History of Corporate Form

Trade Potential in

th 16

Century

Till 15th century sole proprietorship or partnership During 15th century- Europeans found opportunities in Asia and Africa Trade required lot of capital Loans risky- overseas trade- no assurance of money return If there is profit, its huge

Charter Companies
Why not pool the resources and share the profits? European Kingdoms issued charters for forming companies joint stock companies issued shares Appointed board of directors to supervise the management on behalf of shareholders

Charter companies
Muscovy company- Britain 1555- trade with Russia 1579 -Eastland Company (North Sea Company) - trade with Scandinavia and Baltic Sea Nations Levant company- trade with middle east1581 East India Company- 1600

British East India Company

December 31, 1600, the last day of the sixteenth century, the Queen granted a Royal Charter to a group of English merchants under the name, Governor and Company of Merchants of London trading with the East Indies. The charter awarded the newly formed company, for a period of fifteen years, a monopoly of trade with all countries to the east of the Cape of Good Hope and to the west of the Straits of Magellan The Company was finally dissolved on 1 January 1874, as a result of the East India Stock Dividend Redemption Act.

 Dutch East India Company 1602- First MNC Dutch East India Company also established Amsterdam Stock Exchange

Nature of Charter companies

Right to deal with rulers (Monarchs) Right to form banks Right to own, manage and grant or distribute land Can raise its own police force Have trade monopolies

Early joint stock companies only trade- no manufacturing The shareholders did not have limited liability Spread to manufacturing industries after industrial revolution

Problems with JSC

Liability Shareholders dont manage their money. But they are liable to the creditors in case of losses. The majority shareholders who manage the company may show fake losses to other shareholders

 France -1807- Napoleon - limited liabilities With Napoleons conquest on Europe the concept spread It is Civil law version of limited liability

Common law version Limited liability

1811 - New York state brought in a general limited-liability law for manufacturing companies. Other American states adopted it 1844- Britain adopted limited liability for shareholders made it mandatory to have annual statutory audit with the auditor being selected by the shareholders.

Limited liability
Concept of limited liability was not new Roman empire had certain types of limited liability but they were for partnership firms not an universal limited liabilities

Corporate form gradually emerged in the 19th century

Characteristic of Corporations in 20th century

Limited liability Transferability Legal personality Perpetual entity Central management

Corporations Purpose
Human satisfaction Everybody needs everything Social structure Efficiency Identity

Expectations
Jobs, Products and services to satisfy needs But Profit is the main motive of business corporations

Business Ownership Pattern

 Traditionally the business firms are promoted and controlled by business families Even today 35 % of Fortune 500 companies are controlled by Families

Oldest Business Entity

Till January 2007, Worlds oldest family controlled business was Kongo Gumi, founded in 578 AD. It was into the business of constructing Buddhist Temples. After Meiji Restoration the company diversified into commercial construction. Still temple construction accounted for 80 % of their revenue In January 2007, it was ceased to be an company controlled by the family due to debt problems and unfavorable business conditions. It bought by Takamatsu, a large Japanese construction company and became its subsidiary

 As of now the oldest family owned business is Hoshi Ryokan founded in 718 AD Hotel business

Majority Stake owners Classification

Business Families Governments MNCs Institutional Investors (Mutual funds, Pension funds)

Ownership Pattern Across the World Big business firms (10%)

Medium size business firms

Japan
Zaibatsu before WW II 14 powerful Zaibatsus controlled 25 % business assets in Japan Mitsui, Mitsubishi, Sumitomo After WW II - Keiretsu Crossholding

Ownership pattern in USA

Wide spread shareholding Separation of ownership and management Professional managers Why did this happen

USA
Dominance of Families in business till 20th century US government raised funds and placing bonds with the public during WW1. Tightened laws related negotiable instruments to push the bonds Success of Investment banks in selling securities among public Habit of investing in securities

After WW I
Dilution of family shareholding to expand business Booming stock market helped the securities market Highly efficient legal system encouraged the people to invest in shares and securities Big market in USA provided an opportunity to grow big which was not available in other countries Competition among states to get the companies incorporated

Organizational Goals

Organizational Goals - till 15th Century

Till 15th century - Goal of the entrepreneur is the goal of the organization Charter Companies Goal is defined in the charter From Mid 19th century mid 20th Century Goal of the promoter is the goal of the organization

Goals in Modern Corporation

Promoters do not have majority stake in the firms (mainly Anglo American Firms) All stakeholders are aware of their rights and very demanding Employees, customers, stakeholders and Society - objectives are conflicting The Example of Nutrition value in Food and cost of food By Herbert Simon

Importance of Goals
Legitimacy to external audiences such as:
* Investors * Customers * Suppliers

A source of motivation and commitment

* Help employees identify with the organization * Reduce uncertainty and clarify what employees should accomplish.

Goals of modern firms

Broad goal is indicated by the mission statements How they get transformed to next level is reflected in the Value statements

Organizational Mission
Reason for existence, the basic purpose Focus on items such as:
* * * * * * Market and customers Desired types of activities Values, aspirations, and reason for being Product quality Location of facilities Attitude toward employees.

Strategic goals
Broad statements describing where the organization wants to be in the future.

Peter Druckers Eight Areas of Focus

1. Market standing relative to competitors 2. Innovation of new methods or products 3. Productivity or efficiency 4. Resources, both physical and financial 5. Profitability 6. Managerial performance and development 7. Worker performance and attitude 8. Public responsibility to customers and society.

Tactical Goals
Define specific results for major divisions and departments within the organization to achieve.

Operational Goals
Define specific results expected from departments, work groups, and individuals.

Example Mission Statements

ITC
To enhance the wealth generating capability of the enterprise in a globalizing environment, delivering superior and sustainable stakeholder value

Aditya Birla Group

To deliver superior value to our customers, shareholders, employees and society at large

Infosys Technologies Ltd

To achieve our objective (of wealth creation) in an environment of fairness, honesty, and courtesy towards our clients, employees, vendors and society at large."

Tata Group
At the Tata Group our purpose is to improve the quality of life of the communities we serve. We do this through leadership in sectors of national economic significance, to which the Group brings a unique set of capabilities.

Do all the companies have well defined Mission statements?

No The case of Reliance Industries, Bajaj Group

Goals and Ethics

Why studying Goals in Ethics Course? Goals Influence the way companies fulfill their responsibilities to the stakeholders Example Sears Holding Corporation the parent company of Kmart and Sears, Roebuck and Co - Auto Service Centers Problem of overcharging customers

 Edward A. Brennan, CEO and Chairman of Sears, Roebuck & Company, made the following statement in 90s We are confident that our Auto Center customer satisfaction rate is among the highest in the industry. But after an extensive review, we have concluded that our goal and hence goal-setting program and (subsequent) incentive compensation and inadvertently created an environment in which mistakes have occurred. We are moving quickly and aggressively to eliminate that environment

Corporate Governance An Introduction

 In January 2000, AOL merged Time-Warner with itself. The combined entitys shares were trading at around US $ 70 during the initial months AOL Chairman Steve Case and Time Warner CEO Gerald Levin were instrumental in taking the lead for merger.. Steve Case became the Chairman and Gerald Levin become CEO of the AOL Time Warner, the largest media firm in the world, reaching each and every American Citizen in one form or other 2000 employees were fired to achieve synergy.. 20 % of the global workforce

 After 3 years, for the financial year 2002, the company has announced a loss of US $ 98.7 billion. The share prices have touched US $ 8 Another 2000 employees were laid off During the 3 year period 2.3 million customers moved out of the company

 What was the mistake of the shareholders and employees? The decision was taken by Levin and His team.. He and his team grossly overestimated the benefits They need to be punished but why the employees and shareholders?

Refco
Refco brokerage firm for commodities, futures contracts and securities. - the largest broker on the Chicago Mercantile Exchange It was founded in 1969 as "Ray E. Friedman and Co. Went public in August 11, 2005 with the sale of 26.5 million shares to the public at $22. It closed the day over 25% higher than that, valuing the entire company at about $3.5 billion.

Refco
In October 2005, some accounting malpractices were found about related party transactions The CEO Phillip R. Bennett - US$430 million The firms stock fell to US 0.80 from $ 28 The company filed bankruptcy under chapter 11. Almost 50 % of the employees were sacked

 Illegal activities Companies in North eastern states

Corporate Governance
Managers (or controlling shareholders) have the control Other stakeholders are affected by their actions This creates problems for the stakeholders when the managers act selfish objectives

Issues in Corporate governance

Ethical issues frauds illegal activities Companies in North eastern states Accountability issues Refco Efficiency Mergers -Time Warner and AOL

 Corporate Governance- guiding corporations to protect the interests of stakeholders Corporate governance is system by which business corporations directed and controlled Or System of structuring operating and controlling a company with a view to achieve long-term strategic goals to satisfy primary stakeholders

Corporate Governance and Corporate management

Corporate governance External focus Open system Strategy oriented Concerned with where the company is going Corporate Management Internal focus Relatively Closed system Task oriented Concerned with getting the company there

Theories of Corporate Governance

Stewardship theory monitoring required to curtail rare misconduct of humans managing corporations (managers) Berle and Means Agency theory managers need to be monitored as their motives differ from that of shareholders