The Effect of Ownership on Vision, Mission, Objectives and Decisions

Transcription

1 The Effect of Ownership on Vision, Mission, Objectives and Decisions Shareholders interests differ from directors in respect to their different favoured methods for achieving goals and objectives. Shareholders are primarily motivated by the maximisation of profit while managers tend to be oriented toward achieving the maximisation of efficiency. While there are many different forms of ownership, they could be distributed in two distinctive categories: for profit and not for profit organisations. As a result, the effects of ownership on a business organisation vary greatly depending on the context and the type of business form. By apprehending these concepts, this course will help you understand and answer exam questions about the effects of ownership on a business vision,mission, objective(s) and decision process. I. Effects of ownership on the organisation s core components An organisation s core components include elements reflecting its most fundamental characteristics ; its vision, mission and objective(s). These are subject to two groups direct influence of two groups: business owners and managers. While owners degree ofinvolvementvaries depending on the type of ownership structure, we will centre our attention onthe most widely used businessforms which we discussed in the previous courses such as: sole proprietorships, corporations (for profit & not for profit), cooperatives, partnerships, limited partnerships and limited liability companies (LLC).

2 1. Influences of ownership on the organisation s vision & mission Apple Computer Inc. illustration Owners and managers both participate in the design of vision statements; however, proprietors often play a larger role in the process of developing an organisation s vision. In fact, most startups are initiated by individuals with a vision i.e. a set of values and a choice for a specific path; for this reason, a business often reflects the vision of its creator(s).as a matter of fact, the most successful businesses still carry on the original values of their founder(s). A perfect example of this relationship between the founder s value and the vision of a business could be found in Steve Job s role as a key element of Apple Computer Inc. (1976); his vision of a computer for the rest of us revolutionised the high tech industry. Moreover, ownership structure changes could considerably affect an organisation s vision and mission. Apple Computer Inc. functioned for nearly 10 years without its founder after Steve Jobs replacement he resigned in 1985 following disputes with other members of the company. After a decade, the company s performance was mediocre while it seemed to have lost its innovative spirit and direction. With his return, Steve Jobs permitted Apple to regain its role of leader as an international business venture even exceed investors and analysts expectations by becoming a major and highly valued enterprise. In 1986, its price per share was trading between $0.31 and $0.60; a few years later after its founder s return, its share price skyrocketed to levels above $100. A visionary founder is more likely to revolutionise an industry by influencing its core values and by defining a clear direction. Apple s market capitalisation considerably increased to make it one of the largest companies $ billion of market capitalisation in The accomplishment of its objectives provides prestige and value to its company and its

3 shareholders even pride for the people involved as shown by one of Steve Job s more recent declaration which reinforces its initial vision: We started out to get a computer in the hands of everyday people, and we succeeded beyond our wildest dreams 2. Influences of ownership on the organisation s objectives compared to management The level of commitment to the definition of objectives by owners and/or managers varies greatly depending on the organisation s different levels and subsequent various aims and goals. As a result, we note that ownership exercises most of its influence on the higher hierarchical compartments of an organisation as illustrated in the pyramid below:

4 The problems that arise as a result of the relationship between a principal (i.e. owners) and its agents (i.e. manager) are not unusual in business; the agency theory is oriented toward the resolution of possible conflicts between shareholders and managers. It is concerned with two issues: Objectives: the conflicts resulting from the different goals and aims between the principal and its agents. It creates difficulties as it is often difficult and costly to verify if the agent is following instructions. Attitude toward risk: the second category of problems is linked to the different attitudes toward risk; the principal and its agent may have various levels of risk tolerance and may both be willing to take diverging actions and resolutions. While owners are interested mainly by wealth maximisation, managers are more inclined to improve efficiency, the workforce and its working conditions, their own careers and even sometimes their own prestige. II. Effects of ownership on the organisation s centres of controland structure Owners resources and relative influence can support or oppose management. Shareholders will support managers manoeuvres that are perceived oriented toward improving the business efficiency and oppose those perceived as counter-productive. The level of ownership dispersion and the structure of a business are key indicators when determining the effects of ownership on the organisation s centres of control.

5 1. Influences of ownership on decisions Ownership Concentration In order to better evaluate shareholders level of influence we often refer to its ownership concentration. This indicator reflects owners proportions of ownership of an entity. For instance, a business with a high ownership concentration would have one or several large owners e.g. an individual or entity owning more than 5% of a business. In large companies, major owners are often composed of investing institutions e.g. hedge funds, pension funds or mutual funds. Businesses with a high ownership concentration ratio are susceptible to be more intensively and more often influenced by shareholders. In fact, because of the large parts they own in a business, investors might be more implicated in the monitoring of its agents in order to protect their investments. Also, in opposition to the agency theory, problems arising from diverging points of views between owners and agents are in part prevented by a higher ownership concentration as managers could be more likely persuaded to take into consideration large investors wishes. Organisations with lower ownership concentrations exhibit weaker levels of shareholder involvement in their governance. Because an investor might have lower invested interests in a company, he might not be interested in spending resources controlling the managerial team s work. They participate less in the strategic developments of the company and are less likely to involve themselves in the voting processes as well.

6 2. Influences of ownership country comparison In most developed countries, large publicly traded companies are owned primarily by multiple investment funds. In fact, mutual funds have a considerable impact on large businesses due to the considerable size of their market capitalisation - $33.4 trillion in total worldwide assets invested in mutual funds and exchange traded funds in 2014 according to the Investment Company Institute. A major factor affecting the influence of ownership on a business is in regard to the context political, economic, social and technological. The following chart provides with insight about the different characteristics of ownership in six strong & economically diversified countries: As seen in the table above, there are many cases of cross-ownership between companies doing business together. By owning shares of one another, companies are aiming at reinforcing their

7 cooperation in the achievement of their common objectives. Despite its advantages (such as the potential sharing of resources, logistics, and information), the corporate ownership of another company could be detrimental to managerial functions in certain circumstances for instance, in cases of mergers and acquisitions (M&A), companies might have diverging interests. To conclude about the effects of ownership on a business vision, mission and objectives, we note that the most successful businesses originate from the genius ideas of individual entrepreneurs. The change of ownership from a sole proprietorship into a publicly traded company permits to extend an enterprise beyond the capabilities of a single individual s venture. As a result, the decision process is greatly impacted as multiple and sometimes contradictory interests arise from the involvement of different influential parties. In continuation, the next course will identify the effects of ownership on performance and productivity.

8 Multiple Choice Questions 1. What was Apple Computer Inc. missing after Steve Jobs departure? a. Direction; b. Vision; c. Shareholders; d. a & b. 2. Which statement is true? a. Shareholders influence is lower in the most important strategic developments; b. Shareholders influence is higher in the most important strategic developments; c. Managerial influence is lower for the least important strategic developments; d. None. 3. How do owners and managers interests differ? a. Owners are interested by wealth maximisation; b. Shareholders are motivated by improving processes, working condition, and their careers; c. Owners are interested by process optimisation; d. a. & b. 4. What is the Agency Theory? a. A supposition oriented toward the resolution of possible conflicts between shareholders and managers; b. A supposition oriented toward the resolution of possible conflicts between the board of directors and managers

9 c. A supposition oriented toward the resolution of possible conflicts between employees and managers; d. b.& c. 5. What are the two main aspects treated by the agency theory? a. Conflicts due to different visions; b. Conflicts due to different objectives; c. Conflicts due to different risks tolerances; d. b.& c. 6. What is ownership concentration? a. Ratio indicating the level of concentration of large owners; b. The number of outstanding shares; c. Ratio indicating the level of concentration ownerships structures; d. b. & c. 7. Which statement is true regarding ownership concentration? a. The higher, the stronger shareholder s influence; b. The higher, the lower shareholder s influence; c. The lower, the higher their participation in voting processes; d. a & c. 8. What type of ownership is the main owner of large publicly traded companies? a. Family; b. Mutual Funds; c. Corporate; d. Sole trader.

10 9. What is cross-ownership? a. The ownership of a mutual fund by a sole trade; b. The ownership of a company by a mutual fund; c. The ownership of a company s shares by another company; d. None. 10. What is the main concern regarding cross-ownership? a. It slows down a company s growth; b. Could cause conflicts in case of mergers and/or acquisition; c. It requires capital; d. a. & d. Answers 1: d ; 2: b ; 3: d ; 4: a ; 5: d ; 6: a ; 7: a ; 8: b ; 9: c ; 10: b