Study On Shareholder Models Of Corporate Governance Finance Essay
Corporate Governance meaning the balance of control between the stakeholders, managers, and directors of an organization (Collins English Dictionary). Corporate governance is the set of processes, customs, policies, procedures, and rules that determine how a corporation (or company) is managed, administered or controlled and as defined by the company’s bylaws, corporate charter, policies, and applicable laws. (Webster's New World Finance and Investment Dictionary). Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, employees, customers, creditors, suppliers, and the community at large.
Impact meaning the act of one body, object, etc, striking another; collision, the force with which one thing hits another or with which two objects collide, the impression made by an idea, cultural movement, social group, etc.( Collins English Dictionary).
Labour, meaning productive activity, especially for the sake of economic gain, and the body of persons engaged in such activity, especially those working for wages. (Collins English Dictionary). Labour Management defined by other scholar , C. Von Otter (2007), which refers to the system, rules, policies and procedures which govern and organize employment.
Corporate Governance was widely discussed and there are many different models of corporate governance around the world. We referred to O’Sullivan (2005) which defined corporate governance as:
“… a system of corporate governance shapes who makes investment decisions in corporations, what types of investments they make, and how returns from investments are distributed…” (O’Sullivan, 2003:24)
Shleifer and Vishny (1997), they claimed that corporate governance is concerned with who controls the firm, in whose interest the firm is governed and the various ways whereby control is exercised. Governance is about how shareholders control managerial opportunism through the alignment of incentives.
During the US new economy era in 1990’s, the new economy dependence and impact on the stock market boom, it give rise to the emerged of the shareholder model of corporate governance. In CLMS M3 U3, the model was thought to guarantee the efficient allocation of resources to best growth opportunities, therefore benefiting overall economic performance, not only that of shareholder. It gave investors and savers a maximum return and it channel this capital to the most profitable enterprises. The Anglo-American shareholder model is said to lead to competitive pressure to adopt this model as forms of ‘best practices’ are adopted by corporations. The research on comparative corporate governance emphasized studies of change, the assumption being that other system would converge to the ‘more efficient’ shareholder model. The power of this argument diminished as the new economy boom came to the end at the beginning of 21st Century.
In CLMS M3 U3 also claimed that the opposite argument – the institutionalist agreement qualifies the unproblematic efficient working of the market and holds that any form of economic activity is based on and crucially shaped by social institutions – such as the different roles and responsibilities of banks, stock markets, the regulation of labour markets, etc. The institutionalist argument emphasis different sets of institutional configuration that formed corporate behavior. It emphasis of the role of stakeholders as well as resulting differences in the way economic benefits for different stakeholders. As well as the economic argument focuses on the maximization of investments by shareholders and the efficient allocation through competitive market forces, institutionalists emphasis the political aspects of institution building, how national systems consist of different configurations of institutions.
The role of national system of corporate governance can be explained by two stylized models, an Anglo-American (liberal model) vs. a Continental Euporean model (Cooperation model).
Shareholder models of corporate governance
These differ according to the variety of capitalism in which the shareholder models are grounded. Gospel and Pendleton (2003), claimed that the liberal model that is common in Anglo-American countries tends to give priority to the interests of shareholders. Stiglitz (2003), claimed that the superiority of the Anglo-American ‘shareholder’ model of corporate governance, allocating investments to the most productive and profitable sectors of the economy and thus benefiting overall economic performance, but this thoughts were broken as the dot-com bubble burst in 2000.
The liberal model that is common in Anglo-American countries tends to give priority to the interests of shareholders. The coordinated model that one finds in Germany and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community, Gospel and Pendleton (2003). Each model has its own specific competitive advantage. Aguilera and Jackson (2003) characterized Anglo-American ‘shareholder’ model of corporate governance as:
“financing through equity, dispersed ownership, active markets for corporate control, and flexible labor markets, that latter [is stylized] in terms of long –term debt finance, ownership by large blockholders, weak markets for corporate control and rigid labor markets.” (Aguilera and Jackson, 2003:447)
The important difference between systems of corporate governance was mainly according to the distribution of ownership. The Anglo-American system is focused by a large amount of equity and dispersed ownership. The dispersed ownership in the system encourage the focus of short-term performance, that is management focuses on the main business and aims to re-package operations through divestments and also mergers and acquisitions.
As the shareholder objective was obvious, it showed that shareholders had the performance based value of a company. In CLMS M3 U3, in order to have clear understanding of the concept of the shareholders value, we can evaluate through the emergence of the modern corporation expressed that the separation of ownership and control, it will also have a consequence to a potential conflict of interest between shareholders and managers . As shareholders’ main interest was profit, they were having performance-based value and would like to have maximum return (wealth maximization) on their investment at lowest risk in a shortest period of time. Shareholders, especially investors had little stock/share amount would usually more step back and let shareholders have more share amount to have more participation to the company matter. For the management, they may have these interest but they also have other interest, such as interest which related to growth in market share, internal power struggle, careers, remuneration packages, career prospects, etc. Therefore, shareholders usually had pure financial interest and would like to have short-term rate of return.
Alchian and Demsetz, 1972, raised that the issue of shareholder value in a principal-agent, it was related to how the principal (shareholders) control the actions of the agent (management) under different circumstance. The challenge of corporation governance, from internal control structures to the details of management incentive and remuneration system, is to ensure managers act in the interests of shareholders.
In CLMS M3 U3, the difference between ownership and control within the modern corporation, which place the shareholders as owners who invest and risk their capital against managers who control day-to-day operations and possess the specialised skills to run the corporation. As the agency costs arise for shareholder because they cannot assume that managers act in the shareholders interests, that was maximize returns at a reasonable risk. On the other hand, managers might be more interested in maximizing growth in terms of market shares (rather than the rate of return), maximizing their own salaries, maintaining uncompetitive quality of labour standards, or they may just no intention to do better. Therefore, corporate governance in this scenario was representing the mechanisms to align the interests of shareholders and managers in the means of how to monitor under imperfect information, how to enforce limits to managerial discretion. So, in order to reduce the agency costs, small shareholders are more likely to be step back, passing the monitoring and control to large shareholders whose risk is much higher.
As shareholder model of corporate governance had a characteristic of separation of ownership and control and it will rise up the conflict of interests between shareholder and managers. As a result, principal agent problem was emerged due to both parties had their own interest, so that agency theory as mentioned above was implied for the management of the market-based (shareholder) approach of the firm.
Besides the principal-agent problem, financial liberation also have influence the corporate strategies to shareholder value. The financial liberation give rise to the emergence of differentiated financial instruments, such as credit money, derivatives, the role of the stock market which furthered the re-orientation of corporate strategies to shareholder value.
In CLMS M3 U3 stated that the above mentioned point, the corporate governance to solve the principal agent problem and to ensure shareholder value and the emergency of a market for corporate control and form the key ground stone for the shareholder value model of corporate governance. Shareholder interests are viewed as only financial interests and come with strong pressures to restructure for short-term rates of return that is shareholder value. The restructuring via the market for corporate control take place via Management Buy-Outs (MBOs), Management Buy-ins (MBIs), leveraged buy-outs, share buy-backs, divestments, (Froud et al., 2000:101). The managerial restructuring aims to reduce labour costs through different measures, such as outsourcing or a simple reduction of the workforce increase in intensity of work, which can say in the other way to increase shareholder value.
Finance and governance
Any of the organization depends on people. Bartlett and Ghoshal, (1995) claims that, who are willing to take personal initiative and to co-operate with one another, who have self-confidence and a commitment to the company, and who are able to execute relatively routine tasks with the same proficiency as they are willing to learn new skills and ways to take the company to the next stages of ambition. In Eneroth and Larsson (1996), Human Resources Management, also called Labour Management, performed as a control system that ensures acculturation of the organization’s members and directs their behavior toward the attainment of organizational mission and objectives. The HRM (Labour Management) function consists of “selecting, rewarding, appraising, socializing, and developing individuals to contribute as much as possible to the achievement of organizational goals” (Eneroth and Larsson, 1996).
In CLMS M3 U3 linked that the managerial strategic choice with institutionalist thinking, they had identify three sources of influence finance can have on labour management, such as the sources and types of finance, the objectives of finance providers and the intervention rights and practices connected with different forms of finance. Three main forms of financing were identified, such as internally generated funds, debt and share equity, providing different right to different parties, construct the objectives of finance providers as well as managers strategic constraints and opportunities.
Mayer (1997) stated that internal funds (retained profits, depreciation accounts) are by far the most important. source of both working and investment capital, once firms have setup themselves. For the internal funds, the main actual demander can be stated as the managers, although others may lay claim to some share of this in the form of dividends (shareholders) or rents (labour). Managerial strategies may focus on maximizing returns as per their personal interests, to shareholders or to other stakeholders. Debt is a contractual guarantee to future cash flows, and the purpose is to achieve a level of return specified at the commencement of the debt contract, including repayment of the debt. For Equity, is a more open-ended arrangement as shareholder receive some share of the future earning and market value of the firm, coupled with partial control rights.
Impact on the Management of Labour
As we had go through the variations in finance and governance systems, we can think about how shareholder model of corporate governance impact on the management of labour. Gospel and Pendleton (2003), there are six main ways in which financiers’ and owners’ objectives and intervention patterns influence management decision-making through the balance of support given by management of labour and capital, the time-frame of managerial decision-making, the nature of business strategies, the importance ascribed to financial factors in decision-making, the approach to securing managerial and employee commitment and the degree of co-operation with other firms. These factors affecting the changes in decision-making between finance-governance systems.
The balance of interest promoted by management will be influence by finance and governance, like in shareholder model, equity owners have strongly reflected that managers’ main and primary responsibility is to increase the shareholder value and that will be the most important objective for firms, (Lazonick and O’Sullivan 2000: 16-17). It has been argues that in UK, firms try to enhance shareholder value and lead to damaging impacts on labour due to the capacity of firms to achieve real increase in return is highly limited. So that labour will suffer from reduce workforces (Froud st al. 2000b: 785-92), work will be outsource as to reduce cost in order to achieve the goal of wealth maximization. The nature of finance and governance in Anglo-American systems pressurize managers to place shareholder interests above those of labour.
The pressures on labour management in the time frame of managerial decision-making also affect the impact on labour management. In the structure of incentives and governance in out-sider system encourage short-termism, like the pension fund managers are assessed by pension funds on short-term performance, this feeds through to pressure on managers, through market signals, to maximize short-term returns. In co-ordinated market economies, the situation will be vice versa, the closer integration of financiers into the firm, through long-term debt or ownership, it influence the managerial policies towards the use of retained earnings. Usually the pay-back period in shareholder system like UK is shorter (3.3 years) compared with longer pay-back period in Japan (5.5 years). Shorter payback period imply a higher cost of capital. Porter (1997) argued that, US industry invests less in R&D and intangible assets, for example training and related forms of Human Resource development than Japan.
The nature of business strategies will affect by the finance and governance system. The company in shareholder model tends to place more emphasis on narrow financial objectives rather than on boarder objectives such as market share. Carr and Tomkins (1998) claimed that UK & US company place three times as much emphasis on financial issues in key decision than company in Germany and Japan. Porter (1990) and Soskice (1999) showed that German manufacturing company has been able to secure competitive advantage by producing relatively complex products involving intricate production processes. Their competitive advantage is maintained through incremental process innovation in production but in shareholder system, the importance of financial returns tends to discourage investments in increase product improvement and quality production. The differences in product market strategies are influencing management decision making in relation to employment patterns, training and workforce development, such as less skillful labour was employed in lower wages to cut the cost, high turnover of the skillful / experienced labour due to looking for better prospects, and less investment in training.
The market-based measures of performance and mechanisms of governance that are especially important in Anglo-American economies tend to promote internal measures of firm performance that are primarily financial in nature. Porter (1997) argued that ‘the strategic business unit model tends to be favored by large, diversified firms in liberal market economies because it facilitates the use of financial measures in internal capital allocations.’ That will have the effect of cascading financial imperatives down into lower levels of the firm and divorcing top management from the complex realities of organizing production and services. Managers will have hesitation for the human-capital in production and service delivery, managerial decision-making tends to discount the value of assets that are not readily measurable. It may discourage investments in training and lead to reliance instead on external labour markets for supply of skilled labour.
Soskice (1999) stated that the interlocking ownership in co0ordinated market economies, coupled with direct involvement in governance, may facilitate more co-operation among firms. Backes-Gellner (1996) examine the vocational training system in Germany, where employers co-operate to develop general and occupational skills. Ulman (1974) claimed that ownership co-ordination too appears to be consistent with multi-employer collective bargaining, where firms are prepared to co-operate in the fixing of aspects of wages and conditions, while market-based system seems consistent with company or plant bargaining, where firms try to relate pay and conditions to the performance of business units.
Labour Management Outcomes
Shleifer and Summers (1988) argued that the pressure on managers to promote the interests of shareholders in market-based systems force managers to break implicit contracts providing job security and long-term career progression. In USA, there is proof of a decline in job security, decrease in recalls from layoffs and reductions in job tenure in the wake of the rise in shareholder value (Cappelli et al. 1997: 37-8) (Lazonick and O’Sullivan 2000: 18-21). Lichtenberg and Siegel (1990) find that employment growth is negative in establishments changing owners and especially so in auxiliary as opposed to core production establishments. Since internal labour markets have been less developed in the UK, there is also some similar recent evidence of the effects of shareholder value pressures (Froud st al. 2000b: 782; Gospel 1992: 280-1). In contrast, Japan was with more reliance on rational finance and insider governance, employment has also been more stable and long-term, with extensive internal labour markets (Aoki 1998, Chapter 4; Koike 1988: 114-79). So according to Araki (2001) the nature of the finance and governance systems has meant that external pressures to retrench during cyclical downturns or to divest under-performing activities have been less intense, with the result that internal labour markets have remained more intact and employment at firm level has been more stable.
Aoki (1988) stated the evidence that ton skill formation illustrates the effects of pressures on time-frames and tangible performance measures. Long-term employment has coincided with extensive in-house training in Japan and Germany. Relational financing provides greater security for the firm, with the result that managers have been less prone to cut investment in training when there are cash-flow shortfalls.
Bolton and scharfstein (1998) examined that in USA, employers and employees are now less willing to invest in firm-specific skills due to the decline of job security within the firm. It can be viewed that the nature of firms’ demands for skills may vary between the two kind of system, finance and governance play a role in this. Streeck (1992) stated that long-term relationship with owners and financiers in Germany facilitated the development of ‘diversified quality production’, requiring high level of employee skills to produce high-volumn but customized goods. The systems can be vied as a high level of worker skills, firms may seek functional flexibility to capitalize in the greater investment in human capital and to compensate for restrictions on flexibility (Aoki 1994: 12-46). In UK and USA, pressure for quick returns on investment was the important reason for advance flexible machinery which often used as a more intensive form of mass production rather than as a means to achieve more fully flexible production (Appelbaum and Batt 1944; Jones 1988: 473-6).
Gospel (1992) The work relation may influenced by the financial and governance pressure. It affect worker’s attitude towards the ownership of skill and the protection of jobs. In shareholders model, workers have traditionally been highly protective of existing skills and jobs, as the systems might not appear to offer long-term benefits for co-operation. This was act in a form of worker ‘hold-up’ activity, which stresses job control and restrictive practices.
Approach of Contingent forms of remuneration was widely used in the market-outsider economies, especially for top managers. They also more using take a stock-based form, reflecting the importance of equity markets in these economies. The other important factor driving up chief executive pay in liberal market economies is pressure from fianciers for high short-term performance. The features of pay determination result in the ratio of senior executives’ pay to shop-floor employee’ pay being greater in USA and the UK when compared with Germany and Japan.
Employee share ownership plans are also common in USA and UK (Pendlleton et al. 2001:31). It reflect a need for bonding mechanisms in contexts where financial calculation is especially important in governance, and where the capacity to generate commitment through employee voice is limited.
Café de Coral
Cafe de Coral is a chain of affordably priced restaurants in Hong Kong that has been serving the city for the past 40 years. It offers a variety of meals from breakfast to tea time to dinner time. It’s efficient work force enables its outlets serve as many meals as possible, reducing the length of queues usually observed during lunch breaks and early evenings. But behind this worthwhile effort by staff, Cafe de Coral management doesn’t seem to recognize it and instead imposed a new wage structure as most of the public will see as inhuman and unfair.
According to the minimum wages ordinance which will be imposed by Hong Kong government in coming May 2011, Cafe de Coral was imposed to the idea of raising the hourly rate new pay structure but it comes with very distasteful collateral. They said earlier it would offer staff a hourly raise of HK$2 to HK$3.50 on the condition that workers need to forfeit their paid meal break of up to 45 minutes. With such a pay hike, removing the 45-minute paid meal time would even result in the reduction of monthly pay by about HK$50.
As a response to this unreasonable deal, various groups have called for a boycott of Cafe de Coral’s services, including its subsidiary companies involved in catering businesses. They appealed to the University of Hong Kong to urge Cafe de Coral to shelve its plans. The company, through subsidiaries Asia Pacific Catering and Oliver’s Super Sandwiches, handles the university’s catering services. Also, people calls to boycott the fast food outlet gathered steam in Facebook. Their business dropped by 10% in October 2010 due to the boycott and protest against Café de Coral from the Universities students, politicians and public, but not the worker themselves.
The management would like to maximize the investment by cutting the frontline staff cost, but it also lead to the unfavorable feedback not only from their labour, but from the public as well. And it also leads to the boycott and protest action which affect the general sales of the firm. Finally Café de Coral retreat the new wages “increment” due to the enormous noise for the social public.
Foxconn International Holdings Ltd is a Taiwanese company that is the world's largest maker of electronic components. Foxconn did produce a large range of the most renowned products, such as iPod, iPad and iPhone. Many companies have placed orders with Foxconn including Dell, Sony, Motorola, Apple, HP and Nokia. It’s first manufacturing plant in the China opened in Shenzhen in 1988.Now the company's largest operation, 300,000 to 450,000 workers are employed at the Longhua Science & Technology Park, people also called as "Foxconn City" or "iPod City". Workers live in surrounding towns and villages in the self-sufficient "Foxconn City", other than live and work inside the complex, "Foxconn City" also broadcasts its own television network, Foxconn TV.
Allegations of employee mistreatment have been made on a number of occasions. News reports highlight the long working hours, discrimination of mainland Chinese workers by their Taiwanese co-workers, and lack of working relationships at the company. In 2006 a UK newspaper accused it of abusive employment practices. Although Foxconn was found to be compliant in the majority of areas when Apple audited the maker of its iPods and iPhones, the audit did substantiate a few of the allegations.
In October, 2010, a report by 20 Chinese universities described Foxconn factories as labour camps and detailed widespread worker abuse and illegal overtime. The report was a huge reaction to a spate of worker suicides where fourteen died in 2010. In response to the suicides, Foxconn installed suicide-prevention netting at some facilities, and it promised to offer substantially higher wages at its Shenzhen production bases. Workers will obtain a full pay raise after they pass performance evaluations, and new workers will be eligible for the higher wages after 3 months of work.
In 2006, 500 of skillful technology developer resign collectively and join in Foxconn direct competitor, BYD Company. BYD Co Ltd began as a rechargeable-battery factory competing in the Chinese market against Japanese imports. Those skillful technicians with their skill and experience to join in the company, it leads to the trend of order driven from Foxconn to BYD Company, such as Nokia and Motorola.
Those of these issues leads to the social obligation, China government and other nations were highly concern in these issues. The company need to pay extra more to smooth the social obligation and it affect their branding, it also lead to high turnover of the high-skilled labour.
In order to see how the shareholder model of corporate governance impact on the management of labour, we had go through different readings regarding Shareholder model, corporate governance. However, there will not be a best practice model due to different occasions and environment.
The differences in the pressure and influences on managerial behavior between market-outsider (shareholder) and relational-insider (stakeholder) system had great influences from importance of labour interests, time-frames, strategy types, financial measures of performance, the use of market based instruments to secure commitment and the extent of employer co-ordination. These contribute to several important labour management outcomes.
In concluded that, shareholder model of corporate governance had impact on the management of labour. Undoubtedly it was important in US and other Anglo-American countries for the formation of their finance and governance and we can see the finance and governance had impact on labour management. We can see this model was focus on shareholder value and maximize the investment in the short period of time, so it must be favorable to shareholder. On the other hand, in order to maximize investment, the easiest way is to cut cost and explore new horizon, so it may lead to other unfavorable influence to other stakeholders.
We do not view the forces of finance and governance as entirely exogenous, managers may select which forms of finance to use, again albeit within constraints. However finance providers can exert powerful influences on labour management decisions, but they are not the only factors, product and labour markets, trade unions and labour legislation are also important, but they may be the most pressing in some circumstances and have certainly been neglected in the traditional industrial relations and HR management.
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