To what will foreign shareholders lead our economy? Back in 1989 Harvard Business School professor Michael Jensen in his article "The Eclipse of the Public Corporation" has announced that public companies with a large number of shareholders, which were created in the West throughout the twentieth century, nowadays impede the further development of the economy in many sectors.
The reason is simple: the shareholders' interests do not coincide with those of managers. For the first ones it is profitable to "pull" means out from a company, relying on short-term investments. And this policy affects the interest of those who are counting on a longer-term perspective - workers, managers, partners, customers, and even the people of those regions, where …show more content…
That will help to get rid of underperforming management teams. Also he believed that debt is good as well as leveraged buyouts. (Jensen, 1993 cited in Willman, 2004) And there are number of practical and theoretical issues. The practical one is that this approach justifies hostile takeovers, management buy-outs, downsizing, senior management stock options, breaking up of multi-divisional companies, reduction in head office staff, loss of corporate AAA credit ratings, and concentration of dispersed shareholdings through mutual funds and investment banks. All of these were features of the corporate landscape in the last two decades of the twenties century (Davis, 2009 cited in Willman, 2004).
Theoretical point relates to the efficient markets hypothesis. Markets know better than managers and they do so because the price of a stock contains all necessary information about future cash flows.
In his article “The Eclipse of the Public Corporation” (1989), Jensen consider LBO (Leveraged Buy-Out) as a form, by means of which expensive agency problem faced by public corporation will be solved. Such firm is financed almost entirely by debt that is issued by large institutional investors, who bind managers with rigid contractual obligations, and is not …show more content…
He argued that it would be more efficient, because here "the result is paid, managers and directors own significant part of the shares, contracts with owners and creditors exclude cross-subsidization within the organization as well as unnecessary expense." (Jensen, 1989) Advantages of a new structure seemed to Jensen to be obvious, and he predicted its fast distribution. However, quarter of the century later joint-stock companies are still the basis of the corporate
The reason is simple: the shareholders' interests do not coincide with those of managers. For the first ones it is profitable to "pull" means out from a company, relying on short-term investments. And this policy affects the interest of those who are counting on a longer-term perspective - workers, managers, partners, customers, and even the people of those regions, where …show more content…
That will help to get rid of underperforming management teams. Also he believed that debt is good as well as leveraged buyouts. (Jensen, 1993 cited in Willman, 2004) And there are number of practical and theoretical issues. The practical one is that this approach justifies hostile takeovers, management buy-outs, downsizing, senior management stock options, breaking up of multi-divisional companies, reduction in head office staff, loss of corporate AAA credit ratings, and concentration of dispersed shareholdings through mutual funds and investment banks. All of these were features of the corporate landscape in the last two decades of the twenties century (Davis, 2009 cited in Willman, 2004).
Theoretical point relates to the efficient markets hypothesis. Markets know better than managers and they do so because the price of a stock contains all necessary information about future cash flows.
In his article “The Eclipse of the Public Corporation” (1989), Jensen consider LBO (Leveraged Buy-Out) as a form, by means of which expensive agency problem faced by public corporation will be solved. Such firm is financed almost entirely by debt that is issued by large institutional investors, who bind managers with rigid contractual obligations, and is not …show more content…
He argued that it would be more efficient, because here "the result is paid, managers and directors own significant part of the shares, contracts with owners and creditors exclude cross-subsidization within the organization as well as unnecessary expense." (Jensen, 1989) Advantages of a new structure seemed to Jensen to be obvious, and he predicted its fast distribution. However, quarter of the century later joint-stock companies are still the basis of the corporate