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Flashcards in Reading Deck (26)
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1
Q

What problems do businesses face if they only focus on share prices and profits? (Handy, 2002)

A

Cutting expenses geared towards future profits gives short term gain but long term consequences.

2
Q

Importance of fairness in business (Rubin, 2012).

A

-Fairness is a virtue, but is a businesses sole objective to make money?
-If a business acts unfairly, damage to reputation can be costly (despite short-term gains). Also employees satisfaction. May adversely impact sales and the business’ ability to attract top employees.
-Positive consequences outweigh the negative.
-E.g. NIKE- poor treatment of workers in Asia- mid 1990s. Subjecting employees to long working hours in substandard conditions for low wages.
Led to a series of protests.
-Lose loyal customers

3
Q

What does it mean to be fair? (Rubin, 2012)

A

-Impartiality-similar claims or claimants should be treated the same
*How do you allocate scarce resources impartially?
-Consistency with community expectations
*Consider how others are treated in a similar situation, past practices, etc.
Have a reference transaction to base opinion on.
If a firm’s costs rise, it generally would be considered fair for the firm to raise prices or cut wages to maintain profit level. In absence of threat, it would be seen as unfair.

4
Q

ACQUISITION UTILITY (Rubin, 2012)

A

Reflects the difference between the value of the specific item being purchased or sold and the price paid for it.

5
Q

TRANSACTION UTILITY (Rubin, 2012)

A

Reflects elements of the deal other than price versus value of the the item exchanged.

6
Q

How to be fair in distributing scarce resources (Rubin, 2012)?

A

Impartiality and consistency with community expectations.
“Impartiality” in this case means that similar claimants should be treated equitably and that any difference in treatment must be justified by morally relevant distinctions.

Common methods of allocation:
First come/first serve-impartial, everyone has equal opportunity. However, people may have conflicting obligations or claimants may not be able to travel to location or have access to computer.
Random allocation- Chance so impartial.
Allocations based on contribution, ability, or need- Impartial if satisfies the impartiality criterion if contribution, ability, or need were a morally relevant distinction.

7
Q

Differences with family businesses (Cheng, 2014).

A

Family firms have unique characteristics.
1. Hold poorly diversified portfolios due to their concentrated ownership in family firms.
Within family firms in the S&P 1500 index, founding families hold 17% of the shares in their firms on average.
69.5% of founding families hold more than 5% ownership in their firms, and 24.7% of them hold more than 25%.
Due to high ownership and low diversification, founding families enjoy the benefit of good corporate decisions and at the same time bear the consequences of bad corporate decisions, and thus family owners have strong incentives to increase firm value.

  1. Longer investment horizons than other shareholders. Regard ownership as an asset to pass to future generations. Care about long term value of firm, rather than short term gain.
  2. Family members are actively involved in the management of their firms, either as top executives or as directors. On average, founding families hold the CEO position in 62% of family firms within the S&P 1500. Moreover, 98.4% if of founding families appoint at least one family member to their boards.
8
Q

What is a family firm? (Cheng, 2014)

A

A firm in which the founders or descendants of the founding family continue to hold positions in the top management, serve on the board, or are blockholders.

Account for 44% of large firms in Western Europe.
Operate in a broad range of industries

9
Q

What differentiates a family firm from others? (Dunn, 1996)

A

Review by Donckels & Frohlich- cross cultural study of managers in small and medium sized firms across eight European countries.
1.Tend to be more all rounders and organisers and fewer pioneers in terms of entrepreneurial style, leading to risk-aversion, less innovation and growth. Creativity and innovation were considered less important than in non family enterprises.

  1. Family businesses were more “inwardly directed” and described as “close family-related systems”.
  2. Family businesses needed fewer socio-economic networks, were perceived as “independent” and with “less interdependencies with the environment-culture and macro-economic situation”.
  3. Tended to pay higher wages than non-family firms and care significantly more about the satisfaction of their employees. However, they were “less progressive” in terms of human resource issues such as employee involvement.
  4. Strategic behaviour was defined as “conservative” with less exporting and internationalisation in evidence.
  5. Family conflict is an issue. Hiring and firing family members is a difficult issue- succession planning is often mismanaged or ignored. Decisions are often based around family issues may not make business sense to an outsider.
10
Q

What Type II agency problems are there in family firm? (Cheng, 2014)

A

Type II- Conflict between majority (family) and minority shareholders.

  • As they hold substantial ownership and have controlling positions in the firm, majority shareholders may seek private benefits at the expense of minority shareholders.
  • Primary source is founding families’ concentrated equity holdings and substantial control in their firms, which gives them the opportunity to extract private benefits at the expense of other shareholders. May be both monetary and non-monetary.
  • Capable of expropriating wealth from the firm through excessive compensation, related party transactions, or special dividends.
  • Difference between their control rights and cash-flow rights. Founding families are the primary type of blockholders to hold control rights in excess of their cash-flow rights
11
Q

Development of Chinese family businesses (Cheng, 2014)

A
  • Chinese family firms are smaller and younger than US and UK family firms.
  • Do not face as many succession issues- hence control is less diluted than in the UK and US. This means in general Chinese family businesses have larger block of family control and less independent directors hence they are more likely to suffer from Type II agency problems.
12
Q

Impact of the differences of family businesses. (Dunn, 1996)

A
  • More static with growth generally taking place incrementally.
  • Cautious about taking risks- takes a longer term view.
  • Consider how business decision fit with the family culture.
  • Tend to have over-staffing due to staff loyalty and a willingness to find work for relatives of employees.
  • If retained profits need to be used to buy back family shareholdings this can hinder growth.
  • Take into account wider societal interests.
13
Q

How do UK systems hinder family business? (Dunn, 1996)

A
  • Family firms are the dominant type of organisation yet no specific support is provided for this type of enterprise.
  • Much energy and resources are used regaining family control after dilution of ownership due to inheritance.
  • Inheritance tax policies can significantly impact on family businesses ability to grow and survive.
  • More research is needed to understand issues specific to family firms so that appropriate policies and support can be developed.
14
Q

Why do the IASB wish to introduce IFRS for SMEs? (Perera and Chand, 2015)

A
  • IASB believes IFRS for SMEs could enhance access to international finance through harmonisation of high quality information.
  • More than 95% of companies globally are SMEs, hence need to develop appropriate framework.
15
Q

What problems are there of implementation of IFRS for SMEs? (Perera and Chand, 2015)

A

-Inconsistency of global definition of SMEs- no universally accepted definition, may be different in different countries so difficult to enforce.
-Inconsistency between some treatment in full IFRS and IFRS for SMEs
-Decision usefulness theory suggests users should be primary group considered by the new standards, but not many users in consultation process.
-Although the aim is to allow access to international funding, SMEs are generally reluctant to seek outside capital.
-Enforcement issues across different jurisdictions
-IFRS for SMEs may be seen as a burden
-Transition from local GAAP could be costly, complex and prolonged for SMEs.
-Technical difficulties of applying IFRS for SMES
-

16
Q

IMPLICIT PREJUDICE (Banaji, Bazerman and Chugh, 2003)

A

Judging according to unconscious stereotypes rather than merit exacts a high business cost. Exposed to images that juxtapose physical disabilities with mental weakness or portray poor people as lazy, even the most consciously unbiased person is bound to make a biased decision.

Rooted in the fundamental mechanics of thought. We associate things that commonly go together and expect them to inevitably coexist.

In the mid 1990s, Tony Greenwald, a professor of psychology at the University of Washington, developed an experimental tool called the Implicit Association Test (IAT). Requires subjects to rapidly classify words and images as “good” and “bad”. Must make split second decisions. Exposes implicit biases by detecting subtle shifts in reaction time.

17
Q

Why are biases costly? (Banaji, Bazerman and Chugh, 2003)

A

Costly

Exclude qualified people from certain roles.

18
Q

OVER CLAIMING CREDIT (Banaji, Bazerman and Chugh, 2003)

A

We tend to overrate our individual contribution to groups, which leads to an overblown sense of entitlement.

Lab research showed that students in a study group , who were asked what proportion the contributed, summed to more than 100%. The more the sum was over 100%, the less the parties wanted to collaborate in future.

Can reduce performance and longevity of groups within organisations. Take a toll on employee commitment.

19
Q

In group favouritism.(Banaji, Bazerman and Chugh, 2003)

A

Tend do more favours for those we know, and those we know tend to be like ourselves. People who share our social class, religion, race, employer.

Excludes minorities. Discriminates those who are different from us.
Some companies explicitly encourage this by offering hiring bonuses to employees who refer their friends for job opportunities.

20
Q

How to combat unconscious bias? (Banaji, Bazerman and Chugh, 2003)

A

Ethics training is
helpful but not enough on its own, managers need to be made aware of unconscious bias concept.

Possible strategies:

  • Collect data and analyse past decisions systematically.
  • Ask staff who claim they are undervalued to assign credit values to all team members to make them consider and justify this claim- could help counteract a skewed reality.
  • Take IATs to explore and identify individual implicit bias and raise awareness.
  • Exposure to environments that challenge stereotypes
  • Broaden decision making by trying to consider impact on different groups.
21
Q

Corporate social responsibility (Sikka, 2010)

A

The concept of CSR is broader than simple compliance with law. CSR is frequently associated with promises of ethical and socially responsible conduct by businesses and its scope is increasingly broadened.
Increasingly, pressure groups and NGOs are highlighting the disparities between corporate claims of social responsibility and their practice of avoiding taxes which disable the capacity of governments to provide education, healthcare, security, pensions, clean water, or redistribute wealth to eradicate poverty.

22
Q

Disparity between CSR claims and actions of businesses. (Sikka, 2010)

A

Suggests the payment of taxes is a social responsibility of responsible citizens as taxes are used to improve quality of life.

While companies tend to produce extensive documentation on their activities in relation to the environment and other areas of social responsibility, they generally remain silent on the issue of tax avoidance- suggesting that this is a practice they know is wrong.

23
Q

Who helps companies avoid taxes (Sikka, 2010)?

A

Accountants, lawyers, banks and finance professionals help companies implement tax avoidance schemes. These organisations are commercially focused and look for profit maximisation from offering client services- rather than thinking of the obligation to society as a whole.

24
Q

Examples of high profile tax avoidance cases. (Sikka, 2010)

A

ENTRON- Largest US energy company and ranked 7th on fortune 500 list of the country’s largest companies for 2001, had 64 pg Code of Ethics. Won a number of awards. In late 2001, under the weight of frauds by senior management, Enron collapsed. For period 1996-9 the company reported net income of 2.3 billion, but claimed tax losses of 3 billion.
For year 2000, Enron reported financial statement net income of 1 billion and taxable income of 3.1 billion, subject to utilisation of tax losses brought forward.
Top executive got remuneration of 282.7 million.
With help from many big firms, Enron operated through a labrinth of domestic and foreign subsidiaries and affiliates to structure transactions and avoid taxes. Had a group within firm to synthesise tax, finance, legal, and accounting principles to enhance profits.

WorldCom- telecomms- collapsed amidst allegations of fraud. Extensive use of tax avoidance schemes to increase its accounting earnings.
Help of KPMG- tax consultation.

KPMG- considerable amount of revenue from taxation services. Sell “tax products”.
Secretive- no physical proof.
Didn’t register any of its products.

UBS- bank that aided KPMG

Deutsche Bank- Fined in 2003 for helping facilitate tax evasion by its customers.
Systematically helped customers avoid composite tax earnings on interest earnings. Done by opening branches in neighbouring tax havens such as Luxembourg, Switzerland and Liechtenstein.

25
Q

TAX HAVENS (Sikka, 2010)

A

Globalisation allows businesses to search for best bundle of tax obligations.
Many companies have extended their options by establishing in micro-states (tax havens).
one survey estimates that 99% of the European quoted companies have operations in tax havens, which levy lower taxes and offer secrecy to enable corporations to avoid taxes in other jurisdictions.

26
Q

Effect of tax avoidance (Sikka, 2010)

A

Generally pursued away from public scrutiny and company financial reports are mostly silent on the issues. An open declaration to avoid taxes amounts to a direct challenge to the authority of the state and the social bargain struck by parliament to levy taxes.
Under the weight of public expectations the state could respond by punitive actions and rigorous enforcement. A declared intention to avoid taxes also risks alienating citizens who dutifully pay their taxes.