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Jensen attributes this massive organizational change to management-misguided polices and the public corporation lack of aptitude to follow the trends and the volatility of the economy as far back as the sass’s. The aim of this essay is to demonstrate the effect that this movement had on US corporate governance and if there were more benefits than negative aspects In this change. In order to understand the effect the sass’s movement had on corporate management It Is essential to trace those factors that played a key role In originating these changes as well as those activities that contributed to them.
Firstly, with regards to the relation between corporate managers and shareholders before the sass’s, It could be assessed that managers paid little Importance to shareholder Interests and were more loyal to the corporation Itself. In most cases, compensation systems for management were not related to market performance. The need for better corporate performance gave birth to takeovers, Junk bonds and leveraged buyouts. Takeovers were distinguished not only by hostility but also by the use of debt as the main source of capital.
This mechanism consisted in the acquisition of rims by obtaining loans rather than by using their own resources (cash or equity issue). Managers reacted negatively towards them giving birth to hostilities. Evidently, management was reluctant to these new changes probably because they did not understand the real Issue behind them and were not prepared to act adequately. In addition, leveraged buyouts became one of the most frequent means of turning corporations private with debt representing on many occasions more than 80% of their capital. Although some of the features of this phenomenon disappeared
In the sass’s, It could be said that the mall Influence of this movement cannot be denied and is present in the actual way corporations are being run. At the same time, this movement gave birth to other diverse mechanisms that involved capital markets and increasing board of directors and shareholders participation in corporation’s management. It has been argued whether or not the takeover movement that originated In the sass’s has had a beneficial effect on the development of us corporations. However, its beneficial gains cannot be denied. Firstly, there is evidence f corporations gaining in productivity.
In effect, there is no doubt that improvement of productivity levels In the sass’s and later In the sass’s Is good proof of the above. On the other hand, the truth Is that leveraged buyouts led to a new way of compensating management which was based on the granting of equities. This equity based compensation system led to a close relationship between pay and I OFF importance of equity based compensation in the US corporations as managers are forced to work harder to pay off debts, implement new strategies, reduce costs and cake a better use of cash flow.
Moreover, he rules out the idea that outside directors owing little or no equities at all could efficiently monitor and control corporate management. He also makes reference to the appearance of “active investors” who not only hold large equity or debt positions but also belong to the board of directors management and are committed to the long term policies of the company they invest in but also manage the corporation themselves.
Another relevant characteristic of leveraged buyouts that had a great impact in US corporations is the fact that the excessive borrowing companies had to pay off influenced the way managers conceived capital. As Jensen explains in his text, in the past, managers focused on projects with low or negative returns, excessive staff involved and organizational inefficiencies. In the sass’s, managers were constrained to generate cash flow to pay off the enormous debts companies owed. In the same way, Holsters and Kaplan agree with the latter highlighting the increased discipline management had to adopt in order to achieve debt payment.
Managers would have to abandon previous manners of dealing with capital in order to focus on generating the necessary returns to comply with the company’s responsibility of paying off the debts. Those defenders of public corporations used this leveraging estate of corporations to criticize the new organizational model. In opposition, Jensen believes that that debt is an agent of change as it creates the necessary environment for managers to stop investing in unproductive programmer, reduce fixed costs and restructure company’s assets and avoid managers mistaken policies.
Debt is then a way of obliging reparation management to reorganize themselves before more losses occur. Goodyear is a good example of the above as its forced restructuring led to an increase of the companies value to shareholders. The authors Davis, Dietician and Tinsels describe the process by which the dominant organizational model of the sass’s, the conglomerate firm, became denationalizations by the sass’s.
In this respect, they mention that the downfall of the “firm as portfolio’ model was accompanied by the undermine “disuse” of common corporate practices related to his organizational structure. There were different reasons that incited the demonstrativeness’s of the conglomerate firm such as its poor financial performance reflected in the stock market, the elimination of financial barriers and the fall of the regulations that had supported this organizational model.
As the authors mention in their text, the fact that the “firm as portfolio’ model was seen as an institution for corporate practices embodied the main impediment for the downfall of the conglomerate firm. Even though, it has been proved that diversified firms had a rater risk of being took over, and this is one of the alternative explanations of the merger movement in the sass’s. The conglomerate acquisitions that took place in the sass’s followed the process of selling the unrelated businesses of the acquired firm and aiming to focus on the “core competence”.
Therefore, we can say that the merger movement of the sass’s resulted in the presence of more focused firms instead of the dominant corporate form, the conglomerate firm, that had ruled the sass’s. Thus, most companies in the sass’s began focusing on the minimization of their core Hailstorm and Kaplan agree that one of the various factors that caused the merger movement in the sass’s was the poor performance of the conglomerate firm, they are not sure of the extent of the decrease of the diversified firm, one of the results of this process.
Montgomery states that there was no difference in the level of diversification between 1981 and 1991 in a typical firm in the Standard and Poor’s 500. On the other hand, Comment and Quarrel agree that there were big falls in the participation of unrelated segments of the corporations and this is also reflected in he increased percentage of firms participating in a single segment of the market according to Computes.
However, we can conclude that the merger movement of the sass’s influenced US corporations as far as the level of diversification of the firms activities are concerned. Est. queued De Tort fez peer no VA: agrees to the above by stating that managers incentives which are given to them according to performance. This represents an advantage as managers have to work harder to pay off debts, implement new strategies, reduce costs and make a better use of cash flow.