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Global Investors

Global Investors was facing challenges in determining the appropriate transfer pricing model to use between its subsidiaries. There were disagreements between members of the transfer pricing task force on whether the regional offices should be treated as autonomous profit centers or if revenues should be recognized by the New York headquarters. Additionally, the CEO was unconvinced that the current structure needed fixing. The task force would need to find a solution that balanced recognizing the value created by regional offices while also acknowledging the strategic role of the New York research team.

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717 views2 pages

Global Investors

Global Investors was facing challenges in determining the appropriate transfer pricing model to use between its subsidiaries. There were disagreements between members of the transfer pricing task force on whether the regional offices should be treated as autonomous profit centers or if revenues should be recognized by the New York headquarters. Additionally, the CEO was unconvinced that the current structure needed fixing. The task force would need to find a solution that balanced recognizing the value created by regional offices while also acknowledging the strategic role of the New York research team.

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ArtikaIndahsari
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CASE 7

GLOBAL INVESTORS

Background

Global Investors, founded in 1965, was a privately owned investment management company
headquartered in New York. GI focused on two activities:

1. Investment management (which included research, portfolio management, and trading)


2. Client services (which included marketing and investor advisory services provided to
institutional investors and independent brokers/dealers).

Bob Mascola, CFO of Global Investors, Inc. (GI), would meet with Gary Spencer, GI’s CEO.
The transfer pricing task force supervised by Mascola was meeting with Spencer to discuss the
latest transfer pricing models that the task force members had identifi ed. Mascola hoped the
meeting would result in a final decision about the transfer pricing method that should be used to
recognize profits in GI’s subsidiaries. Mascola knew that the meeting would be difficult.

Problems

 Two of the members of the transfer pricing task force, Alistair Hoskins and Jack Davis,
had engaged in heated debates about which transfer pricing model should be selected.
Hoskins, the chairman/CEO of GI’s London office, believed that regional offices – or at
least the regional office he led – should be treated as largely autonomous profit centers so
that the value created by these offices would be refl ected in their financial statements.
However, Davis, GI’s corporate vice president of operations, argued that virtually all of
the investment strategies used to manage the clients’ funds were designed by the research
team located in New York. Consequently, Davis believed that the revenues generated by
investment activities should be recognized in New York, even if a few investment
services were offered by a regional office.
 The company’s investment philosophy revolved around the theory that markets are
affected by judgmental biases of the market participants.
That is, under certain circumstances and for certain time periods, investors, and hence
markets, overreact or underreact to information that is publicly available regarding
companies’ expected risks and returns.
 Gary Spencer was not convinced that the current structure created problems that were
worth fixing.
 Davis and Freeman estimated that the operating incomes recorded for the different
subsidiaries under their proposed model, but this model was unacceptable to Hoskins and
Hoshi also supporting Hoskins. Hoskins argued that the London and Tokyo subsidiaries
were actively participating in investment management, and they should be rewarded for
the value these activities created.

Solutions

 GI was committed to lowering its trading costs through economies of scale, technological
investments aimed at increasing liquidity, and crossing activities (that is, matching
clients’ buy and sell requests).
 GI’s investment philosophy differentiated the firm from most of its competitors. Since its
inception, GI based all of its investment strategies on financial market theories emerging
from academic research.
 The centralization structure cannot be carried out because it has limits or opportunities.
The centraliation will cause the information does not arrive on target, so decentralization
must be made so that the existing market conditions are visible. The decentralization is
good because it avoids asimetric information from down to top corporation. So, it needs
action control inside the process of the work.
 Research conducted by the New York branch does not have a major contribution. In fact,
a research and development that is a future investment that allows can beat competitors
who have more innovation than the companies average.

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