As per request of a follower, I’ve gathered some interesting information on MBAs from The Economist.
First, let’s take a peek at their rankings of the top 10 MBA programs:
Getting In: Check out this link to see a video of two students discuss their experiences of applying to business school:
Let’s Talk Money: According to The Economist, the financial services sector is still the biggest employer of recently graduated MBAs with 22% finding their way into finance or accounting last year, compared to the other common sector, consulting (15%). You may want to take note of these facts: “...as many others in the economy see their pay squeezed, the salaries of MBA graduates are increasing. The median base salary for students who graduated in 2010 was $94,500—20% more than their pre-MBA salary. This compares with an average salary of $91,500 in 2009, US$90,000 in 2008 and US$89,000 in 2007. Students could also expect a bonus of $17,565.”
Additional facts: - 93% of last year’s MBAs are in work, including 7% who are self-employed - The average student submitted 33 CVs, attended six interviews and received two job offers
Find more information about all of the above plus more at their website The Economist
The figure shows a simplified organizational chart for a large corporation (missing departments - for illustration purposes.)
Agency issues
As you can see from the figure, shareholders effectively hire management.The problem is that management goals are not necessarily aligned with shareholder goals; shareholders want to maximize their share price, whereas managers want to maximize their salaries and keep their jobs.
It may seem that these goals would basically result from the same business strategies, but they don’t always.
Some examples are that managers may want to:
Expand the business (bigger business = bigger salary)
Acquire relevant companies at inflated prices (i.e. pay too much!)
Buy a corporate jet that isn’t actually needed or cost-effective (i.e. less cashflow to shareholders!)
Not take risks that shareholders would prefer
For example a shareholder may be well diversified among the drug industry, so it is favorable for the companies to take financial risks to develop the cure for cancer.Failure means that the shareholder will lose their equity in that single business, where as failure to the CEO means loss of job.
What help to align shareholder and management goals?
Luckily for us shareholders, there are three main weapons that we have to keep managers ‘in line.’
First, managers’ main potential income can come from share options.When they are given share options, there new goal becomes to also maximize the share price.They will have incentive to only execute strategies that the market will value and will therefore increase the share price.
Second, we do essentially have the option to hire/fire management if they are underperforming, or not acting optimally.The problem here is that the more shareholders that a firm has, the harder it is to get them all to vote in the same way.Also, many of the shareholders are funds, average people, or organizations (i.e. charities) who are not necessarily active within the company (evaluating management, voting, etc.)So this is a much more powerful weapon with fewer, more active shareholders.
Finally, there is the threat of an acquisition.If a large player notices that the firm is grossly underperforming, he may decide to acquire the firm and turn it around by replacing management.
There are basically three types of businesses, each having their own distinct advantages and disadvantages.They are as follows:
SOLE PROPRIETORSHIP
Pros
Simple to setup and run
Income is taxed only once
Cons
UNLIMITED liability - this means that creditors can go after your personal assets for payment of the businesses debts
Limited growth due to no outside equity funding
Life of the business may be limited to the life of the owner
Neutral?
Owned and operated by one person
PARTNERSHIP
General
Same as sole proprietorship, but with two or more owners (partners)
Partnership agreement outlines how gains/losses will be divided.
Limited
Same as above, but a limited partner(s) have limited liabilities
CORPORATION - Multiple types of corporations are available, but we will focus on the basics of corporations
Pros
LIMITED liability - unless you sign away your personal assets on a loan, they cannot be sought after by creditors.
Easy to transfer ownership(stock sales)
Cons
Very regulated
Corporate income is taxed, and then dividend income is also taxed (the dreaded double taxation)
Different businesses require different business structures. The choice between starting a business as a sole prop or corporation is a tough one – you must carefully consider the pros and cons of each and how they affect your business when making that choice.
