Oedipus the King by Sophocles Essay

Sophocles was one of the greatest Greek playwrights presented the most delightful work of the human civilization – the drama â€Å"Oedipus the King†. Sophocles is a person that stood in the centre of the plot and determines the central crisis of the tragedy – moral self-determination of Oedipus. However, the crisis is not as simple as it may seem. One more central problem is that all deeds and actions of Oedipus are fated by the Gods and, therefore, Oedipus doesn’t have free will to choose his destiny. Sophocles reveals the theme of the universal scope: who rules the destiny – the God or a person himself. Looking for an answer to eternal question the main hero Oedipus has left his native town and practically doomed himself to a certain death. Thus, Oedipus can be defined as dramatic character. The downfall of Oedipus the King was fated by the Gods and he was unable to change his destiny. All Oedipus’ actions were formed by a virulent divinity. For example, Oedipus was foretold by the Gods to kill his own father and to get married with his own mother. Exactly the Gods willed him to do everything he didn’t want to. He found, as he thought, the right decision to leave his house. But he didn’t understand the most important thing: the Gods determined the common aspect of person’s destiny, its direction and one of the possible versions of future reality. The destiny could be changed in some situations but the results would be the same as the Gods had foretold. Oedipus was shown to be free at his choice and his ways. But simultaneously all these choices led him to an inevitable results and even to a catastrophe. When he revealed truth of his life he decided to live his native town as he couldn’t cope with new reality which was killing him mentally. Thereby he expressed the main idea of the dramatic plot: it is the God who rules the destiny and the person is only an instrument. The fate and inevitability are nothing compared to a person who understands and realizes his own moral and spiritual essence.

Agency Costs and Corporate Governance Mechanisms

Agency costs and corporate governance mechanisms: Evidence for UK firms Chrisostomos Florackis and Aydin Ozkan* University of York, UK Abstract In this paper, we aim to extend the empirical literature on the determinants of agency costs by using a large sample of UK listed firms. To do so, we employ two alternative proxies for agency costs: the ratio of total sales to total assets (asset turnover) and the ratio of selling, general and administrative expenses (SG&A) to total sales. In our analysis, we control for the influence of several internal governance mechanisms or devices that were ignored by previous studies.Also, we examine the potential interactions between these mechanisms and firm growth opportunities in determining agency costs. Our results reveal that the capital structure characteristics of firms, namely bank debt and debt maturity, constitute two of the most important corporate governance devices for UK companies. Also, managerial ownership, managerial compensation and ownership concentration seem to play an important role in mitigating agency costs. Finally, our results suggest that the impact exerted by internal governance mechanisms on agency costs varies with firms’ growth opportunities.JEL classification: G3; G32 Keywords: Agency costs; Growth opportunities; Internal Corporate Governance Mechanisms. * Corresponding author. Department of Economics and Related Studies, University of York, Heslington, York, YO10 5DD, UK. Tel. : + 44 (1904) 434672. Fax: + 44 (1904) 433759. E-mail: [email  protected] ac. uk. We thank seminar participants at University of York, and the 2004 European Finance Association Meetings for helpful comments and suggestions. 1 1. Introduction Following Jensen and Meckling (1976), agency relations within the firm and costs associated with them have been extensively investigated in the corporate finance literature.There is a great deal of empirical work providing evidence that financial decisions, investment decision s and, hence, firm value are significantly affected by the presence of agency conflicts and the extent of agency costs. The focus of these studies has been the impact of the expected agency costs on the performance of firms. 1 Moreover, the implicit assumption is that, in imperfect capital markets, agency costs arising from conflicts between firms’ claimholders exist and the value of firms decreases if the market expects that these costs are likely to be realised.It is also assumed that there are internal and external corporate governance mechanisms that can help reduce the expected costs and their negative impact on firm value. For example, much of prior work on the ownership and performance relationship relies on the view that managerial ownership can align the interests of managers and shareholders and hence one would observe a positive impact exerted by managerial shareholdings on the performance of firms. The positive impact is argued to be due to the decrease in the exp ected costs of the agency conflict between managers and shareholders.Despite much valuable insights provided by this strand of literature, however, only very few studies directly tackle the measurement issue of the principal variable of interest, namely agency costs. Notable exceptions are Ang et al. (2000) and Sign and Davidson (2003), which investigate the empirical determinants of agency costs and focus on the role of debt and ownership structure in mitigating agency problems for the US firms. In doing so, they use two alternative proxies for agency costs: the ratio of total sales to total assets (asset turnover) and the ratio of selling, general and administrative expenses (SG&A) to total sales.In line with the findings of prior research they provide evidence for the view that managerial ownership aligns the interests of managers and shareholders and, hence, reduces agency costs in general. However, there is no consensus on the role of debt in mitigating such problems and associ ated costs. Ang et al. (2000) point out that debt has an alleviating role whereas Sign and Davidson (2003) an aggravating one. The objective of this paper is to extend the investigation of these studies by analysing empirically the determinants of agency costs in the UK for a large sample of 1See, for example, Morck et al. (1988); McConnell and Servaes (1990); and Agrawal and Knoeber (1996) among others. 2 listed firms. Following the works of Ang et al. (2000) and, Sign and Davidson (2003), we model both proxies of agency costs: asset turnover and the (SG&A) ratio. More specifically, we empirically examine the impact of capital structure, ownership, board composition and managerial compensation on the costs likely to arise from agency conflicts between managers and shareholders. In doing so, we also pay particular attention to the role of growth opportunities in influencing the effectiveness of internal governance mechanisms in reducing agency costs. In carrying out the analysis in this paper, we aim to provide insights at least in three important areas of the empirical research on agency costs. First, in investigating the determinants of agency costs, the analysis of this paper incorporates important firmspecific characteristics (internal corporate governance devices) that possibly affect agency costs but were ignored by previous studies.For example, we explore the role the debt maturity structure of firms can play in controlling agency costs. It is widely acknowledged that short-term debt may be more effective than long-term debt in reducing the expected costs of the underinvestment problem of Myers (1977). 3 Accordingly, in our analysis, we consider the maturity structure of debt as a potential governance device that is effective in reducing the expected costs of the agency conflict between shareholders and debtholders. Similar to Ang et al. 2000) that investigate if bank debt creates a positive externality in the form of lower agency costs, we also check i f the source of debt financing matters in mitigating agency problems. Another potentially effective corporate governance mechanism we consider relates to managerial compensation. Recent studies suggest that compensation contracts can motivate managers to take actions that maximize shareholders’ wealth (see, e. g. , Core et al. , 2001; Murphy, 1999 among others). This is based on the view that financial â€Å"carrots† motivate managers to maximize firm value.That is, a manager will presumably be less likely, ceteris paribus, to exert insufficient effort and risk the loss of his job the greater the level of his compensation. Several empirical studies provide evidence for the effectiveness of managerial compensation as a corporate governance mechanism. For instance, 2 As explained later in the paper, the two proxies for agency costs that are used in our analysis are more likely to capture the agency problems between managers and shareholders. However, we do not rule out t he possibility that they may also capture the agency problems between shareholders and debtholders. It is argued that firm with greater growth opportunities should have more short-term debt because shortening debt maturity would make it more likely that debt will mature before any opportunity to exercise the growth options. Consistent with this prediction, there are several empirical debt maturity studies that find a negative relation between maturity and growth opportunities (see, e. g. , Barclay and Smith, 1995; Guedes and Opler, 1996; and Ozkan, 2000 among others). 3 Hutchinson and Gul (2004) find that managers’ compensation can moderate the negative association between growth opportunities and firm value.In this paper, we examine the effectiveness of managerial compensation as a corporate governance mechanism by including the salary of managers in our empirical model. We also acknowledge that there have been concerns about excessive compensation packages and their negativ e impact on corporate performance. Accordingly, we investigate the possibility of a non-monotonic impact the managerial compensation may exert on agency costs. Second, our empirical model captures potential interactions between corporate governance mechanisms and growth opportunities.Following McConnell and Servaes (1995) and Lasfer (2002), we expect the effectiveness of governance mechanisms in reducing agency problems to be dependent on firm’s growth opportunities. In particular, if agency problems are associated with greater information asymmetry (a common problem in high-growth firms), we expect the effectiveness of corporate governance mechanisms in mitigating asymmetric information problems to increase in high-growth firms (Smith and Watts, 1992 and Gaver and Gaver, 1993).However, if, as argued by Jensen (1986), agency problems are associated with conflicts over the use of free cash flow (a common problem in low-growth firms), we expect governance mechanisms that are li kely to mitigate such problems to play a more important role in low-growth firms (Jensen, 1986). Last but not least, in contrast to previous studies that focus on the US market, we provide evidence for UK firms. Although the UK and the US are usually characterized as having a similar â€Å"common law† regulatory system (see, e. g. , La Porta et al. 1998), the UK market bears significant distinguishing characteristics. 4 It is argued that several of these characteristics may contribute to a more significant degree of managerial discretion and, hence, higher level of managerial agency costs. For example, despite the relatively high proportion of shares held by financial institutions, there is a great deal of evidence that financial investors do not take an active role in corporate governance. Similarly, UK boards are usually characterized as corporate devices that provide weak disciplinary function.More specifically, weak fiduciary obligations on directors have resulted in none xecutives playing more an advisory than a monitoring role. 5 Consequently, the investigation of agency issues and the effectiveness of the alternative governance 4 For a more detailed discussion about the characteristics of the prevailing UK corporate governance system see Short and Keasey (1999); Faccio and Lasfer (2000); Franks et al. (2001); and Ozkan and Ozkan (2004). 5 Empirical studies by Faccio and Lasfer (2000), Goergen and Rennebog (2001), Franks et al. 2001) and Short and Keasey (1999) provide evidence on the weak role of institutions and board of directors in reducing agency problems in the UK. 4 mechanisms in the UK, in a period that witnesses an intensive discussion of corporate governance issues, would be of significant importance. Our results strongly suggest that managerial ownership constitutes a strong corporate governance mechanism for the UK firms. This result is consistent with the findings provided by Ang et al. (2000) and Sign and Davidson (2003) for the US fi rms.Ownership concentration and salary also seem to play a significant role in mitigating agency related problems. The results concerning the role of capital structure variables on agency costs are striking. It seems that both the source and the maturity structure of corporate debt have a significant effect on agency costs. Finally, there is strong evidence that specific governance mechanisms are not homogeneous but vary with growth opportunities. For instance, we find that executive ownership is more effective as a governance mechanism for high-growth firms.This result is complementary to the results obtained by Smith and Watts (1992), Gaver and Gaver (1993) and Lasfer (2002), which support the view that high-growth firms are likely to prefer incentive mechanisms (e. g. managerial ownership) whereas low-growth firms focus more on monitoring mechanisms (e. g. short-term debt). The remainder of the paper is organized as follows. In section 2 we discuss the related theory and formulat e our empirical hypotheses. Section 3 describes the way in which we have constructed our sample and presents several descriptive statistics of that.Section 4 presents the results of our univariate, multivariate and sensitivity analysis. Finally, section 5 concludes. 2. Agency costs and Governance Mechanisms In what follows, we will discuss the potential interactions between agency costs and internal corporate governance mechanisms available to firms. Also, we will analyze how firm growth opportunities affect agency costs and the relationship between governance mechanism and agency costs. 2. 1 Debt Financing Agency problems within a firm are usually related to free cash-flow and asymmetric information problems (see, for example, Jensen, 1986 and Myers and Majluf, 1984).It is widely acknowledged that debt servicing obligations help reduce of agency problems of this sort. This is particularly true for the case of privately held debt. For example, bank 5 debt incorporates significant si gnalling characteristics that can mitigate informational asymmetry conflicts between managers and outside investors (Jensen, 1986; Stulz, 1990; and Ross, 1977). In particular, the announcement of a bank credit agreement conveys positive news to the stock market about creditor’s worthiness.Bank debt also bears important renegotiation characteristics. As Berlin and Mester (1992) argue, because banks are well informed and typically small in number, renegotiation of a loan is easier. A bank’s willingness to renegotiate and renew a loan indicates the existence of a good relationship between the borrower and the creditor and that is a further good signal about the quality of the firm. Moreover, it is argued that bank debt has an advantage in comparison to publicly traded debt in monitoring firm’s activities and in collecting and processing information.For example, Fama (1985) argues that bank lenders have a comparative advantage in minimizing information costs and get ting access to information not otherwise publicly available. Therefore, banks can be viewed as performing a screening role employing private information that allows them to evaluate and monitor borrowers more effectively than other lenders. In addition to debt source, the maturity structure of debt may matter. For example, short-term debt may be more useful than long-term debt in reducing free cash flow problems and in signalling high quality to outsiders.For example, as Myers (1977) suggests, agency conflicts between managers and shareholders such as the underinvestment problem can be curtailed with short-term debt. Flannery (1986) argues that firms with large potential information asymmetries are likely to issue short-term debt because of the larger information costs associated with long-term debt. Also, short-term debt can be advantageous especially for high-quality companies due to its low refinancing risk (Diamond, 1991). Finally, if yield curve is downward sloping, issuing sho rt-term debt increases firm value (Brick and Ravid, 1985).Consequently, bank debt and short-term debt are expected to constitute two important corporate governance devices. We include the ratio of bank debt to total debt and the ratio of short-term debt to total debt to our empirical model so as to approximate the lender’s ability to mitigate agency problems. Also, we include the ratio of total debt to total assets (leverage) to approximate lender’s incentive to monitor. In general, as leverage increases, so does the risk of default by the firm, hence the incentive for the lender to monitor the firm6. 6 Ang et al. 2000) focus on sample of small firms, which have do not have easy access to public debt, and examine the impact of bank debt on agency costs. On the contrary, Sign and Davidson (2003) focus on a sample of large firms, which have easy access to public debt, and examine the impact of public debt on 6 2. 2 Managerial Ownership The conflicts of interest between m anagers and shareholders arise mainly from the separation between ownership and control. Corporate governance deals with finding ways to reduce the magnitude of these conflicts and their adverse effects on firm value.For instance, Jensen and Meckling (1976) suggest that managerial ownership can align the interest between these two different groups of claimholders and, therefore, reduce the total agency costs within the firm. According to their model, the relationship between managerial ownership and agency costs is linear and the optimal point for the firm is achieved when the managers acquires all of the shares of the firm. However, the relationship between managerial ownership and agency costs can be non-monotonic (see, for example, Morck et al. , 1988; McConnel and Servaes, 1990,1995 and, Short and Keasey, 1999).It has been shown that, at low levels of managerial ownership, managerial ownership aligns managers’ and outside shareholders’ interests by reducing manager ial incentives for perk consumption, utilization of insufficient effort and engagement in nonmaximizing projects (alignment effect). After some level of managerial ownership, though, managers exert insufficient effort (e. g focus on external activities), collect private benefits (e. g. build empires or enjoy perks) and entrench themselves (e. g. undertake high risk projects or bend over backwards to resist a takeover) at the expense of other investors (entrenchment effect).Therefore the relationship between the two is non-linear. The ultimate effect of managerial ownership on agency costs depends upon the trade-off between the alignment and entrenchment effects. In the context of our analysis we propose a non-linear relationship between managerial ownership and managerial agency costs. However, theory does not shed much light on the exact nature of the relationship between the two and, hence, we do not know which of the effects will dominate the other and at what levels of manageria l ownership.We, therefore, carry out a preliminary investigation about the pattern of the relationship between managerial ownership and agency costs. Figure 1 presents the way in which the two variables are associated. [Insert Figure 1 here] agency costs. Our study is more similar to that of Ang et al (2000) given that UK firms use significant amounts of bank debt financing (see Corbett and Jenkinson, 1997). 7 Clearly, at low levels of managerial ownership, asset turnover and managerial ownership are positively related. However, after managerial ownership exceeds the 10 per cent level, the relationship turns from positive to negative.A third turning point is that of 30 percent after which the relationship seems to turn to positive again. Consequently, there is evidence both for the alignment and the entrenchment effects in the case of our sample. In order to capture both of them in our empirical specification, we include the level, the square and the square of managerial ownership i n our model as predictors of agency costs. 2. 3 Ownership Concentration A third alternative for alleviating agency problems is through concentrated ownership.Theoretically, shareholders could take themselves an active role in monitoring management. However, given that the monitoring benefits for shareholders are proportionate to their equity stakes (see, for example, Grossman and Hart, 1988), a small or average shareholder has little or no incentives to exert monitoring behaviour. In contrast, shareholders with substantial stakes have more incentives to supervise management and can do so more effectively (see Shleifer and Vishny, 1986; Shleifer and Vishny, 1997 and Friend and Lang, 1988).In general, the higher the amount of shares that investors hold, the stronger their incentives to monitor and, hence, protect their investment. Although large shareholders may help in the reduction of agency problems associated with managers, they may also harm the firm by causing conflicts between large and minority shareholders. The problem usually arises when large shareholders gain nearly full control of a corporation and engage themselves in self-dealing expropriation procedures at the expense of minority shareholders (Shleifer and Vishny, 1997).Also, as Gomez (2000) points out, these expropriation incentives are stronger when corporate governance of public companies insulates large shareholders from takeover threats or monitoring and the legal system does not protect minority shareholders because either of poor laws or poor enforcement of laws. Furthermore, the existence of concentrated holdings may decrease diversification, market liquidation and stock’s ability to grow and, therefore, increase the incentives of large shareholders to expropriate firm’s resources.Several empirical studies provide evidence consistent with that view (see, for example, Beiner et al, 2003). In order to test the impact of ownership concentration on agency costs, we include a var iable that refers to the sum of stakes of shareholders with equity stake greater than 3 8 per cent in our regression equation. The results remain robust when the threshold value changes from 3 per cent to 5 per cent or 10 per cent. 2. 4 Board of Directors Corporate governance research recognizes the essential role performed by the board of directors in monitoring management (Fama and Jensen, 1983; Weisbach, 1988 and Jensen, 1993).The effectiveness of a board as a corporate governance mechanism depends on its size and composition. Large boards are usually more powerful than small boards and, hence, considered necessary for organizational effectiveness. For instance, as Pearce and Zahra (1991) point out, large powerful boards help in strengthening the link between corporations and their environments, provide counsel and advice regarding strategic options for the firm and play crucial role in creating corporate identity. Other studies, though, suggest that large boards are less effecti ve than large boards.The underlying notion is that large boards make coordination, communication and decision-making more cumbersome than it is in smaller groups. Recent studies by Yermack, 1996; Eisenberg et al. , 1998 and Beiner et al, 2004 support such a view empirically. The composition of a board is also important. There are two components that characterize the independence of a board, the proportion of non-executive directors and the separated or not roles of chief executive officer (CEO) and chairman of the board (COB).Boards with a significant proportion of non-executive directors can limit the exercise of managerial discretion by exploiting their monitoring ability and protecting their reputations as effective and independent decision makers. Consistent with that view, Byrd and Hickman (1992) and Rosenstein and Wyatt (1990) propose a positive relationship between the percentage of non-executive directors on the board and corporate performance. Lin et al. (2003) also propose a positive share price reaction to the appointment of outside directors, especially when board ownership is low and the appointee possesses strong ex ante monitoring incentives.Along a slightly different dimension, Dahya et al. (2002) find that top-manager turnover increases as the fraction of outside directors increases. Other studies find exactly the opposite results. They argue that non-executive directors are usually characterized by lack of information about the firm, do not bring the requisite skills to the job and, hence, prefer to play a less confrontational role rather than a more critical monitoring one (see, for example, Agrawal and Knoeker, 1996; Hermalin 9 nd Weisbach, 1991, and Franks et al. , 2001)7. As far as the separation between the role of CEO and COB is concerned, it is believed that separated roles can lead to better board performance and, hence, less agency conflicts. The Cadbury (1992) report on corporate governance stretches that issue and recommends that C EO and COB should be two distinct jobs. Firms should comply with the recommendation of the report for their own benefit. A decision not to combine these roles should be publicly explained.Empirical studies by Vafeas and Theodorou (1998), and Weir et al. (2002), though, which study that issue for the case of the UK market, provide results that do not support Cadbury’s stance that the CEO – COB duality is undesirable. In the context of the UK market, UK boards are believed to be less effective than the US ones. For instance,. To test the effectiveness of the board of directors in mitigating agency problems we include three variables in our empirical model: a) the ratio of the number of non-executive directors to he number of total directors, b) the total number of directors (board size) and c) a dummy variable which takes the value of 1 when the roles of CEO and COB are not separated and 0 otherwise. 2. 5 Managerial Compensation Another important component of corporate g overnance is the compensation package that is provided to firm management. Recent studies by Core et al. (2001) and Murphy (1999) suggest, among others, that compensation contracts, whose use has been increased dramatically during the 90’s, can motivate managers to take actions that maximize shareholders’ wealth.In particular, as Core et al. (2001) point out, if shareholders could directly observe the firm’s growth opportunities and executives’ actions no incentives would be necessary. However, due to asymmetric information between managers and shareholders, both equity and compensation related incentives are required. For example, an increase in managerial compensation may reduce managerial agency costs in the sense that satisfied managers will be less likely, ceteris paribus, to utilize insufficient effort, perform expropriation behaviour and, hence, risk the loss of their job.Despite the central importance of the issue, only a few empirical studies exa mine the impact of managerial compensation components on corporate performance. For example, Jensen and Murthy 7 Such a result may be consistent with the governance system prevailing in the UK market given the fact that UK legislation encourages non-executive directors to be inactive since it does not impose fiduciary obligations on them. Also, UK boards are dominated by executive directors, which have less monitoring power.Franks et al. (2001) confirm this view by providing evidence on a non-disciplinary role of nonexecutive directors in the UK. 10 (1990) find a statistically significant relationship between the level of pay and performance. Murphy (1995), finds that the form, rather than the level, of compensation is what motivates managers to increase firm value. In particulars, he argues that firm performance is positively related to the percentage of executive compensation that is equity based.More recently, Hutchinson and Gul (2004) analyze whether or not managers’ comp ensation can moderate the negative association between growth opportunities and firm value8. The results of this study indicate that corporate governance mechanisms such as managerial remuneration, managerial ownership and non-executive directors possibly affect the linkages between organizational environmental factors (e. g. growth opportunities) and firm performance.Finally, Chen (2003) analyzes the relationship between equity value and employees’ bonus. He finds that the annual stock bonus is strongly associated with the firm’s contemporaneous but not future performance. Managerial compensation, though, is considered to be a debated component of corporate governance. Despite its potentially positive impact on firm value, compensation may also work as an â€Å"infectious greed† which creates an environment ripe for abuse, especially at significantly high levels.For instance, remuneration packages usually include extreme benefits for managers such as the use of private jet, golf club membership, entertainment and other expenses, apartment purchase etc. Benefits of this sort usually cause severe agency conflicts between managers and shareholders. 9 Therefore, it is possible that the relationship between compensation and agency costs is non-monotonic. Similar to the case of managerial ownership, we carry out a preliminary investigation about the pattern of the relationship between salary and agency costs.As shown in figure 2, the relationship between salary and agency costs is likely to be non-linear10. In our empirical model, we include the ratio of the total salary paid to executive directors to total assets as a determinant of agency costs. Also, in order to capture potential 8 Rather, the majority of the studies in that strand of literature reverse the causation and examine the impact of performance changes on executive or CEO compensation (see, for example, Rayton, 2003 among others). Concerns about excessive compensation packages and their negative impact on corporate performance have lead to the establishment of basic recommendations in the form of â€Å"best practises† in which firms should comply so as the problem with excessive compensation to be diminished. In the case of the UK market, for example, one of the basic recommendations of the Cadbury (1992) report was the establishment of an independent compensation committee. Also, in a posterior report, the Greenbury (1995) report, specific propositions about remuneration issues were made.For example, an issue that was stretched was the rate of increase in managerial compensation. In the case of the US market, the set of â€Å"best practises† includes, among others, the establishment of a compensation committee so as transparency and disclosure to be guaranteed (same practise an in the UK) and the substitution of stock options as compensation components with other tools that promote the long-term value of the company 10 A similar preliminary ana lysis is carried out so as to check potential non-linearities concerning the relationship between the rest of internal governance mechanisms and agency costs.Our results (not reported) indicate that none of them is related to agency costs in a non-linear way. 11 non-linearities, we include higher ordered salary terms in the regression equation. Finally, we include a dummy variable, which takes the value of 1 when a firm pays options or bonuses to managers and 0 otherwise. Including that dummy variable in our analysis enables us to test whether or not options and bonuses themselves provide incentives to managers.As Zhou (2001) points out, ignoring options is likely to incur serious problems unless managerial options are either negligible compared to ownership or almost perfectly correlated with ownership. [Insert Figure 2 here] 2. 6 Growth Opportunities The magnitude of agency costs related to underinvestment, asset substitution and free cash flow differ significantly across high-gro wth and low-growth firms. In the underinvestment problem, managers may decide to pass up positive net present value projects since the benefits would mainly accrue to debt-holders.This is more severe for firms with more growth-options (Myers, 1977). Asset substitution problems, which occur when managers opportunistically substitute higher variance assets for low variance assets, are also more prevalent in high-growth firms due to information asymmetry between investors and borrowers (Jensen and Meckling, 1976). High-growth firms, though, face lower free cashlow problems, which occur when firms have substantial cash reserves and a tendency to undertake risky and usually negative NPV investment projects (Jensen, 1986).Given the different magnitude and types of agency costs between high-growth and low-growth firms, we expect the effectiveness of corporate governance mechanisms to vary with growth opportunities. In particular, if agency problems are associated with greater underinvestme nt or information asymmetry (a common problem in high-growth firms), we expect corporate governance mechanisms that mitigate these kinds of problems to be more effective in high-growth firms (Smith and Watts, 1992 and Gaver and Gaver, 1993).However, if, as argued by Jensen (1986), agency problems are associated with conflicts over the use of free cash flow (a common problem in low-growth firms), we expect governance mechanisms that mitigate such problems to play a more important role in low-growth firms (Jensen, 1986). Several empirical studies that model company performance confirm the existence of potential interactions between internal governance mechanism and growth opportunities. For example, McConnell and Servaes (1995) find that the relationship between firm value and leverage is negative for high-growth firms and positive for low12 growth firms.Their results also indicate that equity ownership matters, and the way in which it matters depends upon investment opportunities. Sp ecifically, they provide weak evidence that on the view that the allocation of equity ownership between corporate insiders and other types of investors is more important in low-growth firms. Also, Lasfer (2002) points out that high-growth firm (low-growth firms) rely more on managerial ownership (board structure) to mitigate agency problems. Finally, Chen (2003) finds that the positive relationship between annual stock bonus and equity value is stronger for firms with greater growth opportunities.In order to capture potential interaction effects, we include interaction terms between proxies for growth opportunities and governance mechanisms in our empirical model and, also, employ sample-splitting methods (see, for example, McConnell and Servaes, 1995 and Lasfer, 2002). Based on previous empirical evidence the prediction we make is that mechanisms that are used to mitigate asymmetric information problems (free cash flow problems) are stronger in high-growth firms (low-growth firms). 3. Data and Methodology 3. 1 Data For our empirical analysis of agency costs we use a large sample of ublicly traded UK firms over the period 1999-2003. We use two data sources for the compilation of our sample. Accounting data and data on the market value of equity are collected from Datastream database. Specifically, we use Datastream to collect information for firm size, market value of equity, annual sales, selling general and administrative expenses, level of bank debt, short-term debt and total debt. Information on firm’s ownership, board and managerial compensation structure is derived from the Hemscott Guru Academic Database.This database provides financial data for the UK’s top 300,000 companies, detailed data on all directors of UK listed companies, live regulatory and AFX News feeds and share price charts and trades. Specifically, we get detailed information on the level of managerial ownership, ownership concentration, size and composition of the board, ma nagerial salary, bonus, options and other benefits. Despite the fact that data on directors are provided in a spreadsheet format, information for each item is given in a separate file. This makes data collection for the required variables fairly complicated.For example, in order to get information about the amount of shares held by executive directors we have to combine two different files: a) the 13 file that contains data on the amount of shares held by each director and b) the file that provides information about the type of each directorship (e. g. executive director vs. nonexecutive director). Also, we have to take into account the fact that several directors in the UK hold positions in more than one company. Complications also arise when we attempt to collect information about the composition of the board and the remuneration package that is provided to executive directors.The way in which our final sample is compiled is the following: we start with a total of 1672 UK listed f irms derived from Datastream. This number reduces to 1450 firms after excluding financial firms from the sample. After matching Datastream data with the data provided by Hemscott, the number of firms further decreases to 1150. Missing firmyear observations for any variable in the model during the sample period are also dropped. Finally, we exclude outliers so as to avoid the problem with extreme values. We end up with 897 firms for our empirical analysis. 3. Dependent Variable In our analysis we use two alternative proxies to measure agency costs. Firstly, we use the ratio of annual sales to total assets (Asset Turnover) as an inverse proxy for agency costs. This ratio can be interpreted as an asset utilization ratio that shows how effectively management deploys the firm’s assets. For instance, a low asset turnover ratio may indicate poor investment decisions, insufficient effort, consumption of perquisites and purchase of unproductive products (e. g. office space). Firms wit h low asset turnover ratios are expected to experience high agency costs between managers and shareholders11.A similar proxy for agency costs is also used in the studies of Ang et al. (2000) and Sign and Davidson (2003). However, Ang et al. (2000), instead of using the ratio directly, they use the difference in the ratios of the firm with a certain ownership and management structure and the no-agency-cost base case firm. Secondly, following Sign and Davidson (2003), we use the ratio of selling, general and administrative (SG&A) expenses to sales (expense ratio). In contrast to asset turnover, expense ratio is a direct proxy of agency costs.SG&A expenses include salaries, commissions charged by agents to facilitate transactions, travel expenses for executives, advertising and marketing costs, rents and other utilities. Therefore, expense ratio should 11 The asset turnover ratio may also capture (to some extent) agency costs of debt. For instance, the sales ratio provides a good signa l for the lender about how effectively the borrower (firm) employs its assets and, therefore, affects the cost of capital 14 reflect to a significant extent managerial discretion in spending company resources.For example, as Sign and Davidson (2003) point out, â€Å"management may use advertising and selling expenses to camouflage expenditures on perquisites† p. 7. Firms with high expense ratios are expected to experience high agency costs between managers and shareholders12. 3. 3 Independent Variables Our empirical model includes a set of corporate governance variables related to firm’s ownership, board, compensation and capital structure. Several control variables are also incorporated. For example, we use the logarithm of total assets in 1999 prices as a proxy for firm size (SIZE).Also, we include the market-to-book value (MKTBOOK) as a proxy for growth opportunities. Finally, we divide firms into 15 sectors and include 14 dummy variables accordingly so as to contro l for sector specific effects. Analytical definitions for all these variables are given in Table 1. [Insert Table 1 here] 3. 4 Methodology We examine the determinants of agency costs by employing a cross sectional regression approach. Following Rajan and Zingales (1995) and Ozkan and Ozkan (2004), the dependent variable is measured at some time t, while for the independent variables we use average-past values.Using averages in the way we construct our explanatory variables helps in mitigating potential problems that may arise due to short-term fluctuations and extreme values in our data. Also, using past values reduces the likelihood of observed relations reflecting the effects of asset turnover on firm specific factors. Specifically, the dependent variable is measured in year 2003. For accounting variables and the market-tobook ratio we use average values for the period 1999-2002. Ownership, board and compensation structure variables are measured in year 2002.Given that equity owne rship characteristics in a country are relatively stable over a certain period of time, we do not expect that measuring them in a single year would yield a significant bias in our results (see also La Porta et al. , 2002, among others). 12 An alternative proxy for agency costs between managers and shareholders, which is not used in our paper though, is the interaction of company’s growth opportunities with its free cash flow (see Doukas et al. , 2002). 15 Our approach captures potential interaction effects that may be present.For example, as explained analytically in section 2. 6, the nature of the relationship between the alternative governance mechanisms or devices and agency costs may vary with firm’s growth opportunities. To explore that possibility, we firstly interact our proxy for growth opportunities (MKTBOOK) with the alternative corporate governance mechanisms. In this way, we test for the existence of both main effects (the impact governance variables on age ncy costs) and conditional effects (the impact of growth opportunities on the relationship between governance variables and agency costs).Additionally, we split the sample into high-growth and low-growth firms and estimate our empirical models for each sample separately. Then we check whether the coefficients of governance variables retain their sign and their significance across the two sub-samples. 3. 5 Sample Characteristics Table 2 presents descriptive statistics for the main variables used in our analysis. It reveals that the average values of asset turnover ratio and SG&A ratio are 1. 24 and 0. 45 respectively. The mean value for managerial ownership is 14. 4 per cent of which the average proportion of stakes held by executive (non-executive) directors is 10. 68 per cent (4. 06 per cent). The ownership concentration reaches the level of 37. 19 per cent, on average, in the UK firms. Also, the average proportion of non-executive directors is 49. 5 per cent and the average board size consists of 6. 97 directors. Finally, we were able to identify only 73 firms out of the final 897 (8. 1 per cent) in which the same person held the positions of CEO and COB. As far as the capital structure variables are concerned, the average proportion of bank debt on firm’s capital structure is 55. 5 per cent and that of short-term debt is 49. 53 per cent. Finally, the average market-to-book value is 2. 09. In general, these values are in line with those reported in other studies for UK firms (see, for example, Ozkan and Ozkan, 2004 and Short and Keasey, 1999). [Insert Table 2 here] The results of the Pearson’s Correlation of our variables are reported in Table 3. Our inverse proxy for agency costs, asset turnover, is clearly positively correlated to managerial ownership, executive ownership, salary, bank debt and short-term debt.Ownership concentration is also positively related to asset turnover but the correlation coefficient is not statistically significant. On the contrary, board size and non-executive 16 directors are found to be negatively correlated with asset turnover. Finally, as expected, asset turnover is found to be negatively correlated with both growth opportunities and firm size. The results for our second proxy for agency costs, SG&A, are qualitatively similar with a few exceptions (e. g. short-term debt) but with opposite signs given that SG&A is a direct and not an inverse proxy for agency costs. Insert Table 3 here] 4. Empirical Results 4. 1 Univariate analysis In Table 4 we report univariate mean-comparison test results of the sample firm subgroups categorized on the basis of above and below median values for managerial ownership, ownership concentration, board size, proportion of non-executives, bank debt, short-term debt, total debt, salary, firm size and growth opportunities. Firms with above median managerial ownership (ownership concentration) have asset turnover of 1. 34 (1. 31) whereas those with below median ma nagerial ownership (ownership concentration) have asset turnover of 1. 5 (1. 17). These differences are statistically significant at the 1 per cent (5 per cent) level. The results for executive ownership, salary, bank debt and short-term debt are also found to be statistically significant and are in the hypothesized direction. Specifically, we find that firms with above median values for all the above mentioned variables have relatively higher asset utilization ratios. On the contrary, there is evidence that firms with larger board sizes indicate significantly lower asset utilization ratios. Insert Table 4 here] In panel B of the same table we report the results using SG&A expense ratio as a proxy for agency costs. Results are in general not in line with the hypothesized signs with notable exceptions those of ownership concentration and growth opportunities. For example, firms with above median ownership concentration (MKTBOOK) have an SG&A expense ratio of 0. 41 (0. 55) whereas fir ms with below median ownership concentration (MKTBOOK) have an SG&A expense ratio of 0. 49 (0. 36).However, the results for managerial ownership, salary and short-term debt suggest that these governance mechanisms or devices are not effective in protecting firms from excessive SG&A 17 expenses. Sign and Davidson (2003) obtains a set of similar results, for the case when agency costs are approximated with the SG&A ratio. Overall, the univariate analysis indicates several corporate governance mechanisms or devices, such as managerial ownership, ownership concentration, salary, bank debt and short-term debt, which can help mitigate agency problems between managers and shareholders.Also, consistent with previous studies, we find that the relation between governance variables and agency costs is stronger for the asset turnover ratio than the SG&A expense ratio. The analysis that follows allows us to test the validity of these results in a multivariate framework. 4. 2 Multivariate analysi s In this section we present our results that are based on a cross sectional regression approach. We start with a linear specification model, where we include only total debt from our set of capital structure variables (model 1).In general, the estimated coefficients are in line with the hypothesized signs. Specifically, consistent with the results of Ang et al. (2000) and Sign and Davidson (2003), we find both managerial ownership and ownership concentration to be positively related to asset-turnover. The coefficients are statistically significant at the 5 per cent and 1 per cent significance level respectively. On the contrary, the coefficient for board size is negative, which probably indicates that firms with larger board size are less efficient in their asset utilization.Also, the results for our proxy for growth opportunities (MKTBOOK) support the view that high-growth firms suffer from higher agency costs than low-growth firms. Finally, there is strong evidence that manageria l salary can work as an effective incentive mechanism that helps aligning the interests of managers with those of shareholders. Specifically, the coefficient for salary is positive and statistically significant to the 1 per cent level. Therefore, compared to previous studies, our empirical model provides evidence on the existence of an additional potential corporate governance mechanism available to firms. Insert Table 5 here] In model 2 we incorporate two additional capital structure variables, the ratio of bank debt to total debt and the ratio of short-term debt to total debt, in order to test whether debtsource and debt-maturity impacts agency costs. Also, we split managerial ownership into executive ownership (the amount of shares held by executive directors) and non-executive 18 ownership (the amount of shares held by non-executive directors). We do this because we expect that equity ownership works as a better incentive mechanism in the hands of executive directors rather in t he hands of non-executive directors.According to our results, bank debt is positively related to asset turnover. Also, in addition to debt source, the maturity structure of debt seems to have a significant effect on agency costs. The coefficient of short-term debt is positive and statistically significant at the 1 per cent significance level. Furthermore, there is evidence that from total managerial ownership, only the amount of shares held by executive directors can enhance asset utilization and, hence, align the interest of managers with those of shareholders.In model 3 we estimate a non-linear model by adding the square of salary. As explained earlier in the paper, a priori expectations, which are supported by preliminary graphical investigation, suggest that the relationship between asset turnover and salary can be non-monotonic. Our results provide strong evidence that the relationship between salary and asset turnover is non-linear. In particular, at low levels of salary, the relationship between salary and asset turnover is positive. However, at higher levels of salary, the relationship becomes negative.This result is consistent with studies that suggest that extremely high levels of salary usually work as an â€Å"infectious greed† and create agency conflicts between managers and shareholders. The coefficients of the remaining variables are similar to those reported in models 1 and 2. Finally, in model 4 we allow for a non-linear relationship between executive ownership and agency costs. However, our results do not support such a relationship and, therefore, the square term in our following models13.To sum up, the results of Table 5 indicate that managerial ownership (executive ownership), ownership concentration, salary (when it is at low levels), bank debt and short-term debt can help in mitigating agency problems by enhancing asset utilization. Also, the coefficients for the control variables market to book and firm size, negative and positiv e respectively, suggest that smaller and non- growth firms are associated with reduced asset utilization ratio and, hence, more severe agency problems between managers and shareholders.As discussed earlier in the paper, there is a possibility that the nature of the relationship between the alternative governance mechanisms or devices and agency costs varies with firm’s growth opportunities. In Panel A of Table 6, we explore such a In trial regressions, which are not reported, the cubic term of executive ownership is also included in our model. Once more, the results do not support the existence of a non-monotonic relationship. 13 19 possibility by interacting those governance mechanisms found significant in models 1-4 with growth opportunities, proxied by market-to-book ratio.Our empirical results support the existence of two interaction effects. We find that executive ownership is an effective governance mechanism especially for high-growth firms (the coefficient EXECOWNER* MKTBOOK is positive and statistically significant). This result is consistent with the study of Lasfer (2002), which suggests that the positive relationship between managerial ownership and firm value is stronger in high-growth firms. On the contrary, the coefficient SHORT_DEBT*MKTBOOK is found to be negative and statistically significant.This means that the efficiency of short-term debt in mitigating agency problems is lower for high-growth firms. A possible explanation may be that short-term debt basically mitigates agency problems related to free cash flow. Given that high-growth firms do not suffer from severe free cash-flow problems (but mainly from asymmetric information problems), the efficiency of short-term debt as governance device decreases for these firms. One could argue, though, that short-term debt should be more important for the case of highgrowth firms since it helps reduce underinvestment problems.However, it seems that this effect is not very strong for the case in our sample. A similar result is obtained in McConnell and Servaes (1995) who find that the relationship between corporate value and leverage is positive (negative) for low-growth (high-growth) firms14. [Insert Table 6 here] Secondly, we use the variable MKTBOOK so as two split the sample into two subsamples. We label the upper 45 per cent in terms of MKTBOOK as â€Å"high-growth firms† and the lower 45 per cent as â€Å"low-growth firms†. Then, we re-estimate our basic model for the two sub-samples separately (Table 6, panel B).The results of this exercise confirm the existence of an interaction effect between executive ownership and asset turnover. In particular, the coefficient of EXECOWNER is positive and statistically significant only in the case of the sample that includes only high-growth firms. As far as short-term debt is concerned, it is found to be positive and statistically significant in both samples. 14 The idea in McConnell and Servaes (1995) is that d ebt has both a positive and a negative impact on the value of the firm because of its influence on corporate investment decisions.What possibly happens is that the negative effect of debt dominates the positive effect in firms with more positive net present value projects (i. e. , high-growth firms) and that the positive effect will dominate the negative effect for firms with fewer positive net present value projects (i. e. , low-growth firms). 20 To summarize, the results of our multivariate analysis suggest, among others, that executive ownership and ownership concentration can work as effective governance mechanisms for the case of the UK market.These results are in line with the ones reported by the studies Ang et al. (2000) and sign and Davidson (2003). Also, we find that, in addition to the source of debt, the maturity structure of debt can help to reduce agency conflicts between managers and shareholders. The fact that previous studies have ignored the maturity structure of d ebt may partly explain their contradicting results concerning the relationship between capital structure and agency costs. Furthermore, we find that salary can work as an additional mechanism that provides incentives to managers to take valuemaximizing actions.However, its impact on asset turnover is not always positive i. e. the relationship between asset turnover and salary is non-monotonic. Finally, there is strong evidence that the relationship between several governance mechanisms and agency costs varies with growth opportunities. Specifically, our results support the view that the positive relationship between executive ownership (short-term debt) is stronger for the case of high growth (low growth) firms. 4. Robustness checks Given the significant impact of growth opportunities on agency costs (main impact) and on the impact of other corporate governance mechanisms (conditional impact), we further investigate the relationship between growth opportunities, governance mechanism s and agency costs. At first, we substitute the variable MKTBOOK with an alternative proxy for growth opportunities. The new proxy is derived after employing common factor analysis, a statistical technique that uses the correlations between observed variables to estimate common factors and the structural relationships linking factors to observed variables.The variables which are used in order to isolate latent factors that account for the patterns of colinearity are following variables: MKTBOOK = Book value of total assets minus the book value of equity plus the market value of equity to book value of assets; MTBE = Market value of equity to book value of equity; METBA = Market value of equity to the book value of assets; METD = Market value of equity plus the book value of debt to the book value of assets. 21 These variables have been extensively used in the literature as alternative proxies for growth opportunities and Tobin’s Q.As shown in Table 7 (panel A) all these varia bles are highly correlated to each other. In order to make sure that principal component analysis can provide valid results for the case of our sample, we perform two tests in our sample, the Barlett’s test and the Kaiser-Meyer-Olkin test. The first test examines whether or not the intercorrelation matrix comes from a population in which the variables are noncollinear (i. e. an identity matrix). The second test is a test for sampling adequacy.The results from these tests, which are reported in panel B, are encouraging and suggest that common factor analysis can be employed in our sample since all the four proxies are likely to measure the same â€Å"thing† i. e. growth opportunities. Panel C presents the eigenvalues of the reduced correlation matrix of our four proxies for growth opportunities. Each factor whose eigenvalue is greater than 1 explains more variance than a single variable. Given that only one eigenvalue is greater than 1, our common factor analysis provid es us with one factor that can explain firm growth opportunities.Clearly, as shown in panel D, the factor is highly correlated with all MKTBOOK, MTBE, METBA and METD. We name the new variable GROWTH and use it as an alternative proxy for growth opportunities. Descriptive statistics for the variable GROWTH are presented in panel D. [Insert Table 7 here] Table 8 presents the results of cross-section analysis after using the variable GROWTH as proxy for agency costs. In general, the results of such a task are similar to the ones reported previously.For instance, there is strong evidence that executive ownership, ownership concentration, salary, short-term debt and, to some extent, bank debt are positively related to asset turnover. Also, there is some evidence supporting a non-linear relationship between salary and asset turnover. Finally, our results clearly indicate that agency costs differ significantly across high-growth and low-growth firms and, most importantly, there is a signif icant interaction effect between growth opportunities and executive ownership.However, we can not provide any evidence on the existence of an interaction between asset turnover and short-term debt. [Insert Table 8 here] 22 In panel B of table 8, we split our sample into high-growth and low-growth firms on the basis of high and low values for the variable GROWTH. Specifically, we label the upper 45 per cent in terms of GROWTH as â€Å"high-growth firms† and the lower 45 per cent as â€Å"low-growth firms†. Then we estimate our basic model for each sub-sample separately. The results are very similar to the ones reported in Table 6 (panel B), where we apply a similar methodology.As an additional robustness check, we use a third proxy for growth opportunities, a dummy variable that takes the value of 1 if the firm is a high-growth firm and 0 otherwise, and re-estimate the models 6 and 7 of Table 8. The definition used in order to distinguish between high-growth and low-gro wth firms is the following: Firms above the 55th percentile in terms of the variable GROWTH are called high-growth firms. Firms below the 45th percentile in terms of the variable GROWTH are called low-growth firms.Finally, firms between the 45th and 55th percentile are excluded from the sample. The results (not reported) are qualitatively similar to the ones reported in Table 8. For example, there is evidence for the existence of an interaction effect between executive ownership and growth opportunities but not for the one between short-term debt and growth opportunities. Also, we re-estimate the models reported in Table 8 after substituting the total salary paid to executive directors for the total remuneration package paid to executive directors.We are doing so given that the total remuneration package that is paid to managers includes several other components. For instance, the components of compensation structure have been increased in number during the last decade and may inclu de annual performance bonus, fringe benefits, stock (e. g. preference shares), stock options, stock appreciation rights, phantom shares and other deferred compensation mechanisms like qualified retirement plans (see Lynch and Perry, 2003 for an analytical discussion). Once more, the results do not change substantially.Finally, in Table 9 we substitute the annual sales to total assets with the ratio of SG&A expenses to total sales. As already mentioned earlier in the paper, this ratio can be used as a direct proxy for agency costs. Our results, as presented in Table 9, indicate that executive ownership, ownership concentration and total debt help reduce discretionary spending and, therefore, the agency conflicts between managers and shareholders. Sign and Davidson (2003) do not find any evidence to support these results. Also, we find that agency costs and growth opportunities are positively related i. . the coefficient of the variable GROWTH is positive and statistically significant to the 5 per cent statistical level. 23 Finally, our results support the existence of an interaction effect between growth opportunities and executive ownership. However, once more, our analysis does not indicate the existence of an interaction effect between short-term debt and growth opportunities. [Insert Table 9 here] 5. Conclusion In this paper we have examined the effectiveness of the alternative corporate governance mechanisms and devices in mitigating managerial agency problems in the UK market.In particular, we have investigated the impact of capital structure, corporate ownership structure, board structure and managerial compensation structure on the costs arising from agency conflicts mainly between managers and shareholders. The interactions among them and growth opportunities in determining the magnitude of these conflicts have also been tested. Our results strongly suggest managerial ownership, ownership concentration, executive compensation, short-term debt and, to s ome extent, bank debt are important governance mechanisms for the UK companies.Moreover, â€Å"growth opportunities† is a significant determinant of the magnitude of agency costs. Our results suggest that highgrowth firms face more serious agency problems than low-growth firms, possibly because of information asymmetries between managers, shareholders and debtholders. Finally, there is strong evidence that some governance mechanisms are not homogeneous but vary with growth oppo

Chapter 9 Review Questions

Fred Bear MAIR 1449. 02 3-24-11 R. Q. Unit 9 (E. B. ) 1. What is magnetism? When two pieces of iron are attracted to each other by physical means or electrical means. 2. Torque is A. Strength that a motor produces by turning. 3. A magnetic field is D. All the above. 4. True or False: A permanent magnet is a piece of material that has been magnetized and can hold its magnetic strength for a reasonable length of time. True. 5. How is an electromagnet produced? Through electricity. 6. Which of the following produces the best electromagnet? B. soft iron 7.Unlike poles of a magnet repel each other and like poles attract each other. 8. What part does polarity play in the operation of an electric motor? It allows the motor to run continuously. 9. What part of a motor produces an inductive magnetic field within itself to facilitate the rotating motion? Rotor and stator. 10. What part does the frequency of alternating current play in the operation of an electric motor? Helps change polarity 1 20 times a second. 11. What would be the speed of a two-pole motor operating on a 120 volts 60 Hertz power supply? 3450rpm 12. What are the five types of single-phase motors used in the industry? 3. Which of the following correctly lists the motor’s starting torque from lowest to highest? B. Shaded pole, three phase, permanent split capacitor, capacitor start. 14. Which of the following is a common use of a shaded pole motor? A. Furnace fan motor. 15. How does a shaded pole motor operate? The shaded poles produce a magnetic field that is out of phase with the magnetic field of the main winding. 16. How can a shaded pole motor be reversed? The stator must be reversed to change the positions of the shaded poles, and this usually means disassembling the motor. 17.What determines the rotation of a shaded pole motor? B. Location of shaded pole. 18. Draw a diagram of a three speed, shaded pole motor. 19. What enables a split phase motor to develop enough torque to begin rotation? T he method of splitting the phase of incoming power to produce a second phase of power, giving the motor enough displacement to start. 20. What removes the starting winding from the electrical circuit of an open type split phase motor once it reaches 75% of its operating speed? Centrifugal switch. 21. What are the three probable areas of trouble in a split phase motor?The bearings, windings, and the centrifugal switch. 22. What is the unit of measurement for the strength of a capacitor? C. microfarad. 23. What is the purpose of the capacitor? To boost the starting torque or running efficiency of a single phase motor. 24. What is the difference between a running and a starting capacitor? Starting capacitors are usually made of plastic and used to assist a single phase motor in starting. A running capacitor has an oil filled case and is mainly used to increase a motor’s running efficiency. 25. List the five capacitor replacement rules. 1.The voltage of any capacitor used for rep lacement must be equal or greater than that of the one being replaced. 2. The strength of the starting capacitor replacement must be at least equal to but not more than 20% greater than the one being replaced. 3. The strength of the running capacitor replacement may vary by plus or minus 10% of the strength of the one being replaced. 4. If capacitors are installed in parallel, the sum of the capacitors is the total capacitance. 5. The total capacitance of capacitors in series may be found in the following formula: 26. Explain the operation of a permanent split capacitor motor.It has two windings, running and starting. A running capacitor is put in series with the starting winding. The capacitor causes the electron to flow through the starting winding to shift it out of phase with the running winding. Therefore, a rotating magnetic field is set up, causing the rotor to turn. 27. How are a PSC motor and a capacitor start capacitor run motor similar? C. Both use starting relays. 28. Wh at are the advantages and disadvantages of using the following types of motors? A. Shaded pole motor- 29. What are the similarities between an open type split phase motor and a capacitor start motor?C. Both have a centrifugal switch. 30. Which of the following is an advantage in using a three phase motor? B. Stronger. 31. Draw a wiring diagram of a capacitor start capacitor run motor: 32. True or false: All starting apparatuses are mounted externally to the hermetic compressor shell. True. 33. What is the purpose in troubleshooting any electric motor? 34. Which of the following is the capacitance of an 88 uf and a 108 uf starting capacitor connected in series? A. 196uf. 35. Which of the following is the capacitance of two 20 uf running capacitors connected in parallel? B. 20uf. 36.If a capacitor produces 15 A on a 240 volt supply, which of the following is its microfarad rating? A. 166 uf. 37. Which of the following capacitors could be used to replace a 35 uf, 370 volt running capac itor? B. 35uf, 390 volt. 38. Which of the following capacitors could be used to replace a 188 uf, 250 volt starting capacitor? C. 200uf, 250 volts. 39. Which of the following capacitors or combination of capacitors could be used to replace a 45 uf 370 volt running capacitor? A. 40uf, 440 volt. 40. Which of the following capacitors or combination of capacitors could be used to replace an 88uf 250 volt starting capacitor?D. 150uf, 250V. 41. Find the common, start, and run terminals of the following hermetic compressor. 42. Briefly explain the procedure for troubleshooting hermetic compressor motors. Electrically taking resistance readings of the windings with a good ohmmeter. 43. What are the electrical failures categories for hermetic compressor motors? Open, shorted, or grounded. 44. What precautions should be taken when checking hermetic compressor motors? Infinity. 45. What would be the highest allowable resistance reading for a grounded compressor motor? Zero. 46.What are the adv antages of using an electronically commutated motor over a PSC motor? 47. Explain the construction of an ECM. The direct current converters convert the alternating current that the power company supplies to direct current, which can then be regulated to vary the speed of the motor. 48. An ECM is a B. Three-phase DC motor. 49. True or False: The resistance readings of the windings of a properly operating ECM should be equal. False. 50. True or False: The line voltage power supply of an ECM should never be disconnected or connected with the power on. True.

Europeans and Native American culture 2 Essay Example | Topics and Well Written Essays - 500 words

Europeans and Native American culture 2 - Essay Example It shall also focus on how the colonials governed themselves within the religious societies, which evolved constantly despite the restrictions, policies and laws of England and her parliament. Lastly, the paper shall conclude. The relationship between Europeans and Native Americans would be termed as interactive. Native Americans taught Europeans what to wear, how to grow food, and innovative forms of transportation. Native Americans implemented the technology of Europeans like weapons. Europeans brought horses into the land of natives, which they would use to move on the plains and hunt buffalo. The Europeans categorized the natives as superstitious savages thus converted them to Christianity1. Europeans altered the native language through teaching them English. Out of interaction connecting cultures, something novel came and peculiarly American. The new settlers brought diseases with them. A new reality would be seen, in which an ordinary cold made the natives ill, and others died. The entire villages in North America got wiped out by diseases like smallpox, cholera, measles and pneumonia. Smallpox proved to be extremely virulent. It spread extensively among the migratory tribes. The North Americans would be forced to reestablish themselves elsewhere. They suffered malnutrition and death eventually2. The climate fluctuations affected the grasslands’ productivity, native subsistence and migration patterns. There were food shortages that resulted to starvation. This facilitated and exacerbated the effects of diseases on populations and individuals. The colonies encompass the corporate, who got support from companies organized within England for profit. The proprietary involves those contracted as proprietorship to individuals. The crown gets controlled by the monarch. In religious matters, a board or committee known as council formulates laws for administration. The colonists were the secretaries of puritan. The first government of

Aircrafts Maintenance - A Commercial and Public Essential Annotated Bibliography

Aircrafts Maintenance - A Commercial and Public Essential - Annotated Bibliography Example The demand for its services, as with most transport, is a derived one that is driven by the needs and desires to attain some other, final objective. Air transport can facilitate, for example, in the economic development of a region or of a particular industry such as tourism, but there has to be a latent demand for the goods and services offered by a region or by an industry.† Since all major business operation, conducted an international scale by the multinational organizations require air traveling, the safety and protection of the crew and passengers is a matter of grave concern for the airline industry. Consequently, the companies pay due heed to the reparation and overhauling procedure on regular basis in order to ensure a safe journey on the one hand, and for minimizing the maintenance expenditures on the other. â€Å"Aircraft maintenance†, CAA states, â€Å"is an essential component of the aviation system which supports the global aviation industry. As air traffi c grows and the stringent requirements of commercial schedules impose increased demands upon aircraft utilization, the pressures on maintenance operations for on-time performance will also continue to escalate.† This annotated bibliography consists of five pieces of research on the need and significance of aircraft overhauling on regular basis in order to avoid any unpleasant and untoward state of affairs during the flight. First research has been made by Samaranyake et al in 2002, in which they have elaborated the importance of the structure and design of aircraft in the overhauling and reparation procedures. To conclude, it becomes evident that all the researches discussed above throw light upon the maintenance, reparation and overhauling systems of the aircrafts.  

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The Mississippi River Lab Assignment Example | Topics and Well Written Essays - 750 words

The Mississippi River Lab - Assignment Example The two questions asked during the study are The subjects were also asked to give approximations of the length of the Mississippi River. Most of the respondents thought that the Mississippi River is 5000 miles. The summary of the length approximations of the Mississippi river as per the subjects is presented in table 2. It is rather conclusive from the results of this paper that many people think that the Mississippi river is longer than 840m miles. Many people as evident in the respondents also think that the Mississippi River is longer than 3840 miles. However, from the length approximations, we can speculate that most people do not know the actual length of the Mississippi River. Majority of the people thought that the river is 5000 miles as shown in table 2. The approximation is way above the length used in this study as a reference point. This study assumed that the length of the Mississippi River is 2340 miles long. In relation to the results from the subjects, the actual and real length of the Mississippi River is less than half the length approximated by the respondents. According to the National Park Service, the actual length of the Mississippi River is 2350 miles

The economic growth of the UK has varied over the 10 years between Essay

The economic growth of the UK has varied over the 10 years between 2004 and 2014 - Essay Example Despite the fact that there was great fluctuation in United Kingdom economic growth there were great improvements in UK economic growth rates between 2004 and 2014. This is because the UK government was able to put in place policies that promote trade and investments. That policy helps to prevent corruption and fraudulent acts that pulls down an economy. Economic growth has numerous benefits which include; it helps to improve consumers and investors confidence. It creates employment opportunities and improves standards of living among the citizens. Moreover, it helps to improve reduce government borrowings (Nafziger and Nafziger, 2005) The above graph indicates the trend patterns of UK GDP growth rates from 2004 to 2014. It can be scrutinized that the GDP growth rate was fluctuating from 2004 to 2014. The United Kingdom GDP growth rate was substantially higher between 2004 and 2006. However, between 2008 and 2009,there was a sharp in economic growth declined at a rate below negative 2 percent and then started rising in the year 2010 and partially 2012 before it starts fluctuating from 2012 to 2014. It can be observed that increase in consumers’ confidence and market conditions tend to be presented by the three phases of economic growth namely; recovery, Booms and Peak as indicated. At peak, the UK economy has reached the maximum point of growth and hence, the consumer confidence starts falling whereby consumer starts to reduce their buying patterns making the GDP to decline causing recession. The UK economy starts to recover at recovery point as consumer’s confidence increase. The UK economy continue s to improve at a faster rate at recovery making the economy to undergo expansion (Boom) phase. At a level the levels of unemployment declines and economy improve significantly, as consumers confidence improves (McKinnon, 2007). ` The fluctuation in the United Kingdom GDP growth

Tourism policy Essay Example | Topics and Well Written Essays - 3000 words

Tourism policy - Essay Example Tourism is a valuable industry for every nation. It not only creates new businesses but also can create jobs, income and can enhance quality of life. For years, tourism industry developed almost fluently and now it has become a chief economic segment. For many countries in the developing world, tourism is a significant basis of income creation and therefore, a key element of economic improvement. A good positive state related to tourism can improve the relationship and it rewards nations. But the consequences of negative conditions such as terrorism are massive on a countries’ financial system. Tourism contributes about 10 percent of global GDP. Tourism industry needs to predict customer requirements, recreate its business strategy, and relocate on providing good services because in recent years customers have become more demanding and a good tourism system can improve the image of the nation. Therefore, the terrorist attacks can play a massively derogatory role in a countryâ €™s economy and thus, the tourism sector similar to other sectors can bear the brunt of such scenario (Wharton University of Pennsylvania, 2010). Importance of Tourism Tourism has become a key economic activity in the 20th Century. The World Travel & Tourism Council had generated income of US $ 655 billion from tourism industry in the year 1995 and had created 212 million jobs. Global employment growth was estimated at 21 percent in the year 2007. This increase was primarily due to increase in capital investment and it contributed to 610,000 people globally being engaged to the tourism industry. The employment increase was from complimentary services such as entertainment and restaurants. The result of amplified travelling has led to rise in government income and gross output; it has multiplier consequence on global economies (Dunn, 1999). The following table shows the growth of tourism till 1992: Figure 1: Growth of tourism till 1992 (Thompson, 2008). Effect on Tourism Industry due to Terrorist Attacks Terrorist attack has an adverse affect on the tourism industry. It can lead to joblessness, homelessness, deflation, crime and other economic crisis. Several factors associated with tourism such as airlines, hotels, restaurants and catering sectors that are used by any firm or industry and their employees are all affected to a greater or lesser extent. Terrorism can unravel a country’s tourism industry. It affects directly to the tourists’ decision making. The role of tourism in emerging countries is currently so enormous that some downturn in the tourism sector is a serious concern. In general, tourism is one of the best performing economic sectors in the developing countries and can have various dimensional effects (Essner, 2003). Several such instances of the affect of terrorist attacks on the tourism industry will be evaluated in the following sections. Terrorism in Maldives Tourism Industry Maldives is a developing nation and is depended on their tourism industry as a source of income. Maldives is a holiday destination for the tourists due to its famous heavenly as well as

Marketing transportation homework Essay Example | Topics and Well Written Essays - 500 words - 2

Marketing transportation homework - Essay Example 2. The two logistic activities that I have settled on include the communication and the transaction processing in companies. The internet has influenced these sectors to a large extent, some being positive while others negative. For instance, communication has been improved and the presence of smart phones has enhanced even attendance in meetings without the presence of an individual. The transactions that exist and occur in businesses has developed to be online. Some issues like theft have come up as many individuals are lured into believing that the sellers are genuine while in real sense are being duped. These issues are quite surprising as one gets to realize that, just like any other solution, the internet has its demerits too. 3. There are many macro level challenges that have come up as a result of technological advancements. For instance, lack of good record keeping due to lack of attending meetings, the opposition to technological development faced by the managers from the employees. The other challenge includes the introduction of more portable devices yet this makes the information more insecure as the level of being prone to theft is much higher and increased. 1. The corporate level strategy is aimed at overseeing the management of the company, the objectives and aims of the business and the type of business in the company. The strategic level plays the role of intermediaries between the business and the managers. They develop strategies and match the needs with the people who will perform the functions to attain the goals of the company. The functional level is where the real work is done. This is the section whereby the logistics and calculations are performed in terms of the objectives of the company. 2. Logistic strategy is not directly connected to the corporate strategy but is influenced through the strategies of the business

Assistive Technology for Students with learning disability Essay

Assistive Technology for Students with learning disability - Essay Example This research paper will analyze the use of assistive technology in schools and how it has helped students with learning disabilities. Both USA and UAE have embraced the use of technology in the education systems. Since technology has become an integral part of our lives, we need to incorporate it in our everyday lives. Technology has helped to revolutionize the education system around the world through increasing the learning opportunities for learners. Assistive technology was introduced in USA as an Act to help individuals with learning disabilities. Over the years, the use of technology to help the student with learning disabilities has greatly increased. Many schools are incorporating assistive technology into their classroom activities. In the UAE, use of assistive technology has not been fully embraced compared to USA. This is because the government is concentrating more on students without learning disabilities than students with learning disabilities. USA is more conversant with the use of assistive technology than UAE. USA has embraced the use of computer systems that help students with spelling problems and slow in writing (Manikam, 2014). Assistive technology for learning disability refers to any tools, equipment’s or devices that help students with learning disabilities compensate or bypass a student’s disability. Over the past few years, studies show the efficacy for students with learning disabilities. The assistive technology helps to increase the child’s sense of independence and self-reliance. The assistive technology does not eliminate the disability but helps the students cope with them. It helps the students with learning disability to capitalize on their strengths and be in a position to deal with their disabilities. Assistive technology helps to address many learning disabilities. These learning disabilities include listening, writing, reading, mathematics, and

System of Inquiry Essay Example for Free

System of Inquiry Essay In an age where truth is relative and compromise is the norm , where people are afraid to take a stand on the thorny issues like Bioethics , Euthanasia , Racism , Abortion etc that clutter our daily horizons – it’s high time now to face these vexing issues boldly and set – up a firmer Code of Ethics at the conscious level of a human . No matter how many laws you make but unless it is dwelled at the conscious level it won’t be that effective ; as ethics is not limited to specific acts and defined moral codes , but encompasses the whole of moral ideals and behaviours – a person’s philosophy of life to be precise . A high performing compliance and ethics program is best organized as an integrated capability assigned to the individuals with overall accountability. As far as the ethics in the system of inquiry goes – reflection , decision making under circumstances of complexity , skills of analysis , synthesis and evaluation as well as communication skills are some of the hallmarks. An ethical system of inquiry program supports the organization’s business objectives, identifies the Ethical and legal boundaries to establish an alert management system. Once an issue is detected, management must be prepared to respond quickly and appropriately . It will enable the organization to better prevent, detect and respond to similar problems in the future. An effective systems of enquiry should include reasoning and conclusions that can be reduced to a form that can be effectively communicated plus a systematic approach that goes a long way in handling any sort of inquiry. Appreciative Inquiry seeks what is right in an organization. It is a habit of mind, heart, and imagination that searches for the success, the life-giving force, the incidence of joy. Every system of inquiry needs to be ethical and ethics is not the same as feelings. Feelings provide important information for our ethical choices. Some people have highly developed habits that make them feel bad when they do something wrong, but many people feel good even though they are doing something wrong. And often our feelings will tell us it is uncomfortable to do the right thing if it is hard. Ethics is not religion. Many people are not religious, but ethics applies to everyone. Most religions do advocate high ethical standards but sometimes do not address all the types of problems we face. Ethics is not following the law. A good system of inquiry does incorporate many ethical standards, but law can deviate from what is ethical. Law can become ethically corrupt, as some totalitarian regimes have made it. Law can be a function of power alone and designed to serve the interests of narrow groups. Law may have a difficult time designing or enforcing standards in some important areas and may be slow to address new problems. A robust system of inquiry should have mechanisms for making good ethical decisions which further requires a trained sensitivity to ethical issues and a practiced method for exploring the ethical aspects of a decision and weighing the considerations that should impact our choice of a course of action. Having a method for ethical decision making is absolutely essential. When practiced regularly, the method becomes so familiar that we work through it automatically without consulting the specific steps. The more novel and difficult the ethical choice we face, the more we need to rely on discussion with others about the dilemma. Its only by careful exploration of the problem, aided by the insights and different perspectives of others, can we make good ethical choices in such situations. Work ethics is relative to the time period in which it is measured and the variables are not independently predictive. We must redefine work ethics to reflect the attitudes, desires, and behaviors of today’s employed if we are to develop pedagogy that will foster changes in worker behavior that will be sustained as situations change. Most contemporary research focuses on teaching skills and knowledge, and not attitudes. Work-related social skills and habits are the most important entry-level skills sought in employees. As business, industry, and education face challenges to produce workers and students who perform at optimum levels, all are faced with the issue of the work ethics. Nearly all discussions with emphasis of linking or improving businesses and education captures work ethic somewhere in the discourse. Underlying questions concerning work ethics is the development of an acceptable definition that is current with today’s environment, the determination of whether work ethics is a teachable characteristic, and the development of acceptable and practical pedagogy.

Employee Empowerment Case Study: TGI Fridays

Employee Empowerment Case Study: TGI Fridays Major shifts in business activities in the recent years due to globalizations have taken Large (LEs) and Small Medium Scale Organizations (SMEs) either National or Multinational towards an intense competitive environment. To respond to these global challenges organizations are now working differently as compared to past and last but not the least the competitive advantage that a company obtains is through its customer service activities. As The cost of attracting a new customer is five times bigger compared to the cost of retaining a current customer (Hart et al, 1990). When an organization is not able to provide the desired satisfaction to customers, the customer becomes aggressive and besides leaving the organization service becomes a tool to disengage customers in his domain. When a company fails to provide a service, the dissatisfied customer may provide negative word-of-mouth. (Chakrapani, 1998) claims that 100 dissatisfied customers cost a company 1600 to 2500 potential customers. To retain the customers it is of paramount importance that the employees of an organization are in line with the organizations objective with regards to the successful operation and in this regard todays managers make sure to convince employees that their personal interests are in agreement with the goals of the organization. (Hellriegel et al, 2005) explained that in todays battle for excellent employees, management has to offer more than high pay to win employees trust and motivate employees. As very aptly discussed by (Latham and Gary, 2004) that the most difficult aspect of being a work team leader is motivation of team members. Work teams may be more successful in achieving organizational goals if their members are empowerment to do their jobs. 2. SIGNIFICANCE: For achieving organizational success employee empowerment and performance are at the core with regards to these concepts. Job satisfaction amongst employees talked about in relation to employee empowerment and contextual performance. Ugboro and Obeng, found that in an organization empowered employees demonstrate job satisfaction at higher levels in contrast in organizations where employees are not empowered. (Ugboro and Obeng, 2000) When the team leader demonstrates the appropriate disciplines Employee motivation can be an easy task the simple disciplines encourage employee motivation to happen naturally. Motivation, whether it is self motivation or employee motivation, is the trigger to act. The competitive business market nowadays stresses on swift solutions as there a shortage of time in making decisions. To succeed, todays complex organizations require the collaboration of multiple followers (Yukl, 2008) managers at all levels who may assume a leadership role contingent on situational demands. As a result, empowerment has become a big slogan in numerous organizations world over. By setting the shared vision and common goal creates an environment in which other employees can control themselves i.e. empowered whether they acting for the objectives of the organization or not. As Kotter said that the vision makes the work more important to employees that envisioned by the common vision, which at the same time stresses their own values (Kotter, 1990). In order to get people move in the same direction that leader chooses, he/she needs to align them rather than organize them (Kotter, 1990). Empowered employees are more willing to serve the customers; his in turn quickens customer needÂÂ ´s responses which in turn result in customer satisfaction (Bowen et al, 1992). Empowered employees self-efficacy levels increase as they are in a position to evaluate the best approach to perform tasks. (Gist et al, 1992) In a Service organization the employees are of primary significance in view of the fact that they are the ones who are the face of the organization and the way they react and interact with the consumers is an indicator to the customers about the organization. The better the service and quality interaction the customer will have the more positive image will be portrayed also since service organizations are empowered as they have to make on the spot decisions this may prompt a negative image also as its a 2 way process. 3. RESEARCH OBJECTIVE: 3.1 AIMS: The idea of the study is to streamline the corporate objective through better quality management by having empowered employees. Whether it is fashion, hospitality, airline or the food industry, consumers first and foremost demand is quality. And this is not area specific. At the end of the day, companies are attracting consumers. However, the underlying challenges facing companies are the maintenance of quality to enhance consumer base. 3.2 RESEARCH QUESTION: For this study the company chosen is TGI Fridays restaurant. The purpose of this research is to ascertain the extent to which TGI Fridays restaurant practices employee empowerment in their organization, and how it impacts on service quality and customer satisfaction. The nature of the food service industry touches directly on the satisfaction and experience of the consumers. This uniqueness may account for the closer scrutiny and monitoring to ensure that certain standards with regard to employee empowerment that would otherwise have been voluntary in other sectors are observed. In this paper, we will delve into the details of employee empowerment in the restaurant business. The core study will revolve around TGI FRIDAYS Quality Management through employee involvement that will ultimately help the brand reach greater heights. According to (Strauss et al, 1998), the research question is a statement that identifies the phenomenon to be studied. It tells the readers what the researcher exclusively wants to know about this subject. How does TGI Fridays empowering of employees impacts on the quality of service and customer satisfaction in their restaurant? 4. Literature Review: 4.1 Total Quality Management: With the advancement in communication technology, transportation and other technologies the world has shrunk into a global village. Products and services developed in a country are now widely accepted in other regions of the globe as well. Many companies like TGI Friday have been developing marketing strategies to fulfill the need, in an increasingly globalized market, for several years. TGI Friday is one of the companies that are being recognized by and whose brand names are familiar to most of the people in every region of the world (Austins Radisson Hotel, 2006) Quality has different connotation to different people. Employees tend to think like their peers and think differently like those at other levels. This suggests that to infuse quality in the organization will be much easier if it is embedded across the board. Many Japanese companies have demonstrated a high perfection of product quality, reliability and customer service through TQM (Garvin, 1988). Such goals require continuous improvement procedures to be established within the company. The relationship between market share, profitability and quality has always been studied. According to Buzzell and Gale (1987) one factor above all others-superior quality drives market share and profit is virtually guaranteed. Companies that are committed to Total Quality Management, apply it in all areas of the organization, because customers are both external and internal functions to the business. Quality can not only reduce cost, it also helps in getting the differential advantage. As we can see in the following illustration, there are two types of quality: quality driven at customer and conformance to organizational quality standards. The Quality Circle is as follows: Price Advantage Customer-Driven Quality Market Share Profitability and Growth Customer Value Customer Attributes and Design Specs Specification Quality Productivity Lower Cost Lower Cost of Quality Investment in Improved Quality Figure 3.1 Quality Circle, Source: Joel E. Ross, (1996). Total Quality Management; Text, Cases and Readings. Second Edition. Total Quality circle implies that the customer is the top priority for all business decisions. It takes into consideration the satisfaction of customer as a key determinant of success in the long run. Sometimes business decisions lead to the demise of an entire enterprise when quality is shown the door, while compromising on customer requirements. According to TQM theory the best way to improve organizational output is to continually improve performance (Dale, 1996). The phenomenon of Total Quality Management is no more another statement for organizations. It has become a reality. In the cut-throat corporate world, companies find themselves in hot water if they compromise on quality, consideration the fact the consumers now have more alternatives at their disposal. 4.1.2 Buzz Word Quality: Every organization has a set of standards and beliefs that they adhere to. Quality is the buzz word in the modern day marketplace. Every organization claim to infuse the best quality in its products and services. In our daily lives, we distinguish different products and services as excellent, average or mediocre. The precise definition of a quality product or service is that it provides customer more than what they were actually looking for at a prescribed price. According to Crosby, quality is the outcome of a carefully constructed culture. This has to be the fabric of the organization. (Crosby, 1988) Organizations operating in modern markets call for an exceptional quality in their products and services. In the case of restaurants, the initiative is that products and services must be readily available to customers. Essentially, organizations focus on the concerns of customer needs, through a well developed mechanism (Kotler, 1991). A good management at a restaurant will instill value that will lead to the creation of admirable products and commendable service, which in turn fulfills customer expectations and satisfies them. Quality is really an attitude built on a perception. Its not the product or company itself. The product is sold by the company. (Aaker, 1991), asserts that the brand of that product is bought by the consumer, predicated upon the consumers perception that the brand he or she buys of a product differs sufficiently from another brand of the same product to warrant choosing one particular brand over another. And, by the way, warrants paying the price for it. Customers look beyond the functional benefits of a restaurant to the overall experience it offers. Johnson stated that people stay in relationships for two major reasons: because they want to and because they have to. (Johnson, 1982) This recommends that service loyalty is influenced by satisfaction and interpersonal bonds. The interplay of these two sets of influences impacts on operational, marketing and human resource management strategies, including the nature and form of empowerment best matched to the service offer. (Cowell, 1984) claims that different organization provide different service features, which in the long-term impacts the operational management, marketing offer to customers and the way that front line employees are managed. 4.1.3 Consumers Charge Quality: Consumers tend to associate quality with price. But a new Cornell study found out that higher price tag may create a more positive view of products, but consumers may not necessarily purchase them. (Lowery, 2009) Some studies support the idea that higher price leads to a more superior quality some case examples are studies by, (Dodds, et al 1991; Gabor, 1988 etc). On the other hand, other studies have found that a high price may not always be related to the perceived superior quality. (Peterson 1970; Peterson and Jolibert, 1976). Such inconsistent findings have prompted the conclusion that a general price perceived quality relationship does not exist (Zeithaml et al, 1988). It is very much clear that quality cannot alone be associated with the price tag. It all depends on the users preference, the availability of different alternatives and the situation that compels the consumer to use the product/service. Many customers seek their prescribed branded services when it comes to restaurants. The branded organization meets customers security needs by making the service offer precise and by delivering a standardized service constant with customer expectations. At the same time many customers are looking for some confirmation of their individuality. (Holpp, 1990) asserts that the problem with the delivery of services is that it is delivered at the customers interface. If a problem exists, it is already too late. The subtle aspects to service and the heterogeneity of services pose difficulty for both customers and organizations supplying services to them. TGI Fridays provides a service which creates a sense of social connection to others. The brand also offers its customers a prospect to deal with the ambiguity felt by many service consumers. Thus, the customer can personalize the experience and knows what to expect. The following extract from an article reinforces the aforementioned argument. Lori Voth asserted that the biggest problem with most of restaurants is that the food looks awesome in the menu, or on TV, billboard, but once it gets delivered to your table, your impression fades away. However TGI Fridays manages to do it perfectly every time. Not only do the photos and descriptions make your mouth water but the actual meal always lives up to its promise. This is one restaurant where you can judge something by its cover, or picture. 4.1.4 Quality Infuse Loyalty: It has been observed that some restaurants have a more loyal following? Why is that people are more attracted to it? Because, the experience is worth remembering. From the very first interaction with the staff, an impression is made. This feeling creates an impression in the mind of the customer. Many restaurants and TGI Fridays in particular identify the value of customer service. Loyalty is an essential part of doing any business. No business can survive without establishing a dedicated client base. Studies have shown that companies that are rated high by their customer can charge close to ten percent more, than those rated poorly (Sonnenberg, 1989). For managers, motivating a group of employees is not a straightforward task. Each employee is a different and unique individual with dissimilar personalities and attitudes. Surprisingly enough, in spite of its evident importance to all businesses, relatively little is known about it. Experts have struggled to define exactly what being a loyal customer means, and too little has been made in determining what factors lead to customer loyalty. So, although customer loyalty is considered the back-bone of business, it still remains a mystery. To be truly effective and be able to repeat business, a brand must fabricate an emotional connection with its customers. And this is what the managers strive to achieve. Emotional branding is connected with the wisdom of brands and leads to an excursion filled with precious hints, ideas, and lessons from the customers. How to infuse brand loyalty in customers and address the trenchant constituents of branding as a product of perceptive thinking is another challenge for the managers. Haddadj (2003) believes that to create an effective workplace in order to motivate employees to perform well is very much in the interest of organization. Managers pivotal role in initiating transformation in a restaurant is to succeed in improving organizational performance. 4.2 What is Employee Empowerment? A pleasant and professional environment helps in the development of the capabilities of employees. On the other hand meager staff quality can be very expensive for any business. Empowerment is defined as the capability of employees to exercise judgment and discretion in their work and to contribute more fully in decisions affecting their work (Potterfield, 1999). Change, regardless of its magnitude is a challenging exercise. In case of employee empowerment, the challenge becomes even bigger as a high level of unpredictability is involved. In any organization, employees are the assets. Human Resource is vital to a corporations growth and prosperity is gaining and retaining competitive advantage. Therefore a motivated and contented workforce is more likely to achieve on many fronts. Loyalty and commitment from the staff cannot be controlled. In Harvester Restaurants, employees work in autonomous work groups without the direction of an immediate supervisor (Ashness et al, 1995). Organizations tie staff loyalty and commitment to its policies and actions. Therefore the management should deal with this issue prudently. (Fedor et al, 1989) concede that the employees who find the work more creative will react less to criticism. Total quality management and the strive for zero defects places issues of quality at the center of every managements reflection. Employees who are empowered are in greater control (Conger et al, 1988). Employee empowerment has its fair share of criticism too. (Purser et al, 1998) in particular are wary of practices, calling it pseudo-empowerment (p. 132). They assert that it is simply putting a new face on an old scheme. Many authors believe it is more self-directed. (Hitchcock et al, 1995) note that the practiced empowerment is a status rather than a process of actively participation. However, those who promote this concept are of the view that it works and is related to the organizations performance. (Piore et al, 1983) believe the organizations will gain superior competitive advantage by focusing on employees as assets and by removing unnecessary levels of management. There are four different, but overlapping managerial motives for introducing empowerment (Lashley, 1995). These are empowerment through participation, through involvement, through commitment, and empowerment through delivering. Each of the aforementioned forms is applied differently with the nature of empowered given to the employee. Organizational theories also attest to the fact that the fit involving business strategies and organizational characteristics is a key determinant of organizational performance (Lorsch et al, 1973). Many authors like (Barry, 1993) say that empowerment is a universally defined term. The idea of empowerment is to engage the employee in different aspects of the service operation. The empowerment model of (Lashley, 1997) is as follows: Source: (Lashley, 1997) 4.2.1 Empowerment Self-Actualization: Abraham Maslow has hinted out at the five levels of human needs. The need of self actualization is on top of the pyramid. The Maslows Hierarchy Model is as follows: http://dinamehta.com/blog/wp-content/uploads/2007/10/800px-maslows_hierarchy_of_needssvg.png Source:NetMBA.com Empowerment is in fact fulfilling ones need of self actualization. It is difficult to develop an environment that allows team players to find opportunities for self-actualization, and to be respected and feel empowered. But in the hospitality industry it is deemed important to allow employees to take responsibility of their actions. (Barbie et al, 1991) believed that a feeling of personal efficacy and self determination in nurtured among employees. They are supposed to feel that they have power and can make a difference. They have choices and can exercise it. (Johnson, 1993) 4.2.2 Employee empowerment in the hospitality industry: Employee empowerment is particularly relevant in the hospitality industry because employees have the maximum amount of direct customer contact. Levels of customer satisfaction can be improved by empowering employees to handle guest requests or problems immediately, rather than having to report to their managers .Managers fundamental task in a restaurant is to improve performance (Haddadj, 2003). Organizations operating in different industries have different set of management rules. The risk is high where the service act is directed at the minds of the people. Caring attitudes by managers succeed in bringing forth employee dedication and approval. (Black et al, 1996) 4.2.3 TGI Fridays Restaurant: The organization structure at TGI restaurants is somewhat traditional and typical for the hospitality business. At Fridays a standardized layout and decor is balanced by an extensive menu which allows the customer to decide on what they should consume within the range. In many ways the offer is comparable to mass customization in manufactured products. The customer knows what to expect, and can personalize the experience through the extensive menu. 4.2.4 TGI Fridays Operations: The Restaurant Manager is responsible for the handling of affairs of the unit. The Front of house operations is managed by the senior service manager. The quality manager is in charge of the operations in kitchen and stores. People are trained for specific jobs that include jobs at bar, in the restaurant and the kitchen. Some employees play a supervisory role as shift leader. Trained hosts receive guests and the expediter is responsible for ensuring the speedy production of meals from the kitchen. To ensure quality and consistency in the service offering is a lot harder to accomplish than in other sectors. This category of service firms is unique since the organization is not isolated from the customer the latter must physically be present throughout the service act, unlike other sectors such as manufacturing (Fitzsimmons and Fitzsimmons, 2004). These are recognized as the critical success factors. (Boynton et al, 1984) define critical success factors as those things that must go well to ensure success for a manager. They imply that these administrative areas must be given individual attention to bring about higher performance. The thorough interaction between the service organization and the customer in person has profound quality implications for the organization. In the case of TGI Fridays where employees are delivering a mass customized service, they need to exercise consultancy skills in their interpretation of customer service needs. This helps in increased motivation in the workforce. This in turn will able the employee to reach future performance standards (Nemoroff et al, 1979). 4.2.5 Employee Empowerment at TGI Fridays: TGI Fridays foster an environment of employee empowerment. They have created an environment where employees are nurtured to take responsibility for their actions. So, performance at TGI Fridays requires more than merely taking order and delivering to the customer (Ritzer, 1993). This is very important to managerial aspirations for their approach. Employees need to be able to interpret, and then deliver, the customer service required. At Fridays employees are managed through a cluster of approaches to enhance perfection in work. When it comes to special events, it really shows that everyone in the staff is an important player. For instance during the week People arrive for their shift, do their shift, and go home. But at special occasions like Christmas, Dub-Dubs, door hosts, bartenders and managers alike stay behind after working. Everyone make sure that customers when they check in feel comfortable about the place. The slogan is to be trusted and respected. This is the managers duty to be an effective communicator and devote time to everyone equally. The natural skills and talents of employees will be realized and utilized to the organizations effectiveness (Ripley and Ripley, 1993). TGI FRIDAYS support the staff to be hands on with customers, but at the same time assesses the character and mood of the guests in order to achieve appropriate level of interaction. They have designed a book they call as the WOW Book. 4.2.6 The WOW Book: TGI FRIDAYS has a book known as WOW (WALK ON WATER). This book for staff lists the extra stuff the employees can offer to the customer. One such example that comes into our mind is lighting a cigarette for the customer. Before the start of each shift, employees are involved in a board game through roley. This role play is based on service encounters. The is based on the culture and philosophy of the organization. The objective of this is to inculcate each employee with the values of the organization. Unlike bureaucracies, empowering organizational structures are collaborative team based organizations (Beyerlein et al, 2003). 4.2.7 TGI Fridays Passport: The management at TGI Fridays have created a flexible employee rotation program once the training is completed. This program is known as the TGI Passport. This system enables employees to work in other branches, states or countries when there is a vacancy. This is an excellent example of empowering employees through flexibility, thus ensuring loyalty. This scheme not only retains staff but also reduces training costs. 4.2.8 The Five Star Values at TGI Fridays: TGI Fridays has identified five star values to symbolize its philosophy and culture. Each value is presented as a triangle and each side of the triangle must be balanced in order to deliver the service the Fridays way. In addition to these stars values, the three rings of the perceived guests are also taught to the staff. These rings represent the core offerings of the brand along with the consistent standards of service. They also entail an environment in which individual employee is encouraged to work to their maximum potential. An engaged employee has a natural drive for innovation, efficiency and a talent for building encouraging relationships (Ganguly, 2003). The five star values empower employees; they own their job and want to achieve better because they feel rewarding for doing so. 4.2.9 The Service Encounter: TGI Fridays calls its service encounter as an unusual experience. Employees are encouraged to think that TGI Fridays gives its customers a value for their money. For TGI Fridays incorporate elements of standard procedure manuals laid down production and presentation specifications. Test on product knowledge is used to ensure that front line employees had the requisite knowledge to be able to advise customers. Dub-Dubs are allowed to offer advice to customers as to how to structure their meal. Furthermore, they also have to identify the customers service requirements and deliver what is needed. (Lashley, 2000) notes that normative control in TGI Fridays is one of the tools to retain employees and encourage them to take ownership of the service encounter. Service target times at TGI Fridays call for the starters to be served within seven minutes of receipt of the order. Main course items must be served within twelve minutes. A computer programme helps managers to check the timing of these service times. Dub-Dubs are trained to work in routines. They check with the customer regularly after three minutes of delivering the meal. The front-line staff is encouraged to develop a sense of ownership of the service encounter. (Spinalli et al, 2000) establish that empowerment leads to both employee and customer satisfaction. Managers are keen to make sure that the employee is able to meet up customer service requirements, answer queries, offer advice, and present the appropriate performance, and maintain company sales targets. The nature of the work requires a particular type of individual, someone who relates well with customers. 4.2.10 Empowerment and Employees Performance: Employee performance requires, more than the traditional acts of greeting, seating and serving (Hochschild, 1983). Customer satisfaction, attitude towards the customer and meeting the order in a specified time tops the list at Fridays. The bar staff at TGI Fridays provides both the showmanship needed to command a premium price. Work teams and information sharing are the building blocks of employee empowerment. Empowered employees own their jobs; can assess their personal and corporate success. The purpose of empowerment is often to cultivate confidence between employers and employees with the end goal of continuous improvement (Khan, 1997; Lawson, 2000). Workplace know-how is a combination of the foundation skills and the workplace competencies. The competencies cannot be achieved without a strong base; but the two can-and should-be learned simultaneously. Employees are expected to control themselves internally by being nice, cheerful, smiling and courteous to customers even when the customer is rude and offensive (Royle, 2000). The performance of the unit is measured by a system known as a WinCard. 4.2.11 The WIN Card: TGI Fridays used wincard which stands for Whitbread in Numbers scorecard. This is a communication tool that helps in bolster the performance. It uses the scorecard approach. Wincard measures a common set of scores across each unit, brand and at a group level. This enables employees to know better what they are doing and ensure that all employees are working towards the same company goal. It provides a reliable, tangible way of both motivating them individually and as a unit and identifying key areas for improvement. This tracks performance on a monthly basis against the agreed target and an in-store wall chart which display to employees the year- to- date results and monthly results via a color coding system. A traffic light system measures these scores. Green measures a result if the performance is better than the anticipated performance. Amber measures a performance that is better than last year but worse than the anticipated financial plan. Red signifies a performance that is just getting worse. 4.2.12 Guest Feedback: Guest Feedback is an important component of TQM. Hospitality businesses do conduct these surveys to get hands on information about the customers experience. The questions asked are about the customer sense of well-being and the experience as an individual. These questions measure the emotional attachment of the guest with the brand. Companies like TGI Fridays gain the feedback and ideas of their associate through these surveys. They empower their employees and they in turn try to score highly in guest and employee satisfaction surveys. It is a win-win situation. The recognition identifies the optimistic approach of the company. At Fridays, recognition comes in different varieties ranging from the award of eye-catching pin badges to trips abroad for high performing management teams. 4.3 Customer Relation Management: In todays increasingly competitive market, it has become increasingly difficult for businesses to remain competitive. With an increase in competition, organizations are focusing more and more on increasing customer satisfaction, as it is the key to remain competitive in the market. In restaurant operations, such as TGI Fridays, it is projected that new customers cost 11 times more to generate than repeat customers (Sellers, 1990). These economic points of views for empowerment further reinforce claims that employee turnover and bureaucratic control systems will decrease operating costs. Quality is a strategic issue and many aspects of quality management entail strategic thinking within the organization about their customers and their requirements. The value of long term relationships in services marketing has only recently been known. External environments can alter rapidly and companies may not be able to change accordingly (Zacharakis et al, 1999). Employees at TG