Formal Research vs. Business Proposal

In his 2007 article, Jeffrey Pfeffer identified a “preoccupation with theory and an interest in novelty”, (p. 1338), as a significant problem plaguing formal research in business schools. Describing this phenomenon as a “quest for ‘what’s new’ rather than ‘what’s true’, (p. 1339), Pfeffer argues, that competition in business schools has produced uniformity and stifled innovation. Pfeffer notes that rather than build upon the evidence-based knowledge that has furthered other disciplines, the pressure to publish in ranked journals has forced researchers to disdain work that informs professionals. Researchers prefer to concentrate on idiosyncrasies of previously published theoretical work that has little effect on real underlying processes in the business world noting that “superficial aspects are imitated that have little effect on underlying processes”, (p. 1341). Additionally while research in academia focuses on what works, it neglects what doesn’t work, when knowing what doesn’t work can be as important as knowing what does, (p. 1338).

Buckley, Ferris, Bernardin, and Harvey, (1988, p.36), identified the same problem when they stated that teaching in business schools has become more theoretical and less applied. Buckley et al. also stated that “HRM practitioners are relatively familiar with research performed in this area, but they fail to see many practical applications in it”, (p. 32), when analyzing the results of a survey they gave to 113 human
Both articles postulate that corporations and universities need to become more adept at forming partnerships so that the research generated at business schools focuses more on real world applications and is therefore directed to a broader audience. Buckley et al., (1988, p. 31), explicitly stated that there is a “lack of follow through in developing business-university partner relationships”, while Pfeffer states that management has failed to follow evidence based practice resulting from academic professional practice relationships that exist in other disciplines noting, “the closer connection with professional practice – not from occasional lecture or executive program but from coproduction of teaching and research and more regular interactions – are features that I see, at least to a somewhat greater extent, in engineering, medicine, and education.” (p. 1342).

According to Bezerman & Moore, (2009), “researchers have found that people rely on a number or simplifying strategies, or rules of thumb, when making decisions”, (p. 6). Managers in business situations rely upon heuristics as well when adopting solutions. In the real world, a business proposal must be viewed, above all things, as feasible. An idea that hasn’t been successfully implemented previously in another setting has little chance for serious
consideration by a firm. Generally corporations seek to implement strategies that correct observed problems or strategies that gain a competitive advantage. These strategies can be surveyed internally, documented, and then presented in a business proposal. They inevitably choose practical real-world applications that have been tried by other firms and have been proven successful for implementation. More often than not these applications do not come from research by academic researchers as their works appear to be predominantly directed towards a scholarly audience. Although they may be influenced by academic research, real-world solutions are more likely to come from books and journals marketed towards business managers. These books and journals may actually even be written by the same academicians engaging in formal research who are merely directing their research towards a difference audience.

References:

Bazerman, M. H., & Moore, D. A. (2009). Judgment in Managerial Decision Making (7th ed.). Hoboken, NJ: Wiley and Sons.

Buckley, M.R., Ferris, G.R., Bernadin, J. & Harvey, M.G. (1998). The disconnect between the science and practice of management. Business Horizons, 41(2), 31-38. Retrieved from Business Source Premier database.

Pfeffer, Jeffrey (2007). A modest proposal: how we might change the process and product of managerial research. Academy of Management Review, 50(6), 1334-1345. Retrieved from Business Source Premier database.

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FOREX

Converting €1 million at an exchange rate of €.70 to $1.00 would mean that you had $1,430,000.00:
If 1.0 dollars = .70 euros, then 1 euro= 1.43 dollars:
1 ÷ .70 = 1.42857 or 1.43 $/€
€ 1million * 1.43 $/€ = $1,430,000.00
If you left the €1 million in an Irish bank for one year at 2% you would make €20,000.00:
€1 million * .02 = € 20,000.00, so you would have €1,020,000.00
If you put the $1,430,000.00 in a U.S. bank at 4% you would make $57,200.00:
$1,430,000.00 * .04 = $57,200.00, so you would have $1,487,000.00
If in one year you took the €1,020,000.00 and cashed it in at a rate of €.65 to $1.00 you would have $1,570,800.00. If 1.0 dollars = .65 euros, then 1 euro= 1.54 dollars:
1 ÷ .65 = 1.53846 or 1.54 $/€
€1,020,000.00 * .1.54 $/€ = $1,570,800.00

Due to the foreign exchange rate you would have been better off leaving the money in euros even though the interest rate was half that of the U.S. interest rate.

Going backwards, if you have 1.43 $/€ then you have .70 €/$, and if you have 1.54 $/€ you have .65 €/$, you have you therefore have more dollars per euro at this exchange rate. You are only receiving 65 euros for every American dollar, as opposed to one year ago when you were receiving 70 euros for every American dollar. According to the theory of purchasing power parity, this would mean that the inflation rate was 7.69% higher in the U.S. than in Europe over this period of time and you would be better off leaving your money in euros:
Inflation rate = 100 * (.70 – .65)/.65 = 7.69%

Banks, corporations, and individuals use covered interest arbitrage as a hedging technique to protect themselves against the fluctuations in the foreign currency exchange market. An investor buys a financial instrument in a specified foreign currency and then at the same time buys a forward foreign exchange contract to convert this currency to another currency. The forward exchange contract would be due at the time of the maturity of the financial instrument and would allow him to convert the principle and interest back to a specified denomination. If at the time of maturity the foreign exchange market isn’t conducive to exchanging the currency, then the investor can choose not to exercise the forward exchange option and can allow the funds to remain in the foreign currency. This allows individuals to repatriate investment currency to their native economies when the exchange rates are optimal. Interestingly, 2009 was the final phase out year for repatriation of dividends under the American Jobs Creation Tax Act of 2004 at a preferred tax rate of 6% of their qualified production activities income; (it had previously been at 3% for the tax years 2005 and 2006), the subsequent repatriation tax rate for dividends from 2010 onward is 9%, (BNA, 2010). This left corporations in the difficult position last year of deciding either to repatriate foreign dividends when the dollar was strong against foreign currency in virtually every market, causing them to lose in the foreign exchange market in order to gain a preferred tax rate, or to leave these investments in foreign currencies with the prospect of obtaining a better foreign exchange rate, and to face a more extreme repatriation tax rate in the future.

Absolute purchasing power parity, (PPP), or the law of one price, is the idea that the pricing for a specific good or service should be the same in every country at the same given time, (Appleyard, Field, & Cobb, p.485). Absolute PPP disregards tariffs and other trade restrictions, transportation costs, and the fact that good and services are not comparable from one country to another, therefore economists often use a scaled down version called relative purchasing power parity that accounts for these discrepancies. As seen in the example above regarding the euro exchange, purchasing power parity is used to compare inflation rates across different countries by comparing the changes in their currencies values to one another.

References:

Appleyard, D., Field, A., & Cobb, S. (2010). International economics (7th ed.). New York: McGraw-Hill Irwin.

BNA Tax Management Inc. (2010). Summary of H.R. 4520, American Jobs Creation Act of 2004. Tax Management Summary online. Retrieved from www.bna.com/tm/eti_tm_summary.htm.

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Coca-Cola Company

The Coca Cola Company, (NYSE: KO), based in Atlanta, GA, is the world’s largest multinational beverage company, with over 90,000 employees worldwide. Coca-Cola is the foremost producer of nonalcoholic beverage syrups and concentrates and has sales in over 200 countries. Additionally they own non-controlling interests in dedicated bottling companies and distributors worldwide, such as Coca-Cola Enterprises, which purchase solely Coca-Cola syrups and concentrates, and account for a significant portion of their revenues. Due to their wide global operations, Coca-Cola currently trades in over 70 functional currencies, with weaknesses in some currency markets offsetting strengths in others to effectively hedge to some degree against overall loss of revenue. Generally, currency exchange poses both opportunities and risks for the Coca-Cola Company, with their exposure in multiple markets offering a great deal of protection against naturally occurring fluctuations in currency in normal market conditions.

Coca-Cola earns revenues, pays assets, incurs debts, and owns capital operations in these different currencies, with 74% of their net operating revenues arising from operations outside of the United States, (Coca-Cola, 2009). Coca-Cola revenue is therefore heavily dependent upon foreign exchange markets with the exchange value of the U.S. dollar affecting their overall net operating profits, though they consolidate most of their foreign currency exposures which allows them to net certain currency risks and take advantage of natural offsets between currencies. Even so, in 2009 their net operating revenues were down 5% predominantly due to currency fluctuations. The strength of the U.S. dollar against the Euro, the British Pound, the Mexican Real, the Australian Dollar, the South African Rand, and the Brazilian Real negatively affected Coca-Cola’s 2009 earnings in Europe, Eurasia, Latin America, and in Africa, with the only substantial gain in their net operating revenues witnessed in their North American market, (in the Pacific the weakness of the dollar against the Japanese Yen and their hedging activities somewhat mitigated their foreign exchange exposure and some gain was realized), (Coca-Cola Company, 2009).

The euro was strongest against the U.S. dollar in February of 2009 with an average of € .78 to $1.00, the euro engaged in a gradual decline in the intervening months ending with November 2009 being the weakest month at € .67 to $1.00, and showed only a relatively minor increase in December at € .68 to $1.00, (OANDA). As the dollar increased in value last year, the rest of the world basically followed the same model with the few exceptions. As such, not only were Coca-Cola’s European revenues were severely affected as the dollar value of net operating revenues that were denominated originally as Euros decreased, but so were their net operating revenues decreased in most other foreign markets. As there profits are particularly dependent upon their chief bottler and distributor, Coca-Cola Enterprises, CCE, which operates globally and experienced the same foreign exchange scenarios, their net operating profits were affected by CCE’s decreases as well. As a result, The Coca Cola Company’s 2009 net operating revenues were $30,990 million, while their 2008 net operating revenues were $31,944 million, indicating a decrease of $1,004 million, or roughly 5%, (Coca-Cola Company, 2009). In the first four months of 2010 the euro is rallying against the dollar, though it still has not reached the February 2009 exchange rate, it has climbed from an average of € .70 to $1.00 in January to its current average for April of € .74 to $1.00. This continued appreciation of the euro against the U.S. dollar would be beneficial for Coca-Cola in 2010 in the European market as we would witness the reverse phenomena; the value of Coca-Cola’s profits in euros would increase. If in fact this phenomenon holds for the rest of the global economy then Coca-Cola should see substantial increases in net operating revenues from their global operations in 2010.
The company regularly enters into forward exchange and currency options to some degree, principally against the Japanese Yen, and the Euro, to hedge against currency fluctuations and these transactions mitigated their currency exchange losses to some extent. However, considering the strength of the U.S. dollars performance in virtually every global market, these forward exchanges, currency options, and other hedging practices were not adequate to protect their net income and earnings per share in 2009.









References:

Average Exchange Rates. (n.d.). OANDA Corporation. Retrieved from http://www.oanda.com/currency/average

Coca-Cola Company. (2009). 10-K Annual Report 2009. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml

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Trade Economics (brief discussion)

Ricardian theory illustrates that countries without an absolute advantage can still gain through international trade based upon having a comparative advantage as long as the relative prices for goods or services are different between the two countries. In other words, even though a country is not the most efficient producer of any product or service, they can still gain by trading with another country that is more efficient, as the other country is invariable more efficient in producing one specific good or service than another. That country would gain its best comparative advantage through complete specialization, or by focusing its resources on the production of the good or service in which they are the most efficient at producing. A country can gain developmentally through trading with a country for a product that they themselves are more efficient in producing, as long as they devote their resources towards producing their single most efficient product. Additionally, the Ricardian theory illustrates that a country that is incapable of meeting global demand for their product stands to gain substantial advantages from trading their product internationally and can maximize their development. The Ricardian model demonstrates that both countries gain, however only the concentration of labor resources as they are applied to production capabilities are considered through this model. Therefore utilizing the Ricardian model, opportunity costs exist as a simple scale and only when substituting the production of one product directly for another.

Regarding international trade patterns, the Heckscher-Ohlin Theory, or H-O Theory, builds upon the Ricardian Theory of economics, but is substantially different in that it includes not only labor as a resource but also capital, where capital is a production resource, as well. The H-O theory illustrates that labor is not the only resource to consider when comparing productivity between trading partners, the H-O model introduces capital as an additional variable. Using this additional variable means that opportunity costs between products exist in an increasing arc rather than a simple scale, and that there is a optimal point of opportunity cost when considering the production of two different products. While some countries may have significant advantages in labor, other countries have significant advantages in capital, and these two resources can be traded to gain comparative advantages for those countries.

H-O models theorize commodities are traded with different relative factor endowments, where a country decides what to produce based upon a combination of which resources are most abundant and economical in terms of capital and labor. Appleyard, Field, and Cobb, describe this abundance in terms of “physical definition” as compared with “price definition”, where the “physical definition” of a country is its ratio of capital to labor where countries are either capital-abundant or a labor-abundant, and the “price definition” of a country considers the prices of capital and labor, (p. 128). Capital-abundant countries, where capital is economical, therefore naturally choose to produce those goods or services that are capital intensive to produce, while labor-abundant countries choose to produce those goods or services that are labor intensive, when labor is economical, as each country utilizes these resources efficiently and can produce more goods.
Additionally the H-O theory is elaborated by the Stolper-Samuelson theorem which considers the effects within countries, as countries continue producing and trading their abundant resources. In short, as countries continue to produce and export their goods utilizing their abundant resources, that industry realizes increased profitability, (Appleyard et al, p. 139). Consumers within these countries also benefit through their ability to purchase goods that utilize the scarcer resources for a more economical price from the countries trading partner. As time goes on, the price of the abundant commodity increases, as does the income for the producer. Producers of goods that utilize a country’s scarcer resources are necessarily disadvantaged as their incomes inevitably drop as their consumer pricing cannot effectively compete against imports of the same product from a country with abundant resources for producing this product. Due to diminished income realization producers that utilize scarce resources favor increased trade restrictions, such as tariffs or quotas, while producers that utilize abundant resources favor increased globalization.

While the H-O theory accounts for both capital and labor, it is flawed in interpreting trade between countries with abundant resources in that it does not observe all phenomena associated with international trade. This flaw is noted when observing the Leontief Paradox, where countries with high capital to labor ratios generally export product with high labor to capital ratios and import products with high capital to labor ratios. While the Leontief paradox weakens the impact of H-O theory, there are several explanations as to why this occurs. Some of these include that H-O theory doesn’t distinguish between a countries preferences for capital intensive or labor intensive goods, that different countries can produce the same product utilizing varying degrees of either capital or labor, a countries trade restrictions, differences between skilled and unskilled labor, and finally that it doesn’t consider a countries natural resources, (Appleyard et al, p. 155-160).

Finally, neither the Ricardian theory nor the H-O theory deals specifically with the individual preferences, or product differentiation, of consumers within a country. One such theory that accounts for this is the Linder theory. The Linder theory asserts that consumers in capital intensive production countries tend to prefer goods from other capital intensive countries. Additionally, Linder’s theory maintains that consumers in labor intensive countries are more likely to buy products from other labor intensive countries, and that this phenomena exists often because these countries are likely to be trading partners due to reasons beyond consumer preferences including in some part geographical location. A final observation is that due to individual consumer preferences regarding perceived value, trade tends to be bidirectional regarding goods between these countries, even if the products or services are similar, regardless of which country has the competitive advantage.



Q&A: Describe a specific tariff, an ad valorem tariff, and a compound tariff. What are the advantages and disadvantages of each?

A specific tariff is a fixed tax based upon a measurable unit of a product such as quantity or weight, thus for every predetermined unit imported the tax is incrementally increased, while an ad valorem tariff is a tax based upon the perceived value of the import at the time of trade and can be adjusted temporally according to the value of the product. There are inherent problems dealing with both a specific tariffs and ad valorem tariffs, in that the former does not account for inflation and therefore the increase in the value of the import, and the latter relies upon the perceived value of the product by both the importer and the exporter. A compound tariff is an import duty that combines features of a specific tariff and that of an ad valorem tariff. While a compound tariff can potentially combine the best features of a specific tariff and an ad valorem tariff and be considered fairer than either, it can also combine the worst feature of both and can in fact be utilized in a protectionist manner.


References:

Appleyard, D., Field, A., & Cobb, S. (2010). International economics (7th ed.). New York: McGraw-Hill Irwin.

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Colombia FTA

In his January 27th, 2010 State of the Union address President Obama stated that America needed to aggressively seek out new trade partners and that within five years we needed to double our exports in order to create an additional 2 million jobs in this country by creating fair and enforceable free trade agreements. One of the countries Obama specifically stated that we needed to strengthen our trade relations with in his address was Colombia, (USDOC, p. 2). President Obama has repeatedly addressed the need for the U.S. Congress to approve this treaty, yet Congress still seems reluctant to do so.

The U.S. signed a comprehensive bilateral Free Trade Agreement, (FTA), with Colombia on November 22, 2006. While Colombia’s Congress approved the agreement in 2007, we are still waiting on U.S. Congressional legislation to approve this agreement, (USTR, nod.). President Obama has tasked the USTR to address any remaining outstanding barriers against the agreement. Initial barriers to the trade agreement generally constituting issues with sanitation and other health safety concerns have long since been addressed, as well as other barriers including intellectual property rights and technology, although Obama has voiced some continuing concerns of fair labor policies in Colombia he has continually attempted to move forward on the trade agreement with Colombian President Alvaro Uribe, (Meckler, n.d.).

Once congressional approval is granted, Colombia will remove all tariffs over a ten year period on all American products, no products are excluded, with agricultural product tariffs slated to be among the first removed upon approval of the treaty. Currently, while 99.9% of Colombia agricultural imports to the U.S. are duty-free, virtually all exports from the U.S. to Colombia are tariffed at a rate between 5% and 20%; additionally many of our exports are subjected to trade restrictions, creating an un-even playing field, (USFDA).

While the U.S. is reticent to impose tariffs on Colombian products to avoid a trade war, it is clear that the U.S. Congress is operating in a protectionist fashion regarding approval of the treaty. U.S. Trade Representative Ron Kirk stated in late 2009 that he does not see the Congressional approval forthcoming as the U.S. Congress has been dealing with issues such as health care. However, the Financial Times noted prior to his confirmation that Kirk would have a tough battle ahead of him on Capitol Hill getting Congress to approve the treaty as protectionist politics were running rampant in Washington. In early 2009 54 congressional members of the House of Representatives signed a letter requesting the White House renegotiate NAFTA, cease talks with China regarding a bilateral trade agreement, and to discard any pending Free Trade Agreements, including the one with Colombia, (Beattie, 2009). Until the trade agreement with Colombia is passed, the U.S. producers will not be able to realize their full potential as trading partners with Colombia, while Colombia will continue to reap profits from tariffs imposed on U.S goods, and producers in Colombia and other countries will enjoy a continued advantage from the imposed quotas.

References:

Beattie, A. (2009, March, 10). Tough battles lie in wait for next US trade chief. The Financial Times, 4 Retrieve from PROQuest ABI/Inform Global.

Meckler, L. (2009, April 20). New movement on Colombia trade pact. Wall Street Journal Digital Network. Retrieved from http://online.wsj.com/article/SB124010048395232143.html

Office of the U.S. Trade Representative, (n.d.). Colombia FTA. Retrieved from http://www.ustr.gov/trade-agreements/free-trade-agreements/colombia-fta

U.S. Department of Commerce International Trade Administration, (2010, February -March). National export initiative looks to increase exports and create jobs. International Trade Update. 1-3. Retrieved from http://trade.gov/press/publications/newsletters/ita_0210/itu_0210.pdf

United States Department of Agriculture, Foreign Agricultural Service, (2009, September). Fact Sheet: U.S. – Colombia Trade Promotion Agreement Overall Agriculture Fact Sheet. Retrieved from http://www.fas.usda.gov/info/factsheets/Colombia/ColombiaDetailed09.pdf

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Chiquita Brands International

Chiquita Brands International is headquartered in Cincinnati, Ohio and is the world’s largest international marketer, producer, and distributor of fresh and processed produce. Chiquita employees over 23,000 people and had revenues of $3,609.4 million in 2008 which represented an increase in sales of 4.2% from 2007. Although sales increased in 2008 this still represented a net operating loss of $281.1 million in 2008, as compared to a net operating loss of $49 million in 2007, (Datamonitor). Chiquita is still struggling out from under a mountain of debt, that ultimately led to a 2002 reorganization under bankruptcy protection, as a result of litigating against trade quotas and tariffs imposed by the European Union that favored fruit grown in former European colonies. As a result of their increasing debt in part due to this litigation and their decrease in market share Chiquita ended up selling their shipping fleet in 2006 which they had used to ship 70% of their produce to Europe, (Nall, 2006). Additionally, in 2007 Chiquita was found guilty of funding paramilitary organizations in Latin America and fined $25 million by the U.S. Department of Justice.

The company sources its bananas, which accounted for 57% of its 2008 annual sales, from Colombia, Costa Rica, Ecuador, Guatemala, Honduras, Nicaragua, Panama, and the Philippines, (Hoovers). Chiquita is attempting to reestablish itself as a leading distributor in the European Union by distributing other products in Europe after a 1993 EU ruling that limited banana imports into Europe from the Latin America in favor of bananas imported from the ACP, (Africa, Caribbean, and Pacific countries), which had formerly been European colonies. In addition to bananas Chiquita produces melons, berries, grapes, pineapples, apples, pears, and other fresh and frozen fruits including smoothies marketed under the product name, Just Fruit in a Bottle. They are also agriculturally diverse and produce vegetables including tomatoes, peppers, spinach, lettuce, onions, broccoli, and other fresh and frozen vegetables including prepackaged salads marketed under the product name, Fresh Express, Additional Chiquita brands include Consul, Amigo, and Chico, (Datamonitor).

Prior to the EU ruling Chiquita had been Europe’s leading banana importer controlling 30% of the market. Chiquita’s closest competitor in this European market had been Dole, which controlled 12% of the market in 1990. In response, Chiquita mounted an aggressive and expensive campaign to reverse the protectionist EU ruling through the U.S. government and the World Trade Organization, (WTO). By 1995, when the WTO ruled the policy was discriminatory, Chiquita had already lost 1/3 of its market share. Additionally, European countries were slow to comply with the WTO ruling, leading Chiquita to continue legal battles against the EU, while their market share continued to erode. While Chiquita’s battles continued, Dole meanwhile capitalized upon its previous relationship with the ACP countries and increased investment in these production facilities. Dole showed a flexibility in international trade necessary that allowed them to gain 4% of Chiquita’s market share by 1995, (Bucheli, 2007), while Chiquita’s European market share is still eroding to date.

Chiquita is diversified geographically as well as in products and services. While the U.S is by far their largest market, they still have considerable market share in Europe, and additionally market their products throughout Latin America and the Caribbean. Operating in politically and economically unstable environments like parts of Latin America has proven to be fraught with difficulty for Chiquita throughout its 100 plus year history. In 2007 Chiquita landed on the Multinational Monitor’s top ten worst corporations list for their funding of a paramilitary organization in Colombia called the United Self-Defense Forces of Colombia, (AUC), (Mokhiber & Weissman, p. 7). Chiquita had paid over $1.7 million to the AUC, which the U.S. government had deemed a terrorist organization, over a nine year period. Chiquita self-reported the payments to the Justice Department and claimed that during this period of time it was forced to pay both right wing and left wing organizations protection money to ensure that their workers were safe.

Their claims have brought little comfort to the surviving families of the AUC’s victims who are now suing Chiquita and it is believed that the impending lawsuit could possibly force Chiquita into bankruptcy again. It is interesting to note that in 1995 Chiquita made the same worst-ten list for the continued exposure of 10,000 banana workers to the pesticide DBCP in 11 different Latin American Countries, (Draffan). Draffan also notes previous scandals with which Chiquita has been involved in Latin America including bribing Latin American government officials through the 1970’s and 1980’s and leaving soil contaminated and unfit for agriculture in the early 1990s.

Chiquita is still optimistically looking to the future despite their continued troubles. Chairman and CEO Fernando Aguirre notes in his 2008 statement in the company’s annual report that despite the economic challenges the year was their most profitable since 2005, noting that the banana industry earned more for them than the cost of capital for the “first time in decades”, (Datamontor, p.24). Additionally Aguirre notes that Chiquita has begun partnering with ACP countries such as China, Angola and Mozambique, and has engaged in significant corporate restructuring. Also notable is that Chiquita partnered with the University of Arkansas and Deloitte Consulting to test a real world application of wireless sensor systems in its live supply chain to regulate temperatures within refrigerated shipping containers to prevent financial losses from waste, pollution, and health hazards. Overall though, Hoover’s indicates that Chiquita has returned to profitability in 2009 for the first time since 2005, with $90.5 million in net income and a net profit margin of 2.5%, though they have yet to reach their pre-2005 levels of profitability. Altogether, this is not a bad performance for a company when the current global economic crisis is considered.


References:

2009, August 18. Chiquita Brands International. DATAMONITOR. Retrieved from Datamonitor Company Profiles via EBSCOhost Business Source Complete.

Bucheli, M. (2005, November). Banana war maneuvers. Harvard Business Review, 83(11), 22-24. Retrieved from EBSCOhost Business Source Complete.

Draffan, G. Directory of transnational companies. Retrieved from http://www.endgame.org/dtc/c.html

Hoovers, (n.d.).Chiquita Brands International. Hoover’s Company Records. Retrieved from http://premium.hoovers.com/subscribe/co/overview.xhtml?ID=ffffrrhhrfhrhcrhsk

Mokhiber, R. & Weissman, R. (2007, November 1). Neither honest nor trustworthy: the ten worst corporations of 2007. Multinational Monitor, 29(5), 10-30 Retrieved from EBSCOhost Business Source Complete.

Nall, S. (2006, October 9). Chiquita to sell fleet. Traffic World, 270(41), 33. Retrieved from EBSCOhost Business Source Complete.

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Globalization vs. Protectionism

Globalization is an opportunity for workers within an industry where a country has a comparative advantage in that industry, while it is a very real threat to workers in industries that have no comparative advantage or in countries where comparative advantages have been diminished by exploitation. When input of resources is equal, a country is said to have a comparative advantage over another country when their productivity and profits are intractably greater that of their competitor nation, due to an intrinsic absolute advantage of efficiency of output. Countries that can produce a good or service at a lower cost can gain a larger market share for their product when trade barriers such as tariffs are limited and open trade is encouraged.

In fact, without the availability of open market policies, increasing market share for many U.S. companies would not be possible as the U.S. economy alone may longer support their growth, (Champy, 2008). Champy goes on to outline seven steps which a company can take to seize the economic opportunity that is presented by globalization including: developing a global business model, becoming a low-cost producer, focusing on value, finding the right global partners, hiring the best local workforce , maintaining consistent values across cultures, and strengthening financial capabilities.

The largest major identifiable threats to globalization and international trade are national protectionist policies. Countries that support international trade can compete in larger markets than those countries that adopt nationalistic protectionist policies. Inevitably, other countries cease to trade with countries that adopt these protectionist policies. Many American politicians, in response to fears expressed by American workers as a result of the recent economic crisis, are openly criticizing the North American Free Trade Agreement, (NAFTA), and espousing protectionist policies despite the fact that NAFTA has generated 26 million jobs in the United States, (Dowd, 2009).

According to Ricardian theory, each nation has a fixed endowment of natural resources, (Appleyard, Field, & Cobb, 2010). Countries exchange these natural resources in order to develop. It is clear that in order for a nation to compete successfully in a global market it must be able to retrain their workers into industries in which it can specialize in industries that utilize these resources. Retraining workers to be productive in industries where they have a comparative advantage should be easily accomplished in developed and developing nations. Additionally, for traditionally underdeveloped nations, or those nations where resources have traditionally been exploited and historically no developed value has been added, globalization provides an advantage in that these nations often realize the highest return on foreign investment, (Anyanwu, 2006).

For all nations global trade could potentially be beneficial for those workers in industries where the nation has a comparative advantage, though for certain nations open trade can pose an even greater benefit. Nations that attempt to protect industries where they cannot achieve a comparable advantage will suffer under increasing globalization.

References:
Anyanwu, J. C. (2006, April). Promoting of Investment in Africa. African Development Review, 18(1), 42-71. Retrieved from EBSCOhost Business Source Complete.
Appleyard, D., Field, A., & Cobb, S. (2010). International economics (7th ed.). New York: McGraw-Hill Irwin.

Champy, J. (2008, January 1). Is global trade a threat or opportunity? Financial Executive, 24(1), 36-41. Retrieved from EBSCOhost Business Source Complete.
Dowd,A. (2009, April 1). The rising tide of protectionism in the United States. Fraser Forum. 31-33. Retrieved from EBSCOhost Business Source Complete.

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Economic Structure of OPEC

An oligopoly represents an intermediate market between a perfectly competitive market and a monopoly. Whereas perfectly competitive markets generally include a large number of producers and have small barriers to entry, oligopolies are competitive markets with a relatively small number of producers and large barriers to entry, and monopolies have a single producer and the largest entry barrier in that they produce a unique product. Competitive markets operate according to supply and demand curves and prices fluctuate accordingly, while monopolies operate only on a demand curves and can set their prices to maximize its profit.

Generally in competitive markets, such as oligopolies, producers need to concern themselves not only with supply and demand and pricing, but also with competition. An exception to this occurs when oligopolies engage in the generally illegal practice of forming cartels. Cartels are formed when the producers within an oligopoly cooperate by fixing their prices, limiting production or distribution in order to decrease supply, allocate markets geographically, or engage in any combination of these or other non-competitive market behaviors. Unless cartels or monopolies are specifically authorized by government intervention, sometimes in order to protect markets which may otherwise be destroyed, they are illegal in most capitalistic countries where competition is valued. Both cartels and monopolies were explicitly outlawed by the United States in 1890 when the U.S. Congress passed the Sherman Antitrust Act and again in 1914 when Congress passed the Federal Trade Commission Act, both of which “prohibit firms from explicitly agreeing to take actions that reduce competition”, (Perloff, 2007, p. 153). This federal legislation was passed notably due to mounting public furor concerning monopolies, most notably one conspicuously notorious monopoly that existed at the end of the 19th century, the Standard Oil Company, which was founded by John D. Rockefeller in 1870. Standard Oil was an extremely efficient company but had a history of alleged corrupt business practices throughout this 40 year period for using intimidation to control the majority of U.S. petroleum production and distribution. Generally Rockefeller either forced competitors out of business or acquired them through predatory pricing and by controlling the distribution network and formed a holding company called the Standard Oil Trust. The early legislation did little to deter Standard Oil Trust’s competitive practices and the company was eventually indicted by the U.S. Supreme Court and was dissolved into 23 different companies in 1911, (Witzel, 2008). By the time of the indictment Standard Oil’s control within the industry had already been steadily decreasing. Although at one point they controlled 88% of the petroleum products market, at the time of the Supreme Court decision they controlled only 64% of the market, (Armentano, p.70), leading one to speculate whether they truly were a monopoly.

Upon the dissolution of the Rockefeller oil companies, Shell, Gulf, and Texaco were already competitors in the industry. Many of the companies which became part of the U.S. petroleum industry oligopoly upon the dissolution of Standard Oil still exist today either as separate entities or as parts of other companies within the industry, including ExxonMobile, Marathon, and Chevron. It’s interesting to note that the although the petroleum production industry was essentially a free competitive market prior to the 1911 Supreme Court decision, following the decision we see increasing government regulation and intervention and we see the beginnings of cooperative, or cartel, behavior within the industry. Beginning with World War One and lasting through the 1960s, U.S. government intervention controlled not only domestic petroleum pricing and production through agencies that were specifically formed for this purpose, but also foreign pricing and production, (Armentano, p. 70).

The governments enforced cartel behavior during this period, through price fixing and limiting production in the guise of reducing waste, endowed the oligopoly with the market power of a monopoly. Cartels, whether they are legal or illegal, allow oligopolies to act as monopolies and destroy social welfare, the cumulation of consumer surplus and producer surplus. Illegal cartels and monopolies destroy social welfare by setting prices above marginal cost leading consumers to purchase less and therefore creating an overall, or deadweight, market loss. However, government intervention through a legal cartel differs from a traditional cartel oligopoly or a monopoly where sellers seek only to maximize profit. In the case of a government intervention, or interventionism, then either buyers or sellers are likely to gain, but at the expense of one another through the creation of an inefficient market. This differs from a traditional competitive oligopoly where buyers and sellers in an efficient market enter into exchange relationships where both gain advantage, and social welfare is gained at the intersection of pricing and output.

Firms in competition must adjust their output and pricing so that their potential economic gains are maximized. In a competitive market, firms in an oligopoly pay close attention to the behavior of one another in order to ensure continued or improved market share. In doing so, these firms are likely to make errors in judgment which generate losses for the firms, which are usually quickly corrected and can often lead to greater efficiency. The behaviors of oligopolistic firms that are involved in this competitive process are analyzed through game theory, a set of tools that economists use to “analyze conflicts and cooperation” (Perloff, p. 147). Firms strategize output and pricing through matrices in an attempt to predict what their options are and what the options of their competitors are, and then choose what appears to be the dominant strategy according to the matrix. In cartels, these same oligopolistic firms covertly share information on pricing and output so that they can act as monopolies, they then fix prices and minimize output so that they can maximize profits for all the members of the cartel. These same game theory matrices are used to predict behavior of firms within the cartel. Issues arise with trust in cartels according to game theory. Ultimately the firms that engaged in cartel behavior are competitors and are more interested in maximizing their own profits rather than the profits of the industry as a whole. Non-cooperative firms that increase output against a cartel agreement can realize even larger gains than they could even as members of the cartel, if they can keep this information secret from the other members of the cartel. The longer a cartel member can keep increased output and sales secret from the other members the larger the gains they are able to realize.

All cartels work to detect members that violate the cartel agreement, or cheat, through various methods up to and including the inspection of another members books, and if caught they also work to punish the offending member. Saudi Arabia, the leading producer of the Organization of Petroleum Exporting Countries, OPEC, acts in the capacity as punisher for this cartel. OPEC is a cartel that includes petroleum producing counties in the Middle East, Africa, and South America and acts to control price and production in the participating nations. In order to control the incentive to cheat and also to counter the problem of defection, which is greater for small producers in the cartel, OPEC enforces a small producer bias within their quotas, (Griffin & Xiong, p. 290). Additionally, OPEC relies upon Saudi Arabia to act in enforcement of the cartel agreement by engaging in modified tit-for-tat strategy where they routinely overlook small amounts of cheating, but punish those nations that drastically deviate from their quotas by allowing them to overproduce as well, (Griffin & Xiong, p. 306). This strategy generally works to curtail large scale cheating as those countries are that engaging in cheating behavior are punished through lower prices for their production, while the Saudis experience a gain in both production and pricing. One of the problems with oil production with the OPEC nations appears to be that they have figured out what level of cheating is allowable and to adjust their quotas accordingly. Invariably this has led to an overall overproduction by the Saudis and a substantial increase in pricing as OPEC nations account for approximately 40% of the world’s crude oil production according to the U.S. Energy Information Administration. A historical analysis of weekly prices dollars per barrel for world production reveals that annually prices have been rising steadily since 2005.

http://tonto.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=wtotworld&f=w

A detailed analysis of the data used to construct the above table indicates that the average for 2005 was $49.87, the average grew to $60.32 in 2006, $69.19 in 2007, spiked to $95.62 in 2008, and although the average came back down to $60.07 in 2009, it has since climbed back up to $75.59 for the first quarter of 2010.
The U.S. government recently announced that it will continue exploration for off-shore reserves in the Atlanta, the Gulf of Mexico, and the Arctic Ocean, (Keefe, 2010), as a result it is expected that OPECS overall contribution will remain at approximately 40% into the future. This is a dynamically efficient market move by the American government; by continuing to tap into previously unexplored reserves they will remain efficiently competitive in the industry. Through past discovery of oil reserves, the U.S. petroleum industry has consistently shown that they have been able to remain competitive despite the continued market manipulation from OPEC. It is expected that OPEC will continue to allow biased increased market share quotas in favor of small producers to prevent defection of these producers from the cartel over the next year. Additionally, OPEC will continue to exert forces on the market through overproduction as a result of Saudi Arabia’s successful tit-for-tat enforcement of the cartel agreement, and will therefore continue to drive up the price for barrels of crude oil, however, they may seek to punish those higher producers even further to try to contain prices to dissuade American exploration. This effort may mitigate rising crude oil prices somewhat by forcing Saudi Arabia to return in part to their role as a swing producer, allocated to making up the residual differences in total production, and then taking the tit-for-tat action only against the greatest increased production offenders within the cartel. Although this method has proved successful for OPEC in controlling cheating by cartel members, all in all it demonstrates an allocative inefficiency due to the fact that oil reserves are a limited natural resource.


References:

Armentano, D.T. (1981, Spring). The petroleum industry: a historical study in power. Cato Journal, 1 (1). 53-85. Retrieved from DOAJ Directory of Open Access Journals http://www.cato.org/pubs/journal/cj1n1/cj1n1-4.pdf

Griffin, J.T. & Xiong, W. (1997, October). The incentive to cheat: an empirical analysis of OPEC. The Journal of Law and Economics, 40(2). 289-316. Retrieved from Lexis/Nexis Academic

Keefe, B. (2010, March 31). Obama opens waters off Georgia, other states to oil exploration. The Atlanta Journal-Constitution. Retrieved from http://www.ajc.com/news/obama-opens-waters-off-423409.html

Perloff, J. M. (2007). Microeconomics (4th ed.). New York: Pearson Addison Wesley.

Witzel, M. (2008). The breaking of Standard Oil. European Business Forum, 2008(32). 50-53. Retrieved from EBSCOhost Business Source Premier.

U.S. Energy Information Administration, (2010, March 31). World Crude Oil Prices. Washington, DC: Author. Retrieved from http://tonto.eia.doe.gov/dnav/pet/PET_PRI_WCO_K_W.htm

U.S. Energy Information Administration, (2009, May 27). International Energy Outlook 2009 (Report #:DOE/EIA-0484). Washington, DC: Author. Retrieved from http://www.eia.doe.gov/oiaf/ieo/highlights.html

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Georgia Power and Dynamic Pricing

Perfect price discrimination relies upon individual consumers paying the maximum price they are willing to pay for the goods or services they receive. Dynamic pricing is “pricing that changes when the demand for something increases or decreases”, (dynamic pricing, 2006). Dynamic pricing can be a form of perfect price discrimination, often referred to as first-degree price discrimination, if it occurs when companies charge differing amounts for the same service, especially when using a model that considers the time of demand of consumption.

Jeffrey Perloff maintains that in order for a firm to perfectly price discriminate they must determine what an individual consumer’s reservation price is, (the maximum amount they are willing to pay), and they must have considerable information about their customers, (2007, p. 118). Electrical utilities operate as monopolies in most states and therefore have a tremendous amount of market power; however the prices that they can charge customers are regulated by the states in which they operate. Georgia Power, the electricity utility for the state of Georgia, has been successfully using a dynamic pricing model for industrial customers for almost twenty years. In order to charge different amounts they must determine when an industrial customer is using electricity during peak usage times. In order to determine this they installed “smart meters” which record hourly usage for industrial customers.

Georgia Power’s program is a two-part fee based program with standard rates for baseline consumption and hourly market rates added to this fee for consumption above this baseline amount, (Kosavanic & Engel, 2004). There have been significant benefits to Georgia Power and its industrial customers as wholesale market prices, which vary hourly, have dropped 17% since the meters were installed, (Colledge, Hicks, Robb, & Wagle, 2002). Industrial customers of Georgia Power can voluntarily shut down or scale back operations during peak billing periods, without affecting their overall output, by monitoring their usage during these peak-periods.

Recently there is evidence that Georgia Power intends to extend a dynamic pricing model to residential customers as well. Currently residential customers in Georgia can agree to allow Georgia Power to install a switch on their houses that is connected to their HVAC units in exchange for an initial $20.00 credit. During peak electricity use periods in the summer months Georgia Power will be able to send a signal to this switch limiting the amount of time air conditioning units will run. Each time that the power company flips this switch, consumers receive an additional $2.00 credit. Additionally Georgia Power began replacing traditional electricity meters with “smart meters” in January of 2008 on residences with the intention of enabling consumers in the future to manage their energy usage and control their own bills, (Southern Company, 2010).

While a dynamic pricing model for industrial consumption may benefit both Georgia Power and the industries that utilize this model, it remains to be seen that this model will benefit residential consumers. Unless specific provisions are made for those consumers with limited incomes, especially the elderly, the infirm, and the disabled, during the summer months these patrons could be forced to make difficult choices between utilizing medical equipment or the necessary operation of air conditioning units and paying increased electric bills. Additionally, oppressive summer heat could force residents who can no longer afford their power bills from their homes into the streets.


References:

Colledge, J., Hicks, J., Robb, J., & Wagle, D. (2002). Power by the minute. Power Economics , 2002(1), 73-81. Retrieved from EBSCOhost Business Source Premier.

Dynamic pricing. (2006). Dictionary of Business. Retrieved from http://www.credoreference.com/entry/acbbusiness/dynamic_pricing

Kosavanic, L. & Engel, D. (2004, May). Meeting the nation’s demand for power: a new take on demand programs. Energy User News, 29(5), 11-14. Retrieved from EBSCOhost
Business Source Premier.

Perloff, J. M. (2007). Microeconomics (4th ed.). New York: Pearson Addison Wesley.
Southern Company. (2010). Your meter is about to get smarter. Retrieved from http://www.georgiapower.com/residential/smartmeter.asp

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Georgia: Peanuts vs. Cotton

Jeffrey Perloff, (2007), states that market pricing is related to three distinct tradeoffs regarding the decision to produce goods: 1. which goods are produced, 2. how goods are produced, and 3. who receives these goods once they are produced, (p. 3). Georgia’s peanut growing industry scaled back production from 685,000 acres to 508,000 acres in 2009 to bring supply and expected demand closer together. This was in part due to the 2008 distribution of salmonella tainted peanut butter associated with Peanut Corporation of America in Blakely, Georgia, and also partly due to a reduction in European exports due to the global economic recession. Neither of these concerns ended up having a devastating consequence on peanut sales. In actuality, the U.S is in danger of losing too many peanut growers this year due to the unpredictability of pricing in the market and the large amount of peanuts already in storage. In actuality, peanut and peanut butter sales tend to increase during difficult economic times, (Smith, 2010), so the demand for peanuts is expected to increase this year.

Georgia will likely increase arable acreage devoted to peanut production this year to cover some amount of anticipated increase in sales, however, the amount of acreage available may be mitigated by prices for this year’s cotton crop. Cotton is expected to trade at between .70 and .80 per pound, whereas in the previous year cotton traded at between .50 and .60 per pound. This significant increase in the price of cotton is primarily due to deficits in the international cotton market, especially in China, Turkey, and Vietnam, (Smith, 2010). An additional mitigation factor that could affect the peanut crop would be the harvest period. Both cotton and peanuts are harvested at the same time in Georgia leading to possible shortages in the number of machinery and workers available to harvest peanuts as workers needed to harvest peanuts would most likely be harvesting cotton instead.

Canada is the single largest customer for U.S. peanut butter, consuming more per capita than the U.S. Additionally Mexico is expected to continue being one of the best foreign markets. Consumption of peanuts and peanut butter in European markets is expected to be curtailed as sales there are more affected by the economic recession, (Smith, 2010).

References:

Perloff, J. M. (2007). Microeconomics (4th ed.). New York: Pearson Addison Wesley.
Smith, R. (2010, March 10). Contracts short for Virginia-type peanuts. Southeast

Farm Press. Retrieved from http://southeastfarmpress.com/peanuts/virginia-peanuts-0310/index.html

Smith, R. (2010, March 18). Peanut demand remains strong. Southeast Farm Press. Retrieved from http://southeastfarmpress.com/peanuts/peanut-markets-0318/

Smith, R. (2010, March 24). Cotton market bullish awhile. Southeast Farm Press. Retrieved from http://southeastfarmpress.com/cotton/cotton-markets-0324/index.html

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Microeconomics Macroeconomics and Property Crime

Within the study of economics there are two basic disciplines, microeconomics, broadly described as a bottom up approach to the study of economic theory, and macroeconomics, broadly described as a top down approach to the study of economic theory. While both studies within economics concern themselves with resources and attempts to allocate resources, microeconomics examines the behaviors of individual entities, whether that entity is a corporation, a consumer, or a government, while macroeconomics concerns itself with the collected behavior of these individuals.

While microeconomics studies the choices that individual entities make and the reasons why they make them, macroeconomics studies the overall phenomena resulting from or contributing to these choices. Jeffrey Perloff explains that microeconomics concerns itself with local markets where prices influence the determination of which goods and services are to be produced, how these goods and services will be produced, and who will benefit from their production, (2007). Generally, macroeconomics is concerned with six major factors that determine the health of an economy: 1. national income, 2. prices, 3. employment levels, 4. fiscal and monetary policy, 5. consumption and investment, and 6. balance of payments, (“Overview: Macroeconomics”, 2008), and macroeconomists watch these six indicators closely to advise government policy. High unemployment levels lead to the scarcity of a basic resource, income, and therefore affect an individual’s ability to pay for goods and services needed. During economic recessions, one microeconomic effect of these increasing unemployment levels is an increase in property crime. These aggregate increases in property crime can also have a macroeconomic effect.

On a microeconomic level, Bijou Lester uses a cost benefit analysis to explain the increasing likelihood of an individual suffering from long term unemployment to resort to theft due to increased profitability of property crime, (1995). In a downturned economy more people are likely to turn to an underground economy seeking discounted pricing. This increases the demand for stolen goods and therefore pricing for black market goods becomes higher. This phenomenon translates into an increased and more profitable market for property theft criminals. The higher the unemployment level, the longer the period of time an individual is likely to be unemployed and the more likely an individual is to run out of unemployment compensation benefits. These factors converge to create an increased and more profitably market, and therefore a greater the potential for benefit for the criminal. Additionally, Daniel Lomba presents a microeconomic analysis concerning criminal markets that indicates that criminals prefer to choose to commit crimes in one location due to an increased probability for success and an increased level of income generated from their crime, (2008). Additional factors included in the decision making process include that criminals are more likely to be apprehended should they venture out of neighborhoods that they know and that they are less likely to know what is available in adjacent neighborhoods. Although Lomba does present the idea that there is a certain amount of spillover between neighborhoods, he goes on to present an urban economic theory that indicates that demand present in one neighborhood is unlikely in adjacent neighborhoods.

On a macroeconomic level, during difficult economic times, especially when unemployment is high, the subsequent increase of property crime can affect a country’s overall economic output or national income. In his 1999 paper presented to the Annual World Bank Conference on Development Economics, Francois Bourguignon, discusses the idea that macroeconomic volatility, in combination with inequality and poverty, can precipitate even higher crime waves during recessions. Countries that ordinarily suffer from the greatest unequal distribution of wealth are particularly affected during major recessionary periods. Recessions, by increasing the numbers of impoverished people have a comparable effect on crime. Ensuing crime waves resulting from of a major economic recession in light of preexisting poverty can result in losses as high as 2% of a country’s GDP, (Bourguignon, p. 3). Bourguignon additionally notes that the resulting increases in criminal behavior due to these conditions are more likely to concentrate in metropolitan areas where the social costs are greater and where it is potentially more disruptive to economic efficiency and growth.

In closing, as the current global recession continues, we should expect to see a significant increase in property crime in major metropolitan areas. Individuals displaced due to unemployment will increasingly seek benefit through criminal behavior in all areas of the world affected by the current recession. In turn, this increase in crime will not only affect recovery in our local communities but also affect the recovery of the global economy by slowing down growth in these countries.

References:

(2008). “Overview: Macroeconomics.” Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. Vol. 1. Detroit: Gale. Retrieved from Gale Virtual Reference Library.

Bourguignon, F. (1999, April). Crime, violence and inequitable development. Paper presented at the Annual World Bank Conference on Developmental Economics, Washington, D.C. Retrieved from http://siteresources.worldbank.org/INTABCDEWASHINGTON1999/Resources/bourg.pdf

Lester, B. (1995, May). Property crime and unemployment: a new perspective. Applied Economics Letters, 2 (5), 159-162. Retrieved from EBSCOhost Business Source Complete

Lomba, D. (2008). A theoretical model of a criminal’s location choice. International Journal of Business Research, 8 (3), 149-155. Retrieved from EBSCOhost Business Source Complete.

Perloff, J. M. (2007). Microeconomics (4th ed.). New York: Pearson Addison Wesley.

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Twiname Article Review

Published in 2008 in the Journal of Workplace Rights, the article describes a field study focusing on employment law, action research, and workplace culture, in reaction to the passage of recent legislation encouraging employee empowerment called the Employee Empowerment Act. The study focuses on the changing viewpoints over a two year period of time of the subordinates at a small New Zealand company, owned by an international parent company, as a result of this legislation. The article reports on the employee’s interpretations of their participation in management decisions as documented through an action research study. The purpose of the research was to examine the relationships between management and their employees and to offer solutions to improve these relationships and the working environment.
The study was intended to be presented to staff, a steering committee, and the management of the company to discover the reasons behind a recent high attrition rate and noticeable employee dissatisfaction in the workplace.

The overall tenor of this article is somewhat accusatory in nature and not objectively presented. The author continually inserts subjective conclusions and opinions concerning her negative viewpoints on worker exploitation and capitalism to such an extent that some valuable conclusions reached by the study are difficult for the reader to absorb. Overt criticism of past indiscretions by the company should have been presented in a temporal context to avoid making the primary audience of the report, the management of the company, defensive. The study should have been reported more objectively, focusing on the changing employment environment in New Zealand as a result of the legislation, and the company’s willingness to investigate the change through their endorsement of the action research project. Another major defect is that a certain amount of anonymity on the part of the management’s reaction to the study is lost by direct quoting of the firm’s financial controller repeatedly. As the audience of the report was in a large part the management of the company, and approved by management with the specific purpose to “reduce costs, enhance staff satisfaction, and enable the organization to benefit more fully from staff skills”, (p. 153), the authors notable bias against the company’s management is indefensible.

The report reads easily otherwise, it flows smoothly due to the author’s intimate writing style. There is an unmarked introduction and a substantial literature review separated into two distinct parts: “Action Research” and “Employee Participation”, however the hypothesis is contained within the literature and not clearly defined. Additionally, the report is organized adequately into parts including; a Results section, a Discussion section, a Conclusion, References, and two appendices, one documenting the survey questions and one documenting projects that resulted from the survey responses. Significantly omitted from the report are tables or graphs representing either descriptive or inferential data analysis. Therefore, the author anecdotally presented positive hypothesis substantiation at the end of the results section.

A steering committee was established to supervise, provide guidance, and assist in the administration of the action research project. Research was reported through annual reports over the two year period to the steering committee, and presented to the managers of the company and to the staff. Information for these reports was taken from the analysis of staff interviews and focus groups. Twiname writes that she intentionally “strove to maintain the participants’ voice and to serve them in their efforts to address their concerns and aspirations”, (p. 154). The purpose of the intermittent reporting was to synthesize the interview and focus group responses to further develop the action research project and to solicit feedback from management and staff. The intermittent analysis reporting resulted in the steering committee coordinating projects with managers and staff to implement projects on an ongoing basis. The cumulative effect in this type of presentation was that a significant number of projects had been completed by the end of the study.

Documented in the report are a significant number of quoted conversations that the researcher had with management and staff of the company, indicating that oral presentations were very much an ongoing part of the field study. The researcher was clearly adept at handling questions from the employees on an ongoing basis and questions and feedback were encouraged throughout the process. The author continually expresses her concerns for the organizations employees throughout the report. Through the inclusion of the quoted material it is apparent that the researcher maintained a comfort level with the employees of the organization indicative of good presentation skills. Although there are significant excerpts from discussions with management, specifically the controller, no reference is made to a final oral or written report being presented to the organization. Sekaran explicitly states that problems, results, conclusions, recommendations, and implementation, “are of vital interest to the organizational members and need to be emphasized during the presentation”, (p. 353). The complete omission of details regarding a final oral or written report leads the reader to suspect that none was given, and more importantly perhaps that none was requested.

The managerial implications of the research are described in the “Conclusion” section of the article. The field study was a qualitative analysis that took place over a two year period with the cooperation of management. Although a descriptive study was indicated by management’s needs to understand the phenomena of employee dissatisfaction and the attrition rates, a qualitative study appears to have been delivered, leaving management with the difficult decision “to judge if the recommendations made would solve the problems, and to what extent changes would be worthwhile”, (Sekaran, p. 374). Despite the fact that the author of the research was familiar and comfortable with the cultural environment, and her observations may have been appropriate, it appears that there was considerable reluctance on the part of management to accept the results or implement the action research process beyond the two year period. Additionally as managements concerns regarding improved communication, reduced costs, and enhanced staff satisfaction, (Twiname, p. 153), and therefore a more productive organization, were not adequately addressed by the author, management reluctance to accept the findings of the study was justified.

It should be noted that as a result of her familiarity with the environment she was well able to originate the change management program and the second appendix lists numerous participatory projects that were concluded during and, more specifically, as a result of the study, indicating some level of success. Within the organization the initial employee resistance was replaced by a gain in employee empowerment that the researcher describes as threatening management. Notably, managerial resistance could possibly have been a result of the lack of objectivity expressed by the researcher as well as the researcher’s failure to account for management goals in implementing empowerment programs, namely increased productivity. The perception left with the reader is that perhaps the researcher may have lacked tact and objectivity in her approach to management, significant variables when researchers enter an organizational setting with the expectation that their solutions will be adopted. Compelling is the potential managerial implication of this project in another setting. If administered appropriately, balancing the needs of staff as well as managers, action research could potentially be a valuable change management tool in organizations where there is a high level of attrition. Perhaps success could be achieved in an organization where there is a higher level of trust between managers and subordinates. The study and research report effectively describes the potential benefits that another organization could potentially reap from a similar endeavor however the author does not seem to conclude with this.

Although the author outlines the results of the action research by describing projects that were accomplished, ultimately the research fails in that it does not suggest appropriate changes to management going forward. In lieu of positive suggestions and solutions the author suggests the failure lies within the organization that was studied, and postulates that additional legislation is required to implement permanent change for all organizations. The negative managerial implications the author suggests should probably be dismissed by the reader in the absence of a final report to management. While the author demonstrates an appropriate level of concern for the empowerment of the subordinates, when noting the projects accomplished gives little or no thought to an increase in productivity for the organization, management’s primary concern in implementing empowerment programs.

 
References

Sekaran, U. (2003). Research methods for business, a skills building approach (4th ed.). Danvers: John Wiley & Sons, Inc.

Twiname, L. (2008). Could Action Research Provide the Key to True Workplace Collaboration?. Journal of Workplace Rights, 13(2), 147-166. doi:10.2190/WR.13.2.d.

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Organizational Culture in Mergers & Acquisitions

In today’s volatile economy it is more important than ever for a firm to be able to strategically and tactically manage its resources effectively. During the 1980-90’s recession there was an incredible wave of corporate mergers and acquisitions throughout the world. This was one of the five largest M&A wave periods ever witnessed. In Recession-Proofing Your Organization, Peter Navarro states that during a downturned economy one successful way of managing business cycles is through mergers and through the acquisition of companies at bargain prices when “executives pursue a buy low, sell high strategy”, (2009, p. 49).

Cultural compatibility is one of the greatest barriers to integration of organizations and yet also one of the least frequently investigated during due diligence, (Badrtalie & Bates, 2007). In 1998 when Daimler-Benz and Chrysler merged during the 80’s-90’s wave, Chrysler was the most profitable car company in the world and Daimler-Benz was suffering from increased competition in the luxury automobile market. Chrysler recognizing the need to diversify its line during this period of time had just acquired American Motors Corporation, AMC, to pursue the minivan market and was now looking to merge with Daimler-Benz to strategically poise itself for future growth in the luxury automotive market. The merger was announced as a merger of equals but there were clear signs that the process was not going to go smoothly from the beginning due to a clash of workplace cultures.

Daimler-Benz was a stricter more hierarchical structure, with innovation working its way up the corporate ladder until it was approved by the company’s leadership, while Chrysler’s culture was more relaxed allowing middle-managers to pursue initiatives on their own often without the consent of executives. While all executives at Daimler-Benz flew first class and generally pursued a more luxury oriented philosophy in keeping with their branding, only senior executives at Chrysler were accustomed to this, however, Chryslers’ executive compensation package was a great as five times that of the executives at Daimler-Benz.

Dress policies reflected this difference in culture as well as did the amount of time employees spent in the office, with Chrysler allowing a much more relaxed dress code and lighter office hours during non-peak performance periods. Furthermore, issues such as where the company would be headquartered, the name of the company, and even the differences between the US accounting and the German accounting system proved to be difficult to manage during the merger negotiations. During the negotiation process Daimler-Benz consistently took the upper hand, by being intractable in their demands during the process. Decisions on other organizational culture issues as well as most other issues went in Daimler-Benz’s favor while Chrysler limited its negotiations to issues concerning profitability, physical assets, and capital, a strategy that had probably worked well for them during their recent AMC acquisition. The AMC acquisition represented two companies with a somewhat shared corporate philosophy and organizational culture merging resources; it appears that Chrysler failed to recognize that it needed to realign its priorities when dealing with a culture so diverse from its own.

Within two years of the merger, in the midst of a continuing culture clash, Daimler Chrysler experienced, “a mass departure of American talents”, (Badrtalie & Bates, 2007), leading to speculation that this was actually more of an acquisition by the German company than a true merger. Following this initial exodus the company experienced large scale financial losses that the company has yet to recover from, with shares of Daimler-Chrysler trading at about half of what shares previously traded for either of the two companies individually.

In conclusion, there is never a true merger of equals, especially in an international arena, unless the organizational cultures can be blended rather than imposed on one another. Bazerman writes that “too many negotiators focus only on claiming value and therefore fail to create value”, (p. 161). The merger between Daimler-Benz and Chrysler would not have even been considered if either company hadn’t previously had a history of success and if both companies could not originally have seen the potential benefits of the merger. Although Daimler Benz succeeded at the negotiating table with obtaining their demands for the merger, through their cultural arrogance they have lost what they initially valued and they are still suffering the economic consequences.

References:

Bazerman, M. H., & Moore, D. A. (2009). Judgment in Managerial Decision Making (7th ed.). Hoboken, NJ: Wiley and Sons.

Badrtalie J., & Bates D. (2007, June). Effect of organizational cultures on mergers and acquisitions: the case of Daimler/Chrysler. International Journal of Management, 24 (2), 303-318. Retrieved from ProQuest ABI/Inform Global.

Navarro, P (2009, Spring). Recession-proofing your organization. MIT Sloan Management Review, 50(3), 45-51. Retrieved from ProQuest ABI/Inform Global

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Trust, Empowerment, and Training Initiatives

This review examines the erosion of trust that arises, and the subsequent loss of organizational productivity, when appropriate training initiatives do not accompany employee empowerment programs. Examined are articles focusing on the loss of trust from managers if they feel defensive and the loss of trust from employees if they feel they are being taken advantage of. In either of these instances a loss of productivity can result for the organization. Research concludes that it is ultimately up to the organization to ensure that empowerment programs are implemented with appropriate training to ensure that both managers and their subordinates are comfortable with the process and do not feel threatened if they are to realize the performance gains expected from these programs. Success in employee empowerment programs is determined by the level of trust that exists bi-directionally between managers and their employees. A theoretical framework is outlined with employee empowerment as an independent variable, productivity as the dependent variable, and trust examined as an intervening variable with moderating variables on this process including manager training and employee training. Hypotheses are examined concerning if the implementation of training programs for both manager and their subordinates lead to successful employee empowerment programs as measured by increased productivity and a research process is outlined to examine issues of trust in organizations that have successfully and unsuccessfully attempted employee empowerment programs.

What exactly is the relationship between a sense of employee empowerment and productivity and why does it sometimes fail to the extent that both managers and employees feel threatened when it is implemented? Much of the literature written concerning the problems with empowering the workforce concentrates on the issue of trust. Issues of trust can arise on either the management or the employee side of the relationship. Managers can be hesitant to lose the control that they have earned in the workplace, while employees can lose their sense of security by being forced to make decisions they feel they aren’t prepared or authorized to make. Additionally employees may feel they aren’t being compensated to make certain decisions and if employees feel that the commitment of management isn’t genuine, they will often feel less empowered. Management attempting to empower their workers in an unplanned or hesitant manner, where managers aren’t fully committed to the empowerment process, can cause misgivings and actually lead to a loss in productivity rather than the anticipated gain.

Literature Review:
Ford and Fottler, (1995), distinguish between “job content”, the tasks and procedures of a particular job, and “job context”, the reason an organization needs the work performed, maintaining that “content” is easier to confer upon workers and “context” takes training and that empowerment should be awarded incrementally to employees by competent managers who need to question whether they are willing to give up their authority and if they trust their employees enough to empower them. In his 2009 article Pech states that managers fear employee decision making will reduce the power of and need for management positions. Managers can be defensive and invariably hold onto control by enforcing strict terms over employee involvement and that this behavior can be destructive on organizations and productivity by eroding their employees trust causing them to disengaged and unproductive. Pech elaborates through case study that tightly controlled employees feel vulnerable and threatened and disengage from the organization.
Boggs, Carr, Fletcher, and Clarke, (2005), caution that it is illogical for supervisors to empower employees by disempowering themselves suggesting that it is better for managers to promise less empowerment rather than deliver “broken promises”. Stainer & Stainer, (2000), agree that empowerment can increase organizational productivity if managers have confidence in their subordinates but that empowerment can be perceived by employees as a device to manipulate them into performing increased workloads. Employees can be resistant to empowerment for this reason stating that an actual shift in corporate governance must occur for empowerment to be ethical. Miscikowski & Stein, (2006), write that a barrier to empowerment is that it requires subordinates to act outside of their traditional roles and employees have difficulty making quality decisions previously made by managers, writing that tools and training are needed so that employees can access the necessary operational knowledge. Can the introduction of appropriate training programs for both managers and employees overcome issues of trust that often result from the implementation of employee empowerment programs?

The literature illustrates the importance of trust for both managers and subordinates in maintaining or increasing productivity in an organization. Although employee empowerment can be a powerful tool in increasing productivity by giving employees more control, if empowerment is not instituted carefully in a graduated process, then it can lead to a loss of the productivity it seeks to gain. Additionally there may in fact be instances, specifically dependent upon an employee’s position, where subordinate empowerment, or decision making, is inappropriate.

Alternatively, if management is defensive about relinquishing control, or if they fail to trust suitable employees adequately to allow them to self-manage, again trust can be lost and productivity will suffer. Both managers and their employees can develop issues resulting from mistrust of each other and the organization by poorly implemented empowerment programs. Although there are many risks, these studies ultimately support employee empowerment initiatives and indicate that it is up to educated and well trained management to decide how and when to implement these programs in order for an organization to reap the potential rewards.

Issues resulting from a lack of trust, the intervening variable, can thwart the successful implementation of employee empowerment programs, the independent variable, to the extent that productivity, the dependent variable, can be substantially diminished instead of improved as a result of these programs. Training of managers when implementing these programs, so that they are not threatened by diminished responsibilities is necessary and is the first moderating variable. Managers are ultimately responsible for implementing these programs and they need to recognize which employees to train, how to train them and in what functional capacities, and also they need to be aware that they are still ultimately responsible for the performance of their employees. Employee training, the second moderating variable, needs to be initiated by managers in a deliberate manner. Employees need to be selected by their managers and trained incrementally and appropriately in order to preserve their trust in the organization. Only employees who are willing to accept control of certain decision-making processes, who wish to assume these responsibilities, and are comfortable in these roles should be selected for empowerment so that subordinates are assured that they are not being taken advantage of. Employees who are forced to make decisions they feel are inappropriate for their positions or are not adequately prepared to make, can become disengaged from the organization and productivity will suffer.

These moderating variables, and their influence on the intervening variable, ultimately explain why many employee empowerment programs are unsuccessful. Appropriate training programs can not only but can also work to decrease the lack of trust between management and employees but can also work to increase the levels of trust management and employees have in an organization:

1. Organizations that do not provide appropriate training for their managers when implementing employee empowerment programs will have decreased productivity due to trust issues that arise between managers and employees.

2. Organizations that do not provide appropriate training for their employees when implementing empowerment programs will have a decrease in productivity due to trust issues arising between employees and the organization.

3..Organizations that do provide appropriate training for both managers and employees will have successful employee empowerment programs that will result in increased productivity.


The purpose of this study was to determine the relationship between employee empowerment training programs and increased organizational productivity, and if training both managers and employees will result in more successful programs than training one group or the other. In order to test the hypotheses above, a correlational cross-sectional study will be designed to survey the levels of trust between management and employees. It will be necessary to design a scalable survey of trust levels between employees and managers in both an organization that has been successful at implementing an empowerment program and an organization that has attempted, but not been successful in implementing, an empowerment program. To avoid negative or positive bias related to their previous participation in empowerment programs the study participants will be informed that the study is concentrating on levels of trust between management and subordinates within the organization. Managers and their employee participants will be assured of the anonymity of their individual responses to the survey, data collected will consolidated and reported to the organization and then made available to the participants. In addition to the qualitative data retrieved from the survey, quantitative data will be gathered indicating the amount of time that employees and managers have spent in training programs, before, during, and after, the implementation of empowerment programs. As the field study will consist of the survey administered in two or more separate non-contrived settings, organizations identified as having highly empowered employees vs. organizations identified as having less empowered employees, a minimum amount of interference in the operations of the organization will be necessary. Preferably, the records of training programs corresponding with the implementation of employee empowerment programs examined will be available for the successful and the unsuccessful organizations. If records of training programs are unavailable, the amount of time spent in training can be included into the survey as a scalable and quantifiable response.

Optimally the settings selected should be similar in nature including the work produced by the organization, the work performed by the individuals, the size of the organization, the sample size, and the manager to employee ratio, to minimize the effect of other variables. For example, if the successful organizations surveyed are medium sized airlines, then the unsuccessful organizations should be medium sized airlines as well. If flight attendants are surveyed within the first organization, then flight attendants will need to be surveyed in any additional organizations. Additionally, the organizations selected should be surveyed at a relatively equivalent time period after the implementation or attempted implementation of the employee empowerment program. As an incidental deliverable, additional survey questions will be formulated to test the level of trust in the organization. These questions will assess the workers perceived value as contributors to the organization’s success. To avoid introducing any additional variables that may affect the results of the study, productivity the dependent variable, will be measured by self-evaluation of subordinates in the amount of decision-making control they currently have in the organization and self-evaluation by managers of the amount of decision-making control they confer upon employees. The responses of managers in this instance will be compared to the responses of subordinates within each organization to see if empowerment exists and then compared across organizations to determine which organizations fare better.


References:

Boggs, L., Carr S. C., Fletcher, R. B. & Clarke, D. C. (2005), Pseudoparticipation in
communication networks: the social psychology of broken promises. The Journal of Social Psychology, 145(5), 621-624. Retrieved from Business Source Premier database.

Ford, R. C. & Fottler, M. D. (1995), Empowerment: a matter of degree. Academy of
Management Executive, 9(3), 21-29. Retrieved from Business Source Premier database.

Miscikowski, D. K. & Stein, E. W. (2006), Empowering employees to pull the quality trigger.
Quality Progress, 39(10), 43-48. Retrieved from ABI/INFORM Global database.

Pech, R. J. (2009), Delegating and devolving power: a case study of engaged employees. Journal
of Business Strategy, 30(1), 27-31. Retrieved from ABI/INFORM Global database.

Stainer, A. & Stainer, L. (2000), Empowerment and strategic change: an ethical perspective.
Strategic Change, 9(5), 287-296. Retrieved from Business Source Premier database.

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Rogue Librarians

Early in the advent of web-based Integrated Library Systems, (ILS), KPMG invested in a system that the a library director subsequently found to be underperforming and no longer suitable for the needs of the corporate library structure. The system was being used to manage print publications across close to three hundred offices but was not adept at managing access to electronic publications. Annual fees for the library system were expensive and additional training for new users on the system was expensive as well. It was also felt that issues that arose with the system were not addressed in a timely enough manner by this ILS’s customer support services. During this period of time the firm was undergoing substantial weeding of the print libraries, reducing them in size to less than one tenth of their original square footage. Additionally, it should be noted that the electronic publications were also being managed by Tax Knowledge Management and Audit Knowledge Management teams and the efforts to manage electronic information were redundant.

In the summer of 2003 the manager appointed three members from a team of approximately twelve Library Coordinators to investigate alternatives to this system. Although the basic reason for the changeover between the two systems was that the newer system would enable access to electronic publications, the basic reason for this system was the control of print materials. The team investigated the features of several alternative web based systems suitable for corporate libraries amongst themselves and suggested a new automated system in a relatively short period of time. It was announced in the late summer of 2003 that library functions would be migrating to this new ILS and an introductory web based training program was held in October of that year. During this migration and development period the firm would continue using the older system while the sub-team was to work on the migration and the development of the new ILS and the new system was purchased. The sub-team attended multiple training sessions over the next year, worked on data migration from the old system to the new system, and also spent numerous hours customizing the software interface.

The new ILS required that we install user interfaces on the hard drives of the local computers in order to access the web-based system. Unknown to the rest of the Library Coordinators, the sub-team that had made the decision to purchase the new system had not consulted with Information Technology, a process step that was supposed to be included with any software purchase. It was revealed in 2004 that they had chosen an ILS with a user interface that was JAVA-based and incompatible with the Time and Expense reporting system that every U.S. employee was currently using. During the period of time between late 2003 and late 2007 the team expended numerous resources trying to adapt this system for use, despite the fact that it was incompatible with the existing U.S. time and expense software. Solutions included housing the system on a server in Canada, where the JAVA based software wasn’t an issue, and redeveloping the user interface so it wouldn’t interfere with time and expense reporting. The firm continued paying many tens of thousands of dollars annually for each of these two systems, in addition to the redevelopment costs and the additional server charges. In 2007 the firm announced that with the exception of local business news, it would no longer be supplying print serials subscriptions. Despite this, the library team continued funding both systems and continued working on the migration and the development of the newer system. Sometime in 2008 the team reached a point where they were able to abandon the older system and concentrate only on the continued development of the newer ILS. By this point in time the majority of print subscriptions were cancelled and new firm requirements for most offices allocated a maximum of 60 linear feet for print library collections as resources were substantially electronic, (the rest of the monographs from these offices had been discarded).

Over a five year period of time the firm paid for duplicative ILS software programs, one of which was never able to perform adequately enough for a full-scale software roll out.
What occurred in this situation was in part a manifestation of regret avoidance. The original decision to allow these team members to pursue this solution in a relatively unrestricted manner, without clearly understanding the procedures involved in making such a purchase, and furthermore the director signing off on the purchase of this software, was regrettable. Pursuing the inferior solution was clearly a matter of regret avoidance. Bazerman states, “the motivation to minimize the opportunity for regret can lead people to make decisions that are suboptimal with respect to actual outcomes”, (p. 98). The director had an emotional reaction to the drastically inferior outcome, in order to avoid regret for making such an egregious and costly error, this inferior outcome had to be pursued.

Although we can witness a fair amount of “Perceptual Biases” in the aftermath of this decision, where the director ignored information that contradicted the original decision, and also “Judgmental Biases” that necessitated that the director hide the inferior ILS selection, this was clearly and more importantly an example of non-rational escalation of commitment termed “Impression Management”, (Bazerman, pp. 109 – 111). The library director had allowed the team members to make a business decision that had extremely adverse economic effects. The error was perpetuated for five years while the team tried to correct the inferior decision, and exacerbated by continuing to pay for both ILS systems for this same period of time. The rewards for the inferior decision seemed greater than they were, especially in light of the firm’s clear direction for reducing the dependence on print libraries. In actuality, the best decision for the company would have been to “focus on future costs and benefits, ignoring any previous commitments”, (Bazerman, p. 111), by abandoning the decision to change ILS early on. A more rational decision would have been to abandon the newer ILS when it became apparent that it was unsuitable for the firm’s use due to the software conflicts, cancel this contract, and return to the previous ILS.

References

Bazerman, M. H., & Moore, D. A. (2009). Judgment in Managerial Decision Making (7th ed.). Hoboken, NJ: Wiley and Sons.

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Gain on Sale Accounting

Gain on Sale is an accounting technique that allows firms to report financial gains before they are actually realized. This type of accounting is generally used by financial firms that have enough assets to support losses if the prospective gains fail to realize, “Used properly, gain on sale is legal. Big investment banks routinely employ the technique when packaging securities for sale to institutional investors”, (Browning, p.1). Issues arose as a result of sub-prime mortgage companies using Gain on Sale accounting in the 1990s; generally this was due to the fact that these companies do not have enough reserves to back their losses. Due to the resulting scandals the accounting principles were rewritten by the Financial Accounting Standards Board, (FASB), requiring firms report to their investors what the fair value of their assets actually are in their annual and quarterly SEC filings. FASB attempted to correct inaccurate reporting by repealing FASB 125, the previously abused standard, and issuing FASB 140, a more diligent standard, in September of 2000. The new standard required that companies “report delinquency rates and credit losses on the total pool of assets securitized”, (National Mortgage News Online, 2000 p).

The 2007 mortgage meltdown indicated that many sub-prime mortgage companies were noncompliant with the new FASB standard and continued business as usual. New Century Financial Corporation was one of these noncompliant sub-prime mortgagers and ended up in bankruptcy in early 2007. Their deceit could not have been accomplished without the duplicity of the accounting firm that reviewed their quarterly and annual reports. As a result of their duplicity, KPMG LLP, New Century Financials auditors, are being sued on behalf of investors for one billion dollars. Additionally, former executives of New Century Financial are being sued to recover fraudulently awarded bonuses and other compensation. The court appointed examiner for the New Century Financial bankruptcy, Michael Missal, recommended in his report that the company “recover money for its creditors by suing KPMG for professional negligence and negligent misrepresentation”, (Brickley & Efrati, 2008, p. A12), as a result of KPMG devising “improper accounting strategies that allowed the company to hide its financial problems for years”, (Brickley & Efrati). Furthermore, the Brickley & Efrati article maintains that the bankruptcy examiner stated that in at least one instance a subordinate was reprimanded for questioning the errant practices. Vikas Bajaj concurs with Brickley & Efrati’s observations stating in an article on nytimes.com that, Michael Missal, the bankruptcy investigator, noted that “KPMG auditors had deferred excessively to New Century”, (2008), and that KPMG auditors knowingly allowed New Century Financial to engage in these accounting irregularities. Bajaj reports further on a telephone interview with Missal where Missal recount e-mails he had seen from the partner in charge of the audit stating that he was concerned that KPMG would be replaced as New Century’s auditors, (2008).

In April of 2009, upon filing of a 1 billion dollar lawsuit against KPMG, the trustee in charge of New Century Financial’s bankruptcy proceedings noted in the lawsuit that the partner in charge of the New Century Financial audit did not pay attention to subordinates who tried to alert him to accounting errors in the audit in order “’to protect KPMG’s business relationship with, and fees from, New Century’”, (Kardos, 2009, p. C3). Although an accounting firms primary audit duties are to the shareholders of a corporation, and not the corporation as an entity, there is enormous pressure on the partners from the accounting partnership not to lose accounts as these generate substantial revenues for the firm. Generally, the larger the corporate client, the larger the accounting firm’s fees are. Conflicts can arise when public corporations refuse to act in accordance with fair accounting standards, as advised by their auditors, and mandated by the Securities and Exchange Commission, (SEC), and other regulating agencies, (notably the PCAOB, FASB, and the AICPA). However, as a corporation employs the audit firm, so to can it dismiss them. Partners at KPMG are not only judged on their ability to attract new clients but also to maintain relationships with current clients. Although the partner at KPMG in charge of the New Century Financial Corporation engagement was advised by his subordinates regarding the accounting inconsistencies, Kardos indicated that he not only ignored their advice but attempted to suppress any discussion of the issue. This appears to be in a large part due to the pervasive climate within the large accounting firms to keep major clients satisfied so they will not migrate to one of the other top tier firms.

In addition, New Century executives themselves are being charged with fraud by the SEC. In a complaint that states that the company’s executives, “conspired to mislead investors”, the SEC is hoping to recover bonuses and other compensation paid, (Goldfarb, 2009). The SEC claim states that the officers received repeated warnings about their company’s financial outlook in weekly ‘Storm Watch’ reports issued by their subordinates, but continued assuring shareholders that the company was on sound financial ground, (Kouwe, 2009, p. B1). New Century’s founders reaped over 40 million dollars in profit from sales of stock in the period between 2004 and 2006, (Bajaj, 2008).

Both New Century Financial and KPMG executives were provided with important information by subordinates; yet they chose to ignore this information, in order to ensure continued profits for themselves and their firms. KPMG desired to continue collecting fees while New Century Financial executives collected bonuses based on fraudulent financials. Executives at both firms fell victim to “self-serving reasoning”, described by Bazerman and Moore as when parties “assessments of what is fair are often biased by self-interest”, (p. 94). Both companies not only acted unethically, as their primary responsibilities were to New Century Financial’s investors, but also illegally by disregarding pertinent government financial regulations. Their behavior resulted not only in losses to New Century Financial’s stock-holders, but also in losses to investors who purchased fraudulent mortgage backed securities sold through Freddie Mac and Fannie Mae. Additionally, as Freddie Mac and Fannie Mae are both governmentally sponsored mortgage corporations, ultimately it was the American people that paid for this deception through government economic bailouts of these organizations securities.
Many companies, including KPMG, have introduced “ethics hotlines” where subordinates can report ethical violations anonymously either online or via the telephone. Additionally, the federal government and most states have enacted “whistle-blower” protection laws to protect individuals who file ethical complaints about fraudulent business practices from retaliation by their employers. Presumably, if any of the affected subordinates had reported these violations then a large amount of this substantial loss suffered by New Century’s shareholders and the American public could have been mitigated.


References
Bajaj, V. (2008, March 27). Inquiry assails accounting firm in lender’s fall. The New York Times. Retrieved from http://www.nytimes.com/2008/03/27/business/27account.html?_r=1

Bazerman, M. H., & Moore, D. A. (2009). Judgment in Managerial Decision Making (7th ed.).
Hoboken, NJ: Wiley and Sons.

Brickley, P. , & Efrati, A. (2008, March 27). KPMG aided New Century missteps, report says. The Wall Street Journal, p. A12. Retrieved from Proquest Newspapers.

Browning, L. (2007, May 1). Accounting said to hide lender losses. The New York Times, p. 1. Retrieved from Lexis/Nexis.

Goldfarb, Z. (2009, December 8). SEC charges former New Century Financial executives with fraud; subprime lender’s collapse helped trigger financial crisis. The Washington Post, p.A22. Retrieved from ProQuest Newspapers.

Kardos, D. (2009, April 2). KPMG is sued over New Century. The Wall Street Journal, p. C3. Retrieved from ProQuest Newspapers.

Kouwe, Z. (2009, December 8). Civil suit says lender ignored own warnings. The New York Times, p.B1. Retrieved from ProQuest Newspapers.

Feds, FASB releases residual rules, (2000, September 27). National Mortgage News Online, Retrieved February 24, 2010. Retrieved from http://www.nationalmortgagenews.com/premium/archive/?ts=970070413

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