Shareholders Style of Governance - Coursework Example

Introduction The main discussion revolves around the share holder’s perspective versus stake holder’s perspective that is followed by American and EUcompanies respectively. The main argument focuses on what perspective has more corporate governance implications and what are the feasibility of these perspectives in rapid internationalization and intense competition. Shareholder Governance Shareholder’s style of governance has the point of view that the firm should only work for maximizing the share holder’s wealth by remaining in its business. This is the style of American and United Kingdom Firms and market. This gives the firms tough competition to fight for resources and customers to maximize its return also improving cutting down costs by downsizing or out sourcing, Share holders have the dominant position also influence over the Management. In the pool of share holding, the dominant ones are mutual funds, pension funds, and insurance companies. Stake holders style of corporate governance followed especially in Germany involves other related business, employees, banks and other institution into account in the strategic decision making process and share holders are same as other stake holders of the firm so that everyone can keep a check and ensure long term economic and social benefit of every one. The first major stake holder is considered to be the bank and Share holder followed by employees and suppliers. Under the umbrella of Anglo American, share holder claim on value generation of the firm is of the utmost important. The intense competition because of capitalist approach of survival the fittest has led the companies to improve their businesses, its functions and value creation in order to remain in the business. The increasing pressure from the share holder’s claim of value addition and the share holding by the financial institutions has tightened the scenarios for the management of these firms. The concepts of Market Value Added is introduced which is criticized as no more than net present value of the future cash flows. As Aglietta1 discussed the mathematical deduction to prove the fact the MVA is discounted EVA and legitimacy of share holders claim on the firm makes their predominant over the stakeholders of that firm. Aglietta stated that the share holder’s claims under the US scenario worked well when the share holding was dispersed that leads to the separation of ownership and control of the business. Now a day, the share holding is dominated by the financial institutions that on the one hand creates new doors for financing but has imbalance the division of ownership and management of the firm. The situation in European region is different for example, there is concept of cross share holding of the companies, the silent support of Banks and other companies to each other businesses that can help in their operations and financing. Strong relationships are encourages with related parties including employees and labours. Both sides of the story have lead to the questions to their corporate governance practices and logic of system of public valuation. Restructuring US companies started its restructuring in 1982. This wave soon reached to Europe and is still in its full swing. This leads to the profit maximization, innovation, expansion, outsourcing and subcontracting that in turn labour cost reduction increasing Profits and saving productive capital which reduces the capital/output ratio. Though the wave tried to restructure both region but the results are quite different. According to Aglietta’s work ROC and Productivity increase were experienced by US firms but Share of Profit were in the favor of EU firms. These restricting leads to the price wars among the firms and IT cut the Product life cycles shorter. These changes created significant macroeconomic affects. Increased leverages played the role to widen the volatility of ROE and hence more risk of failure. This increase in leverage and risk should diminish the demand for the investors and increasing value of shares should not occur but it does. Because financial institutions are less risk averse and take on riskier projects. Now the risk is carried by the Financial Institutions but the concern is the whole market and economy is led by the financial institutions. Many are of the point of that it resulted in inbuilt in stable system and many deny this argument. Employees and Labour as the stake holders are no facing job instabilities and the un skilled labour are no longer able to claim for higher wages. There is also a debate on pension saving and share holders value. Pension funds are considered as complimentary. And it gives the impression to be derived from shareholders claim. But the long run economic benefit that pension funds can have should supersede short term shareholders benefit. European Situation The situation in Europe is complex and different. The concept of Complementary institutions and their support to each other along with cross share holding different from the US market scenario. This leads to the discouragement of hostile takeover by any other firm also complementary institutions are present to help a firm out from a crisis as they all know what is in their advantage. it leads to low level of influence from shareholders perspective as they lose their influence, management cannot be pressured to increase their returns. Also this interdependence of functioning of different firms has impact on other related functions. Therefore, restructuring is a slow process. Germany Germany, as an example stated by Borsch2, neither CEO nor the management board has the power of unilateral control over the firm. Employees, Business and other companies have their say in decision making. Profits are linked to the strategic moves of a firm, its quality of products, market share and employment levels. As profits are product and business operations based, the firms usually focused on investment and sales growth more than the bottom line of the PL account. Firm believes in quality and innovation to charge premium prices and niche marketing. Therefore, on the global arena German firms are slow and active but low. Due to its strong and long term ties with employees and labour, the job instability is not a big issue and downsizing is not common in a financial crisis. These German firms has strength in stakeholders approach and restructuring is always been a slow, hindered and problematic procedure firm. To be more active on internationalization, these German firms may switch to complete shareholders approach that may be not appropriate in their scenario. As far as, German firms manage to carve niche markets and avoid direct competitions, the Stakeholders style of corporate governance out competes the shareholders style by a long shot both in terms of financial and economic perspectives. The papers viewed the hybrid approach to incorporate best practices of corporate governance styles that is not an easy task. This is because of the reason that both stakeholders and shareholders perspective are in inverse to each other strengths and weaknesses. But in the long run, stakeholder’s perspective is better of then the shareholders in the long run. American firms may need to adopt some of the best features of stakeholder’s corporate governance in order to have economic efficiency and benefits. Also, the German firms entered in internationalization and global competition has started to concern more about the investors and has shown significant increase in Dividend payout ratios, as state in Engelen’s work. Engelen3 is on the critique of Share holder’s perspective and the efficiencies of Liquid stock markets. As the strong financial institutes are in the share holding and are not risk averse as an individual investors, their role is not as responsible as it should be in the American context as compared to the German Context. In competition to these American and German systems, Japanese system is proved to have strengths in order to benefit the economy and society. Japanese system is far more interdependent within related business and has its own parameters. They have Keiretsu model, that is, different firms has interlocking system of partnership, businesses and share holding. Their bonds are strong and referred to each other as partners. Vitols4 in “negotiated Share holder’s value in German Companies” stated that the conversion of German Stakeholders approach to shareholders approach is in process but it is a minor change not a transformation. It is termed as negotiated share holders value that is different from Anglo American System in the ways: 1) how the decision are made and participants of decision making i.e. management, Share holders and stake holders like employees and banks are involved, 2) outcomes of the negotiated process leads. It is observed that the initial share holder’s demand is usually negotiated by other coalition members. Not only Germans are adjusting with new situations but in America Employee stock options, management incentive and Stock/Ownership sharing is in practice from years in order to eliminate the conflicts between the stake holders. Discussion As discussed in the above discussion both the systems have the advantages and disadvantages. Both of the systems have their own backgrounds to work with. And they are in practice for decades in one way or another. The question arises with the moral and functioning of these systems. Moral claim of ownership that follows the liberal legal doctrine, gives the shareholders the title of ownership. And the moral principal also has its implication that the reward should be getting on the percentage invested. But ownership of capital is one factor of production out of basic four. So it raises question, why are not other factor has their fixed pay as employees (management) and share holder that are capital owners have all the profit out of it. Controversy between Management and Shareholder’s interests is present from years and has been the topic of agency problem. The ownership as share holder is different from private ownership was all the stakes and efforts are involved. There are many forms of ownership and its reward and requirements. For example, share holding in a publicly traded company and investment through private equity fund varies so as the requirements and their risk. In private investment, the venture is as a capitalist to finance a new business. Capital owner has its high stakes involved. But in a publicly traded company, business is running and the stake of capital investor may not be as high as in venture capitalist case. Do they investor carry all the risk of a business and every other stakeholder has nothing on stake is the big question. Conclusion There are a number of tricky questions in the above stated discussion and in the given readings. The companies that remained in the core business, compete for the customers are the one creating value for their investors and the management because there is also a board to keep check and balance, employees working real time to get the product and services done and also a bank waiting for interest to be paid on time from that firm. Everyone works in their own domain as they should be ethically and morally. These kinds of firm are the one who succeed in the S&P 500 and FTSE 100. If the board is not taking interest and has own motive because the board members are just financial institutions or the management is creating value and rising stock prices by buy backing, or the auditors are not on the top of everything, one of these things go wrong , the chances of success diminishes at the spot. There are not many companies like Microsoft, Google or Siemens everywhere. No firm who is rigid to its ancient shareholder or stakeholder style would last long in the competitive global world. The management and success of a firm is not about focus on the theories and stick to the line and follow because s still water soon starts to stink. Today, it is all about proactive approach of finding and retaining customers by outperforming the competition. That is not done by keep one stake holders (shareholder) satisfied on the cost of others (employee, banks). The focus to find the perfect fit in the light of historically defined theories and learn from every new day experience to gain the excellence in the business you are in. References: 1. Aglietta, M 2000, Shareholder value and corporate governance: some tricky questions, Economy and Society Volume 29 Number 1 February 2000: Page 146–159 2. Borsch, A 2004, Globalisation, Shareholder Value, Restructuring: The (Non)-Transformation of Siemens, New Political Economy, Vol.9, No.3, September 2004 3. Engelen, E 2002, Corporate governance, property and democracy: a conceptual critique of shareholder ideology, Economy and Society Volume 31 Number 3 August 2002: 391–413 4. Vitols, S 2004, Negotiated Shareholder Value: the German Variant of an Anglo-American Practice, Competition & Change Vol.8, No.4, 357–374, December2004 Read More