Finacialization

INTRODUCTION

Based on the reading of Erturk et al. (2008), “Contracts, discipline and management pay” (Fama, 1970) called my attention to the importance of the discussion developed by the author and the effects on my daily challenges as professional and manager, in which the routines of decision making, risk bearing and responsibility towards the stakeholders of the company I work for, and subsequent pay and retributive policies that I am subject to.

“Contracts, discipline and management pay” (Fama, 1970) snapshots his view based one of the agencies theories and briefly comment the concept of ownership of the firm, management and risk bearing, separation between security ownership and control of the firm and contract settling up.

CONCEPT OF OWNWERSHIP OF THE FIRM

Beginning from the definition of firm, considered as framework of contracts which establishes the way inputs are aggregated to become outputs and how those are cashed and distributed among the inputs (Fama, 1970), we can start discussing the concept of ownership and its irrelevance. Nevertheless, it shall be individualized, as well, the concept of capital and security ownership.

The capital as the funds available for the firm activity, which will consolidate in the movement of the working capital throughout its cycles and the generation of cash and equivalents, consequence of the encashment of the outputs with its value added.

Considering security ownership as simple right of an individual or organization on a structured firm, which along this right, the owner is entitled to receive dividends or share losses and care for the business thru pre-established mechanism of monitoring and indirect control.

MANAGEMENT AND RISK BEARING

The firm movement is based on the management capability to gather and create the appropriate framework of contracts, which will allow the firm activities to achieve the maximum of outputs with the minimum of resources, creating the highest profitability possible. The achievement of such goal is possible based on the analysis of several factors, which may affect the firm result, associated to the risk of each activity has in the whole process.

Rests on the management the responsibility to evaluate the circumstances and make the decision, determining which risks the firm will bear or not.

It is noted, as well, that management makes major decisions and they are not subject to the most of the effects, since they are not the largest holders of residual rights, without effective controlling procedures, agents won’t have better chances to make decisions that deviate from shareholder interests. In this sense, it is necessary the control the agents in order to avoid problems in decision-making. In this case, Zylbersztajn (2000) states that specialized structures appear to limit opportunism costs.

Fama and Jensen (1983), disclose that in the most of organizations forms utilize contracts, or we can call internal policies, for instance in the organization I work for, we have a set of guides called golden rules and silver guidelines, which as Fama and Jensen (1983) presents as limitation for risks undertaken by the agents exercising decision processes. Even with pay-offs depending on the performances, the binders imposed for such rules, prevent the managers to simply overrule those regulation in order to achieve the key performance indicators, entitlement that is on the board of directors only.

Then, residual risk is supported by the agents who actually engage with rights and not only exercise powers entitled to them. These agents, carrying such the residual risk are the residual claimants or risk bearers.

Residual claimants are the group of agents that have high uncertainty, since they are not expected to have any other role in the organization. They are also able to spread their risk at any time, since their rights are negotiable. Normally, in such case these are large open companies. The same won’t happen in much smaller organizations when regularly, the residual claimants are those who have the majority of the decision making. In general, they are able to increase the net cash of the organization outputs, by reducing monitoring costs, it is a tendency as well to feel such reduction of output costs, in contract in which the decision rests on the residual claimants.

In order to implement some controlling on the decision-making, a process that involves steps and levels of responsibility within the management is suggested. Those can be made jointly or individually, according to the most appropriate role the managers or group is covering in the organization.

According to Fama and Jensen (1983), the organizations in which the decision’s right is on the entrepreneurial, it tends to ignore the decisions steps, however the structured organizations follow for 4 steps of decision process:

- Initiation: evaluation of availability of resources and its utilization and contractual structuring;

- Ratification: Definition of activities to be developed;

- Implementation: Execution of activities priory defined;

- Monitoring: Controlling and measurement of execution.

Still based on Fama and Jensen (1983), according to the decision steps we can identify that initiation and implementation are normally lead by one single the agent and ratification and monitoring by a different agent or agents. Then, we can break the terminology decision into decision management, defined by the initiation and implementation, and decision control, defined by ratification and monitoring, both part of the decision process.

Mintzberg, Raisinghani & Theoret (1976), as well, present the decision process classifying different routines of decisions. The initiation and implementation of decision are typically assigned to the same agent, combining these two roles under the term: decision management. In the same way, the decision control term includes the ratification and monitoring. The separation between the tools decisions management and decision control include: hierarchy decisions, boards that endorse and screen the most important decisions of the organization, hiring and firing, compensating management (decision makers); and decision making structures that encourage intrinsic monitoring of agent decision.

Fama and Jensen (1983) highlight relation between risk bearing and decision processes of organizations by the separation of residual risk from the decision management that drives to decision systems which dissociate decision management from decision control and merger decision