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The Nature of the South African Corporate Economy: A need to review company objectives?
Abstract
The maximisation of shareholders’ wealth as the primary goal of the firm is the cornerstone of modern financial theory which has its source mainly from USA. The South African corporate economy has significantly different characteristics compared with that of the USA. The article notes that the Japanese corporate economy, with its keiretsu groupings and interlocking directorship, has characteristics similar to ours. Consequently, the article proposes that we re-examine the suitability of the US sourced primary goal of the firm relative to the Japanese goal which is to maximise the wealth producing capacity of the enterprise.
In economics and finance it is often assumed that firms merely seek the maximization of shareholder wealth. In order to test this hypothesis an empirical investigation on the goal structure of firms listed on the Johannesburg Stock Exchange was performed with special reference to the relative importance of the concept of shareholder wealth maximization and social responsibility of the firm.
The responses indicated that the wealth maximization hypothesis tested in this survey appears to be applicable for the firms which participated, albeit not always in terms of all the possible parameters of the wealth maximization hypothesis.
Theory suggests that shareholders who own blocks of stock have a stronger incentive to invest in voting on corporate issues than nonblockholders. Our evidence indicates that institutional investors and other blockholders vote more actively on antitakeover amendments than nonblockholders, and opposition by institutions is greater when the proposal appears to harm shareholders. Our evidence suggests that institutions that are less subject to management influence, such as mutual funds, foundations, and public-employee pension funds, are more likely to oppose management than banks, insurance companies, and trusts, which frequently derive benefits from lines of business under management control.
In the hope that it may help to overcome these obstacles to effective empirical testing, this paper will attempt to fill the existing gap in the theoretical literature on valuation. We shall begin, in Section I , by examining the effects the effects of differences in dividend policy on the current price of shares in an ideal economy characterized by perfect capital markets, rational behavior, and perfect certainty. Still within this convenient analytical framework we shall go on in Section II and III to consider certain closely related issues that appear to have been responsible for considerable misunderstanding of the role of dividend policy. In particular, Section II will focus on the longstanding debate about what investors "really" capitalize when they buy shares; and Section III on the much mooted relations between price, the rate of growth of profits, and the rate of dividends per share. Once these fundamentals have been established, we shall proceed in Section IV to drop the assumption of certainty and to see the extent to which the earlier conclusions about dividend policy must be modified. Finally, in Section V , we shall briefly examine the implications for the dividend policy problem of certain kinds of market imperfections.
Since the publication of the findings of a 1981 survey on the goal structure of listed firms on the Johannesburg Stock Exchange (JSE), many important and fundamental changes have taken place in the political, economic and labour arenas of the Republic of South Africa. These changes, which are also reflected in the continued development by business of formal policies regarding social responsibility, have or could have caused a shift in the perceptions of top management towards the goal structures of the firms which they control. In an effort to establish whether any changes in managements’ attitudes concerning goals and goal structures have taken place, two independent empirical surveys were conducted, viz. an update on the 1981 JSE Survey, which canvassed the opinions of top executives of South African listed firms and an Eastern Cape survey, designed to capture the opinions of smaller-sized unlisted firms regarding their goals.
This article, the first of a series of two, deals mainly with the findings on primary and secondary goals. More than 50% of the respondents regarded profit-maximisation, maximising The rate of return on equity capital, maintenance of liquidity and solvency, maximisation of earnings per share, as well as growth, as primary goals. Respondents of both surveys were not particularly in favour of the maximisation of the current market price of ordinary shares as a primary goal - a possible parameter of the shareholder wealth maximisation hypothesis. Many respondents indicated that share prices are a function of so many variables that it can hardly be considered a primary long-term goal. Provisionally, based only on a single parameter of shareholder wealth, it seems as if the widely reported shareholder wealth maximisation hypothesis lacks empirical validity.
Students come to business schools to gain the skills neces sary to be good general managers. This paper poses the question as to whether there is a benefit to such students to be taugh theory - and in particular the theory of finance. After briefly reviewing the field of financial management; the concept of a theory is discussed. This is followed by some thoughts on why in general, theories should be studied. The theory of risk and return is then presented as a conceptual framework for the study of finance, and it is shown how important this framework is for students of management Some comments follow on the gap between theory and practice, and finally it is postulated that finance, when taught in a risk-return framework, may be cons dered to be the key subject on the MBA programme.
Milton Friedman (1912–2006) was born in Brooklyn, New York, and received his Ph.D. in economics from Columbia University. He taught at the University of Minnesota, and then for many years at the University of Chicago. After 1977, he was a Senior Research Fellow at the Hoover Institution in Stanford, California. Friedman is best known for his work in monetary theory and for his concern for free enterprise and individual liberty. Milton Friedman was awarded the Nobel Prize in economics in 1976. The following essay, which is reprinted in its entirety, is the most influential work on economic methodology of this century. In his admirable book on The Scope and Method of Political Economy John Neville Keynes distinguishes among “a positive science … [,] a body of systematized knowledge concerning what is; a normative or regulative science … [,] a body of systematized knowledge discussing criteria of what ought to be …; an art … [,] a system of rules for the attainment of a given end”; comments that “confusion between them is common and has been the source of many mischievous errors”; and urges the importance of “recognizing a distinct positive science of political economy.” This [essay] is concerned primarily with certain methodological problems that arise in constructing the “distinct positive science” Keynes called for – in particular, the problem how to decide whether a suggested hypothesis or theory should be tentatively accepted as part of the “body of systematized knowledge concerning what is.”
This paper will concentrate on the unanswered question of federal leadership and/or management of the potentially vast federal assets which could possibly be required during periods that seemingly appear to be local in scope. Then they quickly build exhausting state and local resources and capabilities. These incidents continue to grow in increasing complex crisis management. Until eventually, it maybe recognized that they maybe unknowingly defending the sovereign soil of the United States of America. Do we need a federal management requiring a new Presidential Cabinet Secretary, another federal agency, a DOD "War Fighting" military Commander-in-Chief (CINC), or simply a new CZAR? In addition, if so, why? The paper is not to answer the question, only to readdress the already open issue. In doing so I will attempt to provide the uniform and non-uniform leadership of our nation, who will inevitably be required to answer that question with some historical and factual "food for thought". The design of this paper and purpose is simply to provide information that should lead the reader to believe that we already have such in place.
This article surveys the seventeen papers in this special issue of the Journal of Financial Economics, and related work. The major findings are: (1) patterns of stock ownership by insiders and outsiders can influence managerial behavior, corporate performance, and stockholder voting in election contests; (2) corporate leverage, inside stock ownership by managers, and the control market are interrelated; (3) departures from one share/one vote affect firm value and efficiency; (4) takeover resistance through defensive restructurings or poison pill provisions is associated with declines in share price; and (5) top management turnover is inversely related to share price performance.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
Sumario: Fifteen years it was first chronicled, the "unseen revolution" transforming corporate ownership in the United States is now visible to all. The 20 largest pension funds hold around one-tenth of the equity capital of America's publicly owned companies. All told, institutional investors control close to 40% of the common stock of the country's large businesses. The largest and fastest growing funds, those of public employees, are no longer content to be passive investors. Increasingly, they demand a voice in the companies in which they invest.
It is traditional in the theory of the firm to define the production opportunity set available to the firm in terms of its boundary the maximum attainable set of output quantities for various input quantities, given the state of technology and knowledge. This boundary is the production function of the firm. One of our purposes here is to point out the dependence of such production functions on the structure of property rights and contracting rights within which the firm exists. We redefine the production function in order to recognize the dependence of output on the structure of property and contracting rights. That expanded framework is then used to discuss a concrete set of problems surrounding the role of labor in the firm ranging from the labor-managed firm system (in which tradable capital value residual claims [common stock] are legally prohibited), and the codetermination and industrial democracy movements (in which management participation by labor is required by law), to cooperatives and professional partnerships (i.e., quasi-labor-managed firms which arise out of the voluntary contracting process), and the capitalist corporation.
This inductive study offers an examination of 23 cases in which informants from firms engaged in large-scale global projects reported unforeseen costs after failing to comprehend cognitive-cultural, normative, and/or regulative institutions in an unfamiliar host societal context. The study builds on the conceptual framework of institutional theory. The findings, which include propositions and a generic narrative model, contribute to theoretical knowledge of how institutional exceptions arise, how they are resolved, and how they typically involve three general phases: ignorance, sensemaking, and response. The findings also articulate the kinds of institutional transaction costs that an entrant incurs in each of the three phases, and the conditions that lead to the growth of these costs. Journal of International Business Studies (2008) 39, 562–588. doi:10.1057/palgrave.jibs.8400370
This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of "ownership" and "control." Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions. Journal of Law and Economics, Vol. XXVI, June 1983. Separation of Ownership and Control * Eugene F. Fama and Michael C. Jensen Journal of...
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