Analysis of Capital Structure
The theory of agency is the most dominant in the business
world. The relationship between agencies (shareholders and managers) refers to
the contract where an individual engages with the other (agent) to execute a
service or activity on their behalf. It entails delegation of authority and decision-making to an agent (Van Puyvelde et
al., 2012). In this case, the stockholder is the principal while the manager is
the agent. Often, the agent’s goal is divergent, implying that his/her best
interest is not to act as per the directives of the shareholders. Consequently,
the management redirects the shareholder’s main goal of profit maximization to fulfill
personal interests and the needs of the organization. The agency issue arises
when the decision makers are separated from organizational ownership. The
conflict of interest surfaces as shareholders (principals) delegate duties and
authority to agents because they lack the ability to conduct it themselves thus
provide an opportunity for the management to divert resources for the accomplishment of individual interests (Brown
et al., 2011). The agency problem not only exists between the shareholders and
managers but also between the organization and stakeholders like investors and
the public. In light of this, a need exists for customization of corporate
governance model for sufficient protection of creditors’ investments and the
shareholders.
Agency problem can be mitigated. Several mechanisms
exist to minimize this issue. First, the most obvious strategy is the
managerial shareholding. In the developed world such as China, corporations
such as Baidu Inc. Practices this mechanism to provide incentives for reward
and monitoring of the CEO effectively, hence an improvement of the
organizational performance (Cuevas-Rodriguez et al., 2012). Secondly, the
external labor market encourages the managers to shift their focus towards
reputations with the employers, thus performance improvement in the process.
Third, the downgrading threat as imposed by the corporate control market yields
a controlling discipline on the organizational leaders and departmental heads
that exhibit low performance to sustain corporation growth trajectory. Lastly, the
board members have a role of monitoring management and offering support to
strategic decisions prior to their implementation by the management.
To mitigate the agency problems for Baidu Inc.,
determination of suitable governance model in the context of the Chinese market is important. Baidu should
consider adoption of appropriate corporate governance model to protect the
rights of shareholders and to enhance transparency. As a result, the firm is
able to reflect on the market credibility to avoid financial volatilities and
crises (Fayezi et al., 2012). Employment of effective mechanism provides a
system that allows managers to customize corporate practices to serve the
interests of shareholders. Therefore, the agency theory should emphasize on the
elimination of conflict between the top
level managers and the organization’s owners.
Institutional Theory in
China
Business
entities such as Baidu are guided by regulations and rules that ought to be practiced for survival and legitimacy. However,
these regulations cannot guarantee an efficient continuous operation of the
firm, thus conceiving the institutional pressures. As a mechanism, the institutional theory should be adopted to
examine systems that include macro-global frameworks to interpersonal
interactions between the shareholders and the management (Suddaby et al., 2013).
In this way, corporations can organize themselves to employ similar traits with
other business entities in a specified business sector, for instance the social media or internet platform.
Institutional mechanism incorporates three isomorphic processes namely
normative, mimetic, and coercive. Coercive isomorphic process suits Baidu
because it entails pressures that can be exerted to adopt appropriate
governance model. In fact, coercion employs other mechanisms like authority,
power, and legitimateness to instigate the form to improve transparency and
serve the interests of investors. For mimetic isomorphism, Baidu can imitate
similar contexts in online media platforms, though uncertainty plays a vital
role in the selection criteria (Kostova et al., 2013). Normative isomorphism, on the other hand, branches from increased
professionalization among the shareholders. Capital market members and the
management.
Corporate Governance
The Chinese economy has been booming for more than
30 years, thus increasing the liquidity levels in the Chinese market (Claessens
and Yurtoglu, 2013). Likewise, China’s technology evolves at a rapid pace. The majority of the country’s citizens have
adopted the use of social media as the
main mode of communication, especially for the young population. Given the government
shutdown of foreign social media such as twitter and Facebook, Baidu thrives as
a dominant for domestic market with due to minimal external competition. In
this regard, Baidu performs excellently in the stock market.
Oversight
Furthermore, the board
of directors should oversee the implementation of the mechanism by senior
management. They should ensure absolute compliance of the adopted mechanism as
per the laid down rules by the state’s regulatory authorities. Financial
stability can be ensured by operational objectives supervised and administered
by Chinese capital market authorities and Baidu’s internal overseers.
Eventually, first-time investors will be educated and notified on the
developments hence bridging the existing gap between them and the management. Provision
of timely information helps in the determination and correction of errors to
limit or arrest negative impacts of financial or operational shortcomings. In
turn, the firm will gain a reputation as market-efficient because it reveals
the degree of Baidu’s compliance with regulations, market laws, and policies. In
addition, the shareholder will understand the degree of corporation’s risk
management, risk identification, market discipline, and internal controls
(Larcker et al., 2011).
Another mechanism
should involve timely, continuous, and rational provision of Baidu’s performance
data as per the market condition. It allows for consideration of the level of
incentives to be provided to the board members and the managers, especially if
they are successful in the formulation of sound credit and investment decisions
(Krause et al., 2014). Otherwise, the shareholders’ needs will hardly be
adhered to. Resultantly, the need for transparency in business transactions
forces the firm to comply with the set standards of accounting to avert the
risk of shareholder withdrawal or penalization in the stock market. Besides,
the investor can assess the actual financial value of the form in terms of
competitiveness, profitability, and efficiency.
Market-Oriented Mechanism
The goal of embracing
of appropriate mechanisms and models is to promote business governance status
to reflect the market conditions and to avoid cases of conflicts between the
shareholders and the firm’s leadership. In fact, the adopted mechanisms should
be in accordance with the international principles and standards for positive
reflection on risk management and to address the challenges of globalization
(Bell et al., 2014). In China, market-oriented mechanisms rely on mandatory
regulations by the central government to protect shareholder’s interests. They
are dependent on both formal and informal models of hostile takeovers and incentive-based compensational structure to
monitor the accountability of the directors and managers. If this is the case,
it is clear that the board members and the management craft corporate laws to
seamlessly fit the demands of
shareholders and the market circumstances. Under this mechanism, full
disclosure requirement could suffer a setback because of shielding of
performance data from regulators and shareholders.
In this mechanism, the
regulatory bodies have fewer roles to play, thus rendering the unofficial
models to regulate the governance process. In fact, the mechanism works best in
unrestricted economies such as the United States and other Western markets
whose business forces measure and determine organizational performance.
Furthermore, this model requires the shareholders to be aware of the market
mechanisms to speculate the decisions to be made by the management (Bubb and
Warren, 2013). Market-oriented mechanism affects emerging Asian market if Baidu
adopts it because of the shortage in coping with fast technological evolution
on the global platform. Moreover, Baidu and other corporations headquartered in
China are subject to multiple levels of overlapping rules as most of them
strive to enact and implement cost effective mechanisms to mitigate agency
issues.
Organizational Governance
System
The merging of requirements to a single course for
the attainment of shareholders’ needs calls for a development
of enterprise-wide and holistic organizational governance system that employs
technological tool to improve effectiveness in compliance with the set rules. Further, the system should
focus the attention of management towards transparency. If transparency lacks
within the internal business environment, chances are that the shareholders
interests will be exploited in the hands of corporate insiders. Consequently,
Baidu’s strategists should conduct extensive research and development to update
the existing knowledge and to measure the impact of opaqueness in transaction
on the response of shareholders to market behavior.
Business regulatory authority in China can protect shareholder’s
interest by enacting mandatory policies and laws that define the rights of
shareholders. The model will be enforceable rigorously by the firm’s management
to enable market forces to measure performance as per financial data and
reliable accurate operations (Haque et al., 2011). Not only does this protect
the shareholders from mismanagement and abuses but also, controlling
shareholders are inhibited from exercising opportunism against minority
stakeholders. However, it is worth noting that a large section of Baidu’s
shareholders in China and abroad possess little knowledge of the capital market operations.
Managers
that own less than 100 % of common stock in the organization are more likely to
experience agency-related issues with the shareholders because they can make decisions
that are in sharp contrast with the best interest of stockholders (Ingley and Van Der Walt, 2015). For instance,
malicious managers can exercise unethical business practices growing the firm
to avoid foreseeable attempts of takeover to keep their jobs. What they do not
realize is that the planned takeover is in the best interest of shareholders.
In the modern business environment, a scenario like this is avoidable if
primary mechanisms are instituted to motivate the managers. Studies indicate
that genuine motivation results in the management acting in the best interest
of the firm owners.
Compensation
Compensation of
managers as per their input and efforts ought to be constructed to align
shareholder’s needs those of the leadership besides assuring the retention of
competent managers. The mechanism can be implemented by adding company shares
and performance bonuses to the annual salary (Deutsch et al., 2011). The shares
of the business entity are distributable to managers as executive stock options
or performance shares. In the case of stock options, the managers have an
opportunity to acquire shares at a future price and date. Use of stock options
renders managers as shareholders, hence aligning them closer to the interests
of other stockholders.
Direct
Intervention
Shareholders are
empowered to intervene directly in the case of non-responsive management.
Currently, large institutional investors own stocks and shares (including
mutual funds and pensions) in multinationals such as Baidu. Consequently, they
can exert influence on the firm’s operation and the organizational leadership
should they chose to. In fact, they can threaten to fire the managerial staff
especially if they are unhappy with the direction of the company. Their close relations
with the board allow them to forge for reshuffle or total overhaul of the
existing management. Still, the shareholders can re-elect a new BOD for their
demands to be met (Dalziel et al., 2011). Deterioration of stock price due to managerial
incompetence can result in the introduction
of new managers by the stockholders to restore control of interest.
In summary, the organization can be motivated to
achieve and facilitate undertakings by proper corporate governance to meet the
goals and to assure development for shareholder’s benefit. In this way, it is
possible for Baidu to attract international investors and to expand its global
prospects. However, the move cannot be beneficial unless the market readies
itself in terms of clear governance regulations and transparency. An adoption such as this demands a legislative
business environment to enforce to set a comprehensive strategy and to enforce
the implementation process for attainment of accountability and responsibility.
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