Presentation on theme: "By: 1. Kenneth A. Kim John R. Nofsinger And 2. A. C. Fernando."— Presentation transcript:
By: 1. Kenneth A. Kim John R. Nofsinger And 2. A. C. Fernando
Chapter outline ◦ Studying global political system from business point of view ◦ Goal of business i.e. profit maximization ◦ Forms of businesses ◦ What is corporate Governance ◦ Investors influence on management ◦ How to monitor management ◦ Corporate governance: An integrated and complex system.
Introduction ◦ There are two major political systems in the world from business point of view 1. Communism refers to a political system that stresses the primacy of collective goals over individual goals
Characteristic of Communism ◦ Needs of the society are viewed as a whole than individual freedom. ◦ State-owned enterprises are managed to benefit society as a whole, rather than individual capitalists ◦ Examples are: Cuba Vietnam China (market based economic reforms)
Capitalism ◦ Capitalism is an economic system based on the private ownership of capital goods and the means of production, with the creation of goods and services for profit.
Characteristics of Capitalism ◦ Ownership belongs to “YOU” ◦ Freedom of own economic growth ◦ Suitable environment for business ◦ Profit in your “Pocket” ◦ Reward based system ◦ Creative and innovative environment
Goal of a Business ◦ Maximum profit by increasing business ◦ How? 1. Increasing sales in the existing market 2. Creating new markets for the existing products.
. Enhancing business requires capital which brings risk. . So, the ability to access capital and control risk are important in the success or failure of a firm.
Forms of Business Ownership Sole proprietorship – a business own by a single person . Easy to start . More than 70% of all US business . But limited lifespan . Die with the owner’s death or retirement . Limited ability to obtain capital . Owner bears unlimited personal liabilities for the firm . Less trustworthy
Partnership – similar to sole proprietorship but there is more than one owner. .The ability to pool capital But may not be as important as combining service- oriented expertise and skill, especially for larger partnerships, for example; Accounting firms Law firms Investment banks And advertising firms
Corporation – the corporation is its own legal entity, as if it were a person. Advantages . The owner of the corporation enjoys limited financial liabilities Which is very hard in the case of sole proprietorships and partnerships. For example Bill Gates of Microsoft Tim Cook of Apple Larry Ellison of Oracle
Fewer than 20% of all US businesses are corporation but are generating approximately 90% of the country’s business revenue. . The most important advantage of corporation business is access to capital market and can raise money by issuing stocks and bonds to investors. . It doesn’t die when its owner do because corporation is not in single person ownership, it has many owners.
Example “Between 1977 and 1980, Apple Computers sold a total of 121,000 computers. To meet the potential demands for millions of computer per year, Apple needed to expand operations significantly. As a result, in 1980, Apple became the public corporation and sold $65 million worth of stocks”.
Main disadvantages of corporations are; . Corporate profits are subject to business taxes before any income goes to share holders in the form of dividends. . Subsequently, shareholders must also pay personal taxes on dividend income. Which means shareholders are exposed to double taxation.
Running corporation cab be expensive. For example The cost of hiring accountants Legal experts Cost of communicating with all shareholders Cost of complying with Regulations and so forth. Perhaps the main disadvantage is of governance problems. Small stake and lack of true sense of ownership bring RISK and lack of CONTROL
What is Corporate Governance? “Problems that result from the separation of ownership and control Focusing on The internal structure and rules of the board of directors; The creation of independent audit committees; Rules for disclosure of information to shareholders and creditors And control of the management This explain how a corporation is structured.
Separation of ownership and management Corporate Governance Separation of ownership and management Shareholders Employees Board Management
Separation of Ownership and Control . Stockholders own the firm and officers (or executives )control the firm. . Hundreds of thousands of investors can’t collectively take decisions. So firms hire managers for that work. .The shareholder’s main focus is toward business performances and return of their stock, rather than in decision making process.
Why should managers should care about the owners? Satisfactory profit for the stockholders and massive perks for themselves (principal-agent problem or the agency problem) Managers may be tempted to use the firm’s assets for their own ends. Secretaries may take the supplies Managers may take extra food or fancy furniture for their offices Executives can use expensive jets for travelling Etc;etc
Ability to steel from the shareholders, the most are the executives. This problem can be solved by Incentives Common incentives Offering stocks, restricted stocks or stock options (normal practice in US companies) And monitoring