the evolution of the modern corporation
The evolution of the modern corporation: Coursework Assignment
According to Bengt Holmstrom and Steven N. Kaplan in their article published in the Journal of Economic Perspectives, corporations during the 1980’s went through a period of merger, takeovers and restructuring activity. The use of leverage became a common practice as corporations financed takeovers and were made private by leveraged buyouts. These activities were characterized by the use of hostility and the emergence of raiders. Furthermore, Michael C. Jensen attributes this massive organizational change to management-misguided policies and the public corporation lack of aptitude to follow the trends and the volatility of the economy as far back as the 1980’s. The aim of this essay is to demonstrate the effect that this movement had on US corporate governance and if there were more benefits than negative aspects in this change.
In order to understand the effect the 1980’s movement had on corporate management it is essential to trace those factors that played a key role in originating these changes as well as those activities that contributed to them. Firstly, with regards to the relation between corporate managers and shareholders before the 1980’s, it could be assessed that managers paid little importance to shareholder interests and were more loyal to the corporation itself. In most cases, compensation systems for management were not related to market performance. The need for better corporate performance gave birth to takeovers, junk bonds and leveraged buyouts. Takeovers were distinguished not only by hostility but also by the use of debt as the main source of capital. This mechanism consisted in the acquisition of firms by obtaining loans rather than by using their own resources (cash or equity issue). Managers reacted negatively towards them giving birth to hostilities. Evidently, management was reluctant to these new changes probably because they did not understand the real issue
According to Bengt Holmstrom and Steven N. Kaplan in their article published in the Journal of Economic Perspectives, corporations during the 1980’s went through a period of merger, takeovers and restructuring activity. The use of leverage became a common practice as corporations financed takeovers and were made private by leveraged buyouts. These activities were characterized by the use of hostility and the emergence of raiders. Furthermore, Michael C. Jensen attributes this massive organizational change to management-misguided policies and the public corporation lack of aptitude to follow the trends and the volatility of the economy as far back as the 1980’s. The aim of this essay is to demonstrate the effect that this movement had on US corporate governance and if there were more benefits than negative aspects in this change.
In order to understand the effect the 1980’s movement had on corporate management it is essential to trace those factors that played a key role in originating these changes as well as those activities that contributed to them. Firstly, with regards to the relation between corporate managers and shareholders before the 1980’s, it could be assessed that managers paid little importance to shareholder interests and were more loyal to the corporation itself. In most cases, compensation systems for management were not related to market performance. The need for better corporate performance gave birth to takeovers, junk bonds and leveraged buyouts. Takeovers were distinguished not only by hostility but also by the use of debt as the main source of capital. This mechanism consisted in the acquisition of firms by obtaining loans rather than by using their own resources (cash or equity issue). Managers reacted negatively towards them giving birth to hostilities. Evidently, management was reluctant to these new changes probably because they did not understand the real issue