Ownership Structure of a Firm - Coursework Example

Ownership Structure of a Firm and its impact on Short-Term and Long-Term Strategies Employed by Business Table of Contents Table of Contents 2 Overview 3 Ownership Structure and Its Relevance 4 Ownership Structure of the Lego Group 4 Ownership and Control 6 Corporate Governance and Ownership 7 Emergence of Conflicting Objectives 8 Agency Cost and Ownership Structures 9 Summary 10 References 11 Overview The ownership structure of a firm implies a strong impact on the different approaches of the business, influencing its long-term and short-term developmental prospects. In general terms, ownership structure refers to the degree of control that is imposed on the organisation, which holds the potential of either hampering its growth or simulating its future development prospects to gain sustainability advantages. When depicting the different ownership and control pattern, it is evident that the different ownership structures could have either a positive or a negative influence on the competencies as well as sustainability of an organisation. At several instances, it is noted that the ownership structure of a firm has been affecting its steady growth and development at large. Moreover, the ownership structure of the firm is observed to function by developing the image and enhance the strategic development of the firm in both short and long terms (Jensen & Meckling, 1976). With this regard, the paper intends to elaborate on the relevance of the ownership structure followed in The Lego Group. The Lego Group is a private sector company founded in the year 1932. In accordance with its vision, the company’s business was majorly engaged in the development of the children’s cognitive skills through playing. The company has developed its image as a global enterprise over the tenure of 80 years and has developed itself, on of the leading manufacturer of toy in the world (1The LEGO Group, 2014). To develop a better understanding about the ownership structure of the company, a detailed analysis of its provisions and performances have been conducted in the following sections. Ownership Structure and Its Relevance Ownership structure provides a framework for the process of control and helps in developing a system of management of the firm. Ownership structure is therefore defined as the equity structure that depicts the holding rights of a company. This structure further defines the authority that a particular person has on an organisation. Moreover, the ownership structure depicts managerial abilities to control the different operations of the management and enhance the system overall, to suffice the changing needs of the contemporary business environment and adjust with the same, maintaining efficiency. Contextually, the ownership structure helps in identifying the corporate governance and in developing guidelines that in turn tends to shape the internal climate of the company influencing the investors’ confidence level as well as ensuring transparency in its overall strategic process. Ownership of an organisation has a direct effect on its corporate governance that further enhances the managerial process for its daily operations. This notion is quiet evident from the differences observed in the performances of the public and the privately owned organisation (Chen, 2012). Ownership Structure of the Lego Group In general terms, an ownership structure includes both the internal as well as the external stakeholders with substantial influence on the managerial functions of the company and thereby, helps in developing a clear picture of the business model. This enhances the corporate structure of the firm as well as enriches the development of a clear managerial system. This further enhances the flow of information within the company along with influencing the organisational performances, either positively or negatively (Hernaus & et. al., n.d.). Prior to examine the notion within Lego, it is noteworthy to consider that the company has been operating as a ‘privately owned’ organisation. The company initially started its operations as a family owned business. Accordingly, the company’s ownership structure is clearly defined with three-fourth portions of the shares held by Kirkbi A/S and rest by the Lego foundations. This clear defined the ownership structure followed within the organisation to perform and develop a better approach towards attaining both short-term as well as long-term goals. This concentrated system of management developed a sustainable domain and enhanced the process of decision making within the organisation. Furthermore, the less dispersed structure of management developed a better flow of information as well as enhanced the efficiency of its business model to a substantial extent. This could be clearly identified from the fact that the company has been holding on to its popularity and uninterrupted growth through a long period of 80 years (1The LEGO Group, 2014). Through the continuous alignment between the mission and the vision of the company, it is successfully meeting the determined objectives and has been aligning its motive of continuous growth and development with the changes observed in its external environment. In addition to the above, a clear defined structure of the management helps in enhancing the system of the flow of information. This prevents it from the discrepancies related to the decision making as well as develops a clear picture of the system. Although the company has its presence in a number of locations across the globe, it has duly adhered to the initial stages of ownership structure and has remained committed to keep it simple that further adds to its leveraged transparency. Unlike the larger firms having numerous owners, the company has developed its global image by concentrating on a simple ownership structure. Such leadership attributes have further contributed towards developing its brand image at the global domain and has been improving its visibility at large (Wahla & et. al., 2012). Ownership and Control The most significant facets of organisational management are exclusion of control as well as ownership. Notably, this aspect of segregation among ownership along with control was necessary owing to the fact that at certain situations, managers had better managed the operations of a business than the owners had. Rather, the owners with the sole profit motive are often criticised to have a blurred vision, which blocks the anticipations of the long-term development of the firm. However, it has also been evident that the differences between the views of the owners and managers have been facing an adverse effect on the goals of the organisation. This could even have a negating impact on the development or growth of the proper organisational structure that would ensure long-term growth and developments, enhancing the organisational ability to perform better. The different operational systems that are integrated due to the conflict of interest between the management and owners have affected the operations of the business owing to divergence of ideas among the two controlling bodies. The seclusion of ownership from the management functions has been both a blessing and curse for the business. Thus, an organisation, to sustain in the long run, must be developing its management control parallel to the development of its ownership control (Demsetz, 1983). Lego has been successfully operating through its business by developing a sheer line between its ownership and management. Furthermore, the ownership being highly concentrated without any separation between the board of director and ownership, the conflict of ideas are not much evident within the company. This system has helped in developing the image of the company and has acted as a positive motivation to accelerate its corporate excellence. Evidently, the less conflicting situations between the ownership and management have been acting as a catalyst to the development of the organisation in the long term (2The LEGO Group, 2014). Corporate Governance and Ownership ‘Corporate governance’ has been perceived to be of utmost importance for an organisation to operate better. ‘Corporate governance’ largely influences a firm’s performance. In addition, corporate governance helps in conservation the interest of the stakeholders to a considerable extent. Furthermore, corporate governance helps in ensuring proper decision making within the operations of the organisation. Correspondingly, the corporate governance helps in developing an additional control on the stakeholders. Besides, effective corporate governance a firm can assure its performance and ensure long-term sustainability. Moreover, the development of proper corporate governance helps in managing the conflict of interest among the owners and enhances transparency of the business. This would help in developing the image of the company and enhance its level of competencies in the market. Effectively, this provides development of the corporate control as well as ensures effective management of the available resources (Pargendler, 2012; Bebczuk, 2005; Lemmon & Lins, 2003). The Lego group due its ownership structure, which is interlinked with the system of the management, have a positive impact on its growth perspective. This positive correlation between the management and ownership provides the organisation with a positive development in terms of corporate governance. With the commitment to meet the world class standards, the company is successfully aligning its interest with the company objectives. Furthermore, since the group mostly has family ownership the company has been enhancing its professional excellence by integrating specialized management team to control its daily operations. In order to align its individual objectives with the organisational objectives, the company has been integrating different e-learning processes for its directors (2The LEGO Group, 2014). Emergence of Conflicting Objectives With the altering business environment different managerial perspective are changing, which are influencing a more complex structure within the system of management. Hence, this has inflicted a positive development on the process of decision making. This would help in integrating a better approach towards managing the conflicting interests of the management. Furthermore, to develop the brand image the companies should be managing its conflicting interest so that it does not restrict the management from attaining its objectives. The complex organisational structures that are prevalent in the present day have a negative impact on the growth and development of the overall business objectives. Moreover, ownership structures need to be managed in such a way that it is able to meet with the changing demand and societal needs. This phenomenon has a positive impact on the short-term as well as long-term strategic development of the business. Observably, the concentrated system of the ownership structure evidences the lack of involvement of third parties, which leads to the development of various complexities and stagnation of operation (Crilly, 2014). Similarly, the Lego Group has been a concentrated ownership group without the involvement of the third party stakeholders except for a few managerial controls professionals. This phenomenon is observed to have both positive as well as negative impact for the organisation and its operation. The unification between ownership and management on one hand helps in developing an ease in the decision-making process and helps to manage the operations effectively without much indulgences from third parties. However, on the other hand this lack of indulgences of the third parties could duly affect the stakeholder’s interest. Being owned by the family it is difficult to prevent the internal family conflicts, which effect the development of the business at large. This could be having a very negating impact on the implication of the long-term strategic development of the organisation (2The LEGO Group, 2014). Agency Cost and Ownership Structures The ownership structures affect the strategic development of an organisation at large. On one hand, it develops the image of the company and eases decision making for a positive development wherein on the other the huge conflicting interests could lead to the failure of proper management. This conflict among the interest is likely to instigate organisation to falter at conflicting interests often incurs with the involvement of different agencies or principle with vested interest towards a business. Additionally, different private interest affects the development of business and even influences the long-term strategic growth. The fact that agents have a powerful ability to influence the daily operations of the business and manipulate the same is undeniable. This system has a very negating impact on the strategic development of the business (Ang & et. al., 2000; Burkart & Panunzi, 2000; Jensen & Meckling, 1976). The Lego Group have no external involvement of the stakeholders and have fewer exposures of its ownership structures in the management of the business operations. This could also be noted that further involvement of the agencies could influence its strategic development both positively as well as negatively. Furthermore, it can be said that the involvement of agencies other than the different family stakeholders can integrate a positive development. Additionally, this even open ups the scope for innovative ideas and nurturing the same. Thus, it can be stated that the company is prospering with its ‘Concentrated Ownership Structure’ but should also consider third party involvement for its betterment and long-term sustainability (2The LEGO Group, 2014). Summary The strategic development of an organisation is largely dependent on its organisational structure. The Lego group has been efficaciously managing its concentrated management structure to ensure the development of a long-term sustainable plan that would enhance the brand image globally. Moreover, it could be noted that the absence of third party exposes the organisation to the risk of stagnation as minute conflicts amid the stakeholders affect the operation largely. Conclusively, ‘conflict of interest’ being absent within the ownership structure is likely to provide a positive motivation for developing strategic plans. References Ang, J. S. & et. al., 2000. Agency Costs and Ownership Structure. Journal of Finance, Vol. 55, No. 1, pp. 1-60. Bebczuk, R. N., 2005. Corporate Governance and Ownership: Measurement and Impact on Corporate Performance and Dividend Policies in Argentina. Research Network Working paper, pp. 1-59. Burkart, M. & Panunzi, F., 2000. Agency Conflict, Ownership Concentration and Legal Shareholders Protection. Catholic University of The Sacred Heart. [Online] Available at: http://istituti.unicatt.it/teoria_economica_metodi_quantitativi_agency.pdf [Accessed November 9, 2014]. Chen, L., 2012. The Effect of Ownership Structure on Firm Performance. Aarhus School of Business, pp. 1-79. Crilly, D., 2014. Dealing with Conflicting Objectives: The Role of Cognition in Reconciling Corporate Financial and Social Performance Expectations. London Business School. [Online] Available at: http://www.corporate-sustainability.org/conferences/sixth-annual-research-conference/Ioannou.pdf [Accessed November 9, 2014]. Demsetz, H., 1983. The Structure of Ownership and the Theory of the Firm. Journal of Law and Economics, Vol. 26, No. 2, pp. 375-390. Hernaus, T. & et. al., No Date. Relationship between Organisational Learning and Organisational Performance: The Case of Croatia. Paper. [Online] Available at: http://web.efzg.hr/dok/OIM/thernaus/HERNAUS,%20SKERLAVAJ,%20DIMOVSKI%20-%20Paper.pdf [Accessed November 9, 2014]. Jensen, M. C. & Meckling, W. H., 1976. Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics, Vol. 3, Iss. 4, pp. 305-360. Lemmon, M. L. & Lins, K. V., 2003. Ownership Structure, Corporate Governance, And Firm Value: Evidence From The East Asian Financial Crisis. The Journal of Finance, Vol. 58, No. 4, pp. 1445-1468. 1The LEGO Group, 2014. Ownership. About Us. [Online] Available at: http://aboutus.lego.com/en-us/lego-group/ownership [Accessed November 9, 2014]. 2The LEGO Group, 2014. Corporate Governance and Business Conduct. About Us. [Online] Available at: http://aboutus.lego.com/en-us/sustainability/corporate-governance-and-business-conduct [Accessed November 9, 2014]. Pargendler, M., 2012. State Ownership and Corporate Governance. Fordham Law Review, Vol. 80, Iss. 6, pp. 2919-2973. Wahla, K. & et. al., 2012. Impact of Ownership Structure on Firm Performance Evidence from Non-Financial Listed Companies at Karachi Stock Exchange. International Research Journal of Finance and Economics, Iss. 84, pp. 1-8. Read More