Explain the importance of corporate governance and the need for managers to behave ethically.

After Amanda (Mandy) Wu graduated from USC with a degree in finance two years ago, she took a job as assistant to Rick Schmidt, Medical Reports International’s chief financial officer. MRI produces elec-tronic diagnostic equipment that is used in hospitals, nursing homes, acute care facilities, and, increas-ingly, in private homes. The company began in 1981 as Medical Reports Inc., a manufacturer of heat-sensing devices that used a digital transmission system to report on acute care patients in large hospi-tals. It was based in southern California, where its founders resided, but over time the company broad-ened its line of diagnostic equipment and developed into an international leader in the medical equip-ment field. Most of its design workAc€??much of which involves developing software and computer chipsAc€??is done in California, but most of its manufacturing is done in the Far East and Mexico, and it has sales offices throughout the world. To reflect its international presence, the company changed its name to Medical Reports International in 1995. Table ICI-I gives a list of the people involved in the case. One of MRI’s founders, Mike Diaz, was an engineer, and the other, Bob Conti, was a sales representative for a medical supply distributor. Diaz developed a heat-sensing device that showed “hot spots” on patients, transmitted this information to hospital control stations, and thus alerted the medical staff to developing problems. Conti used his con-tacts with hospitals to sell the system. They were successful from the start, and the company was prof-itable enough to finance its early growth with internal funds plus bank loans supported by a strong cash flow. However, in 1985 Diaz and Conti realized that additional capital was needed if the company was to realize its full potential, so they sold a minority interest to Southern California Ventures (SCV), a leading venture capital company. BV 1990, MRI was highly profitable. The firm clearly had a high value even though it was not publicly traded, hence there was no way to actually measure that value. Also, it had become clear that the company should expand internationally, and that would require additional capital. At that point, the principals decided that MRI should go public and raise the required capital by issu-ing new stock. Also, SCV wanted to “harvest” some of its gains; Diaz and Conti wanted to diversify their personal holdings; and a number of key employees svanted to cash in on their stock options and Amanda (Mandy) Wu Rick Schmidt Mike Diaz Bob Conti Vince Fuller Eduardo Suarez Sally Williams Ellen Warren John Costello Assistant to the CFO Vice president, CFO Director, founder, chairman; engineering background Director, founder, president; medical products background Director, officer of venture capital firm Director, international marketing expert Director, college president; expert on adult education Director, scientist; expert on medical equipment Consultant, finance professor buy long-delayed homes and other things. So, MRI had a stock offering in which the company sold new stock to bring in additional capital, and Diaz, Conti, and SCV sold some Of their shares to diversify their holdings. As a result of this offering, and of additional sales in the secondary market over the years, Diaz, Conti, and SVC each own 15 percent of the outstanding stock and public stockholders own the remaining 55 percent. Key employees hold options on 10 percent of the stock, which, when exercised, will reduce those percentages slightly. Neither Diaz nor Conti, nor Vince Fuller, the SCV representative on the board, has had formal finance training. Fuller has an MBA, but he majored in marketing and avoided finance and accounting courses as much as possible. The other three members of the board, Sally Williams, Ellen Warren, and Eduardo Suarez, also lack financial training. Williams is the president of Foothills Community College, Warren is a respected scientist and medical equipment expert, and Suarez is an international marketing expert. After passage of the Sarbanes-Oxley Act in 2003, under which the boards of public companies can be held accountable for improper reporting, board members expressed a concern about their lack of financial expertise. Also, Schmidt thought that the board might be able to make better policy deci-sions if the members were better grounded in the fundamentals Of financial management. At a recent board meeting, Suarez suggested that Schmidt organize an educational program. One of his friends, a director of an aerospace company, told Suarez about such a program his company had set up and how valuable the board felt it had been. Suarez’s suggestion was then discussed, and Schmidt was asked to establish an educational program for MRI’s directors. The discussion then turned to the program’s formatAc€??what should be its content, and who should conduct it? Williams, the college pres-ident, had been involved with various corporate training programs and suggested the best results would be obtained if the program was organized and conducted by a team consisting of a college finance pro-fessor, a senior MRI financial executive, and a sharp junior member of the company’s finance staff. The team would construct a program, with PowerPoint slides and other exhibits, and practice their presen- tation on a group of company representatives who would (1) benefit from knowing more finance and (2) be able to provide feedback on what worked and did not work in terms of getting important con-cepts across. After that, there would be a 2-hour session before each monthly board meeting devoted to finance topics. Williams laughingly said, “At the end, we’ll be awarded with a degree from MRI Uni- versity.” Diaz liked the idea but suggested that the six operating VPs be included, because he sensed that they too needed a stronger background in financial management. Suarez suggested that international finance topics should be covered, because international markets have the best growth potential and pro-vide unique challenges. The remaining board members agreed with these suggestions, and Schmidt was asked to implement the idea, starting with the next monthly board meeting. Schmidt has long felt uncomfortable because few board members had a good understanding of fun-damentally important concepts like the cost of capital and capital budgeting. He thinks board discussions of key policy matters will produce better results if members know more about financial management. For several years, Schmidt has used John Costello, a brilliant finance professor at the local university, as a consultant and advisor on various financial issues. Costello is also an award-winning teacher, so he is a natural choice for the academic on the team. Schmidt himself is the logical choice for the MRI execu-tive, and he quickly decided to ask Mandy Wu to serve as the junior MRI person. Wu is on the fast track for promotion within the company, and work on the project will give her valuable insights into the thoughts of senior executives and board members. Immediately after the board meeting, Schmidt called Costello and Wu, explained the situation, and secured their participation in the program. At a meeting the next morning, they decided to divide the course into 16 sessions, each covering an important issue, following the organization of a leading text- book on international financial management. Costello suggested that each session be organized around a series of questions that would take participants through the fundamentals of the topic. Facts and issues relating to MRI itself would be used, so each session will teach fundamental analysis and apply the analysis to current issues facing MRI. Thus, the sessions will serve both educational and policy-making functions. The board members and executives are all quite intelligent, so they should pick things up quickly, but they are not conversant with many finance terms and concepts. Therefore, even elementary topics should at least be mentioned. Schmidt and Costello, with Wu looking on, prepared the following questions for the introductory session. Wu’s task is to prepare answers for use during the session. Put yourself in Wu’s position and prepare answers for the following questions. QUESTIONS a. What should be the primary goal of the firm? How is this goal achieved? Is this the firm’s only goal? How does this goal relate to those who interact with the company (customers, employees, etc.)? How does this goal relate to other company goals? In your responses, consider the implications of international operations. b. How will increased globalization affect MRI’s financial decision making? c. What major factors have helped shape the current international financial environment, and what business opportunities have they created? d. MRI’s first foray into international operations was selling to overseas customers, and later this expanded to overseas production. List and explain some examples of why firms “go global.” e. MRI’s transition into becoming a multinational enterprise (MNE) was a rough one. Specifically, MRI’s managers had trouble identifying the unique challenges that operating in an international environment presents. Identify some factors that distinguish multinational financial management from domestic financial management. f. Define agency relationships. What agency problems can develop as a firm expands and decides to operate internationally? g. Explain the importance of corporate governance and the need for managers to behave ethically.

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