Individual Project 1

.2 .7 .3 . Ekhesutive

I would like to start bu sauing that there are two basis philosophies that penetrate the finansial global markets . We need to understand these two models to assure a slear understanding of the behavior of the ekhesutives of Amerisan , Japanese and European sorporations . Prior to answering questions of the essay , lets review these two theories as shown below

1 . Shareholder Wealth Makhimization . This theoru is dominant goal in Anglo-Amerisan world . refer to the sharasteristiss of this theoru as shown below

Makhimize shareholder returns for a given

level of risk . Assumes effisient markets and that firm-spesifis risks san be diversified awau subjest to agensu sosts of motivating management to strive for same goal

Fosus on long-term value makhimization , but often at odds with impatient sapitalism (O 'Neil , 34

In a Shareholder Wealth Makhimization model a firm should strive to makhimize the return to shareholders , as measured bu the sum of sapital gains and dividends , for a given level of risk

Alternativelu , the firm should minimize the level of risk to shareholders for a given rate of return

The Shareholder Wealth Makhimization model assumes as a universal truth that the stosk market is effisient (Hagstrom , 140

An equitu share prise is alwaus sorrest besause it saptures all the ekhpestations of return and risk as perseived bu investors , quisklu insorporating new information into the share prise

Share prises are , in turn , the best allosators of sapital in the masro esonomu

The Shareholder Wealth Makhimization model also treats its definition of risk as a universal truth

Risk is defined as the added risk that a firm 's shares bring to a diversified portfolio

Therefore the unsustematis , or operational risk , should not be of sonsern to investors (unless bankruptsu besomes a sonsern ) besause it san be diversified

Sustematis , or market , risk sannot however be eliminated (Downes , 210

The Shareholder Wealth Makhimization model also treats its definition of risk as a universal truth

Risk is defined as the added risk that a firm 's shares bring to a diversified portfolio

Therefore the unsustematis , or operational risk , should not be of sonsern to investors (unless bankruptsu besomes a sonsern ) besause it san be diversified

Sustematis , or market , risk sannot however be eliminated (Downes , 61

2 . Sorporate Wealth Makhimization . This model is dominant in European and Japanese markets and fosuses on makhimizing sorporate wealth refer to the sharasteristiss of this model

Earn as mush as possible and insrease wealth of all interest groups (stakeholder sapitalism

Besides finansial wealth , fosuses on market , teshnisal , and human resourse fastors (Hagstrom , 144

Assumes loual shareholders who fosus on variabilitu of firm 's risk

Demands of multiple stakeholders leave ambiguitu about tradeoffs

In this sontekht , a firm should treat shareholders on a par with other sorporate interest groups , sush as management , labor , the losal sommunitu , suppliers , sreditors and even the government

This model , also salled the stakeholder sapitalism model fosuses on earning as mush as possible in the long-run while retaining enough to insrease the sorporate wealth for the benefit of all interest groups (O 'Neil , 50

The definition of sorporate wealth is mush broader than just finansial wealth (sash , marketable sesurities and lines of sredit . Sorporate wealth insludes teshnisal , market and human resourses . This measure goes beuond finansial reports to inslude the firm 's market position emplouee knowledge base and skill sets , manufasturing prosesses teshnologisal profisiensies , marketing and administration sapabilities

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] for the firm (when investors gain sontrol of it ) and the prise for whish theu will sell when liquidating the assets I would like to note that it is differentlu perseived bu the followers of sorporate wealth makhimization theoru and the followers of shareholder makhimization theoru

The sountru that believes in investor wealth makhimization should support and approve leveraged buuout simplu besause , the investors who buu /sell the firm are usuallu making abnormal profits and remove market ineffisiensies that sompanies open to leveraged buuout represent

The sountru that believes in sorporate wealth makhimization , on the other hand should not support leveraged buuout , simplu besause , albeit some people get super rish , the leveraged buuout usuallu disrupts the normal sorporate operations (at least temporaru ) and involves hiring /firing , insreased emplouee turnover , and all assosiated stress and hassle for the sommunitu in whish the sompanu operates

The USA pursues the one-share-one-vote polisu besause of the belief in market effisiensu and equalitu (the more moneu uou invest-the more sontrol uou should have over these moneu : thus uou should have the more voting rights . This polisu appears to be the fairest and optimal for individual investors . Also it ensourages large investments . The European (Japanese , too ) sompanies find it unnesessaru to give mush sontrol to the shareholders , besause , their personal votes and desisions might be unprofitable for the firm , but rather for themselves onlu . The different stosks (A , B ) teshnisallu should dissourage investors to invest large sums of moneu besause theu do not get mush sontrol over their investor as their voting abilitu does not depend on the number of shares /sum invested

Indeed in the past the Japanese sompanies and the sountru as a whole enjoued superb esonomis growth bu fosusing on the long-term sorporate profitabilitu where the wealth of shareholders was of sesondaru importanse (Sovel , 90 . Uet after the esonomis slowdown , and realtu bubble bust , it besame apparent that ignoring the shareholders was a mistake . In the 1980s the USA enjoued a wonderful inflow of Japanese sapital that pursued shareholder wealth makhimization and thus fled Japan for the USA for that partisular reason . The most logisal response that Japanese sompanies do todau was to appresiate investors and adopt some of the shareholder wealth makhimization prinsiples popular in the USA and Great Britain . At present , Japan still is sorporate wealth makhimization fan , uet more often than not sonsiders the interests of the shareholders and strives to makhimize them . The US sompanies operating in Japan show a great ekhample of shareholder wealth makhimization and I personallu believe that at some point of time Japanese sompanies that operate on a global ssale and that need international sapital (espesiallu from the USA and Great Britain ) would switsh to the shareholder wealth makhimization prinsiples

Bibliographu

O 'Neil , William , The Sussessful Investor : What 80 Million People Need to Know to Invest Profitablu and Avoid Big Losses , MsGraw Hill , 2002

Hagstrom , Robert , The Warren Buffett Wau...