Jonathan Xianqi Zeng’s Primer on Corporate Fiduciary Duties and Internal Controls

Wirecard and Luckin Coffee are two most recent frauds investors met. Here are some takeaways from my corporate board responsibilities class last semester. I’d like to take the opportunity to share several important points.

Several duties categorized below.

Duty of care is mainly procedural. Criteria include:

  • Time commitment and attention being applied. Conduct diligent process in decision makings
    • Collect accurate and timely information
    • Receiving Advice of Outside Experts
    • Making reasonable business judgement that decisions serve the best interest of corporation.

Duty of loyalty

  • Employees should put the company’s interest ahead of personal interest
  • Disclosure. Make timely disclosure on potential conflict of interest events

Internal controls

  • The management must prepare an annual report on company’s internal controls. CEO therefore also cannot claim he/she doesn’t know about the weakness in internal controls.
  • PCAOB regularly reviews external audits of public companies, and would be the agency that most likely have found this alleged violation.
  • It’s always a good idea for investors to read through investment prospectus files or annual filings (10-K for domestic companies, and 20-F for foreign companies listed in the U.S), and read through the management’s discussions on internal control procedures, and whether the management has identified any areas for improvements.
Internal Controls for eCommerce Companies – Risk and Control ...

Xianqi Zeng’s Review on Mobileye’s Strategy

Hello, my name is Jonathan Xianqi Zeng. In this episode, I’d like to discuss my takeaways on Mobileye’s development strategy. As you may know, Mobileye was acquired by Intel. However, have you ever thought about whether this company has ever sought partnership with incumbents and tech giants? Here is a quick summary of Mobileye’s decisions including potential partnership choices:

  1. Not collaborate with Google.
    • Mobileye doesn’t have a clear sense of what Google’s business model is. It’s hard for Mobileye to understand how it could fit into Google’s eco-system, and therefore couldn’t understand how a Mobileye and Google collaboration could bring values to Mobileye
    • Not sure what they can learn from Google. Given Mobileye’s leading role in autonomous vehicle technology, it’s not clear to Mobileye what they would be able to learn from Google, especially that Mobileye is focused in its own field.
    • Mobileye doesn’t know what Google’s longer term goal was. If Google’s goal is to create an ecosystem with the cars, and give out the cars for free but sell software, then it’s disastrous for Mobileye.
  2. Vision for autonomous vehicles in stages.
    • Free drivers from steering wheel, but gives drivers 20 seconds to take back control. Further, there could be issues when driving into downtown, as the crowd in downtown would pose more difficulties.
    • Driver can completely go out of loop. This is the most difficult part, because this requires much more computation.
  3. On branding.
    • When it comes to branding, Mobileye CEO Amnon Shashua believes that the downside of pushing out the brand to end customers overweighs the upside. Specifically Mobileye’s argument is that their customers, the OEMs, know that Mobileye’s products
    • This is similar to Intel’s decision not to make personal computers. However, Intel did make efforts to brand themselves and sell at a premium.

These strategies are keys that define Mobileye’s strategy. This is very interesting to me, as Mobileye’s position might be faced by many other startups or emerging tech firms as well – the choice between collaborating with incumbents in exchange for various resources that large platforms could provide, and remaining its niche strategy focusing on the area that the firm is great at. In the case of Mobileye, it chose the latter, as the company’s ADAS system is perhaps the best among competitors. Indeed, this strategy worked out for Mobileye.

The EV and autonomous driving market is rising on the horizon for investors – here are several ways to invest:

  1. Invest in autonomous vehicle manufacturer. Companies: TSLA.
  2. Invest in autonomous vehicle ecosystem builder. Company: Google, BIDU.
  3. Invest in supply chain: INTC, and other potential semiconductor and parts builders (be careful however on their pricing power v.s their clients!)

Xianqi Zeng’s Review on Software Firm’s Platform Strategy (Part II)

Hello, my name is Jonathan Xianqi Zeng. I’d like to continue my last discussion on the options for a software company to pursue a platform strategy, converting their current product offerings to a platform that enables customers to achieve more values within an integrated toolbox.

The second option is to:

Connect existing customers. In this method, software product provider can try to identify customers’ types and find out ways to connect multiple types of customers. In my business school class, several examples were given: for example, both consumers and lenders are customers of Equifax – on one side, consumers can access Equifax to check their latest credit scores; on the other side, lenders can use Equifax to check the borrowers’ credit scores as well for the purpose of lending. As the market place grows, Equifax was able to connect both sides, and harvest network effects by recommending either side to another. As terrific as the example, I also find other software companies that could use this method to create a platform. Specifically in the advertising space, digital advertising companies can really build an ecosystem to connect publishers (those who provide advertising inventories including but not limited to newspaper, online media, connect TV etc.) with advertisers (advertising agencies who represent brands such as P&G, Audi etc.). There are several ways a software product that traditionally provides advertisers with online real-time bidding functionalities to convert to a platform. Specifically I am thinking about companies such as Adobe, The Trade Desk, Rubicon Project. These are traditionally either represent only Ad Agency or Publisher but not both sides. In a platform strategy, one could imagine a company such as The Trade Desk creates an advertising platform where it not only bids ads for Ad Agencies, but also recommends the other way around, for publishers to look for brands that might be interested in their provided inventories, and therefore creating more efficient linking between advertisers and publishers. Following is a diagram showcasing the current world (courtesy from Stephens).

That said,  there are two main concerns in this strategy:

  1. While product providers could add additional revenues from the other way of the flow, willingness-to-pay by ad agencies in this platform might reduce. This could happen due to a fear of software provider’s possibly impaired objectivity. In a product strategy world, companies such as The Trade Desk essentially acts as the broker for Ad agencies, and therefore aligning its interest tightly with Ad agencies. However, in the new platform strategy, as a platform provider, The Trade Desk’s interest would be to maximize the total profits from the platform as a whole. Note that this issue could be a drawback of creating a platform in general: increased revenue from new sources of business may not make up lost willingness-to-pay from old clients.
  2. Strategy could impose huge threat to incumbents, and create a war that could never be won by a niche player. In executing a platform strategy, it seems clear that resources (could mean anything from cash, to talents, to customer base etc.) highly correlate with the success rate of the strategy’s execution. If a player that traditionally focuses on a small set of customers (ad agencies) decide to pursue platform strategy and expand to wider client base (publishers), it poses a threat to large incumbents such as Google Ads business, and could incur a retaliation by Google. It will be disastrous to The Trade Desk if Google starts to prioritize this line of business and deploy significant amount of resources to drive The Trade Desk out of business.

Xianqi Zeng’s Review on Software Firm’s Platform Strategy (Part I)

Hello. My name is Jonathan Xianqi Zeng. As some of you may know, a product company’s pricing power is as good as the product’s demand itself. However, once a product becomes a platform, customers’ willingness-to-pay and switching cost may rise dramatically. To capture the most value, there are two main ways to make a product a platform, in this series, I will go over these two options, with two corresponding examples (Microsoft and The Trade Desk) I have found. In this first part of the series, I will discuss the first option:

Open doors to 3rd parties. This includes opening up 3rd party developers to add features into the product. In a way, the first method is to crowd source the efforts of building more features on the product to the developer ecosystem. As instructor mentioned, the main debate in this strategy arises when the developed software is a competitor.

Arguments of allowing the 3rd party into the platform when the additional feature is a competitor: create more value for customers. Arguments against doing so: customers might switch to the competitor product, should that product provides better experience than our product.

My take is that: both arguments make sense. However, attentions should be made to switching cost of the customers. Take the example of Microsoft OneNote, which arguably is a better product than iPhone’s built-in notes application – OneNote supports multimedia notes taking and also syncing between different devices; in addition, OneNote supports multi-level classification of notes into notebook, sections, and individual notes. While allowing OneNote does bring in a competitor product into Apple’s ecosystem, the switching cost of customers to Apple’s competitor smartphone product however is high. In fact, the switching cost for customers to use Microsoft’s smartphone due to OneNote is high, unless Microsoft decides to stop supporting OneNote in the iPhone ecosystem. The key variables in that decision includes:

  • Whether Microsoft believes that Microsoft OneNote is so indispensible for users that a large percentage of users would decide to switch should OneNote is no longer supported on non-Microsoft smartphones.
  • Whether Microsoft believes that in doing so, Microsoft would be achieving higher earnings than not doing so. This earning is defined as not only the one time revenue generated by switching that % of customers, but also needs to take into account the losses incurred by potential retaliations from Apple.

Based on this analysis, the return payoff diagram for Apple of allowing third-party products in its ecosystem is perhaps not continuous: there is a point where Microsoft would stop offering OneNote in non-Microsoft smartphones: before that point, the presence of OneNote in Apple ecosystem creates positive payoff, but right after that point is hit, Apple’s payoff goes immediately negative.