Governance at Trail Guide Financial (A)

In this disguised field-based case, Trail Guide Financial (TGF) CFO Tasha Maxwell was examining the earnings for year ended March 31, 2020. In light of the COVID-19 pandemic and the ensuing market drop, the firm suffered significant losses right at the end of its fiscal year. All three of the firm’s divisions—investment management, advisory services, and capital markets—had less than stellar fiscal results. Yet the capital markets compensation increased on a year-over-year basis. How could one group receive superior compensation while the firm, and shareholders, as a whole suffered? Maxwell dug deeper to understand how the financial services industry compensated employees involved in capital markets sales and trading. She was concerned that certain segments were incentivized to make deals—to bring in revenue—without regard to the impact on the firm’s bottom line. To put an even finer point on the issue, while the capital market’s bond business was losing money, the firm’s somewhat new CEO, Victor Nicoli, was collecting a seven-figure income from three sources: a percentage of the firm’s annual pretax income; a percentage of the capital markets division’s annual pretax income; and sales credit (i.e., commission) on sales of bonds, which unlike the first two the proceeds were distributed every two weeks. Maxwell and general counsel and chief compliance officer Jake Tyson both see an issue regarding a misalignment of the CEO’s compensation. In the A case, Maxwell must decide whether to bring up the situation to executive chairman Adam Becker. The B case reveals the conversation between Maxwell and Becker and his decision to address the issue.