This document discusses different political and economic systems from a business perspective, focusing on communism, capitalism, and corporate governance. It outlines the key characteristics of communism, including prioritizing collective over individual goals and state ownership of enterprises. Capitalism is defined as an economic system based on private ownership and profit motivation. The goals of businesses as maximizing profits through sales and market expansion are described. Different forms of business ownership like sole proprietorships, partnerships, and corporations are compared. The document focuses on corporations, explaining how the separation of ownership and management can lead to governance problems if not properly monitored and incentivized.

1. By: 1. Kenneth A. Kim
John R. Nofsinger
And
2. A. C. Fernando

2.  Chapter outline
◦ Studying global political system from business
point of view
◦ Goal of business i.e. profit maximization
◦ Forms of businesses
◦ What is corporate Governance
◦ Investors influence on management
◦ How to monitor management
◦ Corporate governance: An integrated and complex
system.

3.  Introduction
◦ There are two major political systems in the world
from business point of view
 1. Communism
 refers to a political system that stresses
the primacy of collective goals over
individual goals

4.  Characteristic of Communism
◦ Needs of the society are viewed as a whole than
individual freedom.
◦ State-owned enterprises are managed to benefit
society as a whole, rather than individual capitalists
◦ Examples are:
 Cuba
 Vietnam
 China (market based economic reforms)

5.  Capitalism
◦ Capitalism is an economic system based on the private
ownership of capital goods and the means of production,
with the creation of goods and services for profit.

6.  Characteristics of Capitalism
◦ Ownership belongs to “YOU”
◦ Freedom of own economic growth
◦ Suitable environment for business
◦ Profit in your “Pocket”
◦ Reward based system
◦ Creative and innovative environment

7.  Goal of a Business
◦ Maximum profit by increasing business
◦ How?
 1. Increasing sales in the existing
market
 2. Creating new markets for the
existing products.

8.  . Enhancing business requires
capital which brings risk.
 . So, the ability to access
capital and control risk are
important in the success or
failure of a firm.

9.  Forms of Business Ownership
 Sole proprietorship – a business own by a single
person
 . Easy to start
 . More than 70% of all US business
 . But limited lifespan
 . Die with the owner’s death or retirement
 . Limited ability to obtain capital
 . Owner bears unlimited personal liabilities for the
firm
 . Less trustworthy

10.  Partnership – similar to sole proprietorship but
there is more than one owner.
 .The ability to pool capital
 But may not be as important as combining service-
oriented expertise and skill, especially for larger
partnerships, for example;
 Accounting firms
 Law firms
 Investment banks
 And advertising firms

11.  Corporation –
the corporation is its own legal entity, as if it
were a person.
Advantages
 . The owner of the corporation enjoys limited financial
liabilities
 Which is very hard in the case of sole proprietorships
and partnerships.
 For example
 Bill Gates of Microsoft
 Tim Cook of Apple
 Larry Ellison of Oracle

12.  Fewer than 20% of all US businesses are corporation but
are generating approximately 90% of the country’s
business revenue.

 . The most important advantage of corporation business
is access to capital market and can raise money by
issuing stocks and bonds to investors.
 . It doesn’t die when its owner do because corporation is
not in single person ownership, it has many owners.

13.  Example
 “Between 1977 and 1980, Apple Computers sold
a total of 121,000 computers. To meet the
potential demands for millions of computer per
year, Apple needed to expand operations
significantly. As a result, in 1980, Apple became
the public corporation and sold $65 million
worth of stocks”.

14.  Main disadvantages of corporations are;
 . Corporate profits are subject to business taxes
before any income goes to share holders in the form
of dividends.
 . Subsequently, shareholders must also pay personal
taxes on dividend income.
 Which means shareholders are exposed to double
taxation.

15.  Running corporation cab be expensive. For
example
 The cost of hiring accountants
 Legal experts
 Cost of communicating with all shareholders
 Cost of complying with Regulations and so forth.
 Perhaps the main disadvantage is of governance
problems.
 Small stake and lack of true sense of ownership
bring RISK and lack of CONTROL

16.  What is Corporate Governance?
“Problems that result from the separation of
ownership and control
 Focusing on
 The internal structure and rules of the board of
directors;
 The creation of independent audit committees;
 Rules for disclosure of information to shareholders
and creditors
 And control of the management
 This explain how a corporation is structured.

17.  Separation of ownership and management
Corporate Governance
Separation of ownership and
management
Shareholders
Employees
Board
Management

18. Separation of Ownership and Control
 . Stockholders own the firm and officers (or
executives )control the firm.
 . Hundreds of thousands of investors can’t
collectively take decisions. So firms hire
managers for that work.
 .The shareholder’s main focus is toward business
performances and return of their stock, rather
than in decision making process.

19.  Why should managers should care about the
owners?
 Satisfactory profit for the stockholders and
massive perks for themselves (principal-agent
problem or the agency problem)
 Managers may be tempted to use the firm’s assets
for their own ends.
 Secretaries may take the supplies
 Managers may take extra food or fancy furniture for
their offices
 Executives can use expensive jets for travelling
 Etc;etc

20.  Ability to steel from the shareholders, the
most are the executives.
 This problem can be solved by
 Incentives
 Common incentives
 Offering stocks, restricted stocks or stock options
(normal practice in US companies)
 And monitoring