Relevance of Ownership Structures and Impacts on Firm Strategies - Literature review Example

Relevance of Ownership Structures and Impacts on Firm Stratgies By Introduction Several business structures exist. The type of structure is determined by the legal size of operation and the conventional laws that determine the absolute set up. According to Abrams & Abrams (2003), there are seven ownership structures whose operation definition is determined by a collection of factors. The most prime factor of these is the capital that is put into their operation, the effective membership that owns the business and the levels of operation. Ownership may also change as the business grows. Grown businesses also change their ownership as well as having the number of owners increasing depending on the shareholding capacity of the members. The relevance of the ownership structure of a firm is determined by several factors. The short term and long term impacts are determined by the strategic business objectives in operation (Amran, Ooi, & Nejati, 2012, p. 123). This paper seeks to discuss the relevance of the ownership structure of a firm and then evaluate the impacts of this to the short term and long term strategies of the same firm. In light of this, it will first review the relevance of the ownership structures of a business and then examine the impacts of the same on the strategic objectives of the same firms. Relevance of the ownership structure of a firm In a rather narrow perspective, the corporate governance determines the various relationships between the various and different various primary shareholders in the company. This may be in the form of the management teams, directors and shareholders related to the firms (Abrams & Abrams, 2003, p. 213). They have a strong role in determining the relationships between the directions that the firms ought to take. In this sense, it is worth noting that the ownership structure delineates the respective rights and responsibilities of each and every primary stakeholder to the business firm. For instance, a single owner of a large multinational company will determine the responsibilities of the different employees in the firm. In this case, it is worth noting that the managers are hired based on their qualifications. In this case, the owner has a strong influence on the decision making mechanism of the business. Apart from the owner of such large corporations, there are also the shareholders own a part of the firm. The same relationship determines the fact that the shareholders have roles to play in the same decision making mechanism. Majority shareholders have the capacity to take over the running of the company if their share value in the company reaches a value more than 50% (Schjelderup & Schindler, 2012, p. 90). This is a structure that is determined by the fact that the ownership and the management of the same company are not the same. The work of the management is to oversee the economic interests of the owners in the shareholders. Depending on the amount of shares that these shareholders have in the company, they are bound to have an influence in the decision making process of the strategic future of the company. Some owners determine that they desire structures that have a base on the board of directors. According to Arshad, Akram, & Amjad (2013) the board of directors are the soul of any given firm. These boards are usually present in large companies that must build on their reputation to remain relevant in the respective industry. Such companies may consider creating an operation culture that would oversee the founding principles upon which future ownership and management structures will be based. A good culture brings to live good corporate governance in terms of ethics, management discipline, protecting the rights of the shareholders, the responsibilities and accountabilities of the management boards among others. This would implement the principles are highlighted by Bekiris (2013:23) that “focus on the company rather than on one group of people.” Corporate governance systems raise matters related to the type of ownership structure that must be put to task as well as its level of control. On issues related to control, important issues need to be considered in fulsome; the ownership structure in itself, the control instruments and the control exercise. Ownership structures to a large extend determines the performance of a business enterprise. Byun, Choi, & Hwang (2013) argued that the ownership structure of any firm is supposed to be taken as the corporate determinant of the outcome of the decisions made in any given company. Demsetz & Villalonga (2001) however suggested that there is supposed to be an inverse relationship between how diffuse the shareholders are and the performance of the firm. Such developments lead to the fact that corporate governance of any given firm is directly determined by the level and structure of ownership that the firm has. In both cases, it can be realized that the decisions reflect the influences that the shareholders have on the operations of the firm which lead to the company being able to determine such important factors as the market share price. Empirically, it has been established that the ownership structure in terms of the levels of distribution and shareholders determine the corporate governance of any given firm (Amran, Ooi, & Nejati, 2012, p. 121). A case study from India, an emerging market has emphasis on the need to develop a strong link between the ownership structures of any given firm and the eventual level of corporate governance. For instance, it was proved that shareholders in a given firm maintain a given level of influence in a company by virtue of the amount of shares held. The figure below represents an ownership structure of a limited liability company. From the figure, a collection of issues and their inter-relationships can be discerned. Source: Gudmundson, Tower, & Hartman (2003) From the diagram, it can be noted that the company president is either an investor or a chosen representative. If the president is an investor, then he is a shareholder and can as well be the owner of the company. This ownership structure gives the president more powers in the company not only related to ownership but also corporate governance. The other importance of the ownership structure is to determine the relationship that is to exist between ownership of a firm and the eventual management. McMahon (2007) sought to justify the fact that a business is a separate entity from its owners. Earlier theorists had indicated that the two are never a positive issue for the developmental performance of a firm. The interests of the managers and the shareholders in firms usually diverge at certain points. Shareholders try as much as they can to control the managers while the managers create ways in their management that could see them reap large (Bekiris, 2013, p. 109). This information asymmetry is the cause of the need to develop an effective ownership-management structure that would strategically oversee success of the firm in future. It is an argument based on the agency theory in which individuals are opportunity maximizers. In this case, it is also probable that the utility of shareholders has a direct relationship with the equity investments. Management agents and consultants, in their search for the right management strategy for a given firm, enhance their efforts on proposing aspects such as strategies that are corporate as already indicated. However, recent studies have indicated that when there is a stronger influence by the owner in monitoring the operations of the management staffs, the two sets of parties tend to have a financial performance that is corporate. The idea in this discussion is that there is bound to be a conflict of interest in the operations as far as the two businesses are concerned. Different countries have their ownership cultures that determine the levels of ownership that given entrepreneurs attach to the operations of the forms. In India for instance, most businesses are owned by wealthy families and there is almost no relationship between the management teams and the ideal shareholders. There is a tradition of equity ownership by these entrepreneurs (Demsetz & Villalonga, 2001, p. 213). Wealth is institutionalized. In some instances, there is a situation when there is a large equity share held up with fewer openers. On the other hand, smaller equity shares are held by large groups of shareholders. In both cases, it is worth noting that the number of equity shareholders determines to a large extent the ownership structure (Kaur & Gill, 2008, pp. 1-4). This is because there are either a very large number of owners of the company or the number is lower. Impacts on Long Term and Short Term Business Strategies The ownership structure is the primary determinant of the long term and short term strategies of any given firm. McMahon R. G (2007:12) identified seven ownership structures in different firms depending on the levels of operation; Sole Proprietorship Partnership Limited partnership Limited Liability Company (LLC) Corporation (for-profit) Nonprofit Corporation (not-for-profit) Cooperative A determinant consideration of these structures determines that firms will plan depending on whether they have a long term or short term objectives or not. At the introductory section to this research, it was noted that there is need to consider the respective relationships between various primary stakeholders to a firm such as shareholders, the primary founders and owners and the management teams. For consideration of the long term strategies in leadership of the firm, there is always need to confirm that there is a good relationship between the different stakeholders. This allows for cohesion in the implementation of the long terms strategies without which there would be no direction and effective performance by the firms (Kaur & Gill, 2008, p. 132). There is also need to determine the roles of each stakeholder in developing the firm for long term strategies. For instance, there is need to determine the amount of money the shareholders need to add to the investment plan to be able to enlarge the operations of the company. From the examples of ownership structures indicated, the same plan cannot hold for a partnership business as it would for a limited liability company. A company planning to start operating in the multinational domain will have to seek partnerships from the same international domain which will require that there are enough funds to take care of the international marketing and partnering programme. This is a plan that is highly impossible in a partnership type of business because the ownership structure does not command enough resources to operate in such an international market. Apart from the issue of financial involvement, there is a strong link between decision making and the company ownership structure. The strength of the influence on a firm is dependent on the percentage of shares a shareholder has in the firm. In a situation where there are many shareholders, the decision making structure is longer than when they are few (Schjelderup & Schindler, 2012, p. 234). The aspect of decision making also includes the company management as already indicated. This means that the owners of the business must offset the differences that there are with the management to oversee successful corporate and business strategies. The ownership structures will therefore highly influence the ownership structures by way of the number of stakeholders taking part in the decision making process and the value of the decisions made. The management structure also determines the management strategy in planning for the short term and long term strategies. The type of decision made is strongly determined by the level of professionalism by the entrepreneurs. In this case, there are some entrepreneurs that are also professionals in the specified field of business operation. In this case, a management structure will involve a professional that is bound to take the function of a consultant (Santana, 2014, p. 321). Funds are bound to be saved based on this issue as opposed to how it would be if the ownership structure had no professional. Conclusion The relevance of the ownership structure of a firm is as important as determining the profits made by the firm. In this research, where the relevance of ownership structure was determined, it was found that the different structures also determine the corporate operations including strategic decision making. It has also been determined that the structures also determine the long term and short term strategies of the firms. The different ownership structures therefore determine the levels of the levels of decisions made for implementation of both business and corporate objectives. References Abrams, R., & Abrams, M. (2003). The successful business plan: Secrets & strategies. The Planning Shop. . London : Cengage . Amran, A., Ooi, S. K., & Nejati, M. (2012). Relationship of firm attributes, ownership structure and business network. 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