Stakeholders, Governance, and the Russian Enterprise Dilemma

1. Introduction
Russian problems
§ Continuing lack of investment and restructuring in the corporate sector
§ Russian’s firms output, profitability, and cost efficiency is very low
§ Domestic investment in Russian fall
§ Russian receive the least foreign direct investment
§ Wages left unpaid, fiscal obligations unfulfilled, barter based transaction
§ Lack of credible investor protection
§ Why the construction of the institutional apparatus required
o Ensuring payments and investor protection in Russian
o Has proved to be such an intractable problem for so long
o Despite the country’s having received the best available advice and millions of dollars in foreign aid.

2. What happens when manager are owners
No external monitoring should be needed in an enterprise wholly owned by those who:
§ Initiate and implement decision
§ Provide the financing
§ Bear the residual risks
Problem of corporate Governance in Russia
§ Not limited in protecting minority shareholders
§ Involving insufficient incentives
o Owner-managers with the short time horizon
§ expected gain from increasing firm’s value and share application less than what they can obtain by stripping asset
o Maximizing value is reasonable long term analyze
§ Value can be analyzed through the sale of the ownership rights in enterprises
o Owners have been more inclined to withdraw cash (illegally)

3. Regional governments exert influence
§ Regional governments
o Maintain the operations of important local workforce
o Have a strong influence over the actions of key enterprises
§ Cash-flow diversion
§ taxable revenues reduce regional governments then collect revenues and control it

4. Barter and arrears as tools of control
Barter is a nonpayment and non cash settlement (exchange goods)
§ Useful instrument of enterprise control for both regional government and insiders
§ Preferential tax treatment
§ “discount” on utility bills
§ preferences in public procurement
§ Intended to prevent companies from shutting down
§ and laying off employees

5. Need for selective ownership transformation
o Three critical problems in relying upon bankruptcy procedures to initiate ownership transformation:
§ Creditor coordination is difficult to sustain
§ The capacity of the judicial system is limited
§ Bankruptcy is disruptive
Dilemmas on ownership mechanism
§ Simultaneous conversion of debt to shares and the sale of the resulting shares can be accomplished only if there is only a priori investor interest in the share purchase
§ If the investor interest is needed before a conversion can take place, this will preclude a competitive auction
An ownership transformation would accomplish three necessary reforms:
§ It would transfer a cash payment to the regional authorities
§ If followed up with a coherent program of supporting social reforms, it would allow coalitions of outside investors to dilute the ownership of insiders
§ It followed up with a coherent program of supporting social reforms
These approaches to corporate takeovers may be objected to on the grounds:
§ Ownership transformation is an easy exit for managers, but it is notOwnership transformation would be applied only to steps debt

Owner compensation ideas to reconsider at year-end

Anonymous. Partner's Report. New York: Oct 2003. Vol. 03, Iss. 10; pg. 1

Abstract (Summary)
PR agrees that the motivation "angle" is becoming increasingly important as a tactic to institute change within CPA firms. As [Joel Rose] notes, "Firm management will be unable to move the organization in a particular direction unless the compensation system points to that direction as well. Your compensation system's emphasis and its administration ultimately determine your firm's direction and culture.
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Copyright Institute of Management & Administration Oct 2003
[Headnote]
Increasing Margins



Now that year-end is approaching, it's a good idea for CPA firms to revisit the issue of owner compensation-especially this year, with all the shifts in CPA firm practices and priorities. Even if most of your partners are satisfied with the firm's current structure, it can't hurt to consider the range of options.
PR finds interesting several suggestions on new ways to view owner compensation from a consultant who regularly works with law firms, Joel Rose, a Certified Management Consultant and president of Joel A. Rose & Associates, Inc. (Cherry Hill, N.J.; 856-427-0050 or 800-381-1645; e-mail: JROSE63827@aol.com). Although the structure and billing practices of law firms are a bit different from CPA firms, these ideas are easily adaptable to a CPA firm setting.
Start with motivation. "Your partner compensation system must reward owners for their total contribution and serve as a management tool that motivates them to perform the fee-producing and nonbillable activities the firm needs to progress," Rose says. "But when you create, revise, and administer a compensation system or components of the system, you must think carefully about what it will motivate your partners to do."
PR agrees that the motivation "angle" is becoming increasingly important as a tactic to institute change within CPA firms. As Rose notes, "Firm management will be unable to move the organization in a particular direction unless the compensation system points to that direction as well. Your compensation system's emphasis and its administration ultimately determine your firm's direction and culture. You must determine how to make it encourage hours, delegation to others, management, and so forth."
When compensation criteria and firm goals don't mesh. Tensions develop among partners when the compensation criteria you've designed to establish the firm's direction and reinforce its culture fail to do the job. Conflict can result from competing values when compensating partners for:
* Delegation of work vs. revenue from personal working hours.
* Credit for joint business development vs. individual origination.
* Credit given for consequential nonbillable time vs. time devoted to producing client work, etc.
Issues to address. To make your partner compensation plan work for the firm as well as for individual partners, you must resolve issues in the following areas:
* Business origination from new clients. In today's climate, the firm that fails to recognize client origination won't prosper and may not survive. Nonetheless, the system must also reward partners for their efforts to retain clients and expand existing client relationships. Origination has always been a more contentious issue for law firms, but CPA firm partners are finding that the move to cross-selling in recent years has brought this issue to their own partnerships. Properly recognizing the origination of new business-even when a CPA doesn't perform the work-encourages CPAs to participate in business development activities and discourages them from hoarding work. Rose suggests that firms need a procedure to deal with the issue; in particular, you have to decide whether the origination credit will be permanent or for a defined duration.
* Permanent origination credit. This lasts as long as the client or the originating owner remains with the firm. If the originating partner retires or leaves, the client may be considered a "firm client" with no individual attribution or credit assigned to the CPA(s) most closely identified with the client, thereby providing no incentive to the CPA(S) responsible for the client relationship. This system will require adjustment for the winding down of a practice before a partner's retirement, as the partner hands off the primary client relationship to others.
If a subjective compensation system is in place, new business may be considered comparable to the retention of significant clients as long as the partner's efforts are apparent and consistent with the firm's goals and objectives.
* Origination credit for a defined period of time (i.e., five or seven years for total fees). This requires rainmakers to develop new clients. At some point, the new-business credit-but not the cross-selling credit-ceases for a given client and that client becomes a "firm" client.
* Shared-origination credit. This gives credit to partners for their marketing efforts, acknowledges the importance of their initial value to the client, or recognizes their immediate assumption of responsibility to retain and increase the volume of profitable business from that client. This credit is especially useful to ensure that partners don't ignore clients originated by others as they pursue new origination.
Other important issues involve the means for allocating origination credit and the relationship between new-business credit and cross-selling:
* Allocating business origination credit effectively. Your system must track the new business developed by each owner and should include information called for on the new file opening form. Also, to limit misunderstandings between and among partners, the firm should define what constitutes a new client. Problems can be averted by publishing client information in new-business files, thereby allowing all partners to review the list of clients for which new business credit is being given.
It is also important to give credit for and to track cross-selling credits when partners develop new work from existing clients, since this is probably the best source of additional business for the firm. Rose recommends that credit for cross-selling business be equal to that for new business. And, when administering the tracking system, use a broad definition of "new" business to keep the partners' level of interest in origination high.
* Tactics for allocating credit for new business/ cross-selling. These will depend upon whether your firm has a formula or a subjective compensation system. With a formula system, the percentage should be high enough to serve as an incentive to develop business, but not so high that there is no incentive for others to work on the engagements. With a subjective system, make it clear that the firm is giving significant credit for business development. In either case, your firm will have to reach a compromise between the client producers and the work producers.
Compensation systems must also address issues related to receivables, delegation, and credit for management:
* Billing and collections. Your compensation system must value these because the systems that reward hours billed and collected lead to more work being delegated. If origination credit and client satisfaction are measures of value for compensation, delegation is more likely to fulfill both criteria.
The collection of billed hours has proved to be a far more significant measure of productivity than billable hours alone at law firms, where billed hours are still the leading tender for work that is accomplished. While Rose says that hours billed and collected are a fair and significant basis for reward and are probably more likely to lead to delegation, it is important to consider how you will work value or set-fee-billed engagements into the formula so as not to neglect alternative ways to price engagements for the more traditional billed time.
* Partner delegation. Although partners in most firms recognize the importance of delegating work to others, such delegation will only take place under one or more of these conditions:
* The delegator has more than enough work to do.
* The delegator has more important/profitable work to do.
* The delegator has additional responsibilities that require others to do the work.
* For the economic efficiency of the client, it is appropriate for certain work to be done by others.
* The work in question falls within a defined area of concentration that necessitates its transfer.
Partners must establish guidelines to ensure that work is assigned within the appropriate area of the firm and that supervision is available for compliance. If origination credit is involved and is properly rewarded, the partner will be less likely to focus solely on the "eat-what-you-kill" principle.
* Credit for management. The system must award credit for practice areas, activities that relate to the firm, or other defined responsibilities (e.g., managing partner, partner in charge of a department) "so as to be able to identify quantitative and qualitative goals by which to measure management performance," Rose says. Results from management responsibilities must count as well, he stresses. "If the management task assigned and ultimately evaluated results in heightened efficiency, cultural betterment, and/or increased profitability, the firm should include this in the compensation of the responsible partner(s).
"Remembering that leadership of high quality is harder to replace than to retain, firms must reward it appropriately. If they don't, those in current management will be less motivated to continue their efforts, since meeting other criteria of the compensation plan will undoubtedly lead to more dollars for others."
Firms generally acknowledge devotion of time to management by:
1. Reducing the targeted billable hour goals for managers. Those with heavy management responsibilities should be given lower billable-hours goals without having to worry about taking a compensation hit.
2. Paying a fixed stipend for management roles. Rather than adjusting work goals, some firms assign a fixed sum for certain management work, such as $25,000 or $40,000 for service as the managing partner, member of the executive committee, and/or head of a practice area.

Owner Compensation Ideas to Reconsider At Year-End

Year-end is approaching; CPA firms revisit the issue for owner compensation-especially this year, with all the shits in CPA firm practices and priorities.

Motivation:
§ "Your partner compensation system must reward owners for their total contribution
§ Serve as a management tool that motivates them to perform the fee-producing and non-billable
activities the firm needs to progress.
§ When you create, revise, and administer a compensation system or components of the system, you
must think carefully about what it will motivate your partner to do.

Motivation “Angle”
§ Firm management will be unable to move the organization in a particular direction unless the
compensation system points to that direction as well.
§ You must determine how to make it encourage hours, delegation to others, management, and so forth.
§ Compensation criteria and firm goals have to be mesh.
§ This mesh can make the tensions among partners when the compensation criteria you’ve design to
establish the firm’s directions and reinforce its culture to do the job.

Conflict can result from competing values when compensating partners for:
§ Delegation of work vs. revenue from personal working hours.
§ Credit for joint business development vs. individual origination.
§ Credit given for consequential non-billable time vs. time devoted to producing client work, etc.

Business origination from new clients
§ In today's climate, the firm that fails to recognize client origination won't prosper and may not survive.
§ The system must also reward partners for their efforts to retain clients and expand existing client
relationships.
§ Firms need a procedure to deal with the issue; in particular, you have to decide whether the origination
credit will be permanent or for a defined duration.

Permanent origination credit
§ This system will require adjustment for the winding down of a practice before a partner's retirement, as
the partner hands off the primary client relationship to others.
§ If a subjective compensation system is in place, new business may be considered comparable to the
retention of significant clients as long as the partner's efforts are apparent and consistent with the firm's
goals and objectives.

Origination credit for a defined period of time
§ This requires rainmakers to develop new clients.
§ At some point, the new-business credit-but not the cross-selling credit-ceases for a given client and that
client become a "firm" client.

Shared-origination credit
§ This gives credit to partners for their marketing efforts, acknowledges the importance of their initial
value to the client, or recognizes their immediate assumption of responsibility to retain and increase the
volume of profitable business from that client.

Means for allocating origination credit and the relationship between new-business credit and cross-selling:

Allocating business origination credit effectively
§ Your system must track the new business developed by each owner and should include information
called for on the new file opening form.
§ To limit misunderstandings between and among partners, the firm should define what constitutes a new
client.
§ When administering the tracking system, use a broad definition of "new" business to keep the partners'
level of interest in origination high.

Tactics for allocating credit for new business/ cross-selling
§ Your firm has to have a formula or a subjective compensation system.
§ With formula system, the percentage should be high enough to serve as an incentive to develop
business, but not so high that there is no incentive for others to work on the engagements.
§ Compensation systems must also address issues related to receivables, delegation, and credit for
management:

Billing and collections
§ Your compensation system must value these because the systems that reward hours billed and
collected lead to more work being delegated.
§ If origination credit and client satisfaction are measures of value for compensation, delegation is more
likely to fulfill both criteria.

Partner delegation
Although partners in most firms recognize the importance of delegating work to others, such delegation will only take place under one or more of these conditions:
§ The delegator has more than enough work to do.
§ The delegator has more important/profitable work to do.
§ The delegator has additional responsibilities that require others to do the work.
§ For the economic efficiency of the client, it is appropriate for certain work to be done by others.
§ The work in question falls within a defined area of concentration that necessitates its transfer.
§ Partners must establish guidelines to ensure that work is assigned within the appropriate area of the firm
and that supervision is available for compliance

Credit for management
§ Defined responsibilities (e.g., managing partner, partner in charge of a department) so as to be able to
identify quantitative and qualitative goals by which to measure management performance
§ Results from management responsibilities must count as well
§ If the management task assigned and ultimately evaluated results in heightened efficiency, cultural
betterment, and/or increased profitability, the firm should include this in the compensation of the
responsible partner(s).
§ Remembering that leadership of high quality is harder to replace than to retain, firms must reward it
appropriately.

Firms generally acknowledge devotion of time to management by:
§ Reducing the targeted billable hour goals for managers. Paying a fixed stipend for management roles.

Discussion of Separation of Ownership from Control and Acquiring Firm Performance: The Case of Family Ownership in Canada

I. Theoretical Background
a. Traditional Paradigm; agents are fully rational.
b. In Particular, on the announcement date of mergers and acquisitions, we should expect share prices

of both bidder and the target to increase proportionally.
c. The interest in relationship between ownership structure and the value-creation through mergers and

acquisitions.
d. Mergers and acquisitions do pay for both target and bidder shareholders.
e. Not all mergers and acquisitions generate negative long-term return.
f. Ben-Amar and Andre
i. To expand the agency arguments by relating the ownership structure to the performance of the

bidders on the announcement date.
ii. Use the market reaction to mergers and acquisitions as an example of financial decision that will

highlight whether family-controlled firms destroy value.
iii. Detailing cost and benefits of ownerships concentration.
g. In Canada, most firms are closely-held by family
i. Because they want to reduce agency problem.
ii. As a Dominant shareholder that can make decisions.
iii. Link between ownership concentration and firm value is mixed partly.
iv. Easier to transfer wealth to the next generation.

II. The Data and The Methodology
a. Data have to represent all nature.
b. Data selections only in completed bids may result bias as the non-completed one.
c. They consider companies with several mergers and acquisitions during the period, but they do no

specify whether the announcement dates are subject to a confounding event that may affect their

methodology.

III. Empirical Evidence
a. Use size as an explanatory variables
b. The result events study affected by the size of bidder
c. Since the family owned companies appear to be much smaller than the non-family control firms, the

size impact is likely to drive the observed relative over-performance of the family controlled firms.
d. Larger companies are likely to have larger board
e. Cross-listed companies are significantly larger than domestically listed companies
f. Canadian firm is family owned using fundamental variables such as size, profitability, market-to-book

and leverage.
g. Family controlled firms are smaller than the controlled firm; they are more likely to rely on internal

financing to finance their acquisitions.
h. Non-family firms are likely to use cash to finance their acquisitions because they can issue equity or

bonds.