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Business Economics
Lecturer: MA. Nguyen Xuan Huong
Chapter 1: Introduction
Overview of the subject
Credit: 3 credits (15 lectures)
Textbook: Business Economics and
Managerial Decision Making (Trefor Jones, John
Wiley & Sons Ltd. 2004)
Assessment:
Class participation and in-class activities: 10 %
Presentation and assignment: 20%
Mid-course test: 20 %
Exam: 50 %
Total: 100 %

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Overview of the subject (cont)
Lecture times and venues
From 15/4-9/6/2013
- Monday (7-9): A605
- Wednesday (10-12): A604
Chapter Objectives
• Study objectives of Business Economics
• Overview of company
• Distinguish ownership/shareholderrights and
control, owner and managerial controlled firm
• Patterns of shareholding ownership
• Inside and outside system of corporate control
• External and internal factors constraining
managers’ discretion
Key concepts
• Ownership, corporate control, shareholders,
shareholdings, shareholder-owned company
• Dispersed ownership, owner-controlled
managerial-controlled company.
• Outsider and Insider system of corporate control,
external and internal constrains
• Managerialdiscretion
• Corporategovernance, CG code
• Firm, company, corporate, enterprise

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What is Business Economics?
Spencer and Siegelman (1969) “integration of
economic theory with business practice for the purpose of
facilitating decision making and forward planning by
management.”
Main contents: Business Economics focus on answering
the following questions:
• Why firms establish or exit market
• Why firms expand? Horizontally or vertically?
• Roles of entrepreneurs and firms
• Roles of corporate structure
• Relationship between firms and employees, shareholders,
customers, suppliers, governments, as well the environment
Overview of company
1. Definition of company
- French Civil code: “Company is a contract
through which 2 or more individuals agree to use
their assets or capabilities into a common
activities in order to share profits or other
benefits from such common activities
In some cases under the law, company can be
established by one individual.
Members of the company commit to share loss”
(Article 1832)
Overview of Company (cont.)
According to the Enterprise Law of Vietnam (2005)
Enterprise means an economic organization that
has its own name, assets, stable office and is duly
constituted for the purpose of conducting business
(Article 4.1)

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Common characteristics of firms
Firms are different in term of size, ownership
types, products, but have things in common:
Owners - shareholders: set objectives, gain profit and
bear the risk from firm operating
Managers: make day-to-day decision
Objectives: aimed at by owners, may not coincide those
pursued by managers in case the ownership is
dispersed
Resources: capital, labor, technology, land,…
Performance assessment: thorough certain criteria by
owners, managers and other stakeholders
2. Classifying companies
a. According to size of companies (Number of
employees)
Size of company Vietnam WB
Super small <10 <10
Small <200 <50
Medium 200 - 300 50 - 300
Large >300 >300
b. According to Enterprise law 2005
Joint stock company (shareholdingcompany)
Limited liability company with more than 1 member
Limited liability company with 1 member
Partnership
Sole proprietorship (private company)

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b1. Joint Stock company
Charter capital is divided into equal portions known as shares.
Shareholder can be organization or individual; the minimum number
of shareholders will be three and there is no restriction on the
maximum number of shareholders.
Shareholders are liable for debts and other liabilities of the company
within amount of capital that they contributed.
Shareholders are free to transfer their shares, except for restriction with
founding shareholders and voting-preferred shareholders;
A shareholding company will be given a legal status from the issuing
date of the certificate of business registration.
A shareholding company is entitled to issue securities for the purpose
of capital mobilization
Advantages Disadvantages
-Less risky for shareholders as
each will responsible up to the
contributed capital
-Capital structure is flexible: many
people can participate
-Scope of business: very large
-Can mobilize capital more easily
by issuing securities
-Capital/ ownership are easily
transferred
-Complicated -> difficult to control
-Must follow strict regulations:
suchas management and finance
and accounting regulation,
b2. Limited liability company with more than
1 members
Members can be organisation or individual; the minimum number of
members will be 2 and the maximum number of members will be 50.
Members are liable for debts and other liabilities of the company within
amount of capital that they contributed.
Members are able to transfer their contributed capital.
A Limited liability company will be given a legal status from the issuing
date of the certificate of business registration.
A Limited liability company is NOT entitled to issue securities for the
purpose of capital mobilization

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Advantages Disadvantages
-Less risky for members as
each will responsible up to
the contributed capital
-Number of members limited
-> easier in controlling
-Share transfer is regulated
strictly -> can control
members easily
-Can not mobilize capital by
issuing security
-Follow strict regulations
rather than private company
or partnership
Discussion questions:
Compare and contrast the advantages and
disadvantages of shareholding company and liability
limited company?
What do you understand by the terms “divorce
between ownership and control”
CHAPTER 1 TEN PRINCIPLES OF
ECONOMICS
Structure patterns of shareholder-owned company
If ownership is dispersed, the control of the firm
may not belong shareholders but senior managers:
Board of Chief Executive or Directors
- Monistic: firm serves for one interest group –
shareholders;commonly in US and UK
- Dualistic: for two interest groups: shareholder
and employees; in France and Germany
- Pluralistic: for not only interest of groups of
shareholders,employee but stakeholders such as
suppliers; in Japan.

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Patterns of share ownership: United Kingdom
The percentage of individual shareholding in total
decline sharply over 1963-2001 period, from 54 %
to 14.8 %.
In contrast, during similar period that of financial
institutions increases dramatically from 30.3% to
60.2 %, decreased to 50 % in 2001. But this group
replaced the individual as the largest shareholding
Foreign ownership also has risen markedly from 7
% to a stable point of 31.9 % over 40 years.
Patterns of share ownership: other European
The share of financial institution is lower but that
of non-financialcompanies is higher as compared
to UK
Individual ownership is more significant than that
of institution in Italy and Spain, but less in France
Foreign ownership is more important in France,
Spain but less in Germany and Italy
Patterns of enterprises’ ownership : Vietnam
• 100 % state- owned enterprise (SOEs) was
dominanttype before the decade 1990s.The share
of these firms in total firms’ capital has been
decreasing to about 20 %. A number of equitizated
member companies of these corporations, groups
has been increasing.
• Wholly foreign-owned, joint-venture with state-
owned firms, joint-venture with private fastest
increasedduring 90s decade. Those participate to
stock exchange are increasing.

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Patterns of ownershipstructure: Vietnam (cont.)
• The proportionof private-ownedfirms has been
growingfast, especially since 2000. But shareholder
owned/join-stock company (with state-ownedcapital
or not), still make up a small percentage.
• The share of financial institution is not significant in
the join-stock firms but tend to increase since 2000
followingthe operationof the stock exchange, rapid
establishmentof numerousbanks and stock
companies.
Is firm owner- or manager- controlled?
Control of firm is defined as directing the firm to
owners’ objectives
Dispersion control from ownership in shareholder firm:
The owners still bear the risk of operating firm but they
are not manager (or not only chief managers) thus may
not control the firm or lead the firm to goals set by
them. This is because managers who are appointed by
owners but still have ends relatively separate from the
owners.
Is firm owner- or manager- controlled? (cont.)
The easy classifying cutting-off point :
- An individual share owners holds > 50 % of the equity
can outvote the remaining and control company
(assume: one voter held one share)
- If that < 50 % of the stock, they can win the vote if it
gain the sufficient support of the others to outvote. Or
vice versa.

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Is a firm owner- or manager- controlled? (cont.)
The other cut-off points to distinguish:
- Berle & Means (1932): owning 20 % of stock is
sufficient for owner-controlled, < 20 % for managerial
controlled
- Radice (1971): 15 % for owner-controlled and 5 % for
managerial-controlled
Cut-off points is the simplistic classification:
- Nyman & Silberston (1978): strongly criticized that
method, stress one factor which does not emerge from
crude data but affects substantially to voting.
Is firm owner- or manager- controlled? (cont.)
That is coalitions of interests, especially of families.
- Cubin & Leech (1983): create a probabilistic voting
model, defining:
+ Control is arbitrary 95 % chance of winning a vote. The
degree of control is probability the controlling group
securing majority support in a contested vote.
+ In their samples: 10 % is essential (73 companies) and 5
% (in 37 companies)
Variables of control of a company
The size of the largest holding
The size and distribution of the remaining shares
The willingness of other shareholders to form a voting
united front
The willingness of other shareholders to vote for the
largestholding group.

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Discussion questions
• Companies A, B and C have the following share ownership structure:
– Firm A: the largest shareholder is an individual owning 10% of the
equity, a further five members of the family own 25%, with the
remaining shares owned by financial institutions and with no one
institution owning more than 3%. The board of directors does not
include the largest shareholder but does control 10% of the equity.
– Firm B: the largest shareholder is an institution owning 3% of the
equity. The remaining shares are owned by 20,000 individual and
institutionalshare-holders.
– Firm C: the largest shareholder is an individual owning 40% of the
equity. A single bank owns 20% and three companies the remaining
40%.
• Classify each firm according to whether it is owner or managerially
controlled and whether it is likely to be part of an insider or outsider
system of corporate governance
Systems of corporate control: Insider
Concentrated ownership: large-holding, dominance of
institution/corporateshareholder
Shares are not frequently sold, but large block
Firm mergers rarely thorough merger, but agreement
Owners and other stakeholders are represented on the board
of companies; active participation in controlling company
Countries applying: Europe (typically Germany) and Japan
Systems of corporate control: Outsider
Dispersed ownership: dominated by non-bank institution and
private individuals.
Owners and other stakeholders are not represented on the
boards of companies; passive investor, rarely question the
operation of company.
Share is easily traded not for investment purpose
Managerial control; changing management and policies is very
slow; may be via takeover.
Countries: US, UK

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Constrains on managerial discretion:
External factors
Large shareholders: use their voting power to change their
policies or management if they are dissatisfied
Acquirers of share blocks sold by existing unhappy
shareholders
Bidders who state to buy all the voting shares if the company
undergoes takeover process
Debtors/s investors secure their interest, especially in
financially difficult time
Constrains on managerial discretion: External factors
(cont.)
External regulators: company law, and independent auditors,
lodging company’s account to regulator
In outsider system: these external factors mostly affects via
stock market, following movements in the share price.
In insider system: the external constrains exercise through
the voting powers since selling share is not simple.
Constrains on managerial discretion: Internal factors
Non-executivedirectors(UK)or supervisory board (Germany):
theirduty is to constrain executivedirectors.But they are
appointed by executive managers,outvoted by executive directors
thus may not be independent.In Germany the board membersare
selectedmore widely
Owners/shareholders:controlby:
a) using the voting power at meetings of firm or informal with
managers:Vote against re-election of ED or their decisions;
b) Organizing coalitions to influence management informally
and force voting at the general.(in UK)

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Constrains on managerial discretion: Internal factors
(cont.)
Stakeholder within the company: customers, suppliers, lenders
and local community.Their constrain actions being undertaken
in two ways:
+ Direct criticism or comments to the executives
+ Indirect information,affecting to shareholders, medias,
outside experts
Constrains on managerial discretion: aligning the interests
of managers and shareholders
Devising incentive mechanism to align interest of managers
and shareholders:
Profit-related bonus + share options based on successful
performanceof managers in term of owners objectives.
Difficulties: Manager’s non-monetary motivation.
A survey of around 300 companiesin UK in the 1980s –early
90s:weak correlation between rewarding system and firm
performance.
Constrains on managerial discretion: improving corporate
governance
Corporate governance concepts:
• In broader term, CG cover not only management’s
responsibility to shareholders but also to stakeholders as well
as wide community.
• From government point of view : CG is “ensuring
accountabilityin the exercise of power and financial
responsibility,while not discouraging firm from being
enterprising and risk taking.” (Jones, 2004)

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Constrains on managerial discretion: improving corporate
governance (cont.)
The main instrument of CG over the world and in OECD is
codes of practice to ensure two mentioned aspects of good
corporate practice.
In UK, Combined Code 1998, requires each corporate:
+ A non-executive chairman bearing responsibility clearly
distinguished from chief executive
+Three non-executive directors of management
Constrains on managerial discretion: improving corporate
governance (cont.)
+A remuneration committee of at least three non-executive
directors to decide the reward for directors
+A nomination committee composed 100% non-executive
directors to appoint new directors.
+Annual report to shareholders should contain:
a)A narrative account of how the broad principles was
applied, explain any departures from Code
b) Payment to chief executive and highest paid director
Constrains on managerial discretion: improving corporate
governance (cont.)
+ Directors should receive appropriate training to complete
duty well
+The company need to justify if chairman and chief executive
are the same.
+ Directors who retire before the end of term should explain

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Constrains on managerial discretion: limitations for
improving corporate governance
o In practice the Code doest not completely prevent bad
conduct of a part of executives
o The compliance with the Code doest not guaranty the
profitabilityof company
o Non-executive directors are the directors of the other, not
ensuring their independent scrutiny
o Non-executive limited ability to carry out their expected duty
Discussion question
Compare and contrast the constraint of
CEO working for a firm of insider system
and of outsider system?