Dirección comercial I - Tema 5 PDF

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Apuntes de dirección comercial I del tema 5...

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1. Corporate governance Company (firm) ฀ Group of natural or legal persons (shareholders) that contribute with resources and follow contractual terms to pursue a common economic activity.

COMPANIES: CLASSIFICATION LEGAL CLASSIFICATION 1. UNLIMITED RESPONSIBILITY Shareholders' assets may be used for company's debt. All shareholders have decision power on firm activity. Participation cannot be transmitted without agreement from rest of shareholders.

2. LIMITED RESPONSIBILITY Responsibility is limited to contributions in shares (S.A.) or stock (S.L.). Minimum capital investment (e.g. 3.000€ for S.L. and 60.000€ for S.A.).

3. HYBRID General shareholders (unlimited liability) coexist with limited partnership shareholders. In particular, general shareholders hold administrative power.

ECONOMIC CLASSIFICATION Refers to the difficulty of shareholder entry or exit. Degree of openness ฀ Easiness of transferring shares without the agreement of other shareholders or other restrictions. 1. OPEN COMPANIES (Inditex, Telefonica) Easier to enter and exit from the economic perspective (low transaction costs) and there are no restrictions on the legal perspective. Separation between ownership and control ฀ Functional specialisation: o Shareholders contribute to firm capital and assume risk. They do not have to supervise executive administration. Financial specialisation allows no limitation from individual contribution ฀ risk diversification and therefore optimal investment decisions.

o Executive administration ฀ Those with specific knowledge control and manage decision making processes. Functional specialisation can lead to conflicts of interest between ownership and decision-making authorities: ฀ Attitude towards risk ฀ Shareholders assume more risk due to diversified contributions (risk-neutral, as they are less worried with the outcome of one of their many businesses), while administrations are usually risk averse. ฀ Use of firm resources ฀ It may reduce profits and therefore there are less dividends for shareholders. -

Excessive direct use of resources: Set own pay above market levels, expensive work trips, etc.

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Excessive indirect use of resources: Better work conditions to employees, use of firm information for own benefit, etc.

CONTROL MECHANISMS TO AVOID THEM ✔ Automatic mechanisms Market capitalization ฀ Given by the stock market. Executive administration is evaluated via the estimated market value of the firm. Competition for control ฀ Alternative administration teams compete with the current executive administration. These groups usually belong to other firms and seek inefficiently managed firms to control and "reorganise". Takeovers ฀ Acquisition of one company (called the target company) by another (called the acquirer) by buying enough shares to do so. -

Hostile takeover: Both parties fail to reach a purchasing agreement. The executive team of the target company does not agree on the takeover however, they are entirely replaced by the acquirer.

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Friendly takeover: The two firms agree on price and the executive team recommends accepting the takeover.

✔ Contractual mechanisms ฀ Artificial, given by laws that govern the company type.

Shareholder meetings ฀ Allows shareholders to take part in important decision making. Decisions on mergers and acquisitions, contributions to firm capital. Economic incentives ฀ These belong to executive teams and are linked to the value of shares: profit participation (bonuses), distribution of shares, etc. ✔ Other control mechanisms ฀ Reputation of executives, auditing, etc. 2. CLOSE COMPANIES (Mercadona, el Corte Inglés, family firms) Difficult to enter and exit from the economic perspective (high transaction costs) and there are restrictions on the legal perspective (need of consulting the rest of shareholders). They are usually formed by few shareholders to restrict the participation of new ones. They generally present personal guarantees (family members). There is little functional specialisation, as many shareholders have executive power. For that reason, limited responsibility allows transferring risk to creditors. Less specialisation ฀ Less conflicts shareholders. Examples of them are:

between

administrators

and

o Controlling shareholders vs. non-controlling shareholders: Those who control fraud (use artificial prices or excessive salaries) and those who do not. o Founding vs. non-founding shareholders: Founding shareholders have specific information on firm and those who do not.

TRANSITION FROM CLOSE TO OPEN COMPANY IPOs = Initial Public Offer Examples: Airbnb, Robinhood, Snowflake, Unity Software and Lemonade. ● Objectives ฀ Access to funding, increase brand reputation, enhance brand image, improve management and control, attain liquidity for shareholders and obtain objective evaluations. ● Implications for old shareholders ฀ Pressure for professional management actions, pressure to distribute dividends and create value, obligation to inform and monitoring from analysts and investors.

COOPERATIVES Shareholders are workers and contribute with capital at the same time. Workers have control tasks and bear the risk.

Limitations: ● Limited resources ฀ Similar to contributions by unique shareholders (many contributions but in small quantity). ● Unalienable participations ฀ Workers' rights are not transferable. Difficulty to enter or exit the firm (due to personal or firm circumstances). ● Suboptimal investments ฀ Investments are conditioned to the distribution of gains of all shareholders (e.g. investments that imply increasing the number of shareholders) and temporal horizon. Cooperative members prefer distribution of gains between cooperative members, long-term debt and short-term return on investment. ● High levels of risk concentration (two-folded risk) ฀ As worker specific human capital, while as shareholder contribution is most of own assets' value. ● Unspecialised control ฀ Mutual control must be effective. ● Intermediary solutions ฀ Specialised management (executive teams) and less specialised control (workers or creditors). How to minimise free-riding ฀ Ideological training (firm values ฀ cooperative behaviour). Size of the cooperative restricts the efficiency of mutual control.

Solutions: ฀ To alleviate the problem of unspecialised financial contributions ฀ Create "holdings" of cooperatives to diversify and have less risk. ฀ Mechanisms for entry and exit ฀ New members contribute to the firm but have lower salaries during the first years, set an exit compensation (receive invested capital) and set salaries (or exit compensation) linked to tenure. Problems: difficult to value compensation and risk of losing capitalisation.

EFFICIENCY ✔ Successful lawyers...).

cases

of

cooperatives

(consultancy

companies,

auditing,

✔ Mutual control works well. ✔ Reduced size facilitates control. ✔ They benefit from fiscal advantages to stimulate their creation (lower interest rates for credits, subsidies, etc).

HYBRID FORMS ฀ Solution to specialisation problems. Sociedades Anónimas Laborales

฀ Workers have at least 51% of shares.

Characteristics: ● Members can be contributing shareholders (workers or not) and also workers without being shareholders. ● Shares can be regular or with reduced transferability. ● It requires at least three shareholders. ● No shareholder can have more than 33% of capital (except for public entities). ● Minimum capital 60.000€. Can receive same subventions as cooperatives do.

2. Financial relations Assets: What the company has (rights on goods and resources).

Liabilities: What the company must pay to shareholders, creditors, etc.

CONTRIBUTIONS TO FIRM CAPITAL Companies need money from external agents in order to invest in their own projects. There are 2 ways of financing: equity and debt financing.

Restrictions in funding: funds are limited, and the owner is risk averse. This clearly affects the growth potential of the firm.

1) EQUITY FINANCING (shareholders, business angels, etc.) Getting the money from shareholders and in return, they get ownership rights of the firm. Shareholders are remunerated through dividends. ฀ There is no functional specialization between ownership and management, but you benefit from same things (less opportunistic actions because owner and manager are the same person).

2) DEBT FINANCING Banks and creditors give money without ownership rights. Creditors are remunerated through interest rates. ฀ Many specialization and agent problems (principal-agent problem).

BORROWED FUNDS (CREDIT) The creditor only exerts any control action in extreme cases such as bankruptcy ฀ Banks have control on how the assets are liquidated because that is what they will get back. Two main characteristics of credits: ● For firms, there is a priority with respect to shareholders' funds. ●

There is an asymmetry in the remuneration of creditor and debtor ฀ When assets’ value is not enough, creditors do not get paid... but when the assets' value increases, there is no effect on creditors.

These characteristics lead to specialization advantages, but can produce specific conflicts ฀ safeguards are needed. ▪

Specialization in offering credit ฀ Secure conditions: creditor receives a fixed retribution and bears no risk.

The limits to firm growth are eliminated. Residual profits belong to the firm. ▪

Specialization in assuming certain risks (unpaid credit) ฀ Creditor remuneration is a function of asset value.

In this way, the creditor offers assurance to debtors, as they can save the (non-invested) risk averse owner' funds.

AN INTERMEDIARY SOLUTION ฀ Common funding by various shareholders. Advantages: Eliminate restrictions of the unique shareholder situation (limited funding, risk adversity) to allow risk diversification.

Disadvantages: Conflicts distributing gains, control and residual profits.

STRUCTURE OF CREDIT RELATION Fundamental relation between assets, shares and debt: A = C(A) + D(A) ✔ A: Assets’ value. ✔ C(A): Value of capital or owned resources. ✔ D(A): Value of debt (accounting value of N, what the bank will get). Assume that the firm has debt of a nominal value N ฀ Exact monetary amount that the debtor must pay the creditor....