Ownership Structures in Industrialized Countries - Essay Example

Ownership Structures Difference in Ownership Structures among advanced industrialized countries Ownership Ownership can be defines as a of exclusive rights and control over a property (land, real estate, intellectual property, business or some other kind of property). The ownership concept has existed for thousands of years in all cultures and regions. It is the building block of the capitalist socio-economic system. It is considered as the foundation for many other concepts such as money, trade, debt, bankruptcy, the criminality or theft etc. Ownership is self-propagating in that if an object is owned by someone, any additional goods produced by using that object will also, be owned by the same person (Ownership) Ownership Structures Before starting a business the decision about the ownership is the prime factor to be considered by the entrepreneurs. The nature of the Ownership must be stated clearly in order to fulfill all the legal formalities to start a business. Some of the common ownership structures are sole proprietorship, partnership, limited partnership, limited liability company (LLC), corporation (for-profit), nonprofit corporation (not-for-profit), and cooperative. Sole Proprietorship business is owned by a single person. It is very easy to set up a sole proprietorship company as you don’t have to file any papers to set up the company like other ownership structures. In such businesses the business and the Ownership Structures 2 owner are one and the same. In such sole proprietorship business, the owner submits the business income and loses on his or her personal tax return and is personally liable any business related obligations such as debts or court judgment. (Business Ownership Structures) Partnership business is a business owned by two or more persons to become a corporation or limited liability company (LLC). As in the case of sole proprietorship, no need to file any paper work to form a partnership. Both in sole proprietorship and partnership business personal liability is not a big factor. For small average business owners sole proprietor ship and partnership businesses are advisable because of the less complication in such businesses. “As in a sole proprietorship, the partnerships owners pay taxes on their shares of the business income on their personal tax returns and they are each personally liable for the entire amount of any business debts and claims” (Business Ownership Structures) Limited partnership ownership structure is complicated in nature and it is not easy for an average entrepreneur to set up such a complicated business structure. In such partnerships one person or a group of persons (company) which is referred as general partner, who will collect investments from others (limited partners) to accumulate the capital for the business. The general partners have the authority of day to day affairs of the company and they are liable for any business debts caused by the company. On the other hand the limited partners have limited authorities and they are not personally liable for any business debts caused by the company. The functioning of Ownership Structures 3 corporations and LLC’s are though complicated and costly, it limits the liability of the owner for the business debts and court judgments against the business. The LLC’s or the corporations are independent legal and tax entities. People who own the corporation are exempted from the legal and tax formalities of the corporation whereas the owners of LLC’s are responsible for the tax and legal formalities of the company. (Business Ownership Structures) Corporations formed for charitable, educational, religious, literary or scientific purposes are referred as nonprofit corporations. They can make use of contributions from individuals, private and public grants, and donations to raise fund for their activities. Because of the benefits these nonprofit organizations contributing to the society, most of the governments exempted such organizations from taxes. An informal collaboration of a group of people to do a business democratically can be termed as Cooperatives. Such cooperative business group can run any retails business such as a book store, food store or any other suitable cooperative venture. Most of the governments have specific liberal laws towards the cooperative sector. “For ownership to separate from control, managers must be sufficiently aligned with shareholders. But the ways in which some polities settle conflict - or the ways in which the corporate players team up to work together - can affect the degree to which managers ally with shareholders and, concomitantly, how easy it is for ownership and control to separate. Managers agendas can differ from shareholders; tying managers tightly to shareholders has been central to Ownership Structures 4 American corporate governance. But in other economically advanced nations, ownership is not diffuse but concentrated. (Mark J. Roe, 2004) Managers must consider the interests of the shareholders also while taking the decisions. It is on the shareholder’s investment, the company is running and hence their interests must have given priority. Conflicts between managers and the shareholders will always result in poor performance of the organization. Ownership rights and the shareholder rights must be equally considered when taking decisions. One should not overweigh the other. In economically advanced nations like United States, UK, or Japan ownership is not distributed to so many entities, but it is concentrated on limited hands only. “The corporate world today subdivides into rival systems of dispersed and concentrated ownership, with different corporate governance structures characterizing each. The United States and the United Kingdom fall into the former category and other major industrial countries tend to fall into the latter.” (Brian Cheffins) The corporate world could not establish a consensus over the issue of ownership yet. Some advocates the diffused ownership structure while the others are in favor of the concentrated ownership structure. In diffused ownership structure, the market will be more liberalized than the concentrated ownership markets. It is evident from the cases of United States and Germany where the former follows the diffused ownership structure while the latter follow the concentrated ownership structure. The US and UK economies are almost Ownership Structures 5 similar in nature may be because of the political, social and cultural similarities between these countries. “Recent research on corporate governance has documented large differences between countries in ownership concentration in publicly traded firms, in the breadth and depth of financial markets, and in the access of firms to external finance.”(Rafael La Porta, Florencio Lopez de Silanes , Andrei Shleifer,Robert W. Vishny, 1999) The ownership structure is different for different countries irrespective of whether it is a public company, or public corporation. The foreign access to the financial markets such as share trading, banking and insurance sector also has been regulated by so many countries, especially the countries which follow the coordinated economy or mixed economy. It is been pointed out by economists that the current financial crisis has not done much damage to the Indian economy because of the regulations of the foreign intervention in Indian financial markets. “Today’s corporate theory cannot explain why several wealthy European nations protect minority shareholders well, but nevertheless still have concentrated ownership. The most plausible theory is that close ownership persists not because of weak corporate law, but because a) managerial agency costs from dissipating shareholder value would be very high, after full separation, and b) concentrated ownership reduces those costs to shareholders enough”. (Mark J. Roe, 2002) Most of the European countries are successful in protecting the shareholder’s rights well amidst of concentrated ownership. As per corporate theory it is very difficult to explain these phenomena. As per the corporate theory, in a concentrated or closed ownership, it is Ownership Structures 6 difficult to protect the interests of the share holders. Traditional theories of the firm emphasize the importance of managerial incentives, disciplining and finance in corporate governance. Ownership and control emerge as displaying more substantial variations across countries. These differences are associated with the formulation, implementation and adaptation of corporate strategy”. (Colin Mayer,1998) “Diffusely-owned public firms must make managers loyal to shareholders. Agency costs arise from managers having agendas that differ from shareholders’ agendas. Diffuse shareholders want the firm to maximize profits; managers often prefer to maximize the firm’s size, prefer not to take severe risks with the firm even if the risks would maximize profits, and often prefer to defer hard, disruptive actions. (Mark J. Roe, 2000) One of the major differences between the closed ownership and diffused ownership is the top manager’s attitude towards the share holders. In diffusely owned public firms, the managers will be the most obedient representatives of the shareholders and hence they don’t want to be afraid of any policy making or decision taking against the will of them. But in a closed ownership structure, the managers will often think about expansions of the firm rather than the interests of the share holders. They will be reluctant to take risks to maximize the profit which will be beneficial to the share holders. They will postpone all the hard measures which are going against the expansion of the firm irrespective of its advantages to the shareholders. Ownership Structures 7 We suggest that there is a common element to the explanations of these differences, namely how well investors, both shareholders and creditors are protected by law from expropriation by the managers and controlling shareholders of firms. We describe the differences in laws and the effectiveness of their enforcement across countries, summarize the consequences of these differences, and suggest potential strategies of reform of corporate governance. We argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems Liberal and Coordinated Market Economies “Although instances of market and strategic coordination occur in all capitalist economies, this approach contends that, in the spheres central to firm endeavor, the balance between these two types of coordination varies across political economies. At one end of the spectrum stand liberal market economies (LMEs) where relations between firms and other actors are coordinated primarily by competitive markets. At the other end are coordinated market economies (CMEs) where firms typically engage in more strategic interaction with trade unions, suppliers of finance, and other actors.( Peter A. Hall and Daniel W -2001) ‘Most of the firms in liberal economies coordinate their activities primarily through hierarchies and competitive market arrangements. Market relations are Ownership Structures 8 supported by the exchange of goods or services in a context of competition and formal contracting. The price signals generated by such markets will be tackled by the adjustments in supply and demand of goods or services. On the other hand in the case of coordinated economies, firms depend heavily on the non market relationships to coordinate their actions with others. Such relationships often results in exchange of private information which are of collaborative in nature rather than the competitive nature. Market relations and hierarchies are important to firms in all capitalist economies’. (Peter A.Hall, David Soskice) Liberal Market Economy-United States “In comparative political economy the United States is denominated a "liberal market economy" characterized by market-based labor policy, but American political development studies suggest that national-level comparisons, which assume government institutions are a coherent package, may be misguided” (Stephen Amberg-2008) United States is considered to be a liberal market economy. The equity markets were highly transparent and shares are dispersed widely. Depends on the share price takeovers are possible in such liberal market economy. Trade unionism will be very weak in such countries when we compare it with other market economies and hence the safety and protection of employment are very low. Because of the liberal nature of the market, employees are free to take other assignments as well based on their skill set. Only the top managers have considerable authority in such liberalized system. Ownership Structures 9 “Labor unions campaigned for ant-takeover laws, and labor can influence politicians’ votes. But labor unions and labor oriented political parties are not as powerful in the United States as they have been in continental nations.” (Mark J. Roe, 2002).Though the ideology of Marxism emphasizes the importance of rights of the working class; the Marxist led countries have little labor problems compared to other countries because of the tight disciplines and lack of freedom. The influence of working class or trade unionism is not much visible in the industrial section, but they have more prominent role in politics as seen in the recently concluded United States’ Presidential election. Other countries in the American continent especially the Latin American countries have more problems compared to US in the industrial section because of trade unions. Countries like India, especially the Indian state Kerala, which follows mixed economy, is a good example for excessive trade unionism and labor strikes. “In the United States for quite some time distant diffuse stock holders have owned the largest firms”. (Mark J Roe, 2002) The share holders have more authority on large firms because of their larger share in corporate companies. Most of the US people have more belief in share trading rather than any other investment opportunities. So whatever the excess money they have will be invested in the share markets. The share business tycoon, Warren Buffet is the best example. Most of the corporate companies shares are in the hands of the public and hence have they have an elaborated role in the policy making of the companies. Ownership Structures 10 “In the United States labor rarely participates in the board or high level management”. (Mark J Roe, 2002) The labors have little role in the decision making or policy making of a company in United States. Most of the decision making activities will be solely taken by the directors or the top managers of the company. Though democratic in nature, labors are not allowed to intervene in the policy making because of their lack of strength or unionism. In most of the other countries where the trade union has more strength, some of their representatives will be allowed to participate in the board meeting. “Social democratic pressures were weaker in the United States and the managerial agency costs such as close ownership were smaller here”. (Mark J Roe, 2002) As discussed earlier, though United States is been considered as one of the best examples of successful democracies, the pressure from the society or the people to the government will be far less when compared to some other continental countries. The agitations in business sector are very less from the working class. People of US are not much interested in making any big campaigns against the government as seen in some other countries. The managerial agency cost like closed ownership was rarely seen in US. “Without denying the role of economic coordination based on market relations and price, in CMEs more emphasis is on nonmarket and non contractual relations to coordinate efforts and to construct core competencies”. (J.V.ANNOPPEN,2003) Germany on provides a good example of coordinated market economy. Here the Ownership Structures 11 organizations are ably bonded with networks which allow the exchange of information. In this type of economy the firms depend heavily on their reputations rather than the share value. Hence managers are concentrated more on building the reputation of the company rather than the current profitability. Powerful trade unions and high degree of employment protection are some of the features of coordinated market economy. Cooperation in every aspect of business will result in industry associations which help such firms to transfer technologies mutually through collaboration. The authority of the top managers is less in coordinated markets compared to the liberal markets. Democratic approaches are common in such markets because of the heavy unionism and hence the workers are well aware of their rights. “In Germany labor participates directly in the core governance institutions” (Mark J Roe, 2002). The involvement of labors in policy making or decision making processes are more in Germany because of the coordinated market economy. In Germany in every business sector there will be more than one trade union and their representatives will attend the board meetings along with the directors or top managers of the company. It is difficult for the policy makers to avoid the opinions of the trade unions because of their immense strength and involvement in German politics. “Employees can be guaranteed representation on the firm’s board of directors; a solution still prevails in Germany” (Mark J Roe, 2002) Ownership Structures 12 Because of the coordinated market economy, the security markets are not transparent as that of the United States’ share markets and hence foreign participation is very weak in German share markets. The tight rules and regulations prevent foreign investors from entering the German share markets and hence their performances are very weak when compared to the United States’ share markets. The Coordinated market economy actually prevents Germany from taking the advantages of Globalization and Liberalization. Markets are not transparent or free to foreigners and hence the foreign investment which is essential for the growth of a country is very less in Germany. “German securities markets have historically been weak”. (Mark J Roe, 2002) “Lessons from research on varieties of capitalisms have taught us that economic growth may be accomplished within several different institutional environments. Hence, it may well be that trust between employers and employees is more important in coordinated market economies which “generally entails more extensive relational or incomplete contracting” (PerOla Öberg, Sven Oskarsson & Torsten Svensson,2007). The trust between employees and employers are the core for the development of an organization. In Coordinate market economic structure these relations are strongly bonded than that of the Liberal Market Economic structure. Conclusion “A comparison of skills upgrading in several fast-growing economies in Southeast Asia suggests that perhaps there is a new “State Coordinated, Liberal Market Economy” Ownership Structures 13 developmental model that can successfully lead to upgrading-driven economic development. This model combines elements from the Developmental State, Coordinated Market, and Liberal Market Economy models while differing significantly from each” (Bryan K. Ritchie, 2008). Both CME and LME have its own merit as well as demerits. A new approach combining the merits of both CME and LME as stated by Bryan Ritchie above will be more beneficial to the world. Ownership Structures 14 References 1. Brian Cheffins - Does Law Matter?: The Separation Of Ownership And Control In The United Kingdom - Retrieved on 31/12/08 http://ideas.repec.org/p/cbr/cbrwps/wp172.html 2. Bryan K. Ritchie (6 March 2008)Economic upgrading in a state-coordinated, liberal market Economy- Retrieved on 31/12/08- http://www.springerlink.com/content/h39300971t16nn90/ 3. Business Ownership Structures - Retrieved on 30/12/08 http://www.nolo.com/article.cfm/objectId/6294EA66-70E7-4562-81AC734B34CAD352/catID/5DE04E60-45BB-4108-8D757E247F35B8AB/111/182/ART/ 4. Colin Mayer (1998) Financial Systems and Corporate Governance: A Review of the International Evidence – Retrieved on 31/12/08 http://econpapers.repec.org/article/mhrjinste/urn_3Asici_3A0932-4569(199803)154_3A1_5F144_3Afsacga_5F2.0.tx_5F2-r.htm Ownership Structures 15 5. J.V.ANNOPPEN- (2003) A coordinated market economy to benefit the poor Retrieved on 31/12/08- http://209.85.175.132/search?q=cache:WpumSjl4NNoJ:www.econ.kuleuven.be/tem/jaargangen/2001-2010/2003/TEM2003-4/05_Vannoppen.pdf+coordinated+market+economy&hl=en&ct=clnk&cd=2 6. Mark J. Roe- Political Determinants of Corporate Governance -Abstract– (January 14, 2004) Retrieved on 30/12/08 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=472366 7. Mark J. Roe (June 15, 2002) Political Determinants of Corporate Governance - Publisher: Oxford University Press, USA; 1st edition 8. Mark J. Roe corporate Law’s Limits – (2002) Retrieved on 31/12/08 http://209.85.175.132/search?q=cache:jcqWglVv4PYJ:www.law.harvard.edu/programs/olin_center/papers/pdf/380.pdf+Corporate+Law%27s+Limits&hl=en&ct=clnk&cd=3 Ownership Structures 15 9. Mark J. Roe-(January 21, 2000) Political Preconditions to Separating ownership From Corporate Control) http://209.85.175.132/search?q=cache:AG6nOZHNKf4J:www.pse.ens.fr/hautcoeur/M2_histoirefinanciere/Roe_political-conditions.pdf+Political+preconditions+to+separating+ownership+from+corporate+control&hl=en&ct=clnk&cd=3 10. Ownership – Retrieved on 30/12/08 - http://en.wikipedia.org/wiki/Owner 11. Peter A. Hall and Daniel W (August 12, 2001)–Harvard University ––Varieties of Capitalism and Institutional Complementarities in the Macro economy: An Empirical Analysis 12. Peter A.Hall, David Soskice- An introduction to varieties of capitalism-Retrieved On 31/12/08 -http://kisi.deu.edu.tr//muge.tunaer/VoC.pdf 13. PerOla Öberg, Sven Oskarsson & Torsten Svensson(2007) Making Capitalism Work:Fair Institutions and Trust - Retrieved on 31/12/08 http://209.85.175.132/search?q=cache:45jsqVUQPzsJ:www.statsvet.uu.se/Portals/Statsvet/Public/Forskning/Working%2520Papers/WP002.pdf+coordinated+market+economy&hl=en&ct=clnk&cd=4 Ownership Structures 16 14. Rafael La Porta, Florencio Lopez de Silanes , Andrei Shleifer,Robert W. Vishny – (June 1999) Investor Protection and Corporate Governance -Retrieved on 31/12/08 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=183908 15. Stephen Amberg – (2008) Liberal Market Economy or Composite Regime? Institutional Legacies and Labor Market Policy in the United States-Retrieved on 31/12/08 http://www.palgrave-journals.com/polity/journal/v40/n2/abs/2300096a.html Read More