Corporation Based Organization

The role of Agency and Finance Manager in the changed Organization

In 1970, several entrepreneurs agreed to start a company they called ZRM Inc. Their idea was to sponsor syndicate and manage public and private limited partnerships with the purpose of acquiring and leasing transportation equipment. They created an operating subsidiary called FSI (Financial Services Inc.) to be the general partner each of the partnerships. ZRM had limited success in its early years, but during the period 1981 to 1986 more than 27 public partnerships were formed. Each partnership was set up to acquire and lease transportation equipment such as aircraft, tractors and trailers, cargo containers and railcars to transportation companies.

Until the Tax Reform Act of 1986, ZRM enjoyed considerable success with its partnerships. It became one of the largest equipment-leasing firms in the United States. The partnerships appealed to high-tax bracket individuals because unlike corporations, partnerships are not taxed. The partnerships were set up to be self-liquidating (i.e. all excess cash flows was to be distributed to the partners), and no reinvestment could take place. No ready market for partnerships units existed and each partnership invested in a narrow class of transportation equipment. ZRM’s success depended on creating tax-sheltered cash flow from accelerated depreciations and investment tax credits. However, the 1986 Tax Reform Act had a devasting impact on tax-sheltered limited partnerships. The Act substantially flattened personal rate rates, eliminated the investment tax credit, shortened depreciation schedules, and established an alternative minimum tax rate. The Act caused ZRM to think about different types of equipment leasing organizational forms. What was needed was an organization form that could take advantage of potential growth and diversification opportunities and that wasn’t based entirely upon tax sheltering.

In 1987 ZRM, with advice and assistance of the now-bankrupt Drexel Burnham Lambert investment banking firm, terminated its partnerships and converted consenting partnerships to a new umbrella corporation called ZRM International. After much legal maneuvering, ZRM International publicly announced that a majority of the partnerships had consented to the consolidation and incorporation. A majority vote was needed for voluntary termination and some partnerships decided not to incorporate. On February 1988, ZRM International’s common stock began trading on the American Stock Exchange (AMEX) at $8 per share. However, ZRM International did not perform well, despite its conversion to a corporation, in April 2000; its stock was trading at $5 per share.

1. Write an overview and discuss the issue of agency problem for ZRM International.

(Hint: it is required to provide the theoretical background, problems and findings to support your discussion)

(20 marks)

2. In reference to agency problem of ZRM International, critically examine any practice or approach used by any company which has successfully decrease agency problem and increase shareholder’s wealth. (Hint: your answer should include a moderate research, rationale, practical, conclusion and recommendation)

(20 marks)

3. Discuss the role of finance manager in ZRM International, as ZRM has transformed from partnerships based to corporation based organization. Defend your answer. (Hint :it is important to include rationale facts and findings to support your answer using academic standard of writing)

(10 marks)

(TOTAL: 50 marks)