Globalisation, Sustainability & Financial Markets

• Module 1 focuses on globalisation of business, business sustainability and the financial market.
• Module 1 prepared by Wahseem Soobratty
• Contact for [email protected] for more information

Module Objectives

• Understand businesses in a global market
• Identify the consequences of the global market
• Identify the outcomes of globalisation
• Understand business sustainability and its principles
• Understand legitimacy theory underpinning corporate social responsibility
• Understand and apply business ethics

Important information for ACCT1002

• Start this unit early (right from week 1)
• Attend all Lectures and Workshops online
• Be active in Blackboard for notes and announcements
• Seek assistance from tutors and lecturer during their allocated consultation hours (posted on Blackboard; under “Contacts”)
• Prepare for ACCT1002 Financial Decision Making

Business in a Global Market

• Businesses used to operate in local villages with local customers
• Businesses produced their own goods, which they would sell to locals
• With efficient transportation and communication networks, markets have undergone globalisation
• Businesses can now source products and sell worldwide

Defining Globalisation

• Gaspar et al. (2017) defines globalisation as the socioeconomic reform process of eliminating trade, investment, cultural, information technology, and political barriers across countries
• Morrison (2017) defines Globalisation as processes by which products, people, companies, money and information can move quickly around the world with few cross-border impediments, where decision-makers desire
• Gerringer at al (2016) defines Globalisation the tendency toward international integration and interdependency regarding goods, technology, information, labor, and capital, in addition to the process of making this integration happen

Globalisation of Business

• A company's operations no longer confined to just one country
• Companies operate in many countries, producing goods and services in a networked mode
• Policies lowering trade barriers have made the globalisation of business possible
• These policies facilitate the movement of products, services and people relatively freely and quickly

Types of Globalisation

• Globalisation of markets happens through standardised products/services everywhere in the world
• Examples of brands that are standardised regardless of country include; KFC, Pepsi, Pizza Hut and Johnson & Johnson
• Globalisation of production organises different phases of production in different countries to maximise cost savings and value
• Approximately 30% of the Boeing 777's components are made by other companies in different country locations

Benefits of a Global Market

• Specialisation of countries
• Allows larger global market for production at a larger scale for a lower cost per unit
• It results in reverse seasonal food/crop availabilities, shipping goods that may only be available at certain times, and able to be obtained twice rather than once per year

Consequences of a Global Market

• Jobs transferred to lower-cost countries.
• Workers in developed countries may face pay-cut demands, creating a culture of fear for many middle class workers
• Large multi-national corporations can exploit tax havens in other countries
• Multinational corporations, once restricted to commercial activities, are influencing political decisions
• The interconnectivity of the global market creates far reaching consequences

Example Consequences of Global Markets

• The Great Depression (1929-1935)
• Due to rampant speculation, the stock prices in the USA rose nearly 600% from 1921 to 1929, until the bubble burst in 1929
• The Dow Jones Industrial Average lost 89% of its value from top to bottom
• World trade dropped by 60% as businesses closed
• Unemployment rose to 33% in hardest hit countries
• Half of banks failed
• Widespread social unrest caused governments to be overthrown and replaced by dictatorships or authoritarian governments
• Only the demand for wartime goods during WWII ended the Great Depression
• Collapse of the Brumadinho dam in Brazil (2019) resulted in 248 deaths and agriculture damage, which caused Vale to close mines
• As a result, Iron Ore prices went from USD$75/tonne to USD$90/tonne, briefly rising to USD$130/tonne
• The COVID-19 (2020) pandemic spread to over 150 countries
• As of mid-April 2020, over 2 million cases and over 150,000 deaths have been reported worldwide
• Quarantine rules saw economies come to a standstill and the stock market falling to a record low
• Events do not necessarily have to be directly related to a particular industry to have far-reaching global implications
• Unintended consequences can have significant impact

Attempts to Reduce CEO Salaries

• US Securities & Exchange Commission attempted to mitigate high CEO salaries in the 1970s
• There was a requirement for CEO salaries to be publicly disclosed
• From 1978 to 2018, CEO compensation grew by 1,007.5% (940.3% under the options-realized measure)
• The S&P stock market growth was 706.7%, the wage growth of very high earners was 339.2%, and the wage growth for the typical worker was 11.9%
• It encouraged other CEOs to demand higher pay, which has provided hard data telling them they were underpaid

International Air Travel and Disease

• Air allows illness to spread quickly around the world as infected people spread illness onboard and further at their destinations
• International air travel can spread diseases thousands of kilometres from where the illness originated
• Examples of global diseases include Ebola (2014 - ), COVID-19 (2019 - ), SARS-CoV (2002-2003), H1N1 (Swine Flu) (2009)

Motivators and outcomes of globalisation

• Global interconnectedness, interdependence, and globalisation processes are motivators
• Finanace, networked mode of manufacturing, economic interdependence, political co-operation and international trade
• Outcomes include consumer markets, cultural convergence/divergence, growing inequalities and evironmental impacts

Outcomes of Globalisation

• Expand Consumer Markets, for example with mobile phones; cosmetics; music; clothing; packaged food; pharmaceuticals; cars; raw materials etc
• Changes in Culture and Values, for example in the emergence of World Culture; convergence versus divergence
• Income gaps (inequality) within and among countries due to the benefits of causing unequal distribution of incomes
• Unsustainable investment practices impact on environments and societies in host countries
• Employment of foreign investors impacts on local employments

Arguments for Globalisation

• Free trade is good for economic development - Creates jobs and economic prosperity
• Free trade is good for job creation and quality of jobs
• Cheaper goods and services are created, resulting in lower costs for the consumer
• Travel the globe is a great thing

Arguments against Globalisation

• Losers and winners results in not everyone wins
• Job losses (especially in developed countries) such as domestic manufacturing, due to production moving overseas
• Local loss of control over policy making
• A negative impact on environment and health
• Cultural impacts affecting communities
• Impacts worker's rights and human right violations

Business Sustainability

• Business sustainability, needs of the world's poor, in addition to limitations of the environment.

Principles of sustainability

• Ethics
• Governance
• Transparency
• Business relationships
• Financial return
• Community involvement/economic development
• Value of products and services
• Employment practices
• Protection of the environment

Key Drivers for Sustainability through competition

• There is an on going Competition for Resources as the worlds population continuously grows
• Climate Change comes with a fossil-fuel based economy
• Economic Globalisation happens with The integration of national economies into the global economy
• Connectivity and Communication occurs from less time to both build reputations and/or destroy reputations

Theories of Business Sustainability

• Corporate sustainability includes Corporate Social Responsibility, Shareholder Value and Legitimacy Theory

Corporate Social Responsibility (CSR)

• CSR refers to the responsibility an entity has to all stakeholders and the physical environment
• CSR dictates that businesses must look beyond their economic interests to consider the social and environmental impact of their decisions
• Enitities that act in manner are socially responsible due to the benefit of profits
• Entities want to limit interference from governments or other groups
• Managers can also be motivated to act without a economic incentive

Shareholder Theory

• Focuses on stakeholders, individuals or groups, that are interested in the corporations affairs
• Returns the primary focus of an organisation.
• Shareholders own a component of an entity

Agency Theory

• Where managers act on behalf of the shareholders

Legitimacy Theory

• Theory that entities must conduct operations in accordance with societal expectations in a social contract
• Society allows the entity to operate, so long as the entity acts in a socially acceptable manner

Benefits of CSR Activities

• Enhance brand value and company reputation
• Makes firm perceived as a good employer to work for
• Improves enhancement for operational effectiveness through improved environmental management
• Improved management of risk
• Better profit through improved reputation - Better management of risk
• Organisational growth with additional new customers
• Business opportunity created through new and better business practices

Sustainable Strategies

• An internationally operating firm must not just focus on its own profitability, but also on the concerns of its stakeholders through sustainable strategies

Defining Sustainable Strategies

• Strategies that not only make a firm good profits, but additionally improve that firms responsibility in terms of its environmental impact and socially responsibility towards stake holders.

Reporting and Disclosure

• Organisations are voluntarily reporting on their sustainability practices via GRI reporting (Global Reporting Initiative)

GRI

• GRI reporting is a structured frameworks for reporitn on sustainbility
• This framework has reporting and standard principles

Triple Bottom Line Reporting

• Economic Performance
• Environmental Performance
• Social Performance

Defining Business Ethics

• The accepted principles of right or wrong governing the conduct of business people
• The key to governance for sustainability may be determined by the extent of ethical consciousness
• One factor is Morality (acting as one ought to by taking into account the interests of other people), Versus Prudence, (acting in one's self-interest)
• There are no hard and fast rules in ethics, businesses are usually motivated by Four key responsibilities

Business Four key responsibilities:

1. Economic
2. Legal
3. Ethical
4. Discretionary

Ethical issues in International Business

• Ethic frameworks differ when expanding a business internationally, requiring business decision to address the most common ethics when planning for expansion
• Employment Practices
• Human Rights
• Environmental Pollution
• Bribery and Corruption
• Sustainability

APES110 Code of Ethics

• APES110 Code of ethics for professional accountants, issued by the Accounting Professional & Ethical Standards Board (APESB) and established by CPA Australia and the institute of Chartered Accountants Australia
• Members of the two professional bodies above MUST comply with the code of ethics
• Five fundamental principles include:
• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional behaviour