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Conflicts of interest in Financial Reporting

Published December 20, 2013 by Mayrbear's Lair

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Conflicts of interest exist between management and capital market participants because shareholders are interested in the economic reality of a firm’s transactions and managers are under pressure to report information that will satisfy them. Berman and Knight (2008) inform us that handling the company’s finances is both an art and a science (Berman & Knight, 2008). While firms are encouraged to follow the Generally Accepted Accounting Principles (GAAP) parameters in their bookkeeping procedures, conflicts of interest can affect the quality and reality of their reports. Miller (2002) asserts that some firms believe Quality Financial Reporting (QFR) offers stockholders more certainty; others argue it reveals too much information to competitors (Miller, 2002).

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The following scenarios can help illustrate how conflicts of interest between management and shareholders can alter a firm’s economic reality by the quality of their reports. Fraser and Ormiston (2010) suggest that red flags are raised immediately when a cash statement reveals significant changes that show a decrease in accounts receivable (A/R) and an increase in cash from operating activities (Fraser & Ormiston, 2010). This could result from a strategy some managers used under duress to inflate CFO figures by selling A/R for cash to appease shareholders. Conflicts of interest can also affect accounting procedures that may occur at a natural gas company, for instance, that utilizes fracking practices. Because of the demand to find alternative gas resources, this industry is banking on the lower rates they offer consumers and managers are under pressure to provide data that supports the enterprise is profitable while environmentally safe. If for example, management has knowledge the industry is not environmentally safe, in an effort to maintain operations, they may use incomplete reporting tactics to shield this data as long as they can along with any other questionable investing activities that could reveal unethical practices such as funds diverted to falsify results. One method shareholders can use to verify the firm’s claims is to scrutinize the outflows of the investment activities and review the notes for clues. Managers want to achieve desired outcomes and shareholders want to hear a company is financially healthy. Because of this component, it presents opportunities for conflicts of interest to develop that can affect the quality of reports that will alter a firm’s economic reality.

Due to the winter holidays, there will be no new posts for the next few weeks. Look for a new blog post Monday, January 6 where I take a closer look at what Annual Report financial ratios reveal.

Thank you for tuning in everyone! Wishing you all a very beautiful winter holiday season.

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References:

Berman, K., & Knight, J. (2008). Financial intelligence for entrepreneurs. Boston, MA: Harvard Business School Press.

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Miller, P. (2002, April). Quality Financial Reporting. Retrieved November 25, 2013, from Journal of Accountancy: http://www.journalofaccountancy.com/Issues/2002/Apr/QualityFinancialReporting.htm

The Quality of Financial Information

Published December 19, 2013 by Mayrbear's Lair

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The holidays are creeping up on us and I just realized, I neglected to post Wednesday’s blog. This post is significant to my research work in financial analysis because it helps us understand that in order to keep apprised of how well a company is doing, the quality of financial reporting is the key component that determines whether the statements paint an accurate portrait of the firm or not. For example, because of scandals that occurred from companies like ENRON, AEI, and WorldCom, a revolution occurred with respect to financial reporting. According to Bahnson and Miller (2002) old practices and habitual thought processes with respect to accounting principles were put aside and replaced with new strategies and systems. As a result, accountants and finance executives are expected to embark on a different path that embraces a new shift in the bookkeeping paradigm called quality financial reporting (QFR). For financial managers to consider investing in a company they are looking for accurate information about two significant components: (1) opportunities to receive future cash flows, and (2) information about those opportunities (Bahnson & Miller, 2002). QFR provides complete information to investors and creditors to give them confidence in a company’s performance abilities. Much of the information provided on financial statements can be intimidating to many managers and entrepreneurs. This is a typical response from those who lack the financial intelligence required that can help them make more effective decisions in running their firms. Berman and Knight (2008) explain that the figures on financial statements help strategists determine a variety of estimates and assumptions. Learning how to assess that information helps planners to identify the bias of the data provided, in one direction or another (Berman & Knight, 2008). In this context, where financial results are considered, bias merely suggests that the numbers may be skewed in a certain direction. In other words, bookkeepers and finance professionals are trained to use certain assumptions and estimates rather than others who view the reports for other purposes. QFR is essential because it provides sufficient information to identify not only the source of those gains, but whether there are any other events or circumstances that could have an effect out the outcome, like pending litigation.

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Much of the information provided on financial statements can be intimidating to many managers and entrepreneurs. This is a typical response from those who lack the financial intelligence required that can help them make more effective decisions in running their firms. QFR is effective at painting an accurate view of the company’s financial condition. For example, revenue should not be recognized until there is evidence that a sale has transpired. In other words, the recipient has received delivery of the product or completion of the services rendered and revenue is collected. Many companies, however, violate this policy and report revenue prematurely without all criteria being met. Analysts can look for clues of false revenue reporting in the financial reports. For instance, the notes can reveal the company’s position with respect to collecting revenue policies to ascertain whether any changes occurred and determine the reason for the changes as well as the impact they can have.  Another clue is an analysis of the financial statements to determine the pattern of movement from sales, inventory, and accounts payable. For example, spikes in revenue during the final quarter may be a sign of revenue reported prematurely unless there is a specified reason for the spike to generate sales (like an end of the year close-out sale to liquidate inventory). Companies do not commonly experience spikes from sales in the fourth-quarter so this immediately raises flags. Other methods companies use to raise revenue levels include keeping the account records open longer at the end of the allotted accounting period. Some corporations on the other hand, use deceptive tactics like reporting gross sales rather than net to show higher revenue. For example, a company that is acting as an agent for another organization may collect their revenue in the form of a commission. According to regulations set forth by the GAAP (generally accepted accounting practices), agents are not considered the owner of merchandise being moved. Fraser and Ormiston (2010) explain that the GAAP requires the reporting of Gross Revenue for Principal Owners and Net Revenue for those who act as a representative in the in the sale of a product or service.  In other words, because agents are not considered the owners or originators of the product who assume the risk of the merchandise, the company acting as the agency can use the net method for recording revenue. Therefore knowing that a company collects revenue as an agency analysts can scrutinize the data closely to determine whether they reported gross or net revenue.

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QFR is also important because it can help strategists understand the various inventory valuation methods. For instance, there are times when companies produce lower or higher earnings due to the fluctuation of inflation. Analysts again must look to the financial notes to determine the details of the company’s accounting policies to disclose whether the changes in revenue occurred due to LIFO (last in first out) or FIFO (first in first out) inventory cost flow accounting assumptions. If the value of the products sold, for example, falls under its original cost, the product is written down to reflect the market value and is determined by the cost to replace or produce an equivalent. This means that write downs can also play a part in the company’s profit margins which affects the comparability and quality of financial reporting. Accounting practices that do not provide details and incorporate misleading information is considered an unacceptable practice and any CEO that signs off on documentation that provides a misrepresentation of the truth is putting their career at risk and may face dire consequences as a result. That should be incentive enough to engage in QFR. To surmise, QFR provides investors the ratios that reveal whether companies are able to buy inventory and pay their bills. Furthermore, they provide profitability ratios that help creditors understand how much capital the company is generating while efficiency ratios reveal how well the company is managing their assets. The more complete these reports are the more likely they are to reduce shareholder uncertainty. In the eyes of investors and creditors, certainty reduces risk and reduced risk, provides shareholders with the satisfaction of a lower rate of return. In the long run, a lower rate of return means a lower cost for capital, which ultimately produces a higher stock price for the company. In conclusion, providing quality financial information is an essential component to management that contributes to a company’s long term success.  Tomorrow’s blog will post on schedule and will take a look at how different conflicts of interest can effect quality reporting.

References:

Bahnson, P., & Miller, P. (2002). Quality financial reporting. New York, NY: McGraw-Hill.

Berman, K., & Knight, J. (2008). Financial intelligence for entrepreneurs. Boston, MA: Harvard Business School Press.

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education.

Discrimination

Published September 11, 2013 by Mayrbear's Lair

Discrimination

Laws and doctrines help establish the choices that determine the rights of citizens in society regardless of gender, race, or age. Palumbo and Wolfson (2011) explain that many social systems emerged from ancient roots that were cultivated to treat people differently based on the race or sex. In addition, although evidence suggests early matriarchal traditions existed, patriarchal models have dominated Western civilization for millennia (Palumbo & Wolfson, 2011). In fact, the rise of patriarchy produced the manifestation and institutionalization of male dominance over family and society as a whole. Furthermore, men held power in all important facets of society. In short, a patriarchal system has been enforced, cultivated, legitimated, and perpetuated in a variety of manners throughout the ages and supported by religion and laws. In modern society, however, these practices are now viewed as a form of discrimination that federal government agencies like the EEOC, oversee based on Title VII of the Civil Rights Act of 1964.

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Discrimination in the workplace is an ongoing issue in the evolution of humanity. According to Seaquist (2012) discrimination in a business environment affects not only the individual, but the climate of the company as a whole (Seaquist, 2012). A leader’s best defense, as in any legal issue, is to keep meticulous records, develop effective strategies and policies to discourage discrimination and incorporate systems to monitor behavior that include checks and balances. The challenge, however, that most leaders face, is that there are many forms of discrimination; it is not isolated to race, age, or sex only. In fact, discrimination can appear in the form of class, level of academics, religious preferences, and even based on the kind of pet an individual has. Discrimination in short is a concept that creates separation and distrust in people because it focuses on their “inequalities.”

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Many of the founding fathers of this country believed that equality is the ideal that is at the core and fiber of every human being. Fredman (2011) in the meantime, asked us to contemplate the following concept: “When one person is like another, does that entitle them to be treated alike?” For example, for centuries it was commonly accepted that women were not like men and therefore deserved fewer rights. This concept still exists today in many countries. The same premise is used to deny rights to people of color, ethnic groups, sexual orientation, disability or age. Although one can agree or argue whether individuals are different or alike, many still contemplate as to whether they should or are entitled to be treated equally. This would suggest that the treatment of equality is predicated on the principle that justice is inconsistent. This paradox is evident when we accept that equality is formulated in different ways contingent upon the specific concept that is applied. This explains how the consistencies or inconsistencies of two individuals that appear to be alike, are in fact different in terms of things like: (a) access to power, (b) opportunities, and (c) material benefits that manifest in unequal outcomes. Therefore, an alternative view of inequality emerges that is based on perception of justice that is concentrated on balancing maldistribution (Fredman, 2011). This is one way to explain how discrimination continues to thrive and exist.

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Some employers, however, engage in certain kinds of discrimination to justify their business practices. For example, many of the employees hired as cocktail waitresses in certain environments are employed based on a certain attractive look, age, gender and physical features. The reasoning behind this is that it is part of their marketing strategy which is aimed at a dominant male clientele. Although this can be construed as discrimination, EEOC mandates also protect an employer’s right to choose how to run their business and the marketing strategies they deem effective for their industry. As long as a company can produce evidence to support their business is based on profiting by hiring a certain group, whether based on attractive looks, religion, age, gender, or other criteria, the business can engage in this practice legally and within the framework of employment laws. In other words, a business owner can operate an establishment, hire a specific type of employee for specific duties, and the EEOC will not consider it discrimination as long as the employer can provide substantial reason and evidence to support their justification in doing so, that is consistent in their industry. Ultimately, it is the job of each and every business leader to make sure they are familiar with the business laws that govern their industry to ensure that they are not violating any statutes with respect to employment and discrimination laws.

References:

Fredman, S. (2011). Discrimination law. New York, NY: Oxford University Press.

Palumbo, C., & Wolfson, B. (2011). The law of sex discrimination (Fourth ed.). Boston, MA: Cengage Learning.

Seaquist, G. (2012). Business law for managers. San Diego, CA: Bridgepoint Education, Inc.

Code of Ethics

Published August 9, 2013 by Mayrbear's Lair

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The world marketplace continues to expand at alarming speeds because of innovations in technology, transportation, and communication.  As a result, international borders have disappeared and a global sociopolitical economy has emerged where businesses now compete on a worldwide level.  This new environment permeates across boundaries where diverse cultures, values, regulations, and ethical standards exist.  Leaders have been forced to adopt and learn new ways of conducting business in order to maintain their share of the marketplace in this increasingly competitive, and, in extreme cases, hostile climate.  In order to gain the trust and support of stakeholders and prove that organizations and their leaders are engaged in ethical conduct, many organizations implement ethics programs and include a Code of Conduct Statement to represent their standards for ethical and moral behavior.  The focus of this research examines the components required for the development of a Code of Ethics doctrine that outlines the standards for ethical and moral conduct. To help develop and shape the doctrine’s framework, this research takes a closer examination of the fundamentals required including the following mechanisms: (a) a statement of values and principles; (b) a set of rules that frame the parameters of ethical performance; (c) training, communication, and implementation strategies; (c) the role of leadership; (d) corporate social issues; (e) laws and regulations that impact the organization; (f) oversight and enforcement strategies; (g) ethics auditing programs; and (h) considerations for globalization.  The findings of this research will conclude that although limitations and poorly designed codes of conduct encourage unintended outcomes, a company’s Code of Ethics represents an organization’s standards for ethical behavior and moral conduct because when significant disagreements emerge, these statements can achieve a measure of consensus; clarify standards which may otherwise be construed as vague expectations; and provide a clearly defined set of guidelines that represent a company’s values, principles, and aspirations.

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Statement of Values

A corporate Code of Ethics doctrine communicates the standards for ethical behavior in a business environment.  Ethics is a common way to determine what it means to be an upstanding citizen and is utilized as an effective tool for guiding the decision making process.  Ethics outlines the nature and basis of morality where moral judgments, standards, and rules of conduct are identified.  Business ethics, on the other hand, consists of the core values, ideals, and standards that guide behavior and define an organization’s specific principles.  These principles are usually conveyed in the corporation’s mission statement and Code of Ethics doctrines.  The policies in these documents outline pervasive behavioral boundaries and establish a guideline that identifies rules and regulations that the organization embraces as all-encompassing and absolute.  For example, Ross (2007) cited that Chinese factories where low-wage labor force conditions exist and staffers are subjected to eleven-hour work days, twenty-seven out of thirty days a month, could use a Code of Ethics doctrine to create better working conditions.  These conditions exist because: (a) factory leaders justify their ethical misconduct as a solution to satisfy the demands of the expanding global market and (b) there are no policies or regulations in place to deter this behavior (Ross, 2007).  Without clearly defined codes of conduct or regulations to prevent ethical misconduct and corporate abuse, factory bosses will continue to operate prioritizing profits over the well-being of the stakeholders that support them.

At the core, the ethics code must reflect the moral values and the underlying principles of the industry with honesty and integrity as well as address the significant ethical issues leaders face in today’s business culture.  These include: (a) protecting the environment, (b) avoiding fraud and ethical misconduct, (c) prohibiting financial corruption, (d) addressing the manufacturing of harmful products that puts the public at risk, (e) eliminating sexual harassment and discrimination, and (f) protection from piracy.

To develop an effective Code of Ethics, the first step is to begin devising a statement of values that includes the non-negotiable principles of the organization.  Fisher (2013) contends that leaders should design codes of conduct with the following objectives: (a) to express best ethical practices, (b) to articulate a specific value system that concisely delineates both decisional and behavioral rules, (c) to apply ethical conduct through leadership, (d) the requirement of staff participation, and (e) to accept and guide ethical behavior with incentives that motivate staff members (Fisher, 2013).  For example, companies like Ben & Jerry’s and Patagonia have established environmental sustainability as a positive core value and have committed their organizations to operate in an environmentally friendly manner.  Other companies, however, are driven by negative core values that focus on profit and self-interest only, like the tobacco companies that misled their consumers about the hazards of smoking.  A Code of Ethics doctrine should be influenced by the owner’s core values.  These principles could include: dependability, loyalty, commitment, open-mindedness, consistency, honesty, efficiency, creativity, humor, motivation, innovation, positive attitude, optimism, passionate, respectful, courageous, educated, endurance, empathy, and having fun.  These fundamental concepts can play a significant role to help shape a mission statement and a Code of Ethics doctrine.

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Training and Communication

Limitations and poorly written codes of conduct can present unintended consequences.  In the business world, ethics is an ambiguous concept that many leaders believe is a highly technical discipline to interpret and most feel unqualified addressing the subject.  In fact, Freeman and Wicks (2010) suggest that many top level managers suffer from moral muteness.  In short, they lack training and, as a result, are unable to fuse ethics with business conduct (Freeman & Wicks, 2010).  In truth, leaders must consider both the ethical and legal aspects of a situation to make the most effective decisions.  Top managers are in a position of influence and possess a power that controls the destiny of an organization.  Efficient ethical training programs help leaders: (a) make more effective decisions, (b) choose how and who to conduct business with, and (c) decide whether profits are more significant than achieving positive outcomes with social mindfulness.  By electing to conduct business ethically and engage with other like-minded organizations, leaders cultivate an ethical climate that helps avert facing issues of misconduct and avoid legal ramifications.

The most efficient way for leaders to engage in moral conduct and cultivate an ethical environment is to educate these executives to implement effective ethical training programs.  Ferrell et al. (2013) purport that ethical training programs equip staff members with strong reasoning abilities and intellectual skills that can guide them to comprehend and discover more effective solutions to complicated ethical issues.  They have identified the following six stages of moral development based on psychologist Lawrence Kohlberg’s model of philosophy: (a) punishment and obedience; (b) purpose and exchange; (c) interpersonal expectations, relationships, and conformity; (d) social system and conscience maintenance; (e) prior rights, social contract or utility; and (f) universal ethical principles.  Kohlberg’s theories further suggest that individuals should continue to evolve and reshape their morals and ethical behavior with extended training and education, as well as by drawing from personal experiences (Ferrell, Fraedrich, & Ferrell, 2013).  Leaders then apply their highly developed skills to identify and address the nature of the moral dilemmas as they arise to help them achieve optimum solutions.  For example, when a supervisor discovers a staff worker engaging in ethical misconduct, because of their high level of training, the manager can recognize the issue more easily and attempt to resolve it.  When leaders establish clearly defined policies, provide education and training systems to support them, staff members are more likely to abide by them and accept the consequences for behavior that falls outside those boundaries.  A Code of Ethics doctrine may also include a clause to address the training requirements expected from all staff members.

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Implementation Plan

When there are disagreements of an ethical nature, a Code of Ethics doctrine can help achieve a measure of consensus.  The most effective leaders comprehend the significance of identifying the voluntary and legally required aspects of institutional practices and the behavior that supports it.  In addition, this research supports that the most successful leaders engage in actions that demonstrate the leader’s conduct and business practices, while taking responsibility for cultivating of an ethical climate.  This strategy serves to inspire staffers to adopt similar practices.  Aristotle (384– 322 BC) suggested that a person’s character is developed by habituation.  In other words, a person’s righteous or iniquitous behavior is developed by the continuous engagement in acts that have a common quality.  These repetitious acts rely on the individual’s natural tendencies to gravitate towards virtuous or immoral behavior (Aristotle, 2012).  Equipped with this knowledge, leaders are better able to guide ethical behavior and implement programs that help guides staff members to develop patterns and habits that embrace moral conduct.  For example, investigators discovered Enron’s leaders had developed a culture of deceit to safeguard capital gains.  To assure stakeholders and to avoid repeating this situation again, leaders began to design and develop effective ethical training programs to educate employees and implement conducts of ethics as part of their organizational culture.  In addition, the establishment of the Sarbanes-Oxley Act (SOX) by Congress prompted corporations to work with the government in partnership by creating a federal oversight system that monitors corporate accounting practices, making fraud a punishable criminal offense.  Corporate leaders that implement programs inspired by the SOX mandates are able to address a wide range of provisions including corporate transparency in financial reporting; monitor corporate board members conduct; and complying with criminal justice practices.

Leaders that implement ethical training programs for staff members establish a culture that discourages misconduct, prevents behavior that represents a false corporate image, prohibits executives from hiding poor performance outcomes, and acts as an oversight system to monitor accounting and auditing practices to ensure operational integrity.  In addition, to guarantee stakeholder trust and confidence, CEOs now sign off on all company financial forms to confirm that all organizational processors have complied with every mandate.  These significant topics can also be addressed and included in an organization’s Code of Conduct doctrine.

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The Role of Leadership

A Code of Ethics statement clarifies standards that may otherwise be vague expectations.  Most leaders consider themselves ethical.  Others, however, question whether ethics is a substantive component of effective leadership.  Regardless of their views, executives are in a unique situation and have the power to guide corporate culture and shape ethical conduct.  Chopra (2012) contends that despite the advantages a person may have – wealth, intelligence, popularity, or influential social connections – none of these components provides the magic wand to effective leadership (Chopra, 2012).  Leaders continue to face difficult dilemmas and how they cope with various situations can make the difference between a positive outcome that contributes to the benefit of others and whether it results in disastrous outcomes.  For example, a leader that cultivates an atmosphere of deception and misdirection fertilizes the environment for destruction.  Therefore, the most effective and successful leaders must have the ability to: (a) guide a corporation to profits for the sake of the stakeholders, (b) achieve organizational goals in an ethical manner, and (c) motivate employees to engage consistently in ethical behavior in alignment with the organization’s code of conduct consistently.  Furthermore, the most efficient top level managers incorporate policies to inspire high performance levels and motivate staff members to engage in conduct that goes beyond mere observation of policies.  The best leaders establish trust and earn the loyalty of all their stakeholders.  Leaders that work in partnership with personnel achieve greater levels of success.  In return, stakeholders that respect organizational leaders that are more likely to support them and volunteer services beyond achieving organizational goals.  The role of leadership can also be addressed immediately following the mission statement in the form of a Leadership Letter from the organization’s CEO.

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Corporate Social Issues

Codes of Conduct doctrines provide statements of value and can also address a corporation’s social responsibility policies.  Organizations with leaders that incorporate ethical choices and learn corporate social responsibility operate businesses that consist of little worry and fear from concerns of bringing harm to themselves, others, or the environment. This is because their values include business practices that contribute to the welfare of citizens and the environment rather than engage in conduct that exploits or depletes resources.  For example, organizations like Plum Village focus on creating a culture that supports happiness by developing a community of stakeholders that are motivated to support them.  Hanh (2012) postulates Plum Village founders achieved this by creating a model that is not solely focused on profits.  By cultivating an atmosphere that supports joy and happiness, their organization and others like them prove that businesses do not have to sacrifice happiness to achieve high levels of profit (Hanh, 2012).  Furthermore, time and time again, history proves organizations that engage in destructive behavior, commit fraud, and operate without regard for stakeholders or the environment do not enjoy the same long term success.  Leaders that focus on cultivating a climate to motivate ethical conduct without compromising their ability to profit are more likely to succeed as well as maintain the confidence and support of stakeholders.  These are concepts that can be included in the organization’s code of conduct statement or, alternatively, for smaller organizations, can be addressed by implementing green strategies into their daily business practice, like recycling and incorporating efficient systems that reduce energy and fuel costs.

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Laws, Regulations, Oversight, and Enforcement

A Code of Ethics doctrine can also incorporate regulatory measures as another method to influence the impact of the ethical behavior and outcomes in a business environment.  The development of ethical compliance programs serves as a process that establishes corporate commitment to practicing ethical behavior.  These programs are designed by utilizing codes of conduct as the blueprint to direct ethical performances.  In short, effective leaders implement regulatory measures to help them achieve positive outcomes with social awareness and corporate accountability.  For example, Carpenter (2012) contends that because of the complicated manner in which leaders conduct business in the global market, they are required to: (a) identify, comprehend, and implement the acceptable use of corporate funds; (b) recognize the falsification of important documents and account records; and (c) identify debatable techniques sales representatives engage in to close deals (Carpenter, 2012).  These are common issues managers address in the corporate arena.  In addition, competition, political pressure, and different value systems also influence ethical conduct and outcomes.  To help leaders address these complicated challenges, the US government established the Federal Sentencing Guidelines (FSG) to help prevent ethical misconduct that results from white collar crimes.  Bredeson and Prentice (2010) purported that the SOX act, for example, was developed and imposed stern security mandates to: (a) create an oversight program that is monitored by a new federal agency, (b) reform the entire accounting industry, (c) restructure Wall Street practices, (d) alter corporate governance practices, and (e) confront insider trading and obstruction of justice (Bredeson & Prentice, 2010).  As a result, the Public Company Accounting and Oversight Board (PCAOB) was also developed to help support these mandates and work in partnership with the Securities and Exchange Commission (SEC) to help implement SOX’s numerous regulations.  Furthermore, these new governance practices were designed to protect whistle-blowers that support ethical conduct.  The implementation of these regulations, oversights, and the enforcement of these strategies all serve to maintain stakeholder confidence.

Laws and Code of Ethic doctrines are created to help define relations between individuals and corporations that affect the economic and social order of a society’s governance practices.  Mann and Roberts (2013) postulate that these laws are developed to reflect the social, political, economic, religious, and moral principles of society (Mann & Roberts, 2013).  In other words, laws are used as tools to control behavior in society and function to regulate human conduct.  Corporate leaders work in partnership with government agencies to guide acceptable ethical conduct to protect people and keep them safe.  Regulatory measures provide the motivation for organizational leaders to develop core practices that ensure legal and ethical compliance.  They put focus on the development of structurally sound core practices that consist of structural integrity in both financial performance and non-financial performance outcomes.  An organization’s Code of Ethics doctrine should provide in great detail an outline of the policies and regulations that staff members are expected to abide by.

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Ethics Auditing Strategy

Codes of Conduct doctrines also serve to deter corporate leaders from misusing their power and putting stakeholders or the public in harm’s way.  Companies are in the business of making a profit for the benefit of their stakeholders.  Leaders must be conscious that they are required to engage in behavior that supports responsible conduct towards their stakeholders, consisting of employees, customers, suppliers, communities, and society at large.  Ferrel et al. (2013) assert that organizations devise transparent methods to monitor and audit organizational outcomes and behavior by having open access to observe and analyze the following components: communications, compensation, social responsibility, corporate culture, leadership, risk, stakeholder perceptions, and the more subjective aspects of earnings, corporate governance, technology, and other significant areas (Ferrell, Fraedrich, & Ferrell, 2013).  Leaders want their organizations to benefit from large capital gains.  To help achieve this, they integrate ethical programs and audit systems into their code of conduct practices to encourage positive outcomes.  These significant concepts should also be included in the corporations’ Codes of Ethics doctrine.

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The Global Marketplace

In today’s marketplace, a Code of Ethics doctrine must also communicate the standards for ethical conduct on the worldwide stage.  Because organizational leaders are forced to face some very serious choices that could have long term positive or negative outcomes, they initiate directives that support corporate social responsibility (CSR) to achieve a long term competitive advantage in today’s cut throat global marketplace.  McGraw (2012) contends that being surrounded by the right people helps individuals learn the right actions to make the right decisions (McGraw, 2012).  Because US Business practices regulations are not enforced worldwide, many American leaders must contemplate high risk issues like: (a) complying with superiors to engage in ethical misconduct to achieve goals, (b) choosing to refrain from unethical behavior at the cost of losing their position, or (c) discovering another a solution (that may be unpopular) to avoid misconduct to achieve positive outcomes.

As a solution to help establish a more level playing field among companies who compete in the global market, the World Trade Organization (WTO) was created, consisting of 153 members.  Narlikar (2005) declared the WTO provides a variety of noble objectives including: (a) improved standards of living, (b) full employment, (c) expanded production of and trade in goods and services, (d) sustainable development, and (e) an enhanced share of developing countries in global trade.  Members also receive a commitment from the WTO to contribute to these objectives, engaging in a mutually advantageous partnership focused on reducing substantive tariffs and other trade barriers.  In addition, members are assured of the elimination of discriminatory treatment in trade transactions (Narlikar, 2005).  In short, the WTO is committed to liberalizing global trade by addressing economic and social issues with respect to agriculture, textiles, clothing, banking, communications, government purchases, industrial standards, food and sanitation regulations, and intellectual property.

Another important issue many corporations face when entering the global arena are companies that make payments to influential people for the purpose of obtaining favors or receiving business contracts.  The US identifies this type of business conduct as bribery – an illegal practice and a criminal offense.  Ferrel et al. (2013) purport that many American companies were operating at a disadvantage when competing with foreign companies whose governments did not prohibit the act of bribery.  As a solution, in 1998 the US and 33 other countries signed an agreement to combat the practice of bribing foreign officials in global business transactions.  This agreement is called the US Foreign Corruption Practices Act (FCPA) and serves to prevent this kind of conduct from occurring (Ferrell, Fraedrich, & Ferrell, 2013).  The United Kingdom implemented a similar agreement with the UK Antibribery Act to hold corporations and individuals liable for bribery regardless of where the offense is committed.  These and other organizations like the International Monetary Fund (IMF), The United Nations Global Compact, and the Sherman Antitrust Act, provide businesses competing on in the worldwide market parameters and regulations that are enforced help to deter ethical misconduct.  These issues should also be addressed in the Code of Ethics doctrine.

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Conclusion

Code of Ethics doctrines are a set of rules that help establish the standards that guide individuals and organizational behavior.  The Constitution of the United States, for example, is a doctrine that provides – in detail – regulations with the idea of forming a more perfect union to establish equal justice and to promote general welfare among its citizens (Government, 2012).  Corporations are microcosms of a similar organizational system that converge with the intent to promote general welfare and to make a profit doing so.  Companies want to achieve their goals in a uniform manner and do so by operating within the frame of justice that supports the well-being of society and their stakeholders.  For this reason, the development of an efficient and effective corporate ethics program is essential to provide a clearly defined set of parameters that is communicated through the organization’s vision, mission statement, and is further detailed in their Code of Ethics doctrine.

If an organization’s Code of Ethics statement is to have success, it must have full support of the entire organization beginning with the top level managers and include all levels of personnel.  Boatright (2009) suggests that unless this occurs, the code is unlikely to be successful (Boatright, 2009).  The findings of this research have deduced that although limitations and poorly designed codes of conduct encourage unintended outcomes, the development of an effective Code of Ethics doctrine, together with the implementation of an organization’s ethical program, serves to communicate the company’s standards for ethical behavior and moral conduct.  Time after time, these doctrines prove to be essential because when there are disagreements, these statements can achieve a measure of consensus, clarify standards which may otherwise be construed as vague expectations, and provide a clearly defined set of guidelines that represent the company’s values and principles to effectively help with the decision making process.  These combined elements can help achieve the highest outcomes.  In conclusion, for an organization to function successfully and harmoniously with the community and their surrounding environment, they must establish a code of behavior that everyone is willing to accept and abide by.

This concludes my six week research on ethics in organizational management. Next week we begin our six week journey into the realms of Business Law! Thanks for staying with me on this epic adventure in organizational management.

-Mayr

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References

Aristotle. (2012). Ethics. Seattle, WA: Amazon Digital Services, Inc.

Boatright, J. (2009). Ethics and the Conduct of Business (Sixth ed.). Upper Saddle River, NJ: Pearson Education, Inc.

Bredeson, D., & Prentice, R. (2010). Student guide to the Sarbanes-Oxley Act. Mason, OH, USA: Cengage Learning.

Carpenter, D. (2012). The consumer financial protection bureau. Washington, DC, USA: CreateSpace Independent Publishing Platform.

Chopra, D. (Composer). (2012). The seeds of success. [D. Chopra, Performer] On 21 Day Meditation Challenge: Creating abundance [Audio Sound Recording]. San Diego, CA, USA: D. Chopra.

Ferrell, Fraedrich, & Ferrell. (2013). Business ethics and social responsibility (9th ed.). Mason, OH: Cengage Learning.

Fisher, C. (2013). Decoding the ethics code: A practical guide for psychologists. Thousand Oaks, CA: SAGE Publications, Inc.

Freeman, E., & Wicks, A. (2010). Business ethics. Upper Saddle River, NJ: Pearson Education, Inc.

Government, U. (2012). the constitution of the United States of America. New York, NY: American Civil Liberties Union.

Hanh, T. (2012). Work: How to find joy and meaning in each hour of the day. Berkeley, CA: Parallax Press.

Mann, R., & Roberts, B. (2013). Business law and the regulatoin of business. Mason, OH, USA: Cengage.

McGraw, P. (2012). Life code. Los Angeles, CA, USA: Bird Street Books.

Narlikar, A. (2005). The world trade organization: A short introduction. New York, NY: Oxford University Press.

Ross, R. (2007). Slaves to fashion: Poverty and abuse in the new sweatshops. Ann Arbor, MI: University of Michigan Press.

The Learning Paradigm

Published May 13, 2013 by Mayrbear's Lair

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Scholars confirm that to maintain a successful place in today’s global market, there is a need for organizations to be flexible and as a result, today’s CEOs are learning to make necessary adaptations in order to achieve their goals. In addition, because leaders are being bombarded by enormous amounts of external pressure to survive, they have come to understand that learning is the key to their long-term survival and growth. Research indicates that executives are devoting more time to educating their staff and transforming their companies into learning organizations in order to keep up with the expanding global marketplace.  In other words, they are actively seeking opportunities for learning and create an environment with events and activities that support the learning process (Garvin, 2000).

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In addition, effective executives acknowledge that their actions create their reality. If they want to see a different reality, they must learn to take measures that employ efficient strategies. This includes plans that are designed with specific goals to achieve the outcomes they envision. Successful leaders in today’s global marketplace are the ones that tackle organizational learning disabilities because they pose a threat to the company’s productivity.  By adopting strategies that support a learning organization, executives are setting up an environment that nurtures new and expansive patterns of thinking, where collective aspiration thrives and people work together on learning how to produce the results they desire. Leaders that have the flexibility to move their organizations toward a learning paradigm know how to ignite and reignite that spark of genuine learning because it helps drive individuals to focus on what really matters.  Strong leaders are capable of bridging teamwork into macro-creativity and create a climate that is free of confining assumptions and mindsets (Senge, 2006).

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People learn faster when they put their knowledge into action solving problems. Marquardt et al. (2009) refer to this as action learning.  The emphasis on learning is what makes this process strategic rather than tactical in equipping leaders to respond to change more effectively.  Simply translated it is the dynamic process that involves a small group of people working together to solve real organizational problems, while focusing on how their learning can benefit individuals, groups, and the organization as a whole (Marquardt, Skipton, Freedman, & Hill, 2009). I believe successful leaders in today’s organizations must have the flexibility to move their institutions toward a learning paradigm, by applying superior active listening and developing skills that will improve individual, team, and organizational performances. In conclusion, leaders that are flexible and adapt a learning paradigm will most likely outlast those that are too rigid and resistant to change.

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References:

Garvin, D. (2000). Learning in action: A guide to putting the learning organization to work. Boston, MA: Harvard Business School Press.

Marquardt, M., Skipton, L., Freedman, A., & Hill, C. (2009). Action learning for developing leaders and organizations: Principles, strategies and cases. Washington, DC: American Psychological Association.

Senge, P. (2006). The fifth discipline: The art and practice of the learning organization. New York, NY: Doubleday Publishing.

Organizational Experimentation

Published May 6, 2013 by Mayrbear's Lair

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Unprecedented changes in the global marketplace have helped ignite a revolutionary reformation in the design of organizations as a result of the many challenges executives confront. For one thing, organizations are reevaluating the distribution of power and how information is shared.  Firms are expanding and changing their boundaries.  Partnerships and alliances, for example, have become more significant. Flexibility and a high quality of production and service is one competitive objective that organizations seek to achieve. To provide a menu of high quality choices organizations are creating more autonomous teams of workers. As a result, leading experts in corporate design are examining the best methods to create speed, variety and flexibility to expand the company over time and international boundaries to help prepare them for the next century (Bowman & Kogut, 1995). One method organizations employ to help redesign their firm is experimentation.

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Garvin (2000) contends experimentation is an uncommon practice in most organizational settings other than in the R&D and market research divisions. For experiments to have a lasting effect, the primary objective of making one’s case as the preferred position must change. For experimentation to really be effective, organizations must learn to adapt a more open perspective and consider all opposing views. In other words, leaders must embrace knowledge as conditional and outcomes as speculative. In an organizational context, experimentation takes on several definitions: the act of attempting something new or proving it; a temporary system, a practice or series of events that are examined in order to discover something unidentified, where procedures are carefully and intentionally constructed to produce intelligence, wisdom, and productivity that translates into profits and growth. This is typically conducted through a preplanned series of trials, errors, and comparisons (Garvin, 2000).

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An effective organizational experiment should include the following components: (a) pre-experimental planning, (b) data collection, (c) initiative and objective development, (d) experiment execution, and (e) post experiment analysis (McClain & Smith, 2006). As a former employee in the mortgage and loan industry, a growing number of clients at that time, communicated an interest in foreclosure property investments. This was a new arena for our organization, so our leaders decided to investigate and explore this market further.

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Initially a simple experiment was launched to discern how lucrative this market was. An employee traveled to and from the County Recorder’s Office collecting and logging Public Notice information manually in a ledger book. This information was later transcribed and transferred to an electronic format and stored on the company’s server for examination. In addition, analysis and feedback from the employee collecting the data was taken into consideration to formulate a plan and design a software program to create a more efficient cost effective system to retrieve and process the information as investors rapidly consumed the reports we offered. To keep up with consumer demand, the next phase of the experiment involved the inclusion of paying a monthly fee to access the County Recorder’s data from our company’s server. Once the new system was in place and the software program was designed, data was retrieved from the home office, without the employee losing travel time. This new method proved more cost effective. The information could now be retrieved and analyzed immediately, transferred and dispersed into reports in unprecedented time, giving our organization a competitive edge with investors. Within a year’s time, websites emerged offering the data as well for even quicker assessment. As a result of the experimentation and with so many available resources to collect and process this information, our organization established a new Foreclosure Finder Service division that focused serving clients with special interests. Our leaders were cognizant, that for real innovation to occur, active approaches like the experiment we conducted, are essential for organizations that want the upper hand in a competitive marketplace.

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References:

Bowman, E., & Kogut, B. (1995). Redesiging the firm. New York, NY: Oxford University Press, Inc.

Garvin, D. (2000). Learning in action: A guide to putting the learning organization to work. Boston, MA: Harvard Business School Press.

McClain, B., & Smith, D. (2006). Experimentation in a collaborative planning environment. Monterey, CA: Amazon Digital Services, Inc.

Organizational Learning Processes

Published April 22, 2013 by Mayrbear's Lair

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There is a growing interest in the learning processes in organizational contexts fueled by a belief that innovation and education are essential for survival. Garvin (2000) postulates, that there is no one way of successful learning. Although leaders command an arsenal of skills, each method of education remains consistent, in that it requires the acquisition, interpretation, and application of new information (Garvin, 2000). We were assigned a task this week. We were to assume the top manager role of a major clothing store asked to help design a program to increase the level of organizational learning. As the top manager, my first strategy is to conduct an analysis to ascertain the current organizational behavior and develop a way to retrieve unfiltered information from the hearts and minds of the staff. The data gathered would consist of accurate intelligence and up-to-date information. The information collection process would center on identifying and comprehending behavior that is influenced by: (a) the technologies available, (b) the barriers and regulations that are implemented, and (c) the social demographics. This method would serve to acknowledge weaknesses and strengths that will assist in the design of an effective program to increase the level of organizational learning.

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Another strategy I would consider, is to include the formation of systems that incorporate employee self-analysis and assessment. This helps to encourage a learning culture that embraces openness from direct observation, feedback and evaluation as part of the process. Argyris (1992) states organizational learning is a proficiency that all organizations should cultivate. The better they are at learning the more likely they can identify and correct errors as well as recognize when they are unable to detect and correct their own miscalculations. He contends that organizational defenses are one of the most significant barriers to learning. These defenses include policies, practices, or actions that prevent participants (at any level) from experiencing growth. In this context, organizational defenses are anti-learning and overprotective. For this reason, the data collection process for the clothing store must be constructed to identify existing barriers and defenses that can obstruct the learning process. This is one way to help identify policies and actions that prevent growth (Argyris, 1992).

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Research shows that questionnaires are the most popular method used to gather information, because they obtain subjective data about the participants, with measurable documented results that can be analyzed. In order to develop an effective information gathering plan, data may be collected by survey, interview or focus group. The data collection plan would: (a) focus on specific topics, (b) contain appropriate tested questions, (c) include participation from the stakeholders, and (d) address any anonymity issues. The observation design process must also include the ease of analysis, tabulation and summation. Once the unfiltered data is collected, it will be examined and disseminated to identify problems and trouble spots that distinguish which systems are successful and which models are not as effective (Phillips & Stawarski, 2008).  Furthermore and equally important, as a means to connect emotionally and engage staff enthusiasm and support, I would recommend a briefing for the participants.  I would provide an explanation for the significance of the program and articulate that it is part of a special campaign with end goals that will reflect positive results. Finally, I would endorse the use of incentives and include an introduction video or other form of electronic communication from the highest executive officer to personalize the plan and help manage any employee fears. For the clothing company scenario, the combination of these strategies will help provide the detailed intelligence required in the development and design of a more effective learning organization.

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References:

Argyris, C. (1992). on organizational learning (2nd ed.). Oxford: Blackwell Publishers, Inc.

Garvin, D. (2000). Learning in action: A guide to putting the learning organization to work. Boston, MA: Harvard Business School Press.

Phillips, P. P., & Stawarski, C. A. (2008). Data collection: Planning for and Collecting all types of data. San Francisco, CA: John Wiley & Sons, Inc.