensated, if they are not compensated fairly it causes problems. Mr. McBride has made it clear that he does not wish to use shares to compensate his BOD; he would rather issue them a paycheck that is fair. This can be a sticky situation as they are then employees of the company and conflict of interests could follow. By offering stock options to his BOD they will help move the company forward as their compensation is tied to the performance of the companys stock. As Brown and Caylor found in their study Regulator and governance advocates argue that the stock price collapse of such former corporate stalwarts as Adelphia, Enron, Parmalat, Tyco, and WorldCom was due in large part to poor governance (Brown & Caylor, 2004, pg 2.). Mr. McBride would be wise to learn from others mistakes. All of these companies appeared to have solid boards, when in reality they did not and the companies failed because of poor management of the boards. The companies looked good on paper but under that they were all losing large amounts of money while the directors, chairmen and management were making millions the normal shareholder lost everything. Mr. McBride would also be wise to create a compliance department. With this department they would ensure that the reporting requirements were being met and that not one

Problem Solution: McBride Financial Services

person has all the control so any perceived hypocrisy could be eliminated prior to it becoming an issue. In our week two team paper it was noted that Hewlett Packard in 2010 asked for CEO Mark Hurd to step down amid some inaccuracies in his reimbursements and a sexual harassment complaint filed by a contractor. Hewlett Packard has a long standing fiscal policy and it explains how reimbursements work in the end one person attempted to manipulate the program for his benefit. The Board was able to figure out what was going on and took the appropriate action so the company was not further damaged (Wetherell, Lafferty, Siu, Friedlander, Lynn, pg. 3). Mr. McBride would benefit from Hewlett Packard insight on how to handle situations when it comes to reimbursement or expenditures by the CEO of the company. While this opens Hughs expenses up to scrutiny it would help with relations with his investors so they know that their money is not funding his lifestyle but the continued growth of the company. While all of these alternatives are important, individually they do not make for sound corporate governance, they make up parts of the whole, and the optimal solution will be addressed later in this paper and will include elements of these alternatives. Analysis of Alternative Solutions Looking at the alternative solutions I found that three of the four alternatives scored the same. These are important because all of them are needed to advance the company in the direction that Mr. McBride wants it to go. While educating the current leadership scored the lowest it is important to remember that they still need to be educated so mistakes are not made that could cause the investors to revoke their investment and render the company inert. Hiring a wide range of experience in the board, a competitive compensation plan, and a compliance department all scored the same they all offer different perspectives on the operation of the company as a whole.

Problem Solution: McBride Financial Services Having a wide range of experience on the board is important they should not serve on more than five boards as conflict of interest and other problems could arise. They could also be stretched too thin to be effective for McBride Financial Services. Creating a competitive compensation plan is important. Mr. McBride is concerned about diluting his shares, but by offering a pay check to the board creates a conflict even if it is unintended. Outsiders would view this as having a board that is in place to rubber stamp what the CEO wants to do and not looking out for the investors in the company. Creating a compliance department is very important to the functioning of the company as they will ensure that McBride Financial is meeting the required laws and will not face any possible fines for not being in compliance with the regulations.

In evaluating these alternatives I found that all of them are important and need to be used in the final analysis of what McBride Financial should do to move forward with their goals of being compliant with all regulations, becoming an industry leader in the financial lending market and having a knowledgeable board of directors. Risk Assessment and Mitigation Techniques There are risks with every endeavor and mitigating those risks are important in order to move the company forward. In this case we are looking at educating the current management in reporting requirements. By the current leadership not knowing the requirement they run the risk of fines or further punishment up to and including prison for being out of compliance, the way to mitigate this risk is to teach and train management in the importance of the reporting requirements. Hiring a board with a wide range of experiences is important as they may have experience in an area where the company struggles. Some of the risks include not being able to

Problem Solution: McBride Financial Services

find enough experienced people for the seats on the board, the other is having the investors name probable members, doing this Mr. McBride will give up some of his control but the consequences may be too high to not at least explore this option. One way to mitigate these possible problems is to cast a wide net to reach as many possible board members as possible. This will allow all the candidate to be vetted by Mr. McBride and the biggest investors, the investors may also be able to place people on the board that will provide some sense of calm to the investors. The company needs to create a competitive compensation plan so they draw viable candidates for the board. By not having a solid compensation plan they run the risk of not having investment from the managers or board. With the lack of investment they will not have solid direction, or that direction will be skewed in the direction of the CEO and that may not be good for investors as the company may not have their interests in mind. This can be mitigated by educating the managers and board in the proper steps of compensation so they understand that their compensation is tied to the performance of the company, which is good for both the investors and the board. Creating a compliance department is a very important first step in this process. By not having a compliance department in place runs the risk of the company being in a poor position. The cost of compliance may to be high at this point, but it needs to be considered as the consequence of not meeting this could be devastating to the company. They could be forced to close the doors and then have to pay the investors back out of pocket instead of with profits from the company. Finding the right people may be difficult, but by filling the department with anyone could also prove to be just as devastating as not have a compliance department. Managements lack of understanding is placing the company in a precarious position of not

Problem Solution: McBride Financial Services

10

continuing their relationship with the investors as they can back out at any time. These risks can be mitigated by hiring a few compliance personnel to begin with and build the department as the company grows. Optimal Solution In this situation the optimal solution looks like a number of single acts being put into place to appease the investors but over the long run they will move McBride Financial forward as a company, and in the process make Mr. McBride a smarter individual who is not afraid to look at multiple solutions for problems that arise in his company. The optimal solution will take the goals of the company and tie them together in a way that allows for continued education for senior management, hiring a board of directors that will move the company forward while watching for issues that my question the ethics of the company. By compensating the board with stock options and reimbursement for travel and expenses will eliminate any possible conflict of interest by being paid by the company. This will show that the board is not influenced by the CEO but are making strides to move the company forward while they earn fair compensation for their efforts. Bringing a compliance department on line will allow the board and executives to ask questions of the department so when they do begin to expand they are meeting the applicable laws and they are not risking the company or investors in any way. When all of these items are tied together in a way that appears seamless then the company can continue to move forward and find success. While any of these options could be implemented and the company successful the full implementation of all the solutions will place McBride Financial on firm ground moving forward which will draw other investors and allow the company to expand and Mr. McBride will be able to achieve his vision for the company.

Problem Solution: McBride Financial Services Implementation Plan Mr. McBride will begin by hiring a board of directors that will move the company forward into the future; this will take place over the next three to six months with him and Beltway Investments making the decisions that will guide the company. A competitive compensation plan will be implemented prior to the first hire and should be completed in one to three months with Mr. McBride and Human Resources responsible for determining the compensation. The education of the current management will begin immediately and human resources will be responsible for this along with Paul.

11

Creation of the compliance department will take shape over the next three to six months. Mr. McBride and human resources will be responsible for creating this department. Evaluation of Results The goals that McBride Financial set were specific, measurable, attainable, realistic and timely. While they were not easy to meet they were met. At this point McBride has a diverse Board of Directors that is compensated fairly for the work accomplished. The education of the executive team has gone well and they have a better understanding of what is required of a public company, this is not to say that there were not some rough patches but overall they have learned a great deal and are moving the company in a positive direction. The compliance department is on line and performing very well, they have not missed any deadlines and the reporting requirements are being met by the controllers office. Conclusion While Hugh McBride has a great vision and knows where he wants his company to end up, he struggled with governance issues to start. When he learned that certain things have to be

Problem Solution: McBride Financial Services completed in order to remove any doubt that he is running an ethical company things changed.

12

Change was a good thing as the money men were not dictating how he ran his company; they just wanted to protect their investment. By implementing system of checks and balances Mr. McBride built a company that others can look to for years to come.

Problem Solution: McBride Financial Services References Chew, D. H. Jr. & Gillian, S. L. (2005). Corporate governance at the crossroads: A book of readings. Boston: McGraw-Hill. Gandossy, R. & Sonnenfeld, J. (2004). Leadership and governance from the inside out. Hoboken, NJ: Wiley.

13

American Institute of CPAs. (2006-2011). Summary of the provisions of the sarbanes-oxley act of 2002. Retrieved from http://www.aicpa.org/InterestAreas/ForensicAndValuation/Resources/FraudPreventionDe tectionResponse/Pages/Summary%20of%20the%20Provisions%20of%20the%20Sarbane s-Oxley%20Act%20of%202002.aspx University of Phoenix. (nd). McBride Correspondence. Retrieved from University of Phoenix, MMPBL/579 Corporate Governance website.

Park, D. (2009-2011). corporate governance failure at HP over CEO Hurd?. DYP

Advisors Legally Informed Strategy. Retrieved from http://www.dypadvisors.com/2010/08/09/corporate-governance-failure-at-hp-over-hurdcase/

Lockheed Martin. (2011). Audit committee charter. Retrieved from http://www.lockheedmartin.com/investor/corporate_governance/committeecharters/AuditCommi tteeCharter.html

Problem Solution: McBride Financial Services Table 1 Issue and Opportunity Identification Issue Opportunity Reference to Specific Course Concept
(Include citation)

14

Concept

Mr. McBride admits in a communication that he does not fully understand all the reporting requirements, just that they are important

Mr. McBride has the opportunity to learn about reporting requirements and also learn that the board is more than just some people that show up once and a while.

Mr. McBride has an attitude of only him making the decisions and deciding to direction of the company. He stated that he does not plan to let the money men dictate how he will run the company.

The problem with corporate America and mutual fund America lies in the fact that far too many corporate executives and directors have been placed in positions of great power and authority without an adequate understanding of their fiduciary duties. (Gandossy, 2004, p. 134) Mr. McBride This approach can create a argues against partnership evaluating with functional individuals managers using who have been measures related in his same solely to their situation and processesfor he can learn example, using cost how to per unit, proceed in a productivity, defect partnership rates, yields, and with the board cycle times to of directors establish bonus targets for manufacturing managers. All such measures are drivers of success, but each can be managed separately to

Corporate Democracy

Parochial Behavior

Problem Solution: McBride Financial Services produce a favorable result while at the same time damaging other parts of the business. (Chew & Gillian, 2005, p. 252) Mr. McBride is unaware of the reporting requirements and is directing his staff to find out the requirements and pass them along to him. He knows that it is somewhat important, but it is not at the top of his list of things to do. Mr. McBride has the opportunity to educate himself and become a better leader by learning about the reporting requirements of his company Section 302: Corporate Responsibility for Financial Reports. SOX

15

Mr. McBride is not interested in turning the operation of his company over to others to run. This is his company and if the investors want to

Mr. McBride has the opportunity to learn about

The CEO and CFO of each issuer shall prepare a statement to accompany the audit report to certify the "appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer." A violation of this section must be knowing and intentional to give rise to liability. (American Institute of CPAs, 20062011) Oversight is about Oversight making sure, in the event of a wound, a manager has

Problem Solution: McBride Financial Services invest and require a board of directors then he said that he would form one that will not do much. He asked some staff to write bios for the new board members and he wanted them to sound great. Mr. McBride does not want anyone to dictate how he will run the company different areas of responsibilities that are required by companies. He must learn that oversight is important in business as it keeps the company focused on the mission and vision thought about Band-Aids, has the necessary quantity in stock, and has the skills to apply them. It does not mean having board members roll up their own sleeves to lie on the gauze. Fundamentally, for many it is about refining ones questioning skills (McCarthy, Flynn & Brownstein, 2004, p. 182-183).

16

Problem Solution: McBride Financial Services Table 2 Stakeholder Perspectives

17

Stakeholder Perspectives
Stakeholder Groups The Interests, Rights, and Values of Each Group

Beltway Investments

Share holders

Employees

Board of Directors

They have invested in the company and want to ensure that they do not lose their investment. Want to make sure that McBride is doing everything by the book Want to see their investment make some return. If the company is not run properly then they will take their money elsewhere They want to know if they are going to be employed, for any length of time or is the company going to get into trouble for not following the rules. They are going to want to know what their jobs entail and are going to want to make sure that they are leading the company in the right direction and are meeting all the compliance laws.

Problem Solution: McBride Financial Services Table 3

18

Analysis of Alternative Solutions [Click twice on table to change, see instructions on next page. The alternatives and their ratings as well as the goals and their weightings shown below are for illustrative purposes, you should enter your own. Delete this paragraph when done.]

Alternative Solution Evaluation Matrix

GOALS
Comply with all regulations required for public companies Hire a knowledgable board of directors

Become an leader in the financial lending industry

Relative Importance (Weight)==>

Final Rating

ALTERNATIVE SOLUTIONS

Primary Alternative Solutions A) Educate current management in the reporting requirements 4 3 B) Hire a wide range of experiences for the board of directors 4 4 C) Create a competitive compensation plan 3 4 D) Create a compliance department 5 3 E) Secondary Alternative Solutions

3 3 4 3

3.33 3.67 3.67 3.67 -

SCALE==>

5 = High 4 = Middle to High 3 = Middle 2 = Low to Middle 1 = Low

Problem Solution: McBride Financial Services Table 4 Risk Assessment and Mitigation Techniques

19

Risk Assessment and Mitigation Techniques

Alternative Solution Educate the current management in reporting requirements y Risks and Probability By not understanding the reporting requirements they run the risk of fines or further punishment y High probability of getting caught, due to the reporting requirements y y Consequence and Severity Fairly heavy consequence Risking jail or fines for not being compliant y Mitigation Techniques Teach and train management on the importance of reporting requirements

Hire a wide range of experiences for the board of directors

May not be able to

Having the concentration in one area could lean to a failure of the company The oversight that Mr. McBride is attempting to avoid will be present

Cast a wide net for

find enough experienced people for consideration y Have investors

investors and possible board candidates y Have one or two of

the recommendations be on the board and find others that you feel will do the best

give names of possible y candidates

Problem Solution: McBride Financial Services

20

Create a competitive compensation plan

Not have

With a lack of investment the company will not have a solid direction By not drawing acceptable candidates, it may bring in people that are not that interested in the direction of the company

Teach and educate

investment from managers or the board of directors y May not be able to

the board of directors so they understand what we are attempting to accomplish with their compensation

draw viable candidates y

Create a compliance department

Cost of meeting

The consequence of not meeting the requirements could be devastating to the company

Hire a few

compliance requirements may be too high. y Finding the right

compliance staff to begin the process of meeting the requirements

people for the positions can be difficult y Not enough y

By just filling the positions without the correct personnel can cause problems

understanding from management y

By not understanding the requirements they are placing the

Problem Solution: McBride Financial Services company in jeopardy

21

Problem Solution: McBride Financial Services Table 5 Optimal Solution Implementation Plan Deliverable Hire Board of Directors Create a competitive compensation plan for the BOD Educate current managers in basic corporate governance Create a compliance department Timeline 3 to 6 months 1 3 months Who is Responsible Hugh McBride and Beltway Investments Hugh McBride and HR HR HR and Hugh McBride

22

Immediately 3 to 6 months

Problem Solution: McBride Financial Services Table 6 Evaluation of Results End-State Goals Have a well balanced BOD Metrics 3 members from outside the financial industry and 3 from within the industry Benchmark with outside companies to determine what is fair in a company this size across different industries Hire 2 controllers 6 months Target

23

Have a Fair Compensation Plan in place for the BOD

3 month

Have a Compliance Department in Place

3 months