Does Contrast in Long-Term Financing Explain the National Differences in the Governance - Essay Example

Do Contrast in the Long-term Financing and Ownership of Business Explain National Differences in the Governance and Management of Firms, and Fundamentally Account for the Success of Major Economies? 1. Introduction A company in global fast food industry, Kentucky Fried Chicken (KFC) specializes in fried chicken. To answer the question whether or not the contrast in the long-term financing and ownership of business explain the national differences in the governance and management of firms, and fundamentally account for the success of major economies, the case of KFC in UK, US, Japan, and China will be compared and contrast in terms of the nature of ownership, governance, business strategy, corporate objectives, power/authority of management, nature of strategic decision-making, nature of decisions on building corporate capabilities, the long-term and short-term investment in technology, investment in plant and machinery in relation to productivity, and management of people. Eventually, comparison will be made in the four (4) countries’ degree of relationship between performance and finance systems, forces of convergence, and internationalization before and after 1990. Prior to conclusion, the extent in which the crisis of 2008 has transformed the nature of debate about the financial system and types of capitalism will be tackled in details. 2. Key Questions The following key questions will be addressed in this essay: 1. Does contrast in long-term financing explain the national differences in the governance? 2. Does contrast in ownership of business explain the national differences in management of firms? 3. Do contrast in the long-term financing and ownership of business fundamentally account for the success of major economies? 3. Nature of Ownership, Governance, Business Strategy, and Corporate Objectives KFC was first established in US and was eventually sold to PepsiCo back in 1986 and eventually became a subsidiary of YUM! (Cho, 2009; Schreiner, n.d.). As part of its globalization strategy, KFC entered the UK market via 60% franchised + 40% equity (KFC, 2014a), Japan via joint venture (JV) through franchise with Mitsubishi Corporation (62%) (Mitsubishi Corproation, 2013, 2010), and China through franchising (Edward, 2011). Since the Chinese government did not recognize the term “franchising” back in 1990s, most of the first few KFC stores in China were company-owned (Edward, 2011). Governance is all about having the best and most legal and ethical system that can be used in directing or controlling the business (du Plessis, Hargovan and Bagaric, 2011, pp. 3 – 4). In most cases, corporate governance aims to regulate the corporate conduct by creating a balance between the internal and external stakeholders, the government, and the local communities (Monks and Minow, 2011, p. 16; du Plessis, Hargovan and Bagaric, 2011, p. 10). Aside from being able to fulfil the Board’s responsibilities to its shareholders, the top management of KFC strongly believes that the process of creating good corporate governance is one of the key factors that will make their business a success (Yum, 2014). As part of the mother company’s corporate governance policies, KFC in US created its own “code of conduct” in 1997 to ensure that the stakeholders of the company will practice good business ethics (Yum, 2014). On top of keeping a two-way communication between the top management and its employees, KFC in US decided to document all of its corporate governance strategies to ensure transparency (Yum, 2014). KFC in US also conducts a self-evaluation process led by its governance committee each year, allowing the top management and the rest of employees to observe and analyze the business operational plans and results that will be presented by the Board, and seeking the professional help of outside consultants without the need to seek approval from the Company (Yum, 2014). KFC in Japan also seek professional help from outside corporate auditors and outside directors (Mitsubishi Corporation, 2013). In fact, KFC in Japan maintains 8 corporate and independent auditors who audit the company once a month (Mitsubishi Corporation, 2013). Individuals who are directly responsible for its corporate governance are liable when proven guilty of violating the laws and policies on governance (Mitsubishi Corporation, 2013). Not all governance are related to finance. To protect the environment, part of KFC UK’s governance is to ban suppliers who contribute to the degredation of our forest (Illegal Logging Portal, 2012). Last December 2012, KFC in China was subject to a lot of controversy because most of its chicken supply contains excessive amount of antibiotics (Reuters, 2012). To create balance between the company and its internal and external shareholders, the top management of KFC China decided to remove more than 1,000 chicken suppliers from its supply chain system (Business Insider, 2013). Aside from serving KFC chicken worldwide, KFC’s corporate objectives include: (1) keeping the customers happy; (2) offering menu based on their target customers’ choices; (3) continue business expansion worldwide through franchising (KFC, 2014b). The business strategies used by KFC in UK, US, Japan, and China varies from one another. For instance, despite the presence of market saturation, KFC in US recently reduced the company’s ownership in its franchise package from 35% down to 5% to attract more people to franchise KFC (Brady, 2012). In UK, KFC decided to promote the Lavazza coffee in all KFC store outlets in order to attract more coffee drinkers to visit the fast food restaurant (Reynolds, 2013). Aside from strategically locating KFC store outlets in residential areas where most Western expatriate lives, KFC in Japan promoted their food products as a Christmas meal that the Japanese families can enjoy (Mitsubishi Corproation, 2010). Because of the cultural differences when it comes to food choices, KFC in China decided to adapt the cuisine in China (i.e. egg custard tarts, meatballs, egg congee, fried dough, etc.) (Kaiman, 2013; Shen, 2008). Likewise, KFC in China maintains a strong connection and support from the Chinese government (Cho, 2009). (See Table I – Summary of KFC’s Nature of Ownership, Governance, Business Strategy, and Corporate Objectives on page ) 4. Power/Authority of Management, Nature of Strategic Decision-Making, Nature of Decisions on Building Corporate Capabilities In most western countries like UK and US, the use of the top-down management style is common (Tomalin and Nicks, 2007, p. 105). It means that the top management group, the board of directors, and the managers who have the power or authority to make important decision making in business operations that can improve the company’s overall capabilities (Li, 2007, p. 134; Tomalin and Nicks, 2007, p. 105). Bottom-up decision-making process is commonly practiced in Japan (OECD, 2001, p. 127). However, there are some companies in Japan that chose to adapt with the “Japanese parallel duality system” which means that the board of directors are in control of the overall business whereas the corporate managers are the ones who are assigned to implement the decisions made by the board of directors (Li, 2007, p. 134). This explains why there are cases wherein the business managers in Japan are given the limited power and authority to manage and control the business’ financial issues, operational procedures, and matters concerning the human resources (Lebra, 1992, p. 160). In China, most companies follow the “triplex party system” which is normally created by the board of directors, the business managers and the supervisors (Li, 2007, p. 134). It means that the board of directors, the business managers and the supervisors has an equal share of power and authority when it comes to making important business decisions (i.e. long-term financing plan, merger and acquisition, etc.). 5. Long-term and Short-term Investment of Technology Based on Hofstede’s fifth dimension (i.e. long-term and short-term orientation), it is common for both the Japanese and UK-based companies to invest more on long-term technology whereas most US-based companies prefer to invest more on short-term technology (Frankel, 2006, p. 57). In line with this, Frankel (2006, p. 57) explained that one of the main reasons why most US-based companies prefer to invest more on short-term technology is because the type of ownership in US are corporations that are mostly interested in seeking short-term performance. Similar to most Japanese and UK-based companies, Chinese culture is very much long-term oriented (Information Resources Management Association, 1999, p. 893). It means that companies based in China are more likely to engage in long-term investment on technology. Furthermore, Citic Publishing House (2002, p. 1005) explained that engagement in long-term orientation is often times association with a strong economic growth. 6. Investment in Plant and Machinery and Its Relationship to Productivity Companies in UK, US and Japan have different point-of-views when it comes to their investment in plant and machinery. In general, the average life-span of most plants and machinery is approximately 35 years (Booth, 1995, p. 141). As of 2007, Stutely (2011, p. 104) reported that Japan spends more money as compared to UK and US when it comes to investing on plant and machinery. Due to the fact that there is a strong and direct relationship between investment in plant and machinery and productivity output, higher investment made on plant and machinery is more likely to increase the country’s overall long-term capacity on productivity and economic growth (Stutely, 2011, p. 104). Table I – Comparison between UK, US, and Japan’s Investment in Plant and Machinery as of 2007 Investment in Plant and Machinery (% of GDP as of 2007) UK 6.0% US 5.6% Japan 9.6% China - Source: Stutely, 2011, p. 104 7. Management of People Human resources contribute to the success of the business and in major economies. When it comes to determining the best management technique which can be used in managing people in different countries, the Hofstede’s framework can serve as an important tool in business management (Citic Publishing House, 2002, p. 1005). For instance, the power distance score in UK is 35 out of 100 whereas the score in US is 40 out of 100 (Patel, 2014, p. 39). Since US has a higher score on power distance as compared to UK, it means that more people in US accept the fact that inequality within the workplace environment is normal (Information Resources Management Association, 1999, p. 892). With regards to masculinity index, the score in UK is 66 out of 100 whereas the score in US is 62 (Patel, 2014, p. 39). It means that it is common for UK businesses to follow an autocratic management style when managing its people (Machado and Melo, 2014, p. 48). US (91) have a higher score on individuality as compared to UK (89) (Patel, 2014, p. 39). It means that the best way to manage employees in US is to listen and pay more attention to things that could increase the work satisfaction and self-gratitude of each employee (Information Resources Management Association, 1999, p. 893). UK US Power Distance 35 40 Individuality 89 91 Uncertainty Avoidance 35 46 Masculinity 66 62 Source: Patel, 2014, p. 39 8. Degree of Relationship between Performance and Finance System, Forces of Convergence and Internationalization before and after 1990 Johnston and Pazarbasioglu (1995) purposely examined the impact of financial system and economic performance on 40 countries with and without banking crisis. Based on the research findings, Johnston and Pazarbasioglu (1995) found out that countries that managed to implement some sort of reforms in their financial systems are the ones who experience a higher economic growth since they manage to avoid facing the socio-economic consequences of financial crises. The practice of globalization in business started during the early part of the 20th century. Since a lot of western-based companies started to move their business operations in emerging countries, accounting practices in one country to another becomes a huge problem in most financial institutions. For this reason, the need to come up with a universal accounting standard became a controversial issue worldwide. In general, convergence in the standards of accounting practices is pertaining to the goal of being able to create a single universal set of accounting standards which can be use for worldwide application purposes (Financial Accounting Standards Board, 2014). In the process of pushing the convergence in accounting standards, there is a higher chance wherein people from one country to another can avoid the risks of having discrepancy in their accounting practices (IFRS, 2008). 9. Extent to which the Crisis of 2008 has Transformed the Nature of the Debate about Finance Systems and Types of Capitalism Professor Stiglitz argued that the 2008 financial crisis was the result of having “inadequate regulation” in our financial system whereas Professor Scholes argued that it is necessary to hold back innovation in our financial system (The Economist, 2014). On the other hand, some people said that 2008 financial crisis can be avoided provided that government regulation is present (Chan, 2011) whereas other people thought that the 2008 financial crisis was an end result of the crisis on capitalism (McMurty, 1999). Among the different types of capitalism includes: (1) corporate capitalism (i.e. Japan); (2) market-led capitalism (i.e. UK and US); (3) social-democratic capitalism (i.e. Austria and Germany); and (4) state-led capitalism (i.e. China and Germany) (Barrington, p. 39). Because of the 2008 financial crisis, capitalism is criticized for creating too much environmental degradation as well as social, financial, and economic inequality (Campbell, Parker and Bos, 2005, p. 101). 10. Conclusion In general, long-term financing, the type of business ownership, corporate governance, and management of firms are all parts of business management studies. However, not all of these four (4) basic management concepts are interrelated with one another. Even though the type of business ownership may somehow affect the way firms would manage the business, it makes more sense that organizational culture has a more significant impact on how the firms would manage the business. For these two (2) reasons, the use of long-term financing and the type of business ownership does not explain the national differences in corporate governance. Likewise, long-term financing and the type of business ownership does not explain the national differences in the management of firms. With regards to the question as to whether or not contrast in long-term financing and ownership in business can account for the success of major economies, the answer is “yes”. Through long-term financing, each nation will have the opportunity to create more jobs and eventually increase its GDP. 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Table I – Summary of KFC’s Nature of Ownership, Governance, Business Strategy, and Corporate Objectives Nature of Ownership Governance Business Strategy Corporate Objectives UK 60% franchised + 40% equity In response to global warming, KFC in UK banned the use of non-biodegradable packaging materials and suppliers who are involved in clearing the rainforest (i.e. virgin pulp) Promote Lavazza coffee in all KFC store outlets in UK To serve KFC chicken worldwide, keeping the customers happy, offering menu based on their target customers’ choices, and continue business expansion worldwide through franchising (KFC, 2014b) US A subsidiary company of YUM! “Code of Conduct”, maintain two-way communication between top-down management, practice transparency, conduct self-evaluation process annually, and guidance from outside consultants Reduced company ownership in its franchise package from 35% down to 5% Japan JV through franchise between KFC and Mitsubishi Corporation (62%) Seek professional help from outside corporate auditors and outside directors, maintains 8 corporate and independent auditors who audit the company once a month, individuals who are directly responsible for its corporate governance are liable when proven guilty of violating the laws on governance Strategic location near residential area close to where Western expatriate lives and promoted KFC as Christmas meal China Mostly company-owned. Franchising started in 1992 Removed more than 1,000 chicken suppliers from its supply chain system after chicken scare Adapted the local cuisine in China (i.e. egg custard tarts, meatballs, egg congee, fried dough, etc.); support from Chinese government Read More