In business and accounting world, Shareholder meaning a person who owns some of the equal parts into which the ownership of a company is divided (Cambridge Advanced Learner's Dictionary). In Economics, Accounting & Finance defines shareholder as the owner of one or more shares in a company. (Collins English Dictionary). A shareholder can also be viewed as a stockholder, is an individual or institution (including a corporation) that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself.
Corporate Governance meaning the balance of control between the stakeholders, managers, and directors of an organization (Collins English Dictionary). Corporate governance is the set of processes, customs, policies, procedures, and rules that determine how a corporation is managed, administered or controlled and as defined by the company's bylaws, corporate charter, policies, and applicable laws. (Webster's New World Finance and Investment Dictionary). Corporate governance also includes the relationships among the stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, employees, customers, creditors, suppliers, and the community at large.
In CLMS, M3 U1:3, quoted Dicken (2003:12) thought of the differentiation between internationalization and globalization, as the internationalization means 'the geographic spread of economic activities across national boundaries' where globalization is 'the function integration and coordination of the internationally dispersed economic activities.' As the globalization is viewed as the reflection of the positive effects and the continuation of the phenomenon of capitalism. '…progress, increased wealth, freedom, democracy, and happiness. …generating fresh economic opportunities, political democratization, cultural diversity.' (Kellner, 2002: 286 in CLMS, M3 U1:8). It give rise to a 'connected world' with the free-flow of capital, rising numbers of mergers, formation of multinational corporations and large economic entities, mass labor movement, widening economic connectedness and the development of supranational bodies such as the World Trade Organization, General Agreement on Trade and Tariffs, the world bank and the International Monetary Fund (CLMS, M3 U1:8). The growing importance of Transnational Corporations changing the patterns of production and value creation which have close relations to globalization. After decades of financial liberation with volatile equity capital (such as the series of financial crises in different countries, like Mexico 1994, East Asia 1997, etc), the new style of economy giving the rise of the comparative corporate governance and showed the rising importance of the Transnational Corporations which are listed on various stock exchanges (CLMS , M3 U3:11)
In the following paragraph, we would like to through different aspects to evaluate the shareholder model of corporate governance and discuss the impact on the management of labour.
Corporate Governance
Corporate Governance was widely discussed and there are many different models of corporate governance around the world. O'Sullivan (2003) which defined corporate governance as:
"… a system of corporate governance shapes who makes investment decisions in corporations, what types of investments they make, and how returns from investments are distributed…" (O'Sullivan, 2003:24)
Shleifer and Vishny (1997), they believed that corporate governance is to cope with the forms that the suppliers of finance to corporations in order to ensured themselves of getting a return on their investment. It concerned with who controls the firm, in whose interest the firm is governed and the various ways whereby control is exercised. Governance is about how shareholders control managerial opportunism through the alignment of incentives.
During the US new economy era in 1990's, the stock market boom have great impact and provide dependency to the new economy, the companies were more emphasis on the use of corporate stock, companies became more rely on their stock in order to 'acquire other companies and in particular new ventures; as the best basis for compensation schemes, especially stock option plans, to attract, motivate and retain highly mobile employees; and to raise cash to finance productive investments.' (O'Sullivan, 2003:54).
It gives rise to the emerged of the shareholder model of corporate governance, which aimed as:
"… efficient allocation of resources to best growth opportunities, therefore benefiting overall economic performance, not only that of shareholder." (CLMS M3 U3:13)
Shareholder models of corporate governance
The main objective of the shareholder model of corporate governance was gave maximum return to their shareholders and invest their capital to the most profitable enterprises as fast as they can. It was seeded by different authors. Gospel and Pendleton (2003) claimed that the shareholder model tends to target the interests of shareholders as their main goal. Stiglitz (2003) claimed that the main objective of the shareholder model of corporate governance was allocating investments to the most productive and profitable sectors of the economy and thus benefiting overall economic performance.
The shareholder model tends to put the interests of shareholders in the first place. Aguilera and Jackson (2003:447) characterized shareholder model of corporate governance as:
"…financing through equity, dispersed ownership, active markets for corporate control, and flexible labor markets …" (Aguilera and Jackson, 2003:447)
The important difference between systems of corporate governance was mainly according to the separation of ownership and control and the market for corporate control, they were also viewed as the key pillars of shareholder model of corporate governance (CLMS, M3 U3:11-12). As the shareholder objective was obvious, it showed that shareholders had the performance based value of a company. In CLMS M3 U3, the separation of ownership and control, it will also lead to a potential conflict of interest between company owners (shareholders) and the company operators (managers). As shareholders' main interest was profit, they would like to have maximum return on their capital at lowest risk in a shortest period of time. For the managers, company profit may not be their first priority, they may also have other interest, such as interest which related to growth in market share, internal power struggle, careers, remuneration packages, career prospects, etc. Therefore, shareholders usually had pure financial interest and would like to have short-term rate of return.
Alchian and Demsetz (1972) (cited in CLMS, M3 U3) raised that the issue of shareholder value in a principal-agent, it was related to how the principal (shareholders) control the actions of the agent (management) under different circumstance and viewed as 'principal-agent problem'. The conflict of interests, from internal control structures to the details of management incentive and remuneration system, is to ensure managers place the interests of shareholders at first priority.
In CLMS M3 U3, it discussed the difference between ownership and control within the modern corporation, shareholders (owners) who invest and risk their capital vs operators (managers) who control daily operations and possess the specialised skills in order to run the company. As the agency costs arise for shareholder because they cannot assume that managers act in the shareholders interests, that was maximize returns at a reasonable risk. On the other hand, managers might be more interested in maximizing growth in terms of market shares, maximizing their own salaries, maintaining uncompetitive quality of labour standards, or they may just no intention to do better.
Even the interest of shareholders was the first priority, but the shareholders may also facing problems in monitoring management. Aguilera and Jackson (2003) stated that:
"…they have imperfect information to make qualified decisions; contractual limits to management discretion may be difficult to enforce; and shareholders confront free-rider problems where portfolios are diversified, thereby reducing individual incentives to exercise rights and creating preference for exit." (Aguilera and Jackson, 2003:448)
Therefore, corporate governance in this scenario was representing the mechanisms to align the interests of shareholders and managers in the means of how to monitor under imperfect information, how to enforce limits to managerial discretion.
As shareholder model of corporate governance had a characteristic of separation of ownership and control and it will rise up the conflict of interests between shareholder and managers. As a result, principal agent problem was emerged due to both parties had their own interest, so that agency theory as mentioned was implied for the management of the market-based (shareholder) approach of the firm.
Besides the separation of ownership and control, financial liberation also have influence the corporate strategies to shareholder value, which can be viewed as 'market for corporate control.' The financial liberation give rise to the emergence of differentiated financial instruments, such as credit money, derivatives, the role of the stock market may affect the capital flow of the company which may impact the corporate strategies to shareholder value in the way of their wealth maximization.
"…corporations that 'fail' under the shareholder value paradigm in the eyes of their investors or, in fact, their competitors, face increased pressures to restructure for shareholder value or even face hostile takeover." (CLMS, M3 U3:12)
As a result, managers will also sense the chance of takeover may occurred if they do not performed well and the restructuring of corporate strategy may drive by market force.
In CLMS M3 U3, the corporate governance solve the principal agent problem and to ensure shareholder value and the emergency of a market for corporate control. Corporate strategy is drive by shareholder value, i.e. only financial interest driven and mainly for short-term rates of return. The restructuring for corporate control may take place via Management Buy-Outs, Management Buy-ins, leveraged buy-outs, share buy-backs, divestments, (Froud et al., 2000:101). Those managers focused the corporate strategies to short-term corporate performance and focused on the core business by divestment or merger and acquisition. The finance than protectionist orientation also makes corporate expansion rely on credit money of large commercial banks, stock markets and investment banks (Dumenil and Levy, 2001: 590).
Since the shareholder model of corporate governance was focused on shareholders' value, i.e. return on investment in short term, so capital will invest mainly in revenue generated area, so that it will have direct impact on management of labour.
Factors influencing management decision
Gospel and Pendleton (2003:565) stated that , there are six major forms in which shareholder objectives and participation influence management decision-making, " i) the balance of support given by management of labour and capital, ii) the time-frame of managerial decision-making, iii) the nature of business strategies, iv) the importance ascribed to financial factors in decision-making, v) the approach to securing managerial and employee commitment and vi) the degree of co-operation with other firms." These factors have great impact in the changes of decision-making in finance-governance systems as well as company strategies and human resources decision.
Ghoshal (1995) (quoted in Wright, Geroy and MacPhee 2000:36) viewed that any of the organization will dependent on people '…who are willing to take personal initiative and to co-operate with one another, who have self-confidence and a commitment to the company, and who are able to execute relatively routine tasks with the same proficiency as they are willing to learn new skills and ways to take the company to the next stages of ambition.". Human Resources Management, also called Labour Management, performed as a control system that ensures progression of the organization's members and directs their behavior to achieve organizational mission and objectives. Eneroth and Larrson (1996) (quoted in Wright, Geroy and MacPhee 2000:37) also stated that The HRM (Labour Management) function consists of "selecting, rewarding, appraising, socializing, and developing individuals to contribute as much as possible to the achievement of organizational goals"
Gospel and Pendleton (2003:558) had identified three sources of finance can have impact on labour management, such as:
"…the sources and types of finance, the objectives of finance providers and the intervention rights and practices connected with different forms of finance." Gospel and Pendleton (2003:558)
They also categorize three types of source of finance, such as internal funds, debt and share equity Gospel and Pendleton (2003:561). It construct the objectives of finance providers and managers strategic constraints and opportunities.
Gospel and Pendleton (2003:561) stated that internal funds are the most important source of both working and investment capital and the managers were more reliable on it. The management strategies may focus on maximizing returns as per their wish, to shareholders or to other stakeholders. Debt is a contract for corporate to achieve a specific level of return and guarantee to future cash flows. Equity, is an arrangement that shareholder get some share of the future earning and market value, coupled with partial control rights.
As above discussed, management of labor was directed by shareholders time frame and their prospect of return. In shareholder model of corporate governance, shareholder expect the return in shortest period, profit in first priority, short payback period for investment and the highest rate of return. In CLMS, M3 U3, Bowles stated that:
"the firm was seen as no more than a confluence of different factors of production which were put to their most efficient use. Thus, labor was one of many different factor inputs that would somehow be optimized within the firm to produce goods as efficiently and profitably as possible." (CLMS, M3 U3:15)
Shareholders invest mainly for financial returns and those managers have to follow their boss intention, otherwise they will be fired or the shareholder will be exit the corporate. As a result, managers will put forward their resources on fast-return business than the money-spending areas such as human resources development. Therefore, labour cost, training budgets and other investment human resources development were reduced and these corporate were so called as s 'black box'.
Impact on the management of labour
It is no doubted that shareholders model of corporate governance always put the shareholder interest in the first priority, but it will also lead to favorable impact on the management of labour.
In CLMS, M3 U3:27, in global employment trend, shareholder of corporate governance under globalization give rise to 'greater diversity of forms of employment', that was differed from traditional full time employment. It leads to more elasticity in job type for both employer and employee, such as part-time employment, flexible working hours and so on. The 'numerical and functional flexibility' not only benefit to the employee, like increase in job opportunities, for instance, like a worker can earn a living through part-time employment and can continue the study at the same time due to the flexible working hours. It can also benefit to the employer that staff basic cost will be minimized, such as pension scheme, medical and other staff remuneration package due to the part-time employment
In shareholders model of corporate governance, the main objective of shareholders were looking for favorable financial performance in short term and will overlook the long term planning and development. On the other hand, shareholders model of corporate governance may also lead to adverse impact on the management of labour. Under balance of interest promoted by management, Lazonick and O'Sullivan 2000 stated that:
'…equity owners have strongly promulgated the notion that managers' primary responsibility is to them and that enhancement of shareholder value is the most important objective for firms.' (Gospel and Pendleton 2003:565).
In UK, firms try to restructure to enhance shareholder value and to achieve increase in return and decreased cost, workforces decrease will occurred (Froud st al. 2000b: 785-92). So that, outsource, downsize were emerged in order to reduce cost, so as to maximize shareholder's return. The shareholder model pressurize managers to place shareholder interests above those of labour, managers will try to perform to avoid hostile takeovers (Gospel and Pendleton, 2003).
The shareholders model of corporate governance was always looking for highest return in shortest period of time, it lead to inadequate development/ training of skilled labour, result in lack of internal skilled labour, low skill and high turnover (CLMS, M3 U3). Gospel and Pendleton (2003) stated that:
'…equity-based system force managers to shed labor in hard times and avoid investments that have uncertain returns, such as training.' Gospel and Pendleton stated that (2003:559)
Gospel and Pendleton (2003) also comment that this approach break job security and long-term career progression. It let employees feeling insecurity due to afraid of layoffs, unemployed and underemployed.
In the shareholder model of corporate governance, time frame, i.e. short period of time, give pressure to labour management. In the remuneration package, managers will be accessed in order to get the pension fund, give pressure to managers; they will try their best to maximize short-term returns as well as their personal interest. For example, people in a company had a yearend bonus scheme, they will stay in the company until year end due to the bonus and will consider looking for better prospect after getting the bonus.
Besides, business strategies also impact the labour management. In the shareholder model, company take their total attention to financial objectives. Gospel and Pendleton (2003) stated that labour management will be affected by different natures and objectives of business strategies:
'firms in market-outsider systems tend to place more emphasis on narrow financial objectives rather than on broader objectives such as market shares' (Gospel and Pendleton, 2003:566).
In Gospel and Pendleton (2003:566), Porter and Soskice showed that German manufacturing company producing advanced product, the development of the product help them to keep the competitive advantage. In shareholder system, company main objective was to maximize the profit, investment in research and development will be ignored due to minimal financial returns. The employment pattern, training and development, they will employ less experience labour in order to cut the cost, and will lead to high turnover of the experienced labour due to looking for better prospects, and less investment in training.
Gospel and Pendleton (2003:569), Bolton and scharfstein (1998) examined that in USA, employers and employees are not willing to invest in firm- skills due to the decline of job security within the firm. It can be viewed that the nature of firms' demands for skills may vary between the two kind of system, finance and governance play a role in this. In UK and USA, pressure for quick returns on investment was the important reason for advance flexible machinery which often used as a more intensive form of mass production rather than as a means to achieve more fully flexible production (Appelbaum and Batt 1944; Jones 1988: 473-6).
In order to secure the managers to place the shareholder interest at the first priority, management incentives and attractive remunerations were used to control and reward their performance. So that, the wages of top management was no doubted that more than the wages of the front line employee. It will lead to wage inequality and 'class conflict'. (Aguilera and Jackson, 2003). Both shareholders and managers were looking for their own financial interest, 'conflict is likely to arise around trade-offs between wages and profits' (Aguilera and Jackson, 2003:460). In the practice of outsourcing, corporations tend to outsource the non-core, low value-added activities to maintain profitability and cooperate with contractors who offer the lowest contract price with reasonable service or product quality. In order to provide the best service or product quality possible while making the most profit, contractors control their business costs by strategies like sub-contracting the services or productions, or simply cut the wages of labor, decrease the size of workforces and increase their work intensity. These practices worsen inequality, especially wage inequality, for the privileges of the relatively high pay, secured workers in large corporations are bought about at the expense of the low pay, unsecured workers in subcontractor firms (Dore, 2004). Milberg (2004) argues that the gap of income inequality is widened because of the deregulation of labor and social standards. Outsourcing is positively correlated to profits, however, in the mean time, the flow of profits to the developed corporations results in uneven market structure and causes the developing corporations a loss of capital and opportunity for investments and a drain on the balance of payments (Milberg, 2004). Some societies, such as Hong Kong, have considered a statutory minimum wage to protect low-income workers. Such kinds of state policy also have a role to play in management of labor as they sometimes overrule the free-market policy.
Approach of Contingent forms of remuneration was widely used in the market-outsider economies, especially for top managers. They also more using take a stock-based form, reflecting the importance of equity markets in these economies. The other important factor driving up chief executive pay in liberal market economies is pressure from fianciers for high short-term performance. The features of pay determination result in the ratio of senior executives' pay to shop-floor employee' pay being greater in USA and the UK when compared with Germany and Japan.
Employee share ownership plans are also common in USA and UK (Pendlleton et al. 2001:31). It reflect a need for bonding mechanisms in contexts where financial calculation is especially important in governance, and where the capacity to generate commitment through employee voice is limited.
Gospel (1992) The work relation may influenced by the financial and governance pressure. It affect worker's attitude towards the ownership of skill and the protection of jobs. In shareholders model, workers have traditionally been highly protective of existing skills and jobs, as the systems might not appear to offer long-term benefits for co-operation. This was act in a form of worker 'hold-up' activity, which stresses job control and restrictive practices.
Other Argument
From the above captioned adverse impact on the management of labour from shareholder model of corporate governance, we would see that it will not be a perfect way of corporate governance, so that we should consider other models of corporate governance and other factors which can be bring favorable impact to the management of labour.
In CLMS M3 U3 also claimed that the opposite argument - the institutionalist agreement qualifies the unproblematic efficient working of the market and holds that any form of economic activity is based on and crucially shaped by social institutions - such as the different roles and responsibilities of banks, stock markets, the regulation of labour markets, etc. Institutionalist approach challenges the SHM for its 'under-socialized concept of the corporate enterprises (Aguilera and Jackson, 2003: 448)'. The institutionalist argument emphasis different sets of institutional configuration that formed corporate behavior. It emphasis of the role of stakeholders as well as resulting differences in the way economic benefits for different stakeholders. As well as the economic argument focuses on the maximization of investments by shareholders and the efficient allocation through competitive market forces, institutionalists emphasis the political aspects of institution building, how national systems consist of different configurations of institutions.
So, in the light of institutionalist approach, objectives of finance providers can be irrelevant of profits. While the SHM stresses short-term financial returns, some corporations which are financed by internal funds, debt or creditors prioritize quality over rates of returns thus emphasize on long-term strategic development like internal labor development for quality and brand name (Gospel and Pendleton, 2003). Aguilera and Jackson (2003) argue that organizational goal can be long-term, non-financial such as control rights. Thus, corporations financed by debt or creditors may use ownership stakes to regulate competition between firms, underwrite relational contracts, secure market shares, maintain stable growth, promote long-term commitment and protect managerial autonomy from outsiders.
The restructuring of production and consumption patterns is another factor. Industrial upgrading and rising of service consumption sector make training and employee development increasingly important. 'Industrial upgrading is a process of improving the ability of a firm or an economy to move to more profitable and/or technologically sophisticated capital-and skill-intensive economic niches' (Gereffi, quoted in CLMS, M3 U3:22). Firms have to cope with the changing trend of technology requirement to maintain profit and sustainability, therefore, managers invest more in recruitment and selection, skill-related trainings, and rewarding and retaining the skilled labor in order to make sure that sufficient skills are in place for competitive challenges regardless such strategies are to some degree financial burdens to an organization. Moreover, in the wake of the rise of service sector, service consumption demands grow with the actual product consumption demands. Froud et al. (1998) state that:
'…we should look not only at the substitutable finished products but at all the complementary and substitutable products and services which are part of the buyer's consumption, and thereby take in a much broader range of services as well as products.' (Froud et al., 1998: 304)
As the concept of 'value-added' commodity prevails, modern customers purchase not only quality products but also quality services. As a result, managers have to put more weights to recruitment and selection in order to hire service market talents. Service quality-related trainings are strengthened as well for the sake of meeting modern customers' standards. Furthermore, the value-added concept lies not only on the products themselves but extends to the value of social and moral duties that create consumer pressure to organizations.
'The task of marketers and retailers…is to coordinate not only the tangible aspects of the product such as design, material inputs or quality, but also the more 'intangible' aspects of the product (i.e. those that are not visible anymore in the final product.) This relates to the coordination of production according to processes that comply with safety, labour and environment standards.' (CLMS, M3 U3:30)
It shows that the values of products depend not only on their quality but the entire process of production. Whether the production involves hazardous materials, environmental pollutants, use of child labor or other forms of employment exploitations, illegal or unethically practices, or contravention of international human and social rights are of consumers' concerns (CLMS, M3 U3) and hence affect the consumer choices, i.e. indirectly affect the organization's profitability and reputation.
The development of human capital is a vital factor too. Human resources (HR) are the most valuable resources of a corporation. Froud et al. (1998:89) describe HR as 'intellectual capital' leading to the long-term growth of an organization. HRD, skills and education are the emphasis of national policy for competitive advantage in the global economy. For example, higher education is treated as 'a new engine of economic growth…at the heart of a knowledge society' (Park, quoted in CLMS, M3 U2:11).
Finally, culture affects the management of labor in several ways. Graham (2001) argues that culture affects non-verbal behaviors, thinking and decision-making approach. Black (2001) also suggests that the labor markets, including the work pattern, work hours, career development, workforce mobility and loyalty, are culturally-bound. For example, the impulse of people to accumulate money and maximize profits differs in different cultures (Weber, cited in CLMS, M3 U1). Culture also influences the rewarding systems. Hofstede (2001):
'For companies with a strong individualist culture, motivation may be seen in terms of individual rewards such as an increase in pay or status, whereas in a collectivist culture employee in fact wish to forgo individual rewards and instead see them distributed within the group.' (Hofstede, cited in CLMS, M3 U1:29)
Therefore, practices such as promotion or performance-based remuneration are useful for recognizing employee's achievement in Western countries but not in their Eastern counterparts. O'Sullivan (2003) illustrates how different national cultures affect organizational strategy:
'Social democracies press managers to stabilize employment, to forego some profit-maximizing risks with the firm…firms exist in social democracies will be much less inclined to maximize shareholder value than their counterparts in the US.' (O'Sullivan, 2003:29)
Conclusion
This paper goes through the ways and level shareholder model of corporate governance influence on the management of labor. Corporate governance investigates how, who and why a corporate is governed. The shareholder model of corporate governance emphasizes on the financial returns to shareholders. Shareholders are the sources of finance of a corporation, i.e. the principals, who risk their capitals to the performance of the corporation. As a result, their agents (managers) have primary obligation to maximize shareholders' profits, in other words, to enhance the shareholder value, otherwise the shareholders may choose to exit that causes a shake in the sources of finance.
In order to see how the shareholder model of corporate governance impact on the management of labour, we had go through different readings regarding Shareholder model, corporate governance. However, there will not be a best practice model due to different occasions and environment.
The differences in the pressure and influences on managerial behavior between market-outsider (shareholder) and relational-insider (stakeholder) system had great influences from importance of labour interests, time-frames, strategy types, financial measures of performance, the use of market based instruments to secure commitment and the extent of employer co-ordination. These contribute to several important labour management outcomes.
In concluded that, shareholder model of corporate governance had impact on the management of labour. Undoubtedly it was important in US and other Anglo-American countries for the formation of their finance and governance and we can see the finance and governance had impact on labour management. We can see this model was focus on shareholder value and maximize the investment in the short period of time, so it must be favorable to shareholder. On the other hand, in order to maximize investment, the easiest way is to cut cost and explore new horizon, so it may lead to other unfavorable influence to other stakeholders.
We do not view the forces of finance and governance as entirely exogenous, managers may select which forms of finance to use, again albeit within constraints. However finance providers can exert powerful influences on labour management decisions, but they are not the only factors, product and labour markets, trade unions and labour legislation are also important, but they may be the most pressing in some circumstances and have certainly been neglected in the traditional industrial relations and HR management.
