AEM1200-0903ToPost - Department of Applied Economics and...

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Unformatted text preview: Department of Applied Economics and Management Management CORNELL UNIVERSITY AEM 1200 INTRODUCTION TO BUSINESS INTRODUCTION MANAGEMENT MANAGEMENT Pedro David Pérez Fall 2010 AEM1200, Introduction to Business Management Friday 9/3 Business Ownership, Shareholders and Stakeholders Forms of business ownership Sole proprietorship Partnership Corporation Franchise Problems with the corporate form of ownership Corporate Social Responsibility and the Stakeholder Model Forms of Business Ownership Sole proprietorship A business owned and managed by one person A legal form of business with two or more owners A legal entity with authority to act and have liability separate from its owners The right to use a specific business’s name and sell its products or services in a given territory A business owned and controlled by the people who use it – producers, consumers, or workers with similar needs who pool their resources for mutual gain. Partnership Corporation Franchise Cooperatives Ownerships, Partnerships and Corporations Sole Proprietorships Ease of formation Be your own boss / retention of control Pride of ownership Retain profit No special taxes Unlimited liability Limited financial resources Difficulty in mgmt. Time commitment Few fringe benefits Limited growth Limited life span Partnerships More financial resources Shared mgmt. Longer survival Disagreements among partners Difficult to terminate Unlimited liability Division of profits Corporations More money for investment Limited liability Separation of ownership/mgmt. Ease of ownership change Double taxation Perpetual life Size Initial cost Paperwork Two tax returns Termination difficult Partnership – Corporation Hybrids Partnership Limited Partnerships A partnership with general partners (partners that contribute money partnership and management, and are fully liable) and limited partners (partners that only contribute money and run only the risk of that investment); that A corporate-like ownership structure that avoids double taxation; Partnership-like ownership structure that avoids unlimited liability and Partnership-like double taxation; double Partnership-like ownership structure that avoids unlimited liability. S Corporations Limited Liability Companies Limited Liability Partnership Franchises + Management & marketing ass’t + Personal ownership + Recognized name + Financial advice & ass’t + Lower failure rate - High start-up costs - Shared Profit - Management regulation - Coattail effects - Restrictions on selling - Fraudulent franchisors Corporate governance Corporate The relationship of a company to its The shareholders and, more broadly, to society The Board of Directors The Problems of Corporate Governance The Agency Problem Potential conflicts of interest between principals (eg. shareholders/ stakeholders) and agents (managers, especially top executives); Moral Hazard occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk. Conflict of Interest occurs when an individual is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other. The Profit Motive American corporations on average run a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses. The reason for all this saving … is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation. But this means they also short-circuit a major driver of economic growth. Are Profits Hurting Capitalism? NYT, 7/6/2010 The Sarbanes-Oxley Act The Public Company Accounting Oversight Board Prohibit audit firms from doing a variety of non-audit Prohibit work for their clients Independent audit committees Independent Forbid company loans to company executives Top executives must certify company accounts Protects whistleblowers Section 404 makes managers responsible for Section maintaining an “adequate internal control structure and procedures for financial reporting”; and demands that companies' auditors “attest” to the management's assessment of these controls and disclose any “material weaknesses”. weaknesses”. Criticisms of the Corporate Form Criticisms “…the corporation is a psychopath. Like all psychopaths, the firm is the singularly self-interested: its purpose is to create wealth for its shareholders. And, like all psychopaths, the firm is irresponsible, because it puts others at risk to satisfy its profit-maximising goal, harming employees and customers, and damaging the environment. The corporation manipulates everything. It is grandiose, always insisting that it is the best, or number one. It has no empathy, refuses to accept responsibility for its actions and feels no remorse. It relates to others only superficially, via make-believe versions of itself manufactured by public-relations consultants and marketing men. In short, if the metaphor of the firm as person is a valid one, then the corporation is clinically insane… Through their psychopathic pursuit of profit, (corporations) make good people do bad things.” make Review of the documentary “The Corporation”, The Economist, 5/6/2004 CORPORATION, n. An ingenious device for obtaining individual profit without individual responsibility. without Ambrose Bierce's Devil's Dictionary Ambrose Devil's Business Stakeholders Business Stockholders Bankers Suppliers Government Employees Dealers and retailers Activists and environmentalists Community Customers Etc, etc, etc Sustainability Sustainability Meeting the needs of the present Meeting generation without compromising the ability of future generations to meet their own needs. Brundtland Commission, 1987. Brundtland Corporate social responsibility Corporate Refers to the comprehensive approach that a Refers corporation takes to meet or exceed stakeholder expectations beyond measures of revenue, profit and legal obligation. community investment, community human rights and employee relations, human environmental practices ethical conduct. ethical Profits Environmental sustainability Social responsibility But, can it all be measured? And is the economy But, really so static? really The Triple Bottom Line The Cooperatives A business owned and controlled by the people who use it – producers, consumers, or workers with similar needs who pool their resources for mutual gain; Eg. Greenstar Markets. Over 100 million people are members of over 47,000 cooperatives in the U.S.A. Avoid Uncommitted directors; “Dead-weight” members Lack of transparency Lack of enough capital “Not-for-profit” organizations Organization whose primary objective is to support some issue or matter of private interest or public concern for non-commercial purposes; Main characteristics (US) No profits, profit distribution or stock issuance; Does not pay taxes; Monetary contributions to not for profit organizations are not included in taxable income. 501-c3 section of the US tax code. The Stakeholder Corporation and CSR: a critique and There is one and only one social responsibility of There business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud. without Milton Friedman – Nobel laureate Take Aways There are many ways to organize a business. In terms of flexibility and ability to grow, the corporation form is the most successful form of organization in the U.S. economy. The corporate form of organization creates conflicts of agency and social allocation of resources. Business obtains resources and legitimacy from Business society, and it is therefore responsible to it. society, ...
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This note was uploaded on 10/24/2010 for the course AEM 1200 at Cornell University (Engineering School).

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