Tag Archives: corporation

Corporate U.S. in Decline– Number of Corporations is Shrinking– Hits Lowest Level in 40 Years: Creative Destruction, or Crisis…

Corporate U.S. is shrinking– at least by one important measure: In five of six quarters to June 2016, across the S&P 500, share buy-backs and dividends exceeded retained earnings… From around 60% in 2009, the ratio of payouts and buy-backs to earnings grew inexorably, passing 100% at the beginning of 2015 and reaching a staggering 131% in the first quarter of 2016… According to Sir. Martin Sorrell; if you imagine the S&P 500 as one company, then that company ceased to grow at the start of 2015 and shrank by nearly a third in the first three months of 2016…

And, while the FTSE 100 may not have gone into reverse, a similar trend can be observed. The dividend-payout ratio has climbed from less than 40% in 2011, to over 70% in 2016… Unsurprisingly in this context, corporate investment as a proportion of GDP has continued to decline. Companies are choosing to return funds to shareholders rather than invest into operations… Yet there is no shortage of cash to invest. Companies are estimated to be sitting on more than $7 trillion of net cash worldwide– a form of corporate inertia that will continue into 2017 and beyond…

In the article U.S. Shrinking Corporate Sector by William McBride writes: The U.S. now struggles with corporate tax inversions, but this is only one of many ominous signs of a long-term decline in the U.S. corporate sector… According to a Tax Foundation Report; U.S. loses about 60,000 corporations per year and about 1 million corporations since the Tax Reform Act of 1986. IRS data shows that there were 1.6 million C-corporations in 2011. This is lowest number of traditional corporations since 1974 and 1 million fewer than there were at the peak in 1986…

In other words, in every year since 1986, roughly 40,000 U.S. corporations have disappeared from the tax rolls. And the losses have accelerated since 2006 to a rate of about 60,000 per year… Many have gone to the pass-through business sector, where profits are passed through to owners and taxed at individual tax rates that are often lower than the corporate tax rate and where there is no additional double-taxation for shareholders…

Pass-through business is subject to just one layer of tax– individual income tax; while C-corporations face double taxation due to corporate tax and shareholder taxes on dividends and capital gains… Pass-through business have grown dramatically since 1986, such that more than 90% of U.S. business are now pass-through entities. The Tax Reform Act of 1986 reduced statutory corporate tax rate and reduced the individual tax rate further, but ultimately raised taxes on corporations in other ways…

Additionally, the Act changed S-corporation and partnership rules to make them more attractive… And it appears that the Tax Reform Act of 1986 was the decisive factor that marked the start of the decline of U.S. C-corporations and beginning of an upward trend for pass-through business. S-corporations grew from 800,000 in 1986 to 4.2 million in 2011, and partnerships grew from 1.7 million to 3.3 million…

As a result, more than 60% of U.S. business profits are now taxed under the individual income tax code rather than the corporate tax code. This explains why the U.S. collects a relatively small amount of tax revenue from corporations despite having the developed world’s highest corporate tax rate… Key findings from the Tax Foundation’s Report are:

  • U.S. loses about 60,000 corporations per year and has lost about 1 million corporations since the Tax Reform Act of 1986…
  • Over time, more business have structured themselves as ‘pass-through’ entities. This allows profits to be passed through to owners and taxed at individual tax rates, which are often lower than corporate tax rate and eliminates double taxation…
  • More than 60% of U.S. business profits are now taxed under the individual income tax code rather than the corporate tax code, which explains why the U.S. collects a relatively small amount of tax revenue from corporations despite having the world’s highest corporate tax rate…
  • Outside of taxation, the traditional form of corporations often provides the most efficient business structure for large-scale projects and investments. Excessive corporate taxation and the subsequent decline of the corporate sector artificially limits this important aspect of the economy…
  • U.S. should do what the rest of the developed world has done; reduce corporate tax rate, integrate corporate and shareholder taxes to avoid double taxation, and limit corporate taxation to profits earned domestically…

In the article Risk-Aversion is Shrinking Corporate World by Sir Martin Sorrell writes: The past eight years have been an era of low inflation, low pricing power and low growth, with disruption coming from all directions– from tech startups to activist investors and zero-based budgeteers… At the same time, a great flock of geopolitical grey swans (known unknowns) clouds the horizon, draining confidence, e.g.; global rise of populism, ever-greater mistrust of institutions and corporations, intractable conflicts, i.e., migrant crisis, terrorism... In addition, slowing of major economies, potential fiscal-deficit issues, reversal of policy on quantitative easing, low-interest rates… all prey on the minds of business leaders…

This cocktail of pressures and uncertainty is not conducive to long-term strategic thinking… and the financial world’s obsession with quarterly results doesn’t help, e.g.; survey revealed that nearly 80% of executives admit that they would take actions to improve quarterly earnings at the expense of long-term value creation. Risk-aversion and short-termism is the rule in most corporate boardrooms, and although this attitude is understandable, it’s entirely wrong. Calculated risk-taking, in the form of investment, is the lifeblood of any business that wants to be successful in the long-term…

Indeed, some economists can imagine a future where even the most valuable companies will opt-out of public markets… According to Kathleen Kahle, Rene Stulz; not only is number of public corporations  in decline, there is growing inequality in economic wealth of those that remain, e.g.; in 2015, 35 corporations accounted for 50%  of all assets of public corporations and 30 accounted for 50% of all net income… While in 1975, numbers were 94 accounted for 50% and 109 accounted for 50%…

Another striking change: In 1980, institutional ownership of public corporations averaged 17.7%; today it’s over 50%. Also, average age of public corporations increased from 12.2 years in 1995, to 18.5 years 2016… This reflects an increasing unwillingness of companies to go public, and there are very good reasons, e.g.; capital investment is easily available, and companies feel no need to put up with the extra regulation and scrutiny that come with being publicly listed…

Overall there seems to be a loss in the sense of purpose for being a public company… According to Kahle and Stulz; public corporations appear to lack ambition, proper incentives, opportunities… They are returning capital to investors and hoarding cash rather than raising funds to invest more… Hence, shrinking numbers of public corporation is not just problem for business leaders but also one for world at large…

Corporate Board of Directors is a Vestigial Entity Structurally Unable to Achieve– Time to Rethink Corporate Governance…

Corporate governance in the modern public corporation has marginalized the ‘board of directors’ function in favor of powers exercised by the corporation’s investors, senior officers… Has board of directors outlived its purpose?

The ‘law’ of corporate governance places the board of directors at the top of the corporate decision-making structure; and the accountability for major corporate decisions rests primarily on the shoulders of these part-time directors who often lack the time, thorough knowledge… that’s necessary to perform the board’s duties effectively.

According to Kelli A. Alces; the time has come to envision a world beyond the board of directors… While the board structure may be the product of prior market choice; it’s the ‘law’ not the market that preserves the vestigial board of directors’ role at the top of the corporate hierarchy… Eliminating the board of directors would mark a fundamental shift in the understanding of corporate governance, but at the same time, it would realign the law of corporate governance with natural evolution that markets have already initiated.

In recent years there have been many discussions about ‘board of directors’ reform, including; function, composition, duties… with the main focus being the ‘monitoring’ role of the board. The argument is that better monitoring will facilitate the integrity of the fiduciary relationship between– directors, shareholders, other stakeholders… In an effort to improve the board’s effectiveness in its monitoring function, boards have been encouraged to have greater, in-depth director participation and greater independence…

The typical ‘director’ of largest multi-national corporations devote about 17 hours per month to governance of the corporation. This means that the responsibility for the success or failure of corporations lies with a group of people, i.e., board of directors, who work part-time to monitor the corporation’s business, management… and who receive almost all of their information, second-hand…

Certainly the board of directors monitors corporate officers, particularly the CEO, and makes significant business decisions for the corporation, but the board of directors relies heavily on senior corporate officers– who it’s supposed to monitor… also, often these directors lacks– the time, knowledge, expertise… to effectively challenge these senior officers in order to contribute valuable independent business judgment…

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According to a McKinsey & Co report, less than 50% of the 186 board members surveyed say their boards reacted effectively to the global economic turmoil. Many of the board of directors; did not know what to do, or how to do it, which has kept them from being proactive in helping their companies deal with the crisis… There are no cut and dried formulas and few black or white choices for boards to follow. In today’s pace of global business means boards have to respond quicker, and the luxury of time to mull it over or decide next quarter is no longer available.

So how can the CEO and Chairman guarantee that the board is fully functioning and effective? The selection of board members is one of the key routes to building effective boards and will always remain important. But selecting the most experienced players doesn’t mean the team will be effective… A board position is hard work and requires a serious commitment; but many see it as just a perk for elder statesman or as reward for family, friends, colleagues…

It’s a great status symbol. But, in order for board members to be effective and fulfill their fiduciary duties, they must be good corporate citizens having– relevant information and knowledge, relevant experience, relevant industry expertise, passionate about the product, employees, company… and proactively involved in corporate affairs… Board members cannot just be place-holders to fulfill diversity objectives…

In the article Rules for Corporate Governance Success in the Social Age by Barry Libert writes: It’s time for directors to think anew about the meaning of corporate governance in the social age. In addition to their existing roles, boards now have the added responsibility of shepherding their leaders and organizations into today’s digital world. Boards that avoid this obligation risk having their organizations fall prey to the speed and force of today’s social networks, as they seek corporate reform and accountability…

So how does a corporate director think anew about his or her role? Consider the following: Rethink Strategy: Boards need to align their strategy with where value is found today. In the industrial age, value was based on the amount of an organization’s physical assets and manufacturing capabilities. In the social age, value is a function of the size and vitality of an organization’s network and how well it is connected both inside and outside company…

Rethink People: As corporate directors, board members need to fully understand that an organization’s next big idea may come from anywhere and anyone. As such, corporate directors must engage their management team, employees… and act as the catalyst for leveraging the collective wisdom for innovation…

Rethink Process: Yesterday, companies focused on their internal processes to maximize execution and improve efficiency. That ‘inside-out’ focus worked in a supply constrained world in which customers had few choices. But today, consumers can buy from anyone and everyone, both online and off. As such, boards must engage management and shift their focus from ‘inside-out’ to ‘outside-in’ to drive growth…

Rethink Technology: Technology is not just about IT policies; it is also a strategic asset that can be leveraged for success. Boards must play a prodding, if not active, role in ensuring that management think anew about its technology strategy and how it can add value and minimize risks by actively integrating today’s social, mobile, cloud, and big-data technologies into everything it does…

Rethink Leadership: The concept of traditional, top-down management is quickly losing steam in a world in which everyone has a voice– including; customers, employees, partners, investors… Social technologies allow people to say and publicly share whatever they want about an organization, its leadership, culture… In the context of increasing demand for accountability, transparency and open approaches involving all stakeholders, corporate directors must think anew about their board composition and competencies…

Rethink Finance: Boards and leaders hold a number of historical and framing biases that make it a challenge for them to see and invest in today’s ‘intangible’ and unmeasured sources of value, such as; social network membership, intelligence… This is especially critical given that less than 25 years ago, physical and financial assets constituted about 80% of corporate market value. Today that amount is less than 20%. As such, leaders must think anew about their capital reallocation strategies, especially given research by McKinsey that indicates that most companies continue to invest in the same things that they invested in last year…

Rethink Governance: The future for boards is less about traditional governance and regulatory compliance, and more about network alignment, capital real location to new sources of value and technology, business model strategies… Looking backward through the lens of financial reporting will only go so far. Today, boards require social intelligence about the future desires and needs of stakeholders. Leveraging real-time data from social technologies and mobile networks offers a more complete view on what is coming next…

Bottom line: Boards must think anew about their role in the social and mobile world. For corporate directors, there is no time to waste. Directors must join the social and mobile ranks…

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In the article Rethinking Corporate Boards by M. Todd Henderson and Stephen M. Bainbridge write: Corporate boards have a daunting array of tasks, including hiring and firing the chief executive officer, setting the CEO’s compensation, monitoring the CEO’s decisions, ensuring compliance with laws, and above all, representing the interests of shareholders and other stakeholders…

Critics have long complained that boards are not up to the task… There are many reasons boards fail to police corporate management or make good decisions: Directors are part-timers with weak incentives and limited information. They also are generalists, meaning the average board is unlikely to have all the experts it needs at any given time. CEOs often pick directors based on unknown or non-relevant set of factors, and shareholders have no information about how board decisions are made or how individual directors perform…

Corporate governance experts have proposed many reforms, some of which ended up in the Sarbanes-Oxley Act and the Dodd-Frank Act. All the reforms share several unattractive features; ‘one-size-fits-all’ notwithstanding the huge differences across companies, industries… and many reforms rely on academics or other ‘experts’ who apparently know more about what is good for a particular companies than the management team themselves…

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So lessons learned: Corporate governance requires rethinking of its; roles, responsibility, structure, accountability… While the purpose and composition of the board have changed over time, the basic structure and institution of the board has remained constant. We currently expect the board of directors to perform two functions; monitor and manage. These functions are consistent with the notion that the board is responsible for managing or directing the management of the firm…

According to Kelli A. Alces; understanding the reality of corporate decision-making and developing a governance structure that openly acknowledges it is essential to providing more efficient, effective corporate management. Board structures should be tailors to the specific needs of a company. For a growing company in developing field faced with variety of strategic decisions or an inexperienced CEO, the board’s management role may become its primary focus. Therefore the role may require board members with developed expertise who have business relationships…

On other hand when a company is well established with dispersed body of shareholders, the monitoring function of the board may be more important relative to its management functions. Therefore, the board should be made up of sufficiently independent board members who are able to monitor company’s dealings and transactions…

According to Sir David Walker; the principal deficiency in boards is the way directors behave: They don’t challenge the executives enough– there must be a disciplined process of challenge on corporate policy, strategy, ethics. Independence of mind is more relevant than formal independence. Leadership skill of Chairman of the board is important, too; together with the ability to competently deal with major strategic issues…

According to Kelli A. Alces; the metamorphosis of corporate governance will not happen until the 19th century concept of the limited liability company is rethought and brought in line with the reality of business in the 21st century…

 

Rethink the Social Contract– Government, Corporation, People: Reforming the Ties-That-Bind or Just an Empty Concept…

Social Contract: Society is indeed a contract… between those who are living, those who are dead, and those who are to be born… by Edmund Burke (1792).

Social contracts play an important role in defining the reciprocal rights, obligations, and responsibilities between government, corporations, people… Social contract is a theory of social order that was popular in the seventeenth and eighteenth centuries, although the idea goes back to Plato…

Social contract theory is associated with modern moral and political theory and was given its first full exposition and defense by Thomas Hobbes. After Hobbes, John Locke and Jean-Jacques Rousseau are the best known proponents of this enormously influential theory, which has been one of the most dominant theories within moral and political theory throughout the history of the modern West…

Some experts says that a new framework is now needed to redefine the changing relationship between corporations and the other players in the social contract, for example: First, the purpose of corporations must be restated as more than just serving shareholder interests. Secondly, corporations must take a long-term view of wealth creation, rather than concentrating on short-term profits. Third, corporations must recognize the need to operate in partnerships with government and civil society…

According to Dr. JJ Irani; the future will belong to those corporations that build win-win partnerships with shareholders, employees and community groups… According to some experts; social contract is a fiction. It doesn’t exist in any manner whatsoever… there is no contract in the traditional sense… There is no consent either implied or expressed. No signatures, no consideration, nothing that would make it a valid contract in any court…

Yet, we all have grown up being fed this idea that we are obligated in some way to obey, no matter how much it infringes on our freedoms… Social contract or not, the fact is that not near enough people question the behavior of government and corporations… According to Allen White; it’s time to rewrite the social contract that has existed for centuries among– business, citizens, government. Yet, how to rewrite it?

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In the article Social Contract Theories in Business by Scott Thompson writes: The social contract is a concept in philosophy of ethics and political science that has more recently been applied to the study of business ethics. According to this theory, valid and universally applicable moral rules can be determined by asking what rules people would voluntarily make if there were no rules... For example, not everyone would agree on the best type of music or the best books, so these cannot legitimately be the subject of universal moral rules. However, everyone would agree to outlaw theft, fraud, murder… so these can be.

The social contract is an unwritten and strictly hypothetical agreement not to violate moral rules. All members of society are said to agree to this contract simply by participating in society… There are three mainstream theories of business ethics; stockholder theory, stakeholder theory, social contract theory: The stockholder theory holds that a company has no ethical obligations to society other than to earn the largest possible profit for its stockholders or owners within the limits of business ethics and the law.

The stakeholder theory holds that a company is morally obligated to all parties with a stake in the outcome of its activities, including; the employees, the community and the environment, as well as stockholders… Ethical decisions in business can be strongly affected by which theory of business ethics conforms to their decision-making process. For example, if a small business receives a buyout offer from a major company, stockholder theory would support whichever decision was most profitable to the owner; whereas, the stakeholder theory would require the owner to consider the impact of selling the company on the employees and community; and, the social contract theory would require the owner to consider the impact of the decision on society as a whole, not just those immediately affected…

Social contract theory is a controversial concept in the study of business ethics, because it’s tied in to broader political issues about which many people disagree… People who believe strongly in the laissez-faire model of capitalism usually argue that companies benefit society by creating wealth, providing services and employing people.

According to this view, companies can do most good-by concentrating on making profits rather than on difficult and subjective ethical concerns. People who believe in the concept of corporate social responsibility argue that companies receive substantial benefits from society and should reciprocate by acting in the common interest...

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In the article The Biggest Contract by Ian Davis writes: The great, long-running debate about business’s role in society is caught between two contrasting and tired ideological positions. On one side of the debate are those who argue that (i.e., to borrow Milton Friedman’s phrase) the business of business is business; on this view, social issues are peripheral to the challenges of corporate management. And, the sole legitimate purpose of business is to create shareholder value.

On the other side are the proponents of corporate social responsibility (CSR), a rapidly growing rather fuzzy movement encompassing both; companies that already claim to practice CSR, and skeptical campaign groups arguing they need to go further in mitigating their social impacts. As other regions of the world move towards the shareholder-value model, debate between these sides has increasingly taken on global significance; where both perspectives, in different ways, obscure the significance of social issues for business success.

They also caricature, unhelpfully, the contribution of business to social welfare. It’s time for CEOs of corporations to recast the debate and recapture intellectual and moral high ground from their critics. Corporations need to build social issues into their strategy in a way that reflects their actual business importance. They need to articulate corporation’s social contribution to society and define its ultimate purpose in a way that has more subtlety than Friedman’s business of business is business worldview and is less defensive than most current CSR approaches.

In this respect, it can help to view the relationship between government, corporations and society as an implicit social contract; you might say its Jean-Jacques Rousseau’s concept adapted for corporate world with obligations, opportunities, mutual advantage for both sides… More than two centuries ago, Rousseau’s social contract helped to seed the idea among political leaders that they must serve the public good, lest their own legitimacy be threatened. The CEOs of today’s corporations must take the opportunity to restate and reinforce their own social contracts in order to help secure, long-term, the invested resources of their shareholders…

In the article Pros-Cons of Social Contract to Business by Neil Kokemuller writes: The social contract approach to business refers to the strategy a company chooses when it accepts informal expectations from the public and makes social and environmental responsibility important to its business operations. Some companies take on this informal social contract as a point of business differentiation, while others do so to influence potential public scrutiny and backlash for noncompliance.

Meeting informal social responsibility guidelines gives corporations significant protection against possible legal and reputation risks that come with walking an ethical line in business. In the information age, consumer-environmental watch groups are calling attention to  corporations that either; stand out as social responsibility leaders, or fail to deliver on expectations. Failures to participate in your communities treat customers and employees fairly and preserve the environment can all attract negative attention…

More positive benefits of meeting social responsibility expectations from the public can include; stronger customer relationships and better long-term profit potential… Though detractors sometimes question the direct business benefits of social responsibility, one main purpose is to build deep relationships with customers and the community.

Over time, deep connection undoubtedly produces more sales and better profits: This is especially true for small business. Some customers in local markets make it a point to support the local businesses that set standard in meeting social responsibility contracts. However, meeting social contract expectations is expensive; for example, committing to better treatment of employees means that companies must invest in training to build a culture of tolerance and acceptance. It means that companies must give portions of their earned profits to charitable groups, organizations, community programs. On the environmental responsibility front, its expensive to manage recycling programs and to use environmental-friendly materials and business processes…

Another common argument against social responsibility in business is that it distracts companies from a core business pursuit of profits. Detractors suggest that each dollar and time spent focusing on social responsibility is time-money not on product research, development, marketing or other profit-generating activities… Ultimately, the question is balance; where is the balance between the corporations’ social and business obligations…

We are entering a new era of cooperation between businesses, government and citizenry, because the ability to address environmental and social problems is increasingly being seen as beyond the reach of any one of these players… According to Allen White; it’s time to rewrite the social contract that has existed for centuries among business, citizens, government… For more than two centuries, the social contract has undergone cycles of definition and redefinition. This has occurred not through formal acts of government, but through evolving norms and expectations of the purpose of business in society…

The tumultuous business environment of the last decade creates a sense of both urgency and opportunity to rethink the social contract. The rising tide of dialogue around business government, and society is symptomatic of the search to define the elements of a new contract responsive to the demands of the coming decades. Trends and vital signs of many of the world’s economic, environmental, and social communities are sending urgent message that wealth disparities, precipitous decline in the quality of ecosystems, and global healthcare are not being corrected at the rate at which they must to avoid a century of instability and strife among nations and cultures.

Neither business nor government nor civil society is capable, by itself, of reversing these perilous trends: The most promising initiatives are built on tri-sectoral partnerships. The conventional definitions of corporate and government purpose are unsuitable to meet the 21st century challenges. Confidence-trust in corporate and government leaders are disturbingly low because of widely held belief that core social values– democracy, stewardship, justice– are being undermined rather than fortified by contemporary corporate and government practices: For this reason, rethinking the social contract remains one of the most urgent imperatives of our time.

According to Thomas A. Kochan; determining where the boundaries are placed becomes an important part of the negotiation of new social contracts… 

According to Carl Ferenbach and Chris Pinney; create the new social contract between– corporations, government, people– that’s equal to the challenges of the global economy, and build a framework that promotes equal justice for all. As Marcus Aurelius said: That which is not good for the bee-hive, cannot be good for the bees

Mentors, Mentees, Mentoring, Mentorship in Business: Measure Impact, Value, Outcome– The Promise of Mentorship Matters…

Mentors and mentoring relationships can be powerful and life-changing: If you examine successful people they typically have one thing in common: A Mentor. Nearly every successful person in history had someone who they could confide in and learn from when times were tough… They leverage knowledge and experience– guide and focus attention on things that matter, shorten learning curve and speed success…

According to Catherine A. Hansman; perhaps the most acknowledged root of ideas and definitions surrounding the concept of mentors is the well-known story from Greek mythology: The original Mentor is a character in Homer’s epic poem The Odyssey. When Odysseus, King of Ithaca went to fight in the Trojan War, he entrusted the care of his kingdom to Mentor who served as teacher and overseer of Odysseuss’ son, Telemachus.

The concept of Mentor  has continued through the centuries and reflected in the many definitions of mentors and in the expectations of mentoring relationships. Just uttering the word mentor brings to mind images of supportive people in the past or present who have assisted us and continue to sustain us in our professional and personal lives… But, according to Patricia Cross; mentoring is a slippery concept indeed, a search through the mountains of literature and research concerning mentoring reveals differing definitions for the term. For example, Levinson et al. defined a mentor as teacher, advisor, or sponsor, leaving the term open to personal or professional connotation…

Others choose to define mentors as helping more with professional life describing mentors– as people with advanced experiences and knowledge that are willing to provide upward mobility and support to the protégé (i.e., mentees) career development. Others add the idea of nurturing to their definition of a mentor, e.g., professional guide who nurtures and promotes the learning and success of his or her mentee…

The differing definitions of mentors reflect various characteristics that seem to define informal and formal mentoring relationships. Informal mentoring are psychosocial mentoring relationships for enhancing mentees’ self-esteem and building confidence through interpersonal dynamics, emotional bonds, mutual common interests, and relationship building. Formal mentoring, in contrast, are generally organized and sponsored by workplaces or professional organizations; a formal process that matches mentors and mentees for the purpose of building careers…

Different techniques may be used by mentors according to the situation and the mindset of the mentee… According to Jim Kouzes and Barry Posner; mentors should look for ‘teachable moments’ in order to expand or realize the potentialities of the people in the organizations they lead, and they underline that personal credibility is an essential for quality mentoring…

However, despite some of the positive benefits that have been linked to mentoring, some research has found that mentoring can have negative consequences, for example; jealousy, over-dependence, and feelings of failure… However, mentoring does matter– especially in the workplace– with the recognizing that such relationships require vigilance to prevent potential abuses…

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In the article Business Mentoring: What It Is Why It Matters by Chris Wallace writes: While it can be challenging to always quantify whether a mentoring relationship is successful (e.g. how do you measure things like increased confidence?) some studies and statistics do exist and are encouraging. Many in the mentoring field often point to a study conducted in 2006: The study compared the career progress of 1000 employees over a 5-year period and the results showed that those who participated in a mentoring program experienced many more benefits than those who did not.

An article in Forbes that talks about the study noted; both mentors and mentees were approximately 20% more likely to get a raise than people who did not participate in the mentoring program and 25% of mentees and 28% of mentors received a raise versus only 5% of managers who were not mentors.

Mentoring can also help reduce employee turnover, as an article in the Harvard Business Review noted: One of the most critical elements in retaining great people is effective mentoring. By investing in mentoring, you empower senior-level employees (who serve as mentors) and bolster junior-level employees who typically welcome (and thrive from) the increased guidance, support, and insight that mentoring provides.

The keys to a successful mentoring program include; oversight, training and guidance, and embracing of a mentoring spirit throughout the organization. A company that invests in its people often ends up having happier, more loyal and more productive employees as a result, which can only help a company’s bottom line…

Various mentoring models exist. Formal one-to-one programs match a mentor and mentee, while group mentoring involves having one mentor for a small group of mentees. Self-directed mentoring is an informal mentoring model where a gung-ho mentee who understands the benefits of mentoring goes out and finds a mentor on his or her own (either within or outside of the company). As business landscape changes, other mentoring models form to adapt to these changes.

Reverse mentoring is one such model that’s growing in popularity, especially with millennial… An article in The Wall Street Journal noted; in an effort to school senior executives in technology, social media and the latest workplace trends, many businesses are pairing upper management with younger employees in a practice known as reverse mentoring…

In the article Business Mentoring by Mike Morrison writes: According to a Chartered Institute of Personnel and Development (CIPD) Survey; 87% of businesses in the UK utilize mentoring; mentoring in a business sense is a vehicle for self-development. Having a formal relationship with a respected senior within an industry or organization is valuable to both the mentee and mentor; it’s an effective people development strategy and one that can support succession plans…

Mentoring is in essence the sharing of experience and learning from one person to another… It’s interesting to observe that often in education, mentoring is used for those that are under performing whilst in business, mentoring is used for those with potential– the high fliers in organizations and support of people starting their own business.

There are in essence two basic approaches to mentoring and they can be portrayed as– American and European methods or sponsoring (informal) and developmental (formal), respectively. In the informal process, it tends to occur naturally and involves individual choice like sponsoring… Whereas, the formal is structured with a formal facilitated process that can be managed and monitored…

The informal approach is more associated with the roots of mentoring, and emphasizes the need of a more senior experienced and wiser person, the mentor, to pass down their skills, knowledge and experience to a younger individual appropriately named as a protégé rather than a mentee.

The relationship between mentor and mentee is naturally developed often by choice of how and whom the mentor wishes to take under their wing. The pace of the relationship is controlled by the mentor and consists of a more authoritarian and influential approach…

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In the article Mentors Make a Business Better by Emily Keller writes: It’s never too late to have a mentor. If there’s an area in your career or personal life you want to improve, don’t think it’s too late. For workers who are seeking to change direction in their industry, climb to the next level or adjust to a merger or structural change at their company, management experts say finding a mentor could be their best transitional tool.

Successful mentorship can be in any number of forms: online or in-person, formal or informal, temporary or long-term, or between individuals or in groups: What experts say are the essentials– direction, dedication, and openness… To be sure that your time as a mentee is fruitful, experts recommend setting specific goals at the outset and revisiting them along the way, as well as looking for a mentor who has traveled the career path you seek and has the skills you need, instead of seeking out a mentor whom you like for personal reasons.

According to Lois Zachary; people put too much weight on personal chemistry-likeability, but they are not a prerequisite for learning. So what makes a good mentor? Ask the right questions are the key but receiving all the answers is not always expected. Your mentors shouldn’t tell you what your goals are; they should just ask you what your goals are… The benefits are far-reaching: In addition to improving managerial skills, company mentorship programs may also aid in recruitment: More and more people are attracted to organizations that help them grow and learn…

For the whole purpose of talent attraction and talent retention today, mentoring is a vital part… Yet mentors and mentees must be dedicated to skill-building for the relationships to work. Mentees should avoid seeking relationships for political or nebulous reasons, like trying to get a promotion and mentors should avoid making promises they can’t keep...

Research confirms what we already know– anecdotally or intuitively– mentoring works… To be successful in life it’s very important to have a mentor, a coach, someone with more experience than you, someone who is in a position in life that you desire to be in future. Most people underestimate the value of a mentor: A mentor offers valuable insight to things that only experience can teach… A good mentor will motivate you with a simple statement that affirms that you are on the right track, even when things do not seem to be going well… A mentor will help you prevent mistakes that you otherwise would have no way of avoiding… There are only two ways to gain wisdom in life; making your own mistakes or learning from others mistakes

According to Elizabeth Alleman and Diana Clarke; the first step in developing a business mentoring program is to answer three questions: 1) What business issues are you trying to address (e.g., turnover, recruitment cost, productivity or some other problem)? 2) Why is addressing this issue important? Companies address issues that have a financial impact or affect the quality of the products and/or services.

3) How will the organization be different as a result of the program? When business issues involving the effectiveness of employees have been identified, the next two questions arise: 4) Who do you want to change or develop? (i.e., who will be the mentee? and 5) How will those people be different? Answering these questions establishes program objectives. These objectives must be specific, measurable, and realistic and they must have an appropriate time frame…

While the intangibles benefits of such programs are often the most important outcomes; it’s also very desirable, if possible, to simply convert one of the intangibles into a significant tangible benefit; e.g., personal productivity into a monetary value which shows an ROI for the program.

This type of quantifiable result allows the proponents of the program to speak in the language of business and possibly influence upper management on the value of the program… We live in constantly changing world and mentoring programs are increasingly important in the workplace; but perhaps its greatest benefit is as a way to offer some kind of security in insecure times…

Leverage– Business Valuation– Know It, Understand It, Apply It: It’s a Pre-Requisite for Intelligent Decision-Making…

Business Valuation: Most business people know the value of their home, automobile… but have no idea on the value of their business.

Most business management rely on simple formulas or multipliers that do not take into consideration many business variables, such as– industry trends, technology, revenues, profitability, receivables, equipment and much more… But, quite simply, business valuation is a process and a set of procedures used to determine what a business is ‘worth’– it’s a measure of the worth of the business…

The premise of business valuation is that– we can make reasonable estimates of value and determine the worth of all types of assets, even intangibles… Some assets are easier to value than others and the details of the valuation varies from asset to asset; similarly the uncertainty associated with each value estimate is different for different assets, but the core principle remains the same…

There are those who are disingenuous enough to argue that value is in the eyes of the beholder, and that any price can be justified if there are other people willing to pay the price. That is patently absurd: Perceptions may be all that matter when the asset is a painting, sculpture… but we do not and should not buy most assets for aesthetic or emotional reasons; we buy business-financial assets for the cash flows we expect to receive from them.

Consequently, perceptions of value must be backed up by reality, which implies that the price paid for any asset should reflect the cash flow it’s expected to generate– various valuation models attempt to relate value and levels of uncertainty about the expected growth in cash flow. There are two extreme views of the valuation process: At one end are those who believe that valuation, done right, is a hard science, where there is little room for analyst views or human error.

At the other end are those who feel that valuation is more of an art, where savvy analysts can manipulate numbers to generate whatever result they want; but in reality, the truth lies somewhere in the middle…

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Business Valuation Methods: Business Valuation has become an intrinsic part of the corporate landscape. The corporate landscape has witnessed dynamic changes in recent years as– mergers and acquisitions, corporate restructurings, and share repurchases are happening in record numbers, both in the U. S. and abroad. At the core of the dynamics of all these activities stands some notion of business valuation.

The valuation methods are not only necessary for accounting purposes, but they also serve as roadmaps for– capital investors, venture capitalists, corporate acquirers… in order to know an estimated value of a company’s assets… Four standard business valuation approaches are:

  • Asset accumulation: This approach is based on the premise that it’s generally possible to liquidate the property, plant and equipment (PP&E)… assets of a company and after paying off the company’s liabilities the net proceeds would accrue to the equity of the company. Valuation of assets based on liquidity does not yield better results, if the fair market value of assets is in excess of the value of its assets on a liquidated basis.
  • Discounted cash flow method: This valuation method based on cash flow is  considered a strong tool because it concentrates on cash generation potential of a business. This valuation method uses the future cash flow of the company discounted by the firm’s weighted average cost-of-capital, plus a risk factor measured by Beta (measure of volatility or systematic risk); since risks are not always easy to determine precisely…
  • Market Value: This valuation method is applicable for public companies only. The market value is determined by multiplying the share price of the company by the number of issued shares. This valuation reflects the price that the market, at a point in time, is prepared to pay for all shares, and that determines the value of the company…
  • Price Earnings Multiple Valuation: The price-earnings ratio (P/E) is simply the price of a company’s share of common stock in the public market divided by its earnings-per-share. By multiplying this P/E multiple by the net income, the value for the business could be determined…

In the article Myths in Valuation by Aswath Damodaran writes: Myth–Valuation is a science that yields precise answers…

Reality 1: Valuations are always biased…

  • Truth 1.1: All valuations are biased. The only questions are how much and in which direction.
  • Truth 1.2: The direction and magnitude of the bias in valuation is directly proportional to who pays you and how much you are paid.

Reality 2: Equity valuations are always imprecise, but they are most valuable when they are most imprecise.

  • Truth 2.1: There are no precise valuations.
  • Truth 2.2: The payoff to valuation is greatest when valuation is least precise.

Reality 3: Complex valuations do not yield better estimates of value.

  • Truth 3.1: One’s understanding of a valuation model is inversely proportional to the number of inputs required for the model.
  • Truth 3.2: Simpler valuation models do much better than complex ones.

In the article Business Valuation: Three Approaches by ValuAdder writes: Quite simply, business valuation is a process, and a set of procedures used to determine what a business is worth. While this sounds easy enough, getting your business valuation done right takes preparation and thought.

Business valuation results depend on assumptions: For one thing, there is no one way to establish what a business is worth. That’s because business value means different things to different people… For example; business management may believe that the business connection to the community it serves is worth a lot, and an investor may think that the business value is entirely defined by its historic income… Traditionally, there are three fundamental ways to  measure what a business is worth:

  • Asset approach: The asset approach views the business as a set of assets and liabilities that are used as building blocks to construct the picture of business value. The asset approach is based on the so-called economic principle of substitution which addresses this question: What will it cost to create another business like this one that will produce the same economic benefits for its owners?
  • Market approach: The market approach, as the name implies, relies on signs from the  actual market place to determine what a business is worth. Here, the so-called economic principle of competition applies: What are other businesses worth that is similar to your business?
  • Income approach: The income approach takes a look at the core reason for running a business– making money. Here the so-called economic principle of expectation applies: If I invest time, money and effort into the business; what are the economic benefits and when will they be available?

In the article Valuation Myths by Lewis Schiff writes: Since valuation is part science and part art, it’s very easy to fall into misconceptions of the business valuation process… Two valuation experts recently identified common myths that could lead to poor management of intangible assets, and could also cause confusion:

  • Myth 1: Valuation is a well-defined and well-understood term.
  • Myth 2: Valuation of intangible asset is equal to price someone is willing to pay.
  • Myth 3: Valuation is equal to the cost of creating an item.
  • Myth 4: Each intangible should have only one official value.
  • Myth 5: Balance sheet provides good information about the value of intangibles.
  • Myth 6: Fair market value is a good construct for use with intangibles valuation.
  • Myth 7: There should be only one accepted method for valuing intangibles.
  • Myth 8: Current estimate of the future price must equal the eventual transaction price, in order to be considered accurate.
  • Myth 9: Patents cannot be valued credibly because each one is unique.
  • Myth 10: Value of company’s intangibles is the difference between its market value and the value of its tangible assets.

Determining the value of a business is a complicated and intricate process. Even valuation experts have referred to it as more of an art than a science. Valuing a business requires the determination of its future earnings potential, the risks inherent in those future earnings, an analysis of its mix of physical and intangible assets, and the general economic and industry conditions…

A business valuation is not just for a businesses preparing for a sale: In fact, there are numerous business and legal situations that require a detailed valuation. First, a detailed valuation is needed when a seller is considering merger, sale, acquisition, or shareholder wishes to buy-out other shareholders… Second, government or judicial authorities often require a business valuation for legal matters such as; shareholder disputes, divorce proceedings, eminent domain takings; employee stock ownership plans (ESOPs), S-corporation election, or breach of contract disputes… Third, taxable events, such as; estate and gift planning or charitable giving also necessitate a valuation…

Finally, a detailed valuation can help identify what’s needed– to increase the value of the business, attract new capital, project potential proceeds from an initial public offering (IPO)… With this many potential situations requiring a business valuation, it’s important to have an up-to-date estimate of the value of business. However, unlike fine wine, valuations do not age well. Sales can go up-or-down, demand for products and services can go up-or-down, the economy can go up-or-down: The state of a business can change pretty quickly… and a valuation becomes out of date, quickly– perhaps even by the time it’s done…

But, a valuation can be very useful when there is a specific reason for it, and a time frame within which to use it… Learn to understand the principles of valuation and what a valuation is trying to achieve, and then harness what the valuation provides to– identify strengths, weaknesses, opportunities, and threats in the business…

Changing Nature of Leadership– Irrefutable Laws of Leadership: Shifting Perspectives on Leadership…

Leadership: What is it? What an obvious question! It may be interesting to note; that there is absolutely no consensus, among the experts, on the definition of ‘leadership’– despite how much it has been studied and written about.

According to Warren Bennis, in his book ‘Leaders (1997)’ writes; academic analysis has given us more than 850 definitions of leadership. I think it’s fair to say that defining leadership will be studied and debated for a long time to come, and it’s likely that we will never all agree on the ‘best’ definition…

However, most attempts to define leadership emphasize different aspects of leadership or leadership characteristics or reflect the originator’s leadership values. For example, dictionaries write; leadership is the ability to lead…

Wikipedia writes; leadership is a process of social influence in which one person can enlist the aid and support of others in the accomplishment of a common task…

According to Akhil Shahani; leadership is the process by which a person influences others to accomplish an objective… All these and many other definitions are interesting because they contain two essential elements of leadership, i.e.; the ‘people elements’ and the ‘task elements’ (related to objectives), and every successful leader must work with both of these elements.

Also, most leadership definitions involve a ‘common task’ or ‘objective’ that suggest the end goal is already known, and clearly defined… However, in reality, leadership doesn’t always have the luxury of such clarity… Some experts think of leaders as providing direction (‘dream’ or ‘vision’), which may then be crystallized into common goals and objectives...

According to Peter Maxwell; leadership is influence– nothing more, nothing less… Then, Thomas Carlyle talks about; the ‘great man’ theory of leadership, which is based on the belief that leaders are born and not made… but Herbert Spencer countered the ‘great man’ theory of leadership and says; leaders are result of the society in which they live… Then, according to Peter G. Northous; leadership is a process whereby an individual influences a group of individuals to achieve a common goal… which may be the best definition of the lot…

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In the article What Is A Leader by F. John Reh writes: A leader is a person who has vision, drive and commitment to achieve that vision, and the skills to make it happen. Leaders ‘dream’ dreams. They refuse to let anyone or anything get in the way of achieving those dreams.

They are realistic, but unrelenting. They are polite, but insistent. The constantly and consistently drive forward toward their goal. You can be a leader– and you will be– when the cause matters enough to you… the ‘Bass Theory’ of leadership states; there are three basic ways to explain how people become leaders:

  • Some personality traits may lead people naturally into leadership roles. This is the ‘Trait Theory’.
  • A crisis or important event may cause a person to rise to the occasion, which brings out extraordinary leadership qualities in an ordinary person. This is the ‘Great Events Theory’.
  • People can choose to become leaders. People can learn leadership skills. This is the ‘Transformational or Process Leadership Theory’. It’s the most widely accepted theory today…

In the article The 21 Irrefutable Laws of Leadership–John Maxwell by Phil Campbell writes: Although most people are not born leaders, we all have the capacity to improve our leadership abilities. If we continually invest in our leadership development, letting our ‘assets’ compound, the inevitable result is growth over time. Maxwell is a champion of continual growth and his ‘21 Irrefutable Laws of

Leadership’ is collection of what he identified as absolute qualities of effective leadership. By breaking down the individual qualities (laws), Maxwell encourages readers to assess their own leadership strengths and weaknesses. Here is a brief overview of John Maxwell’s ‘Irrefutable Laws of Leadership’ and how they can help you become a more effective and influential leader.

  1. Law of the Lid: Leadership is like a ‘lid’ or a ceiling on an organisation– it will not rise beyond the level your leadership allows. That’s why when a corporation or team needs to be fixed, they fire the leader.
  2. Law of Influence: Leadership is simply about influencing people. Nothing more, nothing less. The true test of a leader is to ask him to create positive change in an organisation. If you cannot create change, you cannot lead. Being a leader is not about being first, or being an entrepreneur, or being the most knowledgeable, or being a manager. Being a leader is not just holding a leadership position. (It’s not the position that makes a leader, but the leader who makes a position.) The very essence of all power to influence lies in getting the other person to participate. (He who thinks he leads but has no followers is only taking a walk.)
  3. Law of Process: Leadership is learned over time. And, it can be learned. People skills, emotional strength, vision, momentum, and timing are all areas that can and should be learned. Leaders are always learners.
  4. Law of Navigation: Anyone can steer the ship, but it takes a leader to chart the course. Vision is defined as the ability to see the whole trip before leaving the dock. A leader will also see obstacles before others do. A leader sees more, sees farther, and sees before others. A navigator (leader) listens – he finds out about grassroots level reactions. Navigators balance optimism with realism. Preparation is the key to good navigation. It’s not the size of the project, it’s the size of the leader that counts.
  5. Law of E.F. Hutton: Hutton was America’s most influential stock market analyst. When he spoke, everyone listened. When ‘real’ leaders speak, people automatically listen. Conversely, you can identify the real leaders by looking for those who people listen to… Factors involved in being accepted as a new real leader include character, building key relationships, information, intuition, experience, past success and ability.
  6. Law of Solid Ground: Trust is the foundation for all effective leadership. When it comes to leadership, there are no shortcuts. Building trust requires competence, connection and character.
  7. Law of Respect: People naturally follow people stronger than themselves. Even natural leaders tend to fall in behind those who they sense have a higher ‘leadership quotient’ than themselves.
  8. Law of Intuition: Leaders evaluate everything with leadership bias. Leaders see trends, resources and problems, and can read people.
  9. Law of Magnetism: Leaders attract people like themselves. Who you are is who you attract. (Mmm… I thought ‘like poles’ were meant to repel!) Handy hint: ‘Staff’ your weaknesses. If you only attract followers, your organisation will be weak. Work to attract leaders rather than followers, if you want to build a truly strong organisation.
  10. Law of Connection: You must touch the heart before you ask people to follow. Communicate on the level of emotion first to make a personal connection.
  11. Law of the Inner Circle: A leader’s potential is determined by those closest to him. The leader finds greatness in the group, and helps the members find it in themselves.
  12. Law of Empowerment: Only secure leaders give power to others. Mark Twain said; great things can happen when you don’t care who gets the credit. Another point to ponder… Great leaders gain authority by giving it away.
  13. Law of Reproduction: It takes a leader to raise up a leader. Followers can’t do it, and neither can institutional programs– It takes one to know one, to show one, to grow one. The potential of an organisation depends on the growth of its leadership.
  14. Law of Buy-In: People buy-in to the leader first, then the vision. If they don’t like the leader but like the vision, they get a new leader. If they don’t like the leader or the vision, they get a new leader. If they don’t like the vision but like the leader, they get a new vision.
  15. Law of Victory: Leaders find a way for the team to win. You can’t win ‘without’ good athletes, but you ‘can’ lose with them. Unity of vision, diversity of skills plus a leader is needed for a win.
  16. Law of Momentum: You can’t steer a ship that isn’t moving forward. It takes a leader to create forward motion.
  17. Law of Priorities: Activity is not necessarily accomplishment. We need to learn the difference. A leader is the one who climbs the tallest tree, surveys the entire situation, and yells ‘wrong jungle’! If you are a leader, you must learn the three ‘Rs’;  a.) What’s Required?  b.) What gives the greatest Return? c.) What brings the greatest Reward?
  18. Law of Sacrifice: A leader must give-up to go-up. Successful leaders must maintain an attitude of sacrifice to turn around an organisation. One sacrifice seldom brings success. When you become a leader, you lose the right to think about yourself.
  19. Law of Timing: When to lead is as important as what to do and where to go. Only the right action at the right time will bring success.
  20. Law of Explosive Growth: To add growth, lead followers. To multiply growth, lead leaders. It’s my job to build the people who are going to build the company.
  21. Law of Legacy: A leader’s lasting value is measured by succession. Leadership is the one thing you can’t delegate. You either exercise it – or abdicate it.

Leadership is not just a title; it’s not just a few moments of standing in front of the crowd. Leadership is the iceberg deep below the water. It can be cold and lonely at times, and it’s often mislabeled, mistaken, and overlooked until after the fact. Great leaders don’t have to carry big titles or have letters after their name. Great leaders have the depth of character and willingness to do what’s necessary before and after everyone is watching…

According to Gabe; don’t ever underestimate the power of your personal influence on a team. You might not consider yourself a leader, but the fact is that we all lead in one way or another. We either lead poorly or effectively: The choice is ours.  Leadership will always be the difference maker for your ideas, for your business…

According to John Maxwell; everything rises and falls on leadership, but knowing how to lead is only half the battle. Understanding leadership and actually leading are two different activities… the key to transforming yourself from someone who understands leadership to a person who successfully leads in the real world is ‘character’. Your character qualities activate and empower your leadership ability, or they can stand in the way of your success! Several key attributes to being a good leader, include:

  • Charisma: First Impression Can Seal the Deal.
  • Courage: One Person With Courage Is a Majority.
  • Problem Solving: You Can’t Let Your Problems Be a Problem.
  • Teach-ability: To Keep Leading, Keep Learning.
  • Vision: You can Seize Only What You Can See.

Tax Loopholes– Corporation, Business, Special Interest..: Red Herring– Shifting Burden, Avoiding, Dodging– Political Reality…

The precise point at which tax deductions become– tax loopholes or tax incentives become– subsidies for special interests is one great mystery of politics. ~John Sununu

U.S. corporations, businesses– like many U.S. citizens– exploit every available rule in the tax code to minimize taxes they pay: These are tax deductions, incentives or loopholes… also known as tax expenditures, in the arcane lexicon of budget experts. Tax expenditures have grown significantly since early 1990s, which is a consequence of increasing demand for government programs coupled with resistance to raising taxes. Last year they added up to more than 7% of the nation’s economic output; sizable figure considering that all federal taxes took some 15% of the economy.

The term loophole is derived from loupe which refers to a narrow opening in a wall. This slit-like window or loophole was located in medieval castles, and used to deflect incoming projectiles… According to Eric Epstein; modern-day corporation, business and many other groups exploit loopholes to deflect tax burden. Tax loopholes are provisions in tax law that removes income or assets from taxable situations into ones with either lower taxes or no taxes at all without directly violating law.

According to Eric Toder and Donald Marron; spending-like exclusions or loopholes increases size of the federal government by about 4% of gross domestic product; that’s about $600 billion in hidden spending through tax code, last year alone.

According to Eduardo Porter; just because some tax breaks are inefficient and misdirected does not necessarily mean that the goals they serve are unworthy… it only means there may be more effective ways to achieve government objectives. Utilizing loopholes isn’t breaking law, but circumventing it in a way that was not intended by regulators or legislators that put the law or restriction into place.

However with the fiscal crisis, it’s important to begin an open debate about the purpose, efficacy, and cost of many tax loopholes… But, that is not the same as simply looking for loopholes to close: It’s a debate about purpose of government and how best to achieve its goals…

In the article Big Corporations Use Loopholes by Jia Lynn Yang writes: Many large U.S. companies pay no federal taxes– or even make money through credits and refunds from the government by using an array of tax loopholes and tax breaks… A report by ‘Citizens for Tax Justice and Institute on Taxation and Economic Policy’; examined finances of 280 corporations from 2008 through 2010 and found; 30 paid zero taxes or used loopholes to wind up with negative tax rates. Under the federal tax code, corporations are supposed to pay 35% of their profits in taxes.

But the study found many of the companies used legal tax breaks that allowed them to pay lower rates than ordinary Americans. Powerful business lobby groups, such as; ‘Business Roundtable’, have said they want lawmakers to lower the overall 35% tax rate in exchange for closing some loopholes. Lobbyists frequently cite this rate when arguing that U.S. firms pay more than foreign competitors. Some corporations pushed back at the report, saying it relied on fuzzy accounting.

The report said that 71 of the companies paid effective rate of more than 30% over the three years. But roughly equal number paid less than 10%. The range between industries is wide: Retail and health-care companies, in particular, tend to pay more taxes. These firms usually have less intellectual property that can be shifted overseas to take advantage of other countries’ lower tax rates. The report found they paid an effective rate of 30% over the three years. By contrast, tech companies and manufacturers paid far less…

In the article What You Can Do About Corporate Loopholes by Robert Broens writes: While the official U.S. statutory corporate income tax rate stands at 35% the Government Accountability Office (GAO) estimates effective tax rate is 25.2%. This 10 points difference makes U.S. tax rate competitive with other developed nations. The U.S. Congressional Budget Office (CBO) estimates that U.S. corporate tax receipts for 2011 came in at $181 billion. Using the 25% effective tax rate estimate from the GAO this means U.S. taxpayers are missing out on an annual $71 billion in tax receipts.

There are many loopholes for corporations and cost estimates for the tax payer that fluctuate wildly. The following is just a small overview of the most important and bizarre loopholes: One of the most important loopholes is the deferral of income from foreign controlled corporations. U.S. corporations can leave profits abroad and can defy paying U.S. taxes until they transfer those profits back into the U.S. (repatriation). ‘Credit Rating Agency Moody’s’ estimates corporations hold some $1.2 trillion in cash balances– and stored some $700 billion overseas.

Other loopholes include: Companies can deduct punitive damages (or settlements) from their income; flexible ways of accounting (mostly LIFO inventory system); modified accelerated depreciation schemes (corporate jets can be depreciated faster than commercial airline)… Estimates are 83 out of the top 100 U.S. firms have shell companies in offshore locations with the sole purpose of tax evasion…

On average the 280 companies investigated, in the report of ‘Citizens for Tax Justice’, paid an effective tax rate of 18.5%, or $251 billion in corporate taxes on their reported profits of $1.35 trillion for the three-year period of 2008-2010. When, they should have paid almost double that amount. In 2011 U.S. Federal income tax receipts totaled some $181 billion according to the CBO. The 280 companies, in the report of ‘Citizens for Tax Justice’, paid $85 billion in corporate taxes in 2010 on nearly $488 billion in earnings, for an effective tax rate of 17.5%, half of what they should have paid.

Just this sample of 280 companies should have paid around $170 billion in taxes– somewhere they found $85 billion in loopholes. While there are valid arguments that a tax rate of 35% is very high, their effective tax rate is 17.5%, which implies that small and medium businesses pay a much higher tax rate as their effective tax rate is estimated at 25.2%. Some of the reasoning is that these companies do not have access to expensive consultants, accountants or foreign shell companies…

This is crucial as economists agree that small and medium businesses are critical for getting employment growing again. This distorted tax code creates competitive advantages for the largest corporations and impacts the market place in a severe manner. Clearly, there is room for tax reform…

In the article Corporate Tax Giveaways–Outcry–Profit! by Suzy Khimm writes: Pundits on both left and right were outraged when they realized a whole flotilla of corporate tax giveaways were buried in the fiscal cliff deal; ranging from a tax break for race-car track owners to electric-scooter makers…

According to Matt Stoller; surely a modest hike in income taxes for people who make more than $400k in income would be worth trading-off for the few hundred billion dollars in corporate pork. This is what the fiscal cliff is about – who gets the money…

According to Tim Carney; tax breaks that came out of Senate legislationattracts lobbyists like a raw steak attracts wolves... But the animus against the narrowly targeted tax breaks, known as ‘tax extenders’, could actually help corporations in their effort to land a much bigger prize, than temporary giveaways, i.e., comprehensive corporate tax reform. Neither party, actually, likes the current tax system for corporations, which is riddled with too many loopholes and complexities, and both agree that it should be simplified by eliminating many tax loopholes…

At the same, both parties have promised that such reform would also be accompanied by significant cuts to the corporate tax rate… Republicans want to lower tax rate to 25% and White House says 28%. A comprehensive overhaul would also deal with overseas earnings, paving way for corporations to make the case for transition to territorial tax system that would eliminate taxes on foreign income– holy grail– for multinationals. Both Republicans and Democrats seem to agree that the package should be ‘revenue-neutral’— i.e., overall tax burden on corporations would be the same, just enacted through a tax code that would be simpler and more efficient….

Closing corporate tax loopholes, for sure, sounds good… So good, in fact, that politicians talk about it all the time. According to some experts; loopholes are gaps in tax law that corporations exploit against law’s intent, while others say; that is not the case...

According to Eric Toder; most tax proposals are not loopholes, but incentives… According to David Barrett, CPA; tax professionals work within the tax code to find the best options for their clients to pay least amount of taxes that are legally required. As for tax code, it’s more than 4,000 pages and ever-changing; it’s incomprehensible to the average taxpayer, and so complex that it’s accompanied by 10,000-page document to decipher it… all of that contributes to some of the so-called loopholes.

According to Lougen Valenti; the concept of loopholes is somewhat of a myth– much of this talk is politically driven. What we do for clients is tax planning and giving business advice, not tax loopholes. We help clients plan and use the law to advantage, and contrary to the idea that wealthy clients are simply beating the tax person. Proper tax planning frees up funds for investment, for example; expanding business, hiring employees, investing in product development.

A common  misconception is tax-saving opportunities are only available to the wealthiest… there are countless small businesses that are able to thrive because of tax-saving options available to them. Also, there are plenty of deductions for individual taxpayers, in the middle class, as well. Even though there is little agreement on the level and scope of taxation in U.S.; nearly all participants in the tax debates agree that the system needs fundamental reform–making the system fair, more understandable, easier to navigate…

However, one thing remains clear; the kind of corporate tax reform that both political parties are proposing is ‘revenue-neutral’, i.e., off-setting tax rate by closing loopholes and expenditures; but, that isn’t going to reduce the deficit…

According to Scott Rasmussen, pollsters, says 80% of Americans would favor a simpler tax code, with lower rates and fewer deductions, e.g., flatter, fairer, broader-based system for individual and corporate income. The idea has proponents even among politicians, although it’s fair to wonder whether they actually have the will to act…

Deductions or loopholes are granted to favored groups and those groups, in turn, lobby members to retain, extend or expand their favors: As circles go, it’s not always most virtuous: People are not powerless– they decide who serves in Washington DC; and until they make it clear on– what they want– they get government they deserve.

Reviving the Conglomerate– Corporate Diversification– Growth: Evolving Into a New Breed of ‘Quasi’ Conglomerate…

Warren Buffett’s ‘Berkshire Hathaway’ is an example of a successful conglomerate that used capital from its insurance subsidiaries to invest in other unrelated businesses…

Revival of the business conglomerate– A business or corporate conglomerate is a large, often multinational, corporation that owns companies in several different industry sectors. Conglomerates gained popularity in the 1960s as companies that generally engaged in one line of business, then began diversifying the business models through leveraged buyouts, mergers, acquisitions…

The concept of conglomerate or multi-industry corporation is not new and the business model has become common worldwide. At best, the conglomerate is excellent way to maximize profits (and growth) while building protection against economic and other shifts that could weaken a given market or industry. However, the conglomerate experienced turbulent times over last quarter of 20th century and it’s been substantially replaced by newer ideas, for example: Focus on a company’s core competency…

During this era ‘Tom Peters and Robert Waterman’ encapsulated this thinking in book ‘In Search of Excellence’ that encouraged  companies to ‘stick to their knitting’; do what they are good at rather than try to create and manage diverse businesses.

According to Paul Simmonds; undoubtedly conglomerates were a product of the prevailing times when management teams became convinced that they could manage ‘any’ business regardless of its– products, services… and the lack of experience in those sectors. Newly empowered– skilled, successful, confident– management teams were looking to make acquisitions and add-value to their companies; also, there were many companies that were willing targets.

According to Michael Jensen; diversification is way for managers to build empires rather than way to create value… The case against conglomerates is summed up in two words: size and complexity. Size slow decision-making. Complexity creates confusion. These two factors make it hard for even good managers to cope with the challenges of specialized markets and rapid change. In contrast, breaking companies into constituent parts allows managers to focus on business they know something about.

To say that a well-run conglomerate can sometimes succeed is hardly proof that conglomeration is a sound principle. Look behind many apparently diversified successes and they include either or both of the following: First, some degree of focus; e.g., manufacturing, customers-served, technology… Second, rare business minds; e.g., Jack Welch, Richard Branson, Warren Buffett…

In the article Conglomerate Makes a Come-Back by Prof. Shlomo Maital writes: A column in the Financial Times asked: Is the time right for the return of the conglomerate? In the 1960′s, and later in the 1990′s, it became fashionable for large companies to diversify their businesses by acquiring companies in a wide range of different industries. The idea was based on financial diversification, spreading risk. If retailing did poorly, well, perhaps media and entertainment would offset it.

The core of idea came from a Harvard Business School proposition that– management is management– if you could manage an oil business; you could also manage a movie studio, because the basic fundamental principles were the same. This hubris (excessive pride) proved inaccurate. Management is not management universally and there is a core competency of understanding deeply the industry in which one operates, based on long experience.

Many conglomerates failed for this reason. Exxon, for instance, expanded into non-oil industries like– high-tech and failed…  But, is it time to revive the conglomerate business model? And if so, what is the rationale? The reason is simple. A key constraint limiting growth and expansion today is credit and finance. Banks are reluctant to lend, and even when the recovery picks-up, banks will likely be far more stringent with their loans than in past.

The conglomerate, because of their size, clout, and ability to generate cash, will be able to surmount this constraint and supply credit to their constituent businesses. This may prove a key strategic asset. Consultant ‘Ian Harnett’ noted; companies that generate free cash flow for their group can provide risk capital for more widespread investment, when banks’ risk appetite disappears. Look for the conglomerate to return. If it does, it will be a wise reaction to the paradigm shift in finance and financial services that suddenly make companies become their own financiers.

In the article Case for Conglomerate by Randy Myers writes: Corporate landscape is littered with failed mergers and acquisitions, it’s getting hard to argue the advantages of operating in diverse lines of business. Even if you pull it off, numerous academic studies conducted over the past decade suggest you’ll pay a penalty in the stock market; so-called diversification discount relative to more highly focused companies.

No wonder countless firms have sought to ‘unlock’ the value of important subsidiaries by spinning them off as separately traded entities, leaving both parent and child to operate with a more narrow focus. Yet diversification continues to exert an alluring appeal. Why? Done well, it can help to smooth financial results for companies in cyclical industries. More broadly, it can allow firms in mature markets to grow revenues far more rapidly than they could by hewing to their existing lines of business.

According to Larry Shulman; companies that quickly shy away from diversification opportunities may be short-changing themselves and their investors–especially if they are led by executives who are proficient in strategic thinking and capital allocation, and emphasize performance and accountability... Although conglomerates may seem to operate in businesses that have no common thread, Shulman says; the successful ones typically focus on no more than two strategic types of businesses.

By doing so, managers are able to clarify the management process, and improve their odds of success. However, most diversified companies get that way through acquisitions. Few have the patience, breadth of management, manufacturing skills to allow them to branch out into businesses where they have no track record. Yet given enough time, companies can diversify organically…

In the article Who Owns What? Today’s Major Conglomerates and Subsidiaries by Amy Swanson writes: If you wait long enough, history will repeat itself in broad brushes and themes, and even through specific crazes. Lately I’ve been noticing one business fashion, conglomeration, which seems to be returning in a new form: The e-conglomerate.

An e-conglomerate is a high-tech company whose lines of business move increasingly further afield of each other. For example; Microsoft makes money with desktop operating system, servers, and office productivity software — and loses it in their online and entertainment/ gaming divisions. Amazon makes 97.4% of its net sales from media, electronics, and other general merchandise. And yet, the company is investigating other arenas, such as; online payment service provider for other companies, selling Kindle e-book reader, outsourcing software development, cloud-computing.

Then, Google with search engines, advertising, mobile phone design, advertising, user productivity software, enterprise software, clean energy technologies… The company does say that it devotes 70% of its resources to search and advertising, 20% to related businesses that include the apps, and ten percent to areas that are farther afield but have huge potential, such as Android…

Traditionally, high-tech companies are not shy about diversification. HP has enterprise storage, services, software, personal systems, imaging and printing, financial services… IBM might have been the prototypical e-conglomerate, before Lou Gerstner started to change the focus to services and the company began to shed many of its non-core activities… E-conglomeration is possible because the technology needs of so many business areas are similar, lowering the cost of adding a new one.

However, the markets, customers, needs, and practices can completely differ. Just as the dot-coms failed to redefine the basic rules of business, e-conglomerates are not necessarily good for business and shareholders. Money isn’t the issue so much as distraction. Softening management focus, politics, bureaucracy, and an unproven assumption of competency in new areas causes poor forecasting and planning.

I think Microsoft has demonstrated these signs for some time, and Google and Amazon are beginning to as well. Because these companies are so respected, there’s a good chance that others, emulating them, could also start to diversify beyond their ability to control the results. At such times, there’s nothing like a little dose of historic reality to remind us all that the most important rule of success is keeping your nose to that same grindstone.

The case for conglomerates can be summed up in one word: Diversification. According to financial theory, since business cycles affects industries in different ways, diversification can result in a reduction of investment risk. A downturn suffered by one subsidiary, for instance, can be counterbalanced by stability, or even expansion, in another venture.

The case against conglomerates according to Peter Lynch uses the phrase ‘diworsification‘ to describe companies that diversify into areas beyond their core competencies. No matter how good the management team, its energies and resources will be split over numerous businesses, which may or may not be synergistic. However, diversification strategies are essential to expand firms’ operations by adding markets, products, services, or stages of production to the existing business.

According to Joe G. Thomas; ‘diversification’ is a growth strategy. Many organizations pursue one or more types of growth strategies, and a primary reason is the view that ‘bigger is better’. One of the most common reasons for pursuing a conglomerate growth strategy is that opportunities in a firm’s current line of business are limited; requiring consideration of  alternatives in other types of businesses.

For example, Philip Morris’s acquisition of Miller Brewing was a conglomerate move: Products, markets, and production technologies of the brewery were quite different from those required to produce cigarettes; however, both products serve the consumer…

Firms may also pursue a conglomerate diversification strategy as a means of increasing the firm’s growth rate. A study by ‘Marlin, Lamont, and Geiger’; found that a diversification strategy must be well-matched to the strengths of its top management team; to be successful. For example, success of a merger may depend not only on how integrated the joining firms become, but also on how well top executives are suited to manage it.

Diversification can put the business on fast track to growth, but if the strategy fails– it can also be the down fall of the business. It’s vital to thoroughly research new strategies before diversifying. Look carefully at your existing business. Do you have the right managers to cope with a divaricating strategy?

Should you integrate the diversified business into one company or fence the new operation as a business in its own right? Is your organization strong enough to be an umbrella brand, where your core values resonate across the group?

Think hard– understand risks and rewards– good governance and management is about ensuring a brighter future…. diversification, in all forms, must be an ongoing consideration…

Debt in Business, Government… Game of Hot Potato: Drop It, Hold It, Sell It, Ignore It..: Pass the Debt or Shuffle the Risk…

Debt is a double-edged sword, capable of doing a lot of good, but also capable of destroying your business (or, the nation). Handle that sword with the utmost care and deliberation, not with a flippant attitude.

Do you remember the game that we used to play when we were kids? We’d sit in a circle and then we would take a potato and pass it from one kid to the next kid in a circle until the music stopped or until somebody said stop. The person holding the potato was out of the game.

According to Joel Block; some business, financial, government… debt issues work a lot like the kids’ game but, unfortunately, it’s more like a ‘hot potato’ game. In this economy, where mortgage debacles are taking down some of the big financial institutions that exist in the country, it’s all related to the concept of a ‘hot potato’. When banks make mortgage loans to consumers, they accumulate the paper that secures the mortgage money that’s been loaned.

They package it up and they sell it to larger organizations that, in turn, accumulate a portfolio for many financial institutions into giant bundles. These bundles, in turn, are sold to other investors. These investors either hold the paper or sell the paper to someone else. The paper keeps moving around and around in circles among giant investor groups. When the music stops, and loans start going bad, some investors are going to get stuck holding the bag full of potatoes.

Although the original game was played with a real potato, today there are many variations of ‘hot potato’, and no single version is the right way to play. The word ‘hot’ is the operative word in any variation, as players do not want to hold on to their ‘potato’ any longer than is possible. Variations can be created to suit most any theme and any situation…

A debt is an obligation owed by one party (debtor) to a second party (creditor); usually this refers to assets granted by creditor to debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value. Some companies and organizations use debt as a part of their overall corporate finance strategy.

A company uses various kinds of debt to finance its operations. The various types of debt can generally be categorized into: 1) secured and unsecured debt, 2) private and public debt, 3) syndicated and bilateral debt, and 4) other types of debt that display one or more of characteristics noted above.  Debt allows organizations and people to do things that they would otherwise not be able, or allowed, to do.

Commonly, people in industrialized nations use it to purchase houses, cars and many other things too expensive to buy with cash on hand. Companies also use debt in many ways to leverage investment made in their assets, ‘leveraging’ the return on their equity. This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier.

For both companies and individuals, this increased risk can lead to poor results, as the cost of servicing the debt can grow beyond the ability to pay due to either external events (income loss) or internal difficulties (poor management). Excess in debt accumulation have been blamed for exacerbating economic problems… and these debt issues in business, financial, government… become the ‘hot potato’…

In the article Managing Business Debt by Lea Strickland writes: The debt clock is ticking up to over $16 trillion. Student loan debt (which has exceeded $1 trillion) now exceeds credit card debt (approximately $800 billion). Politicians are debating its impact and how to address it. But any way you look at things (right or left), debt is a major issue, whether it’s the national debt, student loan debt, or debt needed to finance businesses and homes.

As the country (and world) struggle to deal with debt, individual business needs access to capital, but face limited availability under tighter lending guidelines, markets. Whether you are entrepreneurs or major corporations you have one thing in common: the need to manage debt. For most organizations, debt is a necessary part of the growth equation, often used to smooth out the temporary fluctuations in cash flow. However, debt is not a solution or a fix for bad business practices, inefficient operations, or overly ambitious plans; neither, ‘build it and they will come’ or ‘spend it and figure out how to repay it later’ are sound business practices…

Debt is not about borrowing as much as you can get. Instead, it’s about wisely borrowing an amount sufficient to meet well-reasoned, planned, and temporary condition in the business… Carrying debt is usually necessary at some point in the life of a business. However, carrying debt and making payments on principal and interest means that you begin to have fewer options the larger the debt obligation becomes.

Debt must be temporary, not a crutch or long-term strategy: If you consistently borrow money against credit cards, equity lines, and on vendor terms, juggle payments and scrape by to meet payroll, then you must take hard look at the business and determine what needs to change.

If you are debt dependent, then you need to understand why. If you don’t know why, you must acknowledge that your profitability is being reduced by cost of borrowing funds. One final point: Growth is not always a good thing: Sacrilege, you say! If you are growing sales and operations, but profitability is not increasing and you are not cash positive (i.e., have cash on hand to meet current demands), then you need to take a breath and stop growing until you raise both profitability and cash flow. Growth in sales that does not include comparable growth in profitability and a move to positive cash flow does not generate adequate return on the investment being made…

In the article How much Business Debt is Appropriate? by DB writes: Some conventional wisdom suggests that businesses should only use enough debt to support growth; and in amounts that can be serviced even if revenues decline, significantly. Businesses should be continually forecasting operating revenues to help them decide the maximum amount of debt that can be carried. Once the debt limit is reached, businesses should look to equity or other types of financing to make up required difference.

Most companies that go bankrupt in tough economic times are ones where revenues and related company values declined below the principal values of the business debt. When a company’s market value declines, and the effective loan to values ratios increases to greater than 1, then that means owners no longer have equity in the company. Once owners are ‘upside-down’ in their loans and no longer have any equity in their business, they have no choice but to relinquish control to the lenders.

Most of these situations occurred because the owners took on too much business debt and could no longer service minimum monthly debt payments. To manage debt correctly, owners should understand terms and legal obligations stated in the loan documents. Terms should be analyzed as part of the company’s cash flow forecasting, and in determining appropriate amount of debt required to support business growth without increasing risk of loan default.

Business should refrain from paying debt haphazardly, and instead make payments as set out by a well crafted debt management strategy.

In the article Does ‘Good’ Debt Really Exist? by Marcia Frellick writes: Does ‘good’ debts exist anymore? Financial experts differ, but many say that in today’s economy, it’s time to reconsider how we look at some common types of debt. Traditional thinking separates debt into ‘good’ and ‘bad’. Mortgages and student loans have been considered good debt because they have fairly low-interest rates and hold the promise of a substantial long-term payoff. Auto loans and credit cards usually rate a bad debt label.

Noted personal finance author David Bach says, no. The recession, he says, taught us that ‘all debt is bad, if you can’t pay it off’. ‘For many Americans today, almost 30 to 50% of their paycheck is going just to interest payments, says Bach,  ‘There’s been a real awakening that debt is bad’. Others say ‘good’ debt still exists, that buying a house is still a sound investment over the long-haul, and borrowing for college education is good risk; if borrowing is kept down and the education is for a profession that can pay it off…

Businesses and debt go hand in hand, particularly when they are new and need funds to get off the ground. The ubiquity of debt in business, though, can make it seem deceptively easy to handle when in fact it can be dangerous. Borrowers should have a plan for money they take, and fully understand payment terms and consequences for failure. Hoping to be able to pay it off later is not the same as knowing how it will happen.

Debt should never be a long-term strategy; ideally, it should be a temporary bridge between cash-out and cash-in. The lending industry has become a huge, nationwide game of ‘hot potato’, which worked well enough in good economic times, but as the economy has faltered we’ve started to see some of the huge problems that exist with a lot of these loans, and the so-called sub-prime mortgage crisis is looking more and more like it’s just the tip of the proverbial iceberg.

The global debt situation is getting even more precarious. The world (i.e.,  governments) has kicked the proverbial can down the road each time debt market threatens to revolt. The problem is that now debt problems are compounding. The global debt bubble is continuing to peak its head through the curtain and remind the world that it’s still here, and that it’s still deflating.

According to Chris Whalen; deflation is like the cancer that is progressively getting worse, and it will continue until debt is repudiated or restructured to be in line with the ability to pay… Intentions are good, but sometimes they  lack common sense: For example, there was a political push by U.S. Congress to increase homeownership among all people, but no one seemed to ask; ‘Wait, what if some people cannot afford a home?’

Apparently, no one cared. Because in the insane grab for more and more volume, you can significantly enlarge pool of borrowers, if there are ‘no standards‘. For example: No down payment? We don’t care. No job? We don’t care. Bad credit? We don’t care. It’s amazing how many borrowers you can find when there are no standards and a ‘we don’t care’, attitude.

There was a widespread belief among the entire lending community that everyone was playing ‘hot potato’ game; and, if you get rid of the loan before it goes bad, it was OK. Ultimately, someone gets stuck with the ‘hot potato’, and that’s what happened; but, it continues to happen and more notably with governments…

Decline of the Publicly-Traded Corporation: Diminishing Value, Excessive Regulations, Viable Alternatives… Return to Private Enterprise…

The number of publicly traded companies in the U. S. continues to fall with a 42% decline from 1997. U.S. publicly traded listings have decreased every single year since 1997 with no rebound at all. ~Edward Kim,

The publicly held corporation– the main engine of economic progress in the U. S. for a century– has outlived its usefulness in many sectors of the economy and is being eclipsed by other more relevant corporate structures. According to Michael C. Jensen; new organizations are emerging, organizations that are corporate in form, but have no public shareholders and not listed or traded on organized stock exchanges.

These organizations use public and private debt, rather than public equity, as their major source of capital. Their primary owners are not households but large institutions and entrepreneurs that designate agents to manage and monitor on their behalf and bind those agents with large equity interests and contracts governing the distribution of cash. Takeovers, corporate breakups, division spin-offs, leveraged buyouts, and going-private are the most visible manifestations of the organizational changes in the economy.

The private organizations are making remarkable gains in operating efficiency, employee productivity, and shareholder value.  Whereas, publicly traded companies are in danger of becoming less important as an organizational structure. The rise of the private-equity industry and proliferation of private markets gives more power to a smaller circle of company founders and experienced investors. Public companies have shown an extraordinary resilience through the century, but there are alternative organizational structures that might be better suited for the new economy…

In the article Eclipse of the Public Corporation by Michael C. Jensen writes:  The forces behind the decline of the publicly traded  corporation differ from industry-to-industry. The decline is real, enduring, and highly productive, however, the current trend does not imply that the publicly traded corporation has no future.

The conventional 20th-century model of corporate governance, consisting of; dispersed public ownership, professional managers without substantial equity holdings; board of directors dominated by management appointed outsiders– remains a viable option in some areas of the economy. Particularly for growth companies whose profitable investment opportunities exceed the cash that they generate internally.

These companies can be found in industries, such as; computers and electronics, biotechnology, pharmaceuticals, and financial services. However, the public corporation is not suitable in industries where long-term growth is slow, or where internal generated funds outstrip the opportunities to invest them profitably, or where downsizing is the most productive long-term strategy.

The publicly traded corporation is a social invention of vast historical importance. Its genius is rooted in its capacity to spread financial risk over the diversified portfolios of millions of individuals and institutions and to allow investors to customize risk to their unique circumstances and predilections. By diversifying risks that would otherwise be borne by owner-entrepreneurs, and by facilitating the creation of a liquid-capital market for exchanging risk, the publicly traded corporation lowered the cost of capital.

However, the widespread waste and inefficiency of the public corporation and its inability to adapt to changing economic circumstances have generated a wave of other organizational innovation over the last 20 years; innovation driven by rebirth of active investors. Active investors are investors who hold large equity or debt positions, sit on boards of directors, monitor and sometimes dismiss management, are involved with the long-term strategic direction of the companies they invest in, and sometimes manage the companies themselves. Active investors are creating a new model of general management.

The model is built around highly leveraged financial structures, pay-for-performance compensation systems, substantial equity ownership by managers and directors, and contracts with owners and creditors that limit both cross-subsidization among business units and the waste of free cash flow. Consistent with modern finance theory, these organizations are not managed to maximize profit but to maximize value, with a strong emphasis on cash flow.

More than any other factor, these organizations are motivating the same people, managing the same resources, to perform more effectively under private ownership than in the publicly traded corporate form.

In the article The Staying Power of Public Corporation” writes: Has the publicly traded  corporation out-lived its usefulness? Michael C. Jensen says; Yes. The institutional shortcomings of the public corporation are so grave, he argued, that it must be considered fatally flawed. There are new better forms for an enterprise, which releases much of the untapped value, as well as, corrects many of the inefficiencies of large public companies.

Alfred Rappaport, a professor and consultant, joins the debate with a rebuttal to Jensen. Rappaport shares many of Jensen’s criticisms of current strategic and financial practices among publicly traded companies, but he does not believe leveraged buyouts and other going-private transactions can replace the public corporation. Rappaport argues that the publicly traded corporation is worth saving: It’s inherently flexible and its self-renewing-properties are fundamental to stability and progress in market-driven economy. These characteristics cannot be duplicated in a transitory organizational structure, such as; a private-equity company…

In the article “The Endangered Public Company by The Economist writes: The number of public companies has fallen dramatically over the past decade– by 38% in the U.S. since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in the U.S. has declined from an average of 311 per year in 1980-2000 to 99 per year in 2001-11. Especially, small companies, those with annual sales of less than $50 million before their IPOs– have been hardest hit. In 1980-2000 an average of 165 small companies undertook IPOs in the U.S.  each year. In 2001-09 that number fell to 30.

The burden of regulation has grown heavier for publicly traded  companies since the collapse of Enron in 2001. Corporate chiefs complain that the combination of fussy regulators and demanding money managers makes it impossible to focus on long-term growth. Shareholders are also angry. Their interests seldom seem to be properly aligned at publicly traded companies with those of the managers, who often waste millions on empire-building and sumptuous perks.

At the same time, alternative corporate forms are flourishing. Once, ‘going public’ was every CEO’s dream; now it is perfectly respectable to ‘go private’. The increase in the number of corporate forms is a good thing: a varied ecosystem is more robust. But there are reasons to worry about the decline of an organizational structure that has spread prosperity for 150 years…

Fewer IPOs mean fewer chances for ordinary people to put their money in growth companies. The rise of private-equity and spread of private markets are returning power to a club of privileged investors. All this argues for a change in thinking– especially among politicians who heap regulations onto publicly traded corporations, blithely assuming that business have no choice but to go public in the long run.

Many firms now go (or stay) private to avoid red tape. The result is that ever more business is conducted in the dark, with rich insiders playing a more powerful role. The publicly traded company has long been the locomotive of capitalism. Governments should not derail it…

In the article Why is the Public Corporation in Eclipse” by Larry Ribstein writes: The publicly traded corporation has stayed dominant through modern business history in part because it has political support. In other words, perhaps we should be asking not why the public corporation is threatened, but why, despite everything, it continues to survive. The answer, I think, is the pseudo-democracy of the publicly traded corporation form. Indeed, this explains at least some of the political hostility to private-equity and hedge funds.

These organizations, which truly serve the residual claimants, are a bit too much ‘shareholder activism’ for the so-called ‘shareholder activists.’ The question is how much longer can the rise of the new corporate forms that are threatening to eclipse the publicly traded corporation be delayed.

Everyone, it seems, wants to be private and, particularly, public corporate CEOs, who are concerned about such things as; compliance overkill, preoccupation with risk aversion, lost opportunity cost, inability to pay-for-performance without outcry from public shareholders, and how publicly traded company directors can’t attend board meetings without bringing their lawyers. 

The public corporation retains its dominance at least in part because of the strong political support for preserving corporate managers as quasi-bureaucrats who are susceptible to demands of activists, e.g., unions, legislators…  I think that the publicly traded corporation may have seen its day, which may seem hard to believe today, when these firms are still so dominant. But mastodons may have felt pretty invulnerable, too, at one point.

During the five decades after Adolf Berle and Gardiner Means published ‘The Modern Corporation and Private Property’ in 1932, their analysis became the dominant doctrine of the U.S. public corporation. Berle and Means did not anticipate an economy dominated by a handful of ever-larger corporations run by an unaccountable managerial class, and inspired scholarship from sociologists (who were convinced they were right) to financial economists (who wanted to prove them wrong) to lawyers (who contemplated the rights and obligations implied by this system).

However, a decade into the twenty-first century the public-traded corporation may have reached its twilight.  According to Jerry Davis; it’s notable that the number of public-traded corporations in the U.S. has been in continuous decline since 1997, and the number of IPOs have not kept pace with number of mergers, bankruptcies, and de-listings. It is also notable that even the most successful public-traded companies no longer create many jobs, within their own boundaries, even though they are creating shareholder value.

So, how did this happen? Where did the publicly traded corporations go? One hypothesis is– meddling politicians and regulators required publicly traded corporations to audit themselves more carefully, disclose more information, vouch for it more rigorously, and staff their boards more thoughtfully, e.g., Sarbanes-Oxley…  For many companies, the cost of complying with these regulatory demands makes it too costly to ‘go public’ in the U.S.– so instead, they either; stay private, or go to a foreign exchange to list shares where regulations are less stringent…

Another hypothesis is– the public corporation is best suited for the organization in the traditional economy, whereas, the new economy has different organizational characteristics. Outside of retail, energy, and a few other industries; today, many new enterprises have relatively few assets and lower employment: However, they do generate huge profitable revenues… So, why go public? Clearly, many entrepreneurs, VC, and other investors are deciding to skip IPO and stay or go private …

When company ownership is separated from management, the latter will inevitably begin to neglect the interests of the former, creating dysfunction within the company. Some maintain that recent events in corporate U.S. may serve to reinforce Smith’s warnings. ~Adam Smith