Icahn Enterprises, a publicly traded limited partnership founded and operated by famed activist investor Carl Icahn, had earned above market returns for over a decade. Between 2018 and early 2023, it had a compound annual return of 31%. Icahn invested in undervalued companies and then publicly pressured boards of directors to make changes to increase the share price. Hindenburg Research (Hindenburg), an activist short-selling investment firm founded by Nathan Anderson, took short positions in companies it felt were overvalued, published research reports to drive down the stock price, and then profit from the decline. In May 2023, Hindenburg published a report claiming that Icahn Enterprises stock price was overvalued by 75%, that its 15% dividend yield was not sustainable, and that it sustained itself through a Ponzi-like economic model by issuing new stock to new investors so it could pay dividends to existing investors. Would Icahn Enterprises continue to outperform the market or was it a Ponzi disaster waiting to happen?
The case examines how to account for risks associated with loan assets (or receivables) through financial reporting for loan losses (or bad debt expenses) in the context of the adoption of the new accounting standard, Current Expected Credit Loss (CECL) model. CECL required banks to consider future economic conditions and to include forward-looking credit loss estimates in the setting of allowance for loan and lease losses (ALLL). This marked a departure from the previous standard, which is called the incurred loss model. Under that model, credit losses were recognized when it became "probable and estimable" that a credit loss had incurred based on historical data and current economic conditions. The case also explores what banks, regulators, and investors thought about the new method. Both bankers and regulators called CECL the biggest change ever to bank accounting. JPMorgan Chase CEO Jamie Dimon called CECL accounting crazy. Financial Accounting Standards Board member Hal Schroeder indicated CECL would lead to a safer financial system and a more resilient economy. Investors and analysts were trying to figure out the new CECL method and what impact it would have on financial statements.
In December 2022, Juan Luciano, Chairman and CEO of agribusiness and nutrition giant ADM, considered the next phase of the historic company's future. Beginning in 2011 when he joined as COO and moving into his tenure as CEO in 2015, Luciano led a transformation of ADM from a commodities-focused trading company to a customer-centric solutions firm. Upon coming aboard at ADM, Luciano saw changes in the agribusiness industry that warranted pivots in ADM's business strategy to ensure long-term success. To shepherd the company through a changing industry, Luciano conceptualized three "strategic horizons"-general timeframes to pursue specific goals. The first horizon was aimed at getting ADM financially fit including raising ROIC above WACC and reducing CapEx. The second horizon was characterized by moving closer to customers through identifying global macro-trends and offering corresponding products and services to generate better margins. As part of the second horizon, ADM acquired flavor company and food and beverage solutions provider WILD Flavors which resulted in Luciano creating a Nutrition division that used rapid design-for-market capabilities to create complete product solutions for customers. As a leader, Luciano exhibited the traits of both a learner (e.g., seeking out a variety of perspectives before ultimately making key decisions himself) and a teacher (e.g., utilizing drawings, vivid analogies, and hands-on demonstrations). Luciano needed to define the company's next horizon. He knew his general goal was sustainable growth, but balancing profitability with innovation and pace of change with durability of change could prove challenging in the years to come.
In early 2019, Anthony Campagna, the global director of fundamental research at ISS EVA, a unit of the proxy advisory firm Institutional Shareholder Services (ISS), was preparing to release ISS's analyses of public company performance and CEO compensation ahead of Say on Pay (SOP) voting. ISS's reports helped institutions and other investors determine how to vote their shares at annual shareholder meetings. The report's assessment of CEO compensation for SOP relied on the degree of alignment between a CEO's industry-relative compensation and the firm's industry-relative performance. ISS had long used total shareholder return (TSR)-a measurement based on a company's stock price appreciation and dividend payouts-to measure company performance. In 2019, for the first time, ISS supplemented the TSR measure with economic value added (EVA)-a measurement based on accounting data that combined operating profit and a charge for capital-to measure performance. ISS believed that using EVA as a complement to TSR painted a more complete picture of company performance than TSR alone. EVA was, however, a far more complicated and not widely understood performance metric. Interpreting EVA for certain types of firms-young, high-growth, investment-intensive-could also be challenging. Campagna wondered how market participants would respond to ISS's use of EVA in its voting recommendations, particularly when TSR and EVA could make company performance look quite different. Did the benefits of EVA make managing its complexities worthwhile? Was EVA too complicated for investors to understand? Would EVA work equally well for young and high-growth firms as for mature firms? How might Campagna best promote the use of EVA?
In 2019, Bruno Masson, the vice chairman of Veolia's Ethics Committee, was preparing for a meeting on a rollout plan for a new whistleblowing system to more countries. Veolia, a global supplier of water, waste, and energy services, had recently gone through several incidents of corporate misconduct. In response, Veolia believed that strengthening corporate whistleblowing was an essential next step to prevent future incidents of misconduct. Given the positive experiences with its existing platform in the U.S., Veolia had originally tested this platform in Germany, where both corporate and legal protections for whistleblowers were weaker compared to the U.S.. However, this rollout turned out to be unsuccessful. This initial setback prompted Masson to try a different approach to encourage more whistleblowing. They hired an outside vendor to provide Veolia with new whistleblowing capabilities. Would the new system be more successful in encouraging employees to report their concerns? How would the whistleblowing laws in Germany influence the effectiveness of this platform? Could this technology have negative implications for employee trust and productivity in the long run?
In early 2020, James Quincey, the 14th chair of the 133-year old The Coca-Cola Company, was in the midst of a years-long transformation of Coca-Cola from being the leading carbonated soft drink (CSD) beverage company into a total beverage company. The company's flagship product, Coca-Cola, had been the world's best-selling beverage for 100 years, yet some consumers were turning away from CSDs due to health concerns over sugar consumption and a proliferation of other beverage options. The company had both acquired and developed many new beverage brands. It was in the process of changing its culture to be faster moving and more willing to take risks, and a culture where the new brands meant as much to the company as did its flagship product, which was still the company's largest selling beverage. Coca-Cola was also working to improve its environmental sustainability and social consciousness activities, and building a company where people were proud to work. The case also provides a historical look at the company's development, its relations with bottlers, competition with rival PepsiCo, and ends with emerging issues in the early days of the COVID-19 pandemic.
Pearson, which billed itself as the "world's learning company," faced a host of critical decisions in mid-2020. Several years prior, it had embarked on a new path that put the learner at the heart of the business and committed to a new strategic orientation. The new approach, under the heading of "efficacy," was meant to ensure that products and services were developed with measurable outcomes that mattered to learners in mind; and such offerings would further be taken to market with an emphasis on touting their efficacy credentials. While several efficacy reports had been produced on existing products to hone the framework, 2020 marked the first year Pearson launched a new product (the AIDA Calculus app) with efficacy in mind from the get go. As CEO John Fallon, the main architect behind efficacy, neared the end of his tenure at Pearson, he wanted to chart the next phase of the efficacy journey. In particular, should the company develop all its products and services with efficacy as the guiding principle? Which learner outcomes made the most sense to focus on in the future? How could Pearson better communicate efficacy in the marketplace and get it to resonate with various stakeholders-particularly educators and learners? With competitors following suit and using efficacy in their own communications, often without the same rigor that Pearson had applied, how should Pearson combat such "copy-cat" behavior? Was efficacy a pillar upon which to build the Pearson brand? In short, should he and his successor bet the "Pearson farm" on efficacy?
The Carroll Family, U.S. pig and grain farmers, needed to decide what to plant, whether to purchase land, emphasize pigs or grain, or other investments. Seven family members across three generations owned and operated Carroll Family Farms (CFF). In Illinois, CFF raised pigs as part of a commodity pork business, grew corn and soybeans to feed the pigs, and used the pig manure to fertilize its crops. CFF also owned a significant farming operation in Brazil that grew soybeans, cotton, and corn, and it provided farm services for other farmers in Brazil. They had low debt, and significant cash flow. CFF faced significant market uncertainties. The U.S. and China were in the midst of a trade war that was impacting the supply, demand, prices, and trade patterns of agricultural products. There was a growing African swine fever outbreak that could kill off a large portion of the world's pig population. The U.S. government paid large, but uncertain agricultural subsidies, and farmland was expensive and rarely available for purchase. How should the Carroll family farmers address these challenges?
Marilynn Duker, CEO, was exploring how to grow the company while maintaining the culture that made it a leader in the field of senior housing. Brightview constructed and operated senior living apartment communities that offered independent living, assisted living, and dementia care services for seniors in northeastern U.S. markets. While Brightview was smaller than the largest senior living firms (it had 42 properties with over 5,600 apartments), it had purposely managed its growth so that it could focus on offering the best work experience for its employees. The executives believed that doing so would lead to the best experience for its residents and, ultimately, the best financial returns for its investors. Its strategy appeared to be working so far and the company had received rewards for being a best place to work. Regardless of market or product, Duker and the executive team recognized that many seniors preferred to live at home and bring in help or could not afford to live in a senior living community.
Mike Zani and Daniel Muzquiz needed to decide next steps to create a new category in the human resources consulting industry and scale their company. Zani and Muzquiz, serial entrepreneurs, acquired Predictive Index in 2014. Previously, as clients of the 65-year-old Predictive Index, they had used its behavioral assessment tool to help them hire staff and build teams and they strongly believed in its value. They also believed, however, that Predictive Index had the potential to be something more. After acquiring the company, they invested in technology and people to modernize the business, and Predictive Index earned recognition as a "best place to work." In 2018, they developed a Talent Optimization platform, an offering that had the potential to transform the industry by helping companies align their business strategies with their human capital and leadership development strategies. In late 2019, as they prepared a broad rollout of Talent Optimization, and planned to scale their business by an order of magnitude, the pair wondered what hurdles they might face along the way and what other steps they should take to reach their goals.
Mark Cooke, Global Head of Operational Risk, needed to decide between a traditional regulatory control system and a new regtech system to manage non-financial risks. Non-financial risks failures such as money laundering and tax evasion had cost HSBC billions of dollars in fines and settlements over the previous decade. In response, HSBC had hired thousands of risk and compliance staff and invested billions in traditional control systems. Cooke, however, could not be sure HSBC's traditional methods were sufficient and he was worried they were not sustainable. Cooke recently ran a pilot test of a regtech solution that promised to warn of problem areas in advance, and do so at a much lower cost than traditional systems. The regtech solution provider was a small startup and the technology was not fully developed. Cooke wondered how much he could trust a technology from a startup company with a handful of employees and almost no revenue to meet the needs of a world-leading bank with global operations.
Stephen Scott needed to decide whether to keep his behavioral analytics startup in the people analytics sector or shift his company into the RegTech sector. Starling had develop technology that enabled its customers to anticipate and shape the behavior of their employees by examining company data on employees, including email traffic. Starling had struggled to grow in the people analytics sector while RegTech was an emerging sector that might provide better opportunities to grow.
Formula E's season three is nearly complete. CEO Alejandro Agag needs to examine his business model to ensure the racing series is positioned to grow sustainable in the years to come.
In 2015, National Hockey League (NHL) commissioner Gary Bettman was weighing two major decisions: whether to expand the league to a new city, and whether to conclude a digital media rights deal with Major League Baseball Advanced Media (MLBAM). Expansion required a careful balance between the needs of existing teams, and of parallel fan bases in the U.S. and Canada. Between two candidate expansion cities, Las Vegas, NV and Quebec, QC, Bettman would have to decide to expand to either, neither, or both. If the NHL accepted MLBAM's offer, it would be one of sports' first digital media rights deals, and the first time one major sport had outsourced its digital media production to another. This case also explores the history of the National Hockey League and labor relations between the league and its players.
Robert Mayhem, a senior manager at International Game Technology, had filed a whistleblower report with the U.S. Securities and Exchange Commission alleging that the company has misstatements in its financial reports. Mayhem's report involved IGT's practice of refurbishing used parts in one of its reporting segments and then transferring those parts to another reporting segment. Mayhem indicated that IGT's method of determining the costs of the refurbished parts was inaccurate and resulted in profits being shifted from one segment to another. Prior to his report to the SEC, Mayhem had reported his concerns to his managers and to the company's internal compliance hotline. At about the same time, IGT announced that it had accepted an offer to be acquired by another large player in the industry which would soon move its incorporation out of the U.S. and into the U.K. What should IGT do regarding the whistleblower and his report?
This note provides an overview of U.S. federal legislation relating to whistleblowing, Sarbanes-Oxley, Dodd-Frank (including the Office of the Whistleblower), and the False Claims Act.
In 2018, City Year was a 30 year old nonprofit that recruited and organized teams of young-adult "volunteers" (corps teams) to provide a year of citizen service. It had 3,100 corps members serving in 327 schools located in 28 U.S. cities. In its early decades, City Year provided a variety of services to a variety of organizations in need. Over its most recent decade, City Year had pivoted to having all corps members serve in low-income public schools to keep students on track to graduation in an effort to reduce the nation's high school dropout rate. City Year also worked with partners to help schools transform themselves to better meet the needs of low-income students, and worked with policy makers and elected officials to promote the value of national citizen service. In 2012, City Year launched a Long Term Impact strategy (LTI) aimed at making a substantial improvement in high school graduation rates. The LTI required City Year to transform itself over time to create an organization capable of delivering its ambitious impact strategy. The case explores City Year's history and its efforts to align its organization with its strategy. In March 2018, City Year CEO Michael Brown must examine the state of his organization and its strategy to determine next steps to achieving its LTI goals.