跨国金融原理(第三版)教师手册M02_MOFF9242_03_IM_C.pdf
Chapter 2 Financial Goals and Corporate Governance 1.Ownership of the Business.How does ownership alter the goals and governance of a business?The return to a shareholder in a publicly traded firm combines current income in the form of dividends and capital gains from the appreciation of share price:2111PricePriceDividendShareholder returnPricePrice where the initial price,P1,is equivalent to the initial investment by the shareholder,and P2 is the price of the share at the end of period.The shareholder theoretically receives income from both components.For example,over the past 50 or 60 years in the U.S.marketplace,a diversified investor may have received a total average annual return of 14%,split roughly between dividends,2%,and capital gains,12%.Management generally believes it has the most direct influence over the first componentthe dividend yield.Management makes strategic and operational decisions which grow sales,generate profits,and then distributes those profits to ownership in the form of dividends.Capital gainsthe change in the share price as traded in the equity marketsis much more complex,and reflects many forces which are not in the direct control of management.Despite growing market share,profits,or any other traditional measure of business success,the market may not reward these actions directly with share price appreciation.A privately held firm has a much simpler shareholder return objective function:maximize current and sustainable income.The privately held firm does not have a share price(it does have a value,but this is not a definitive market-determined value in the way in which we believe markets work).It therefore simply focuses on generating current income,dividend income,to generate the returns to its ownership.If the privately held ownership is a family,the family may also place a great emphasis on the ability to sustain those earnings over time while maintaining a slower rate of growth which can be managed by the family itself.2.Separation of Ownership and Management.Why is this separation so critical to the understanding of how businesses are structured and led?The field of agency theory is the study of how shareholders can motivate management to accept the prescriptions of the shareholder wealth maximization(SWM)model.For example,liberal use of stock options should encourage management to think like shareholders.Whether these inducements succeed is open to debate.However,if management deviates too much from SWM objectives of working to maximize the returns to the shareholdersthe board of directors should replace them.In cases where the board is too weak or ingrown to take this action,the discipline of the equity markets could do it through a takeover.This discipline is made possible by the one-share-one-vote rule that exists in most Anglo-American markets.6 Moffett/Stonehill/Eiteman Fundamentals of Multinational Finance,Third Edition 3.Corporate Goals:Shareholder Wealth Maximization.Explain the assumptions and objectives of the shareholder wealth maximization model.The Anglo-American markets are characterized by a philosophy that a firms objective should be to maximize shareholder wealth.Anglo-American is defined to mean the United States,United Kingdom,Canada,Australia,and New Zealand.This theory assumes that the firm should strive to maximize the return to shareholdersthose individuals owning equity shares in the firm,as measured by the sum of capital gains and dividends,for a given level of risk.This in turn implies that management should always attempt to minimize the risk to shareholders for a given rate of return.4.Corporate Goals:Stakeholder Wealth Maximization.Explain the assumptions and objectives of the stakeholder wealth maximization model.Continental European and Japanese markets are characterized by a philosophy that all of a corporations stakeholders should be considered,and the objective should be to maximize corporate wealth.Thus a firm should treat shareholders on a par with other corporate stakeholders,such as management,labor,the local community,suppliers,creditors,and even the government.The goal is to earn as much as possible in the long run,but to retain enough to increase the corporate wealth for the benefit of all.This model has also been labeled the stakeholder capitalism model.5.Corporate Governance.Define the following terms:a.Corporate governance.Corporate governance is the control of the firm.It is a broad operation concerned with choosing the board of directors and with setting the long-run objectives of the firm.This means managing the relationship between various stakeholders in the context of determining and controlling the strategic direction and performance of the organization.Corporate governance is the process of ensuring that managers make decision in line with the stated objectives of the firm.Management of the firm concerns implementation of the stated objectives of the firm by professional managers employed by the firm.In theory managers are the employees of the shareholders,and can be hired or fired as the shareholders,acting through their elected board,may decide.Ownership of the firm is that group of individuals and institutions which own shares of stock and which elected the board of directors.b.The market for corporate control.The relationship among stakeholders used to determine and control the strategic direction and performance of an organization is termed corporate governance.The corporate governance of the organization is therefore the way in which order and process is established to ensure that decisions are made and interests are representedfor all stakeholdersproperly.c.Agency theory.In countries and cultures in which the ownership of the firm has continued to be an integral part of management,agency issues and failures have been less of a problem.In countries like the United States,in which ownership has become largely separated from management(and widely dispersed),aligning the goals of management and ownership is much more difficult.d.Stakeholder capitalism.The philosophy that all of a corporations stakeholders should be considered,and the objective should be to maximize corporate wealth.Thus a firm should treat shareholders on a par with other corporate stakeholders,such as management,labor,the local community,suppliers,creditors,and even the government.The goal is to earn as much as possible in the long run,but to retain enough to increase the corporate wealth for the benefit of all.This model has also been labeled the stakeholder capitalism model.Chapter 2 Financial Goals and Corporate Governance 7 6.Operational Goals.What should be the primary operational goal of a MNE?Financial goals differ from strategic goals in that the former focus on money and wealth(such as the present value of expected future cash flows).Strategic goals are more qualitativeoperating objectives such as growth rates and/or share-of-market goals.Tridents strategic goals are the setting of such objectives as degree of global scope and depth of operations.In what countries should the firm operate?What products should be made in each country?Should the firm integrate its international operations or have each foreign subsidiary operate more or less on its own?Should it manufacture abroad through wholly owned subsidiaries,through joint ventures,or through licensing other companies to make its products?Of course,successful implementation of these several strategic goals is undertaken as a means to benefit shareholders and/or other stakeholders.Tridents financial goals are to maximize shareholder wealth relative to a risk constraint and in consideration of the long-term life of the firm and the long-term wealth of shareholders.That is,wealth maximization does not mean short-term pushing up share prices so executives can execute their options before the company crashesa consideration that must be made in the light of the Enron scandals.7.Knowledge Assets.“Knowledge assets”are a firms intangible assets,the sources and uses of its intellectual talentits competitive advantage.What are some of the most important“knowledge assets”that create shareholder value?The definition of corporate wealth is much broader than just financial wealth.It includes the firms technical,market,and human resources.This means that a MNE that believes it must close a manufacturing facility in Stuttgart,Germany,and shift its operations to Penang,Malaysia,may not do so without considering the employment and other social impacts on the Stuttgart community.As one study put it,“Corporate wealth goes beyond the wealth measured by conventional financial reports to include the firms market position as well as the knowledge and skill of its employees in technology,manufacturing processes,marketing and administration of the enterprise.”8.Labor Unions.In Germany and Scandinavia,among others,labor unions have representation on boards of directors or supervisory boards.How might such union representation be viewed under the shareholder wealth maximization model compared to the corporate wealth maximization model?Labor union representation required by statute is an example of governmental direction toward the corporate wealth maximization(CWM)model,in that such a requirement is intended to make the board responsive to stakeholders other than owners.Under the CWM model,such a statute would be viewed favorably,while under the SWM model such a statute would be viewed as undue interference in the right of owners to manage the assets into which they alone have invested money.9.Interlocking Directorates.In an interlocking directorate,members of the board of directors of one firm also sit on the board of directors of other firms.How would interlocking directorates be viewed by the shareholder wealth maximization model compared to the corporate wealth maximization model?Interlocking directorates allow firms,via intertwined management and governance,to cooperate and/or collude.A simple answer along CWM or SWM lines is not so easy here.Many countries characterized by the CWM model,such as Germany and Japan,allow interlocking directorates so that“all stakeholders”will be represented.SWM countries,such as the United States,often prohibit interlocking directorates on the premise that they may stifle unfettered competition because decisions may be based on friendships,influence,or promises of reciprocity.8 Moffett/Stonehill/Eiteman Fundamentals of Multinational Finance,Third Edition 10.Leveraged Buyouts.A leveraged buyout is a financial strategy in which a group of investors gain voting control of a firm and then liquidate its assets in order to repay the loans used to purchase the firms shares.How would leveraged buyouts be viewed by the shareholder wealth maximization model compared to the corporate wealth maximization model?A leveraged buyout is perceived in a country that believes in CWM as generally irresponsible.The liquidation of assets,often at market prices that do not reflect the value of the activity to workers and their communities,is not consistent with the CWM philosophy.Those believing in SWM argue that if the selling shareholdersthe initial owners of the firmare paid a price for their shares that is higher than the market as a result of the leveraged buyout,the market forces which are so important for competition and growth are allowed to work.Additionally,the selling shareholders now have more capital to freely invest in other ventures,in turn creating more jobs and attendant benefits.11.High Leverage.How would a high degree of leverage(debt/assets)be viewed by the shareholder wealth maximization model compared to the corporate wealth maximization model?High leverage increases both the risk of corporate bankruptcy and the possibility of a greater rate of return for shareholders.The corporate wealth maximization model looks askance at higher leverage because any benefits will flow only to shareholders,while other stakeholders(such as labor)will bear the brunt of the risk should the company go bankrupt because of the fixed financial costs of disproportionately high debt.Under the shareholder wealth maximization model,the decision on the degree of leverage resides with the owners as represented by the board,and the trade-off between risk and return is presumably based on their risk-return preferences.Under modern financial theory,the risk-return attributes of a single company are meaningful only in the context of the contribution that the company makes to a diversified portfolio.12.Conglomerates.Conglomerates are firms that have diversified into unrelated fields.How would a policy of conglomeration be viewed by the shareholder wealth maximization model compared to the corporate wealth maximization model?Conglomerates created to achieve diversification are presumably looked upon more favorably in countries tied to the corporate wealth maximization model because the greater size of the conglomerate means the business entity in its entirety is larger;i.e.,has greater wealth and is possibly less vulnerable to competition or takeover by another firm.Worker jobs are safer.An offsetting argument is that firms in CWM countries with interlocking directorates can act as if they were conglomerates,even though structurally they are not.Under the shareholder wealth maximization model,conglomerates created to achieve diversification are formed only when the owners alone believe that synergies will come about because of the consolidation.Critics of conglomerates in SWM countries point out that shareholders can achieve unique diversification in their own portfolios without conglomerate diversification being“forced”upon them.Additionally,an argument is sometimes made that management skilled in one type of economic activity may be quite incapable in another type of activity,and that consequently conglomerates may perform less well overall than would a portfolio composed of the no-longer-existing separate constituent companies.13.Risk.How is risk defined in the shareholder wealth maximization model compared to the corporate wealth maximization model?Shareholder Wealth Maximization(SWM)firms usually consider risk as a constraint on seeking to maximize current earnings.In an operational context for managers,risk is usually taken to be the expected variability for earnings over a period of future years.In a more specific portfolio sense for investors(as distinct from managers),risk in SWM countries is the added systematic risk that the Chapter 2 Financial Goals and Corporate Governance 9 firms shares bring to a diversified portfolio.Unsystematic risk,the risk of the individual security,can be eliminated through portfolio diversification by the investors.Thus unsystematic risk is not a prime concern for management unless it increases the prospect of bankruptcy.Systematic risk,the risk of the market in general,cannot be eliminated.Corporate Wealth Maximization firms define risk in a much more qualitative sense.The term“pat
