BUSINESS FINANCE

Case study

Objective: To assess a companys structure and examine the relationships between different stakeholders in the business (society, bondholders, and financial markets) and their impact on the firms objectives.

Key Steps 1. Select any company listed in the Nairobi securities exchange.

2. Examine the separation between the management of the company and its owners. Assess how much power owners have in monitoring management and influencing decisions.

3 If the firm has borrowed money, either in the form banks or in the form of bonds, evaluate the potential for conflicts of interest between the equity investors and lenders and how it is managed.

4. Examine how markets get information about the firm and investor reactions and assessments of the stock.

5. Evaluate the companys standing as a corporate citizen, by looking at its reputation (good or bad) in society.

6. Pass a judgement based on the above metrics.

Framework for Analysis/Guide for Analysis

1. Corporate governance

Areas to focus on include:

1. Voting structure: Look at whether the firm has multiple classes of shares and if so, whether they have different voting rights. If the government is an investor, check to see whether it has veto powers (golden shares) over key decisions.
2. Ownership structure: Start by looking at proportions of the outstanding stock held by institutions, insiders, and individuals. These data are generally available in public sources.
3. Top shareholders: Look at the top ten to twenty holders of the companys shares. In addition to checking to see how many are institutions, look for the presence of founders and activist investors on the list. (You are trying to see whether these stockholders will be willing to stand and contest management, if they feel that their value is being put at risk.)
4. CEO and top management: Look at the background of the CEO and examine how he or she got to the position. In particular, check for tenure (how long he or she been CEO), whether the CEO came up through the ranks or from another organization, his/her age, and connections to the ownership of the company. If you can, ask the same questions about the rest of the top management team.
5. Board of directors: Look at the composition of the board of directors and in particular at connections that the directors may have to the top management and, in particular, to the CEO. Check to see whether there are external assessments of the boards independence and quality and also check news stories to evaluate whether there is evidence that the board is willing to stand up to management.
6. Compensation structure: Find out how much the CEO/top managers were paid in recent periods and in what form (cash, restricted stock, and options) and how these payments relate to company performance over the same periods (both in terms of accounting profits and stock prices).

2. Bondholder concerns

Areas to focus on include:

1. Debt type: If the firm borrows money, examine whether it borrows from banks or by issuing bonds. Follow through and find more details on the borrowing.
2. Debt covenants: Check to see whether there are covenants or restrictions imposed by the lenders. You may be able to find this information in the annual report or filings with the regulatory agencies.
3. Default risk measures: If your company has been rated by a ratings agency, find out the bond rating and the rating agencys views of the company.

3. Financial markets

Areas to focus on include:

1. Trading and liquidity: Examine the portion of the shares that is available for trading (free float) and how much trading there is in the company (by looking at trading volume, relative to market value). If you can, get measures of liquidity costs from the market including bid-ask spreads.
2. Analyst following: If it is a publicly traded company, see whether you can find a listing of the sell-side analysts who follow the company and what they think about the stock. Many services provide information on both metrics, with a breakdown of buy, sell, and hold recommendations from analysts following a company.

4. Society and other stakeholders

Areas to focus on include:

1. Employee satisfaction: Look for hard data on employee satisfaction such as employee turnover and compensation numbers for the company, relative to its peer group. Also, look for qualitative assessments of the company as an employer, generally from news stories about the issue.
2. Society: In addition to looking for news stories that mention your company is a social context, you can try to see whether the company makes the lists of socially responsible corporations that are published by some external entities (environmental, labor, and political) but recognizes that they may be no consensus, as these groups have different agendas.