Business Task 1 on individual report Essay Example

excessive greed among investors, overheated equity markets, and a winner-take-all mentality in society; corporate failures and accounting scandals have become more widespread. However, it has been observed in the past decade that irregularities in accounting practices, managerial greed, and misuse of power are not exclusive to the United States but are global occurrences. Many companies outside of the U.S., such as Parallax, Adecco Television Azteca Hollinger Royal Dutch Shell Vivendi China Aviation Barings Bank etc., have also experienced failures in corporate governance and other forms of misfortune.Furthermore, there has been a significant decline in global standards and an acceptance of unethical practices that raise questions. This, along with corporate governance failures, has led to a decrease in trust from investors and shareholders in the effectiveness of capital markets. Currently, there is no universally accepted model for corporate governance that effectively protects the interests of stockholders and investors while also ensuring adequate shareholder wealth (Donaldson and Davis 2001; Huse 1995; Frentrop 2003). Much debate revolves around whether the Board of Directors holds enough power to ensure informed decision-making by senior management. The traditional model of corporate governance fails to consider the unique influence that company owners can have on both the board and top management, impacting specific decisions. Consequently, studies have not fully addressed the complexities inherent in corporate governance processes. Factors such as risk aversion influence investment choices and owner preferences. Owners who have economic ties to the company will prioritize protecting their own interests, even if it leads to poor performance.Banks functioning as owners and lenders would discourage risky projects that may impede meeting financial obligations. The government also serves as both owner and

regulator, creating a tradeoff for proprietors between promoting shareholder value and other objectives. However, corporate governance models in the UAE currently overlook these concerns. Instead, they primarily focus on assessing how effectively the board aligns top management with shareholders' goals. Yet, these frameworks do not adequately monitor owners and their influence over top management. This existing model fails to align the roles of house owners, the board of managers, and managers' interests and actions with the objective of generating shareholder value while ensuring stakeholder welfare.
Shifting gears to discuss the future structure of the industry, Abu Dhabi specifically aims to boost its economy by reducing dependence on hydrocarbons as a percentage of Gross Domestic Product (GDP). This strategy involves increasing investments across various sectors such as telecommunications services, education, media, healthcare, tourism, aviation, metals, petrochemicals pharmaceuticals biotechnology transportation trade. Moreover,the United Arab Emirates has made substantial investments in establishing itself as a major regional trade hub and is a member of the World Trade Organization (WTO).In addition, ongoing dialogues are taking place to establish free trade agreements with other parts and states such as the EU. These efforts will have a positive impact on integrating the region into the global economic system. Furthermore, the United Arab Emirates is currently working towards diversifying its economic systems beyond reliance on the oil sector. This diversification is expected to not only increase trade among member states but also expand trading relationships with other states and regions (Sturm et al., 2008).

The influence of ownership construction on firm performance in the energy production sector in the United Arab Emirates is determined by how it affects strategy determinations. While this region has

experienced significant economic growth in recent decades, it also faces challenges due to poor corporate governance practices that result in underperforming firms. Corporate governance issues are not unique to the United Arab Emirates but are present in other GCC countries as well.

From a global perspective, corporate governance has undergone substantial transformations in recent years, leading to increased research focusing on this area. The credibility of current corporate governance structures has been called into question following global corporate failures and low performance. The ownership structure of a company can directly affect its risk aversion, giving rise to agency problems resulting from conflicting interests between owners (principals) and managers (agents).The board of directors has four important roles: monitoring, stewardship, controlling decisions made by top management, and reporting. They mediate between parties and influence managerial decisions through internal influences imposed by the board and external influences related to the market's role in monitoring and sanctioning managers.

In terms of the economy of the chosen country, the United Arab Emirates (UAE) contributes significantly due to its abundant oil reserves. Along with other Gulf Cooperation Council countries, UAE holds over 40% of global oil reserves and remains an essential supplier to the global economy. As a result, investment spending on oil exploration and development of new oil fields is increasing. The demand for oil worldwide is also rising, primarily driven by emerging market economies. With Europe and the U.S. depleting their oil reserves, the UAE and other GCC states are becoming increasingly crucial as producers of oil.The UAE is expected to significantly increase its role as a global economic player. In 2011, the GDP of the UAE reached $360.2 billion, with

annual growth of GNP ranging from 7.4% to 30.7% in 2001. Initially protected from the global recession by high oil prices, the UAE eventually faced its consequences when oil demand decreased and resulted in a significant drop in oil prices.

In 2008, the UAE experienced a decline due to global economic turmoil, which ultimately impacted its economy. As of 2013, the country had proven oil reserves of 97.8 million barrels and an oil supply of thousand bbl/d in 2012. Additionally, crude oil consumption occurred during that same year.

The reserves-to-production ratio for natural gas was recorded at 3.21361895 billion three-dimensional pess in 2013, with dry natural gas production occurring in 2012 along with dry natural gas ingestion. The reserves-to-production ratio measured at 215.0251 during that same year.

Ownership and management of businesses in the United Arab Emirates are mainly controlled by a select group of stockholders and families as most companies are relatively young. Both small and large businesses are predominantly family-owned with significant involvement from the government in managing these companies—a contrast to Western democracies where ownership is diverse among various stockholders separating it from control.
In the UAE, there is a lack of non-executive directors overseeing company operations, unlike in Western countries. Practices such as rights issues allow wealthy existing stockholders and influential families to invest in initial public offerings (IPOs), contributing to high ownership concentration. According to a study conducted by the Union of Arab Banks (2003), family ownership is prevalent in this region. Corporate boards are primarily controlled by dominant stockholders who often have personal connections through friendship or association (Union of Arab Banks, 2003). As a result, there is minimal separation between control and

ownership, leading to decisions heavily influenced by these stockholders. Independent managers on the board are rare, with the CEO and Chairman roles usually combined into one position. This concentration of ownership contradicts the principles of good corporate governance commonly followed in Western settings (Yasin and Shehab, 2004). The World Bank's investigation into corporate governance practices in the Middle East North Africa (MENA) region validates these findings for the Gulf region as well (2003). Empirical evidence aims to analyze how ownership structure impacts firm performance; however, different studies have used varied samples and reached conflicting conclusions that can be challenging to compare.Existing literature suggests that there are two main ownership structures in firms: dispersed ownership and concentrated ownership. The majority of empirical evidence indicates that concentrated ownership has a negative impact on performance (e.g., Johnson et al., 2000; Gugler and Weigand, 2003; Grosfeld, 2006; Holmstrom and Tirole, 1993). Various studies have also focused on understanding how different types of concentrated ownership structures specifically influence firm performance.

Regarding government ownership, theoretical arguments provided by Jefferson (1998), Stiglitz (1996), and Sun et al. (2002) suggest that it can have a positive effect on firm performance by addressing property rights issues. However, Xu and Wang (1999) and Sun and Tong (2003) present empirical evidence indicating that government ownership actually has a negative impact on firm performance. On the contrary, Sun et al. (2002) offer empirical evidence supporting the idea that government ownership can positively influence firm performance. Some argue that the relationship between government ownership and firm performance is non-linear.

Family ownership is another type of ownership frequently studied in relation to its impact on firm performance. Anderson and Reeb (2003),

Villanonga and Amit (2006), Maury (2006), Barontini and Caprio (2006), and Pindado et al.(2008) propose a positive association between family ownership and firm performance.Despite the positive impact of family ownership on firm performance, some studies (DeAngelo and DeAngelo (2000), Fan and Wong( 2002 ), Schulze et al.( 2001 ), Demsetz(1983 ), Famaand Jensen( 1983 ), Shleiferand Vishny( 1997 )) suggest a negative effect. On the other hand, research examining foreign ownership (Arnoldand Javorcik( 20O5 ), Petkova(20O8 ) , Girma(20OS ) , Girmaand Georg(20OG ) , Girmaet al.) indicates a positive impact. The text discusses various studies conducted by Chari et al.(2007), Mattes (2011), Demsetz and Lehn (1985), McConnell and Servaes (1990), Han and Suk (1998), Tsai and Gu (2007), Arouri et al.(2013) , Zeitun and Al-Kawari (2012) to explore the relationship between ownership structure and firm performance in GCC states like UAE. However, it acknowledges the difficulty in separating this relationship due to endogeneity of ownership as well as variables such as firm type and observation period. The study aims to further examine the factors influencing different types of ownership structure in the Gulf region and their potential impact on firm performance, with a focus on how concentrated ownership may positively affect firm performance through increased monitoring.Despite expectations, dispersed ownership is not as widespread as believed, with most firms having some level of ownership concentration. However, there is growing concern for safeguarding the rights of non-controlling shareholders in these highly concentrated ownership structures. Research indicates that concentrated ownership often results in poor performance and hampers the development of minority shareholders by granting control to majority shareholders (Grosfeld, 2006). According to Holmstrom and Tirole (1993), concentrated

ownership can also lead to low liquidity, which negatively impacts performance. Additionally, high ownership concentration restricts a firm's ability to diversify (Demsetz and Lehn, 1985; Admati et al., 1994). Different forms of concentrated ownership exist including government ownership, household ownership, managerial ownership, institutional ownership, and foreign ownership. The literature review will examine how these various forms of ownership influence firm performance. Government ownership's effect on firm performance has attracted attention from many researchers. In certain countries, governments possess the largest share of listed companies and utilize government-owned enterprises as a means of intervention (Kang and Kim, 2012). Shleifer and Vishny (1997) argue that this can result in poor firm performance due to political pressure for excessive employment within government-owned enterprises.Supervising directors of these enterprises face difficulties and a lack of involvement in business process reengineering. Some economists argue that government ownership can actually enhance firm performance in less developed and emerging economies by addressing property rights issues. However, empirical evidence on the impact of state ownership on firm performance is inconclusive. Xu and Wang (1999) discovered a negative relationship between state ownership and firm performance based on data from Chinese listed firms during 1993-1995, but found no association between state ownership and the market-to-book ratio. Sun and Tong (2003), using data from 1994-2000, compared legal individual ownership with government ownership and found that government ownership negatively impacts firm performance while legal individual ownership has a positive effect according to the market-to-book ratio as a measure of performance. Family ownership tends to result in a more cautious decision-making approach, prioritizing stability and wealth preservation over risky ventures (Arosa et al., 2004). This caution can affect company

performance as family owners are less likely to take on excessive debt or pursue aggressive expansion strategies. Family ownership also fosters a stronger sense of identity and commitment to the company, with family members having a personal stake in its success and involvement in day-to-day operations (Arosa et al., 2004).The text emphasizes the complexities and challenges that come with family ownership, such as conflicts between family members and difficulties in attracting external financing. It also highlights the various factors that influence the impact of family ownership on firm performance, including family size, management involvement, values, and goals for the company. A study conducted in 2010 found that household proprietors prioritize their house's reputation above other shareholders' interests to protect both firm and family reputations. Several studies have examined the relationship between family ownership and firm performance, all pointing towards a positive correlation. The research suggests that family firms have long-term goals, distinguishing them from other stockholders who prioritize short-term investments. Family owners are more motivated to monitor directors due to their wealth being closely tied to the value of the household firm compared to other stockholders. They also have a strong interest in offering incentives that foster loyalty to the firm. Furthermore, there is a significant presence of families in these firms who are determined to maintain their reputation over time.Family ownership has a positive impact on business success and the preservation of the family name (Wang.2006). It promotes long-term financial rewards and prioritizes the interests of both the business and the family. Family firms have robust control structures in place that facilitate effective communication with stakeholders and creditors, leading to higher quality financial reporting

and reduced financing costs. This also helps prevent opportunistic behavior among family members in terms of profit distribution and management allocation. However, there are concerns about high ownership concentration, which can lead to corporate governance issues. Controlling shareholders may engage in activities that unfairly benefit themselves at the expense of non-controlling shareholders, such as hesitating to pay dividends or using the company as a family employment service. These actions result in agency costs due to limited management positions for non-family members and significant dividends paid to family shareholders (La Porta et al., 1999; Vollalonga & Amit, 2006).In addition, it is important to consider that families may have their own unique interests and concerns that may not align with other investor groups. Schulze et al.(2001) explain that the impact of family ownership on firm performance can vary depending on the generation. They argue that initial-generation family firms generally experience fewer agency problems because management decisions are made by the same person who owns the business. As a result, the reduction in agency costs in first-generation family firms is due to the absence of separation between ownership and control (Miller and Le-Breton-Miller, 2006). In these cases, there is likely to be a positive relationship between family ownership and performance.

However, as the company progresses into second and third generations, this dynamic can change. This shift occurs because household ownership becomes more distributed among a larger number of family members with varying interests. Consequently, a negative relationship emerges between household ownership and performance. Furthermore, conflicts within the family may arise from these relationships since family members who have control over the firm's resources are more inclined to favor their

own children and relatives.

To summarize, research has shown that the relationship between household ownership and firm performance is not straightforward; it can have both positive and negative effects. For example, when ownership is less concentrated, it tends to positively impact performance.On the other hand, when ownership becomes more concentrated, it can lead to the exploitation of minority shareholders by family owners, resulting in a negative impact on performance. Moreover, smaller countries typically have weaker competitive advantages compared to larger nations.

D. Analysis

1.0 Potter's Diamond Model
The analysis of competitive forces and advantages should focus on key factors of competition and their influence on the business (Porter 1998, p.142). The state plays a crucial role in this analysis as well. Inheritance does not determine wealth; instead, wealth is created through the development of connected and supportive industries and opportunities (Porter 1998, p.155). Upgrading and innovation across all areas of financial activity are essential for continuous improvement within an industry. Porter's model examines both direct and indirect factors that impact competitive advantage. For instance, the oil sector exemplifies how its environment influences competition – including abilities, resources, data organization, and stakeholder objectives – thereby contributing to its competitive advantage. Furthermore, the oil sector faces pressure to innovate and invest in order to stay aheadA SWOT analysis reveals that the oil sector in the UAE has strengths in its established history of oil production and a variety of sub-sectors that provide stability and support for industrialists. However, there are failings such as a relatively outdated scientific foundation and a lack of well-educated professionals and residents compared to industry demands. On the positive

side, the oil sector benefits from lower labor costs due to low wages. There are also opportunities for utilizing EU funds and state resources, as well as a reasonable percentage of graduate students finding employment in the oil sector. Contributions to motivational and investment projects also help develop the UAE's economy. However, there are menaces such as the expansion of oil production capacity in Southeastern economies with lower product prices and production costs, job outsourcing, and competition from neighboring economies that attract foreign investments in the UAE oil sector.

References:
- Admati, A., Pfleiderer, P., & Zechner, J. (1994). "Large stockholder activism, hazard sharing, and financial market equilibrium." Journal of Political Economy , 102(1097-1130).
- AL ARUSI, A.S., et al.(2009). "Determinants of Financial and Environmental Disclosures through the Internet by Malaysian Companies." Asian Review of Accounting , 17(1), 59-76.
- Anderson,C.R., Mansi,A.S., & Reeb,M.D.(2003)."Establishing family ownership and the agency cost of debt." The journal identified is "Journal of Financial Economics" with issue number 68.