Factors which Limit the Scope for Improving Corporate Performance - Assignment Example

HOW STRUCTURAL AND AL FACTORS IN BRITAIN AND AMERICA MAY HAVE LIMITED THE SCOPE FOR IMPROVING CORPORATE PERFORMANCE. By of the Class Name of the Professor Name of the School City, State January 7, 2013 Introduction The general performance of corporate is influenced by corporate strategy, corporate operating performance, and corporate organization (Capon, Farley, and Hoenig, 1996). Institutional factors are focused on factors that affect policy outcome rather than economic performance. According to Malhotra, the institutional factors that have implications on the social responsibility of corporate institutions include firstly, the “difference in the composition of institutional investors in the two markets, with a higher percentage of institutional investors in the UK being pension funds and insurance companies with longer time horizons for investment than the mutual funds that have dominated in the US” (2009, p.246). Secondly, soft laws, which are encouraged by the highly influential Cadbury commission of institutional investors in the United Kingdom, which gets into contracts with portfolio companies. Thirdly, attention to issues of Corporate Social Responsibility, which is encouraged by “the Institutional Shareholders Committee, which represents over 80% of institutional investment in the UK” (Malhotra, 2009, p. 246). Institutional factors have a lot of influence on the performance of organizations. Limitations or possibilities for how and how quickly organizations can change depend on institutional factors. These “include factors such as to what degree policies-and the laws that formalize policies –are really driving actions of senior executives , civil servants and front line service providers” (Fowler, Acquaye-Baddoo, and Ubels, 2010, p.150), and how far a nation’s budget process is driven by interests of influential people or by policies. Presence or lack of a positive relation between corporate governance and corporate financial performance has been used to test whether reforms in corporate governance have a positive impact on industries in Britain. According to Prasad “corporate governance refers to the relationship that exists between the different participants, and defining the direction and performance of a corporate firm” (2006, p.1). Corporate governance is vital in international business. Poor financial performance by corporate can be attributed to bad corporate governance. This can be seen in the case of the United States where “companies with weaker corporate governance structures (indicated by substantial agency problems) perform less well than companies with better corporate governance structures” (Solomon, 2010, n.p.). This can be clearly seen in the case of the United States where there is poor performance by companies with poor corporate governance structures, while those with good corporate governance structures perform well. Structural reforms in nations have had a number of benefits. Structural factors are important determinants of competitive business and growth prospects. The structure of an organization is influenced by factors such as technology, size, changes in the environment, and the strategy. Since the late 1970s, structural reforms have attracted a lot of attention by policy makers. In Britain, structural reforms began when the government “was under Mrs. Thatcher, it adopted a series of structural reforms to result in successfully reviving the British economy. The US government under President Regan followed Mrs. Thatcher’s policy by pursuing structural reforms and successfully rejuvenated the US economy” (OECD, 2005, p.24). In recent years, developed and developing countries have recognized the beneficial effects of structural reforms, and have therefore adopted them. Among these nations, some have successfully attained economic growth, while others haven’t been successful. From this it is clear that structural and institutional reforms can have positive or negative impacts on corporate performance in nations, which is among the factors that determine economic progress. Structural and Institutional Reforms in Britain and America Structural and institutional reforms have been major factors in Britain and the America in the twentieth century. In fact, the United Kingdom is regarded as a pioneer in reforms on corporate governance. This was after the nation suffered from frauds and disasters, high profile corporate failures, and long recessions that were attributed to lack of proper corporate governance. National public spending on healthcare and primary and secondary education have increased both in the United States and Britain. Welfare reforms have been implemented and child poverty reduced in both nations. Tax reforms aimed at increasing balance in the tax system have been implemented. These reforms were meant to reduce reliance on inefficient trade, and help in the movement towards indirect consumption. Tax reforms are gaining more attention as policymakers in America suggest a change in income tax reforms, such as the Nunn-Domenici tax in the United States. The tax reforms assume that the existing income tax system is necessary incomplete, and can’t be complete without a complete redo. Trade reforms focused on opening the economy and reduce non tariffs barriers. These trade reforms involve elimination of export restrictions and trade barriers, reduction of exchange rates so as to increase export profitability, and removal of quantitative import restrictions for tariff protection. Financial reforms. These are focused on reducing reserves in the bank remove interest rates, eliminate direct credits and strengthen legislation. These reforms focus on the banking system, but also stock market. Financial sector reforms is the easiest and simplest macro-economic stability is not in doubt and the Government fiscal position is not weak. Major drivers in the search for improved corporate performance in Britain and the United States include pension funds, which are used in seeking higher returns on capital for corporate shareholders. Institutional investors and corporations in America and Britain have a relation that is both creative and positive. Involvement of shareholder in corporate activities is another major driver for improving corporate performance. During the last few decades, there have however been very few structural changes in Britain. According to Hodgson “underlying structural and institutional factors are included in some accounts of entrepreneurial or management failure in Britain” (2006, p.112). This is in the case of markets for goods, services, and capital pressures for improved corporate performance, which in turn can affect the relation between local communities and resource providers, and this causes social tension. For example, in competitive products and services and capital market, the corporation may face the urge to reduce its workforce. The following factors have an influence on corporate performance: 1. Government policies. Government policies have greatly affected the climate of business in many different ways. For example, small businesses face difficulties when they want to enter a complex federal grant or contract. A key area of Government policy is the role that the Government plays in the state economy. Between 1945 and 1979 in Britain, the Government altered its country’s economy when it created industries run by the state, which were in form of public corporations (The Times 100 Business Case Studies, 2013). This led to lack of competition in the business environment; hence, in 1979 privatization of industries took place, as the government sold the industries to private shareholders. 2. Taxation policy: This mostly affects the business costs. For example, an increase in corporation tax has the same effect as an increase in costs, and this can be a disadvantage as most of the businesses pass these taxes to their customers. 3. Legal changes. The British Government changes its laws within its political policies, and as a result businesses continue to respond to changes of legal framework for example: The establishment of National Minimum wage was extended and it recently affects the people under the age of 18. The new law that businesses should cater for disabled people by constructing ramps into offices and shops. The creation of rules that constitute for fair competition between businesses. Examples are European Union regulations and directives have affected businesses in Britain in recent years (The Times 100 Business Case Studies, 2013). Market based economic systems require effective mechanisms for corporate governance. In order to deal with the catastrophes that come with deficiencies in governance, countries and firms have been carrying out corporate governance reforms. Reformation of corporate governance at a nation’s level leads to economic growth and development. On the other hand, reformation of corporate governance at a firm’s level has led to redefinition of boundaries in most firms, where firms are able to include more stakeholders apart from those that supply financial capital. Improvement of Corporate Performance Although measurement of success is defined differently across corporations worldwide, they all aim to improve their performance. Good corporate governance is vital for the growth and development of businesses worldwide. Public policy stimulates companies to differences between social and private interests, while disciplining them at the same time. Accountable, responsible, transparent, and fair enterprise sectors are necessary for sustainable growth in any economy. Improved corporate performance justifies and accelerates efforts of transition economies to change their command driven economies to market driven economies, which is their main goal. According to the Organisation for Economic Co-operation and Development, “sound corporate governance is a necessary but not sufficient condition to achieving world-class performance” (2001, p. 48). A nation’s economic settings, behavioural and cultural attitudes of shareholders, the management and workforce, as well as institutional settings are significant. Liberalization, deregulation, and delicensing are factors that improve corporate performance, which in turn boost a nation’s economy. Good corporate governance practices in a nation’s big corporations serves to boost the confidence of potential and existing investors, who with the confidence are able to commit their finances in such corporations. Improvement of corporate governance improves access to international capital markets by corporations. Clarke points out that “in the evidence submitted to the UK modern company law Review (DTI 2000) the association of good corporate governance with higher performance was often made without necessarily suggesting a direct link” (2007, p.46). Reference List Buxton, Tony, 1998. Britains Economic Performance. London: Routledge. Capon, N., Farley, John U., and Hoenig, S., 1996. Toward an Integrative Explanation of Corporate Financial Performance. Massachusetts: Kluwer Academic Publishers. Clarke, T., 2007. International Corporate Governance: A Comparative Approach. Abingdon: Routledge. Fowler, A., Acquaye-Baddoo, N., and Ubels, J. ed., 2010. Capacity Development in Practice. London: Earthscan Ltd. Hodgson, G. M., 2006. Economics in the Shadows of Darwin and Marx: Essays on Institutional and Evolutionary Themes. Cheltenham: Edward Elgar Publishing Limited. Hoeing, S., Farley, J. U., and Capon, N., 1996. Toward an Integrative Explanation of Corporate Financial Performance. 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