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History of Corporate Form



Trade Potential in 16th Century

Till 15th century sole proprietorship or partnership

During 15th

century- Europeans foundopportunities in Asia and Africa

Trade required lot of capital

Loans ± risky- overseas trade- no assuranceof money return

If there is profit, its huge



Charter Companies

Why not pool the resources and share theprofits?

European Kingdoms issued charters for forming companies ± joint stockcompanies ± issued shares

Appointed board of directors to supervisethe management on behalf of shareholders



Charter companies

Muscovy company- Britain ± 1555- tradewith Russia

1579 -Eastland Company (North SeaCompany) - trade with Scandinavia andBaltic Sea Nations

Levant company- trade with middle east-1581

East India Company- 1600



British East India Company

December 31, 1600, the last day of the sixteenthcentury, the Queen granted a Royal Charter to agroup 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 tradewith 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 January1874, as a result of the East India Stock Dividend

Redemption Act.



Dutch East India Company ± 1602- FirstMNC

Dutch East India Company alsoestablished 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- nomanufacturing

The shareholders did not have limitedliability

Spread to manufacturing industries after industrial revolution



Problems with JSC

Liability ±

Shareholders don¶t manage their money.

But they are liable to the creditors in caseof losses.

The majority shareholders who manage thecompany may show fake losses to other shareholders



France -1807- Napoleon - limited liabilities

With Napoleon¶s conquest on Europe the

concept spread It is Civil law version of limited liability



Common law version

Limited liability1811 - New York state brought in a general

limited-liability law for manufacturingcompanies. Other American statesadopted 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 limitedliability ± but they were for partnershipfirms ± not an universal limited liabilities



Corporate form gradually emerged in the19th century



Characteristic of Corporations in

20

th

centuryLimited liability

Transferability

Legal personality ±Perpetual entity

Central management



Corporations ± Purpose

Human satisfaction ± Everybody needseverything

Social structureEfficiency

Identity



Expectations

Jobs, Products and services to satisfy needs

But Profit is the main motive of businesscorporations



Business Ownership Pattern



Traditionally the business firms arepromoted and controlled by businessfamilies

Even today 35 % of Fortune 500companies are controlled by Families



Oldest Business Entity

Till January 2007, World¶s oldest family controlledbusiness was Kongo Gumi, founded in 578 AD. It wasinto the business of constructing Buddhist Temples.

After Meiji Restoration the company diversified into

commercial construction. Still temple constructionaccounted for 80 % of their revenue

In January 2007, it was ceased to be an company

controlled by the family due to debt problems andunfavorable business conditions. It bought byTakamatsu, a large Japanese construction company andbecame its subsidiary



As of now the oldest family ownedbusiness is µHoshi Ryokan¶ founded in718 AD ± Hotel business



Majority Stake ownersClassification

Business Families

Governments

MNCs Institutional Investors (Mutual funds,

Pension funds)



Ownership Pattern Across theWorld ± Big business firms (10%)



Medium size business firms



Japan

Zaibatsu ± before WW II ± 14 powerfulZaibatsu¶s controlled 25 % businessassets 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 publicHabit of investing in securities



After WW I

Dilution of family shareholding to expand business

Booming stock market helped the securitiesmarket

Highly efficient legal system encouraged thepeople to invest in shares and securities

Big market in USA provided an opportunity to growbig which was not available in other countries

Competition among states to get the companiesincorporated



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 inthe charter

From Mid 19th century mid 20th Century -Goal of the promoter is the goal of theorganization



Goals in Modern Corporation

Promoters do not have majority stake inthe firms (mainly Anglo American Firms)

All stakeholders are aware of their rightsand very demanding

Employees, customers, stakeholders andSociety - objectives are conflicting

The Example of Nutrition value in Foodand 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 employeesshould accomplish.



Goals of modern firms

Broad goal is indicated by the missionstatements

How they get transformed to next level isreflected 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 theorganization wants to be in the future.



Peter Drucker¶s Eight Areas of Focus

1. Market standing relative to competitors2. Innovation of new methods or products

3. Productivity or efficiency

4. Resources, both physical and financial5. Profitability

6. Managerial performance and

development7. Worker performance and attitude

8. Public responsibility to customers and

society.



Tactical Goals

Define specific results for major divisionsand departments within the organization toachieve.



Operational Goals

Define specific results expected fromdepartments, work groups, andindividuals.



Example Mission Statements



ITC

To enhance the wealthgenerating capability of theenterprise in a globalizing

environment, deliveringsuperior and sustainablestakeholder value



Aditya Birla Group

To deliver superior value to our customers,shareholders,

employees andsociety at large



Infosys Technologies Ltd

To achieve our objective (of wealthcreation) in an

environment of fairness, honesty, andcourtesy towards our clients, employees,

vendors and societyat large."



Tata Group

At the Tata Group our purpose is to improve thequality of life of thecommunities we serve.We do this throughleadership in sectors of national economicsignificance, to which the

Group brings a unique setof capabilities.



Do all the companies have welldefined Mission statements?

No

The case of Reliance Industries, BajajGroup



Goals and Ethics

Why studying µGoals¶ in Ethics Course?

Goals Influence the way companies fulfilltheir 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 followingstatement in 90s

³We are confident that our Auto Center customer satisfaction rate is among the highest in theindustry. But after an extensive review, we haveconcluded that our goal and hence goal-settingprogram and (subsequent) incentivecompensation and inadvertently created anenvironment in which mistakes have occurred.We are moving quickly and aggressively toeliminate that environment´



Corporate Governance ± An

Introduction



In January 2000, AOL merged Time-Warner withitself.

The combined entity¶s shares were trading ataround US $ 70 during the initial months

AOL Chairman Steve Case and Time Warner CEO Gerald Levin were instrumental in takingthe lead for merger.. Steve Case became theChairman and Gerald Levin become CEO of the

AOLT

ime Warner, the largest media firm in theworld, reaching each and every AmericanCitizen 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 millioncustomers moved out of the company



What was the mistake of the shareholdersand employees?

T

he decision was taken by Levin and Histeam..

He and his team grossly overestimated thebenefits

They need to be punished « but why theemployees and shareholders?



Refco

Refco ± brokerage firm for commodities, futurescontracts and securities. - the largest broker onthe Chicago Mercantile Exchange

It was founded in 1969 as "Ray E. Friedman andCo.³

Went public in August 11, 2005 with the sale of 26.5 million shares to the public at $22. It closedthe day over 25% higher than that, valuing theentire company at about $3.5 billion.



Refco

In October 2005, some accountingmalpractices were found about relatedparty transactions ±The CEO Phillip R.Bennett - US$430 million ± The firm¶sstock fell to US 0.80 from $ 28

The company filed bankruptcy under

chapter 11. Almost 50 % of the employeeswere sacked



Illegal activities ±Companies in Northeastern states



Corporate Governance

Managers (or controlling shareholders) havethe control

Other stakeholders are affected by their actions

This creates problems for the stakeholderswhen 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 toprotect the interests of stakeholders

Corporate governance is system by which

business corporations directed and controlledOr

System of structuring operating and controlling acompany with a view to achieve long-termstrategic goals to satisfy primary stakeholders



Corporate Governance andCorporate management

Corporate governance Corporate Management

External focus Internal focus

Open system Relatively Closedsystem

Strategy oriented Task oriented

Concerned with wherethe company is going

Concerned with gettingthe company there



Theories of Corporate Governance

Stewardship theory ± monitoring requiredto curtail rare misconduct of humansmanaging corporations (managers)

Berle and Means

Agency theory ± managers need to bemonitored as their motives differ from thatof shareholders

20341526 history of corporate form and cg into

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