AE 321 Unit 1 Financial Strategy and Corporate Objectives PDF

AE 321 COURSE LEARNING OUTCOMES At the end of the module, you should be...

AE 321 COURSE LEARNING OUTCOMES At the end of the module, you should be able to: Evaluate the role and responsibility of financial manager/advisor in the context of setting strategic objectives, financial goals and financial policy development.  Describe the financial and non-financial objectives.  Explain investment, financing, and dividend decisions.  Describe the importance and objectives of financial planning Unit 1: Financial Strategy and control and Corporate Objectives  Discuss risk management and the risk analysis process. Part 1: The Role and  Identify communicating policy Responsibility of the to stakeholders  Describe the strategies for Financial Advisor achieving financial goals.  Identify and discuss the roles and responsibilities of financial advisors in the above- mentioned areas. 1 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  THE ROLES AND RESPONSIBILITIES OF FINANCIAL ADVISORS Financial advisors are financial planning experts who help individuals, families and business organizations prepare for the future. They require both theoretical knowledge and on-field experience as well as adherence to codes of conduct when dealing with clients. a. Educating It has been determined through studies that financial literacy is low worldwide. Improving one’s financial literacy is recommended to improve the financial status, financial goals and financial wellbeing of individuals, families, and businesses. Financial advisors are also educators who help in understanding financial matters and how to achieve financial goals. b. Supporting financial and non-financial goals and objectives Financial goals and objectives are targets on the performance of businesses and individuals quantifiable in monetary terms. They may include: 1. Saving. Saving could be for short-term and mid-term plans such as for emergency, travel, and education purposes for individuals. These could be for setting aside for current operations in businesses. One could be saving for retirement and other long-terms plans. With the increasing needs of people as they age, there need to have good retirement preparation. Businesses plan for business expansions. 2. Creating budgets. A budget is a financial plan so there is nothing better than looking at one’s financial figures and plan how to spend the available resources, save some, invest some, or how to create additional income. 3. Paying off debt. Financial advisors recommend paying off debt and getting out of debt as one of the first steps in setting financial goals and objectives. One has to get rid of burdening interests and penalties before moving to other financial goals and objectives such as saving and investing. 4. Building good credit. Borrowing loans and purchasing on credit are not totally bad. Borrowers and debtors can use these as resources for taking advantage of opportunities at hand. Some invest funds from loans if expected returns are higher than the interests associated with the credit. It is good to build a good credit line to have readily available funds when needed. 5. Investing. Financial advisors would often talk about “making your money work for you.” They refer to investment. Investments come in so many forms. Some invest in stocks, bonds, commodities such as gold, and some in real estate. These are in anticipation of future increases in the value of these assets. 6. Making more money. Businesses open additional branches and additional line of products to make more money. Individuals may engage in several activities that increase their income such as additional job, or business be it physical or online. This will allow them to have more funds that exceed their needs or expenditures so they will have savings. 2 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  Non-financial objectives are likewise essential in improving the overall performance of businesses. These include customer and employee satisfaction, low employee turnover so that the company can fully utilize these employees’ skills and trainings earned in the company, production quality, and meeting production requirements and standards. Companies have now incorporated corporate social responsibility in their goals and objectives while there is a growing number of social enterprises. The objectives are no longer merely focused on profit but is shifting to the triple bottom line: profit, people and planet. Financial advisors contribute their knowledge and skills in the financial aspect to improve the overall performance of businesses. c. Advising on the client’s financing, investment, dividend decisions c.1. A financing decision pertains to when, where and how to acquire fund. It involves identification of where to source finance, whether it should be short-term or long-term. It can be borrowed from creditors or sourced from shareholders. Factors that affect the investment decision are:  Cost: The most cost-efficient source should be selected. Normally, the cost of borrowing is higher than the cost of issuing equity but there are other factors being considered other than cost so that firms do not immediately jump into issuing their shares of equity.  Risk: The higher the risk, the less likely that the financial source will be considered. Financing from loans pose higher risks than equity funds.  Cash flow position: This pertains to the cash position as a result of net change in cash generated by cash inflows and outflows. A loan may be acceptable as a source of financing when the firm has the ability to pay off interests.  Conditions of the market: During depressions, firms would likely need to borrow because investors are hesitant at investing in equity. However, when the market is good, firms could easily issue shares to raise funds. The cost of financing is the most crucial quantifiable data that a financial advisor can provide. We will take this topic in the subsequent modules (Long-term Financing Decisions). A more detailed discussion will be taken up then. c.2. Investment decisions are decisions that involve investment of funds in assets with the aim to earn the highest possible returns. These are also known as capital budgeting decisions. Investment assets are considered if expected profits outweigh the cost of investment. More often, investors evaluate investment opportunities then choose the most promising option. These could be stocks, bonds, bank products, commodities, real estate, retirement funds, etc. Selecting which type of these assets in which to invest into is an investment decision. Factors that affect the investment decision are: 3 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.   Cost of investment – Only investments that can be acquired with the available funds from the financing decisions can be feasible.  Interest rates and investment criteria of the firm – The comparative returns (e.g., if the entity makes passive income from the funding vs accepting the investment option) may be used as required minimum returns. The firm’s own investment criteria on whether to accept or reject an investment opportunity should also be considered.  Expected return (in absolute amounts and in percentages; cash- or accrual basis) – The forecasted actual returns should be gathered and analyzed. Some would consider regular cash flows during the venture as very essential while profits are treated the most critical criteria in choosing a venture. As future financial advisors, we learn about capital budgeting techniques to help managers decide which investment projects to accept (in AE313). c.3. Dividend decision - Firms may decide whether to distribute their profits to shareholders in the form of dividends or to retain these for future plans and projects. If attractive investment opportunities exist within the firm, then the shareholders must be convinced to forego their share of dividend and reinvest in the firm for better future returns. At the same time, the management must ensure that the value of the stock does not get adversely affected due to less or no dividends paid out to the shareholders. The objective of the financial management is the Maximization of Shareholder’s Wealth. Therefore, the finance manager must ensure a win-win situation for both the shareholders and the company. There are several factors that affect dividend decisions.  Earnings: If a company is earning, it is more likely to pay out dividends as dividends are paid out of present and past income. A firm that earns more can pay higher dividend.  Balancing Dividends: To balance payout of dividends per share, firms regularly pay dividends.  Development Opportunity: Growing organizations are more likely to pay smaller dividends.  Cash flow: Availability of cash to pay the dividends also influences dividend declaration.  Shareholders’ Choices: The shareholders may opt to receive a certain amount of dividends (a)annually, quarterly, monthly or when the firm is capable. As for the amount, it could be a fixed amount or a percent of profits or a combination of both. They may also prefer to retain the fund for business expansion instead.  Taxes: Two taxes affect the dividend decision – dividend tax and capital gains taxes. The tax on dividends is incurred when earnings are paid out. Capital gains tax, on the other hand, are accrued when the shares (including the 4 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  value of the earnings not paid out) are sold. Capital gains can be delayed more than dividends tax.  Access to Capital Market: With greater access to capital markets, large corporations may not rely on their retained earnings. In this case, they can afford to pay higher dividends.  Contractual and Legal Constraints: Some contracts may restrict the distribution of dividends as these require appropriation of funds and earnings. The dividend decision is among the most complex decisions to be made by a manager. Earnings may be paid out as dividends that shareholders can actually hold on to. Earnings may also be retained and reinvested as a source of additional funding. Financial advisors can combine all of the available information to support the dividend decision of the firm. d. Assistance in financial planning and control Financial planning pertains to the steps, measures, and strategies that firms establish to attain their financial goals and objectives. It involves framing of objectives, policies, procedures and resources required to carry out the financial activities. Importance of Financial Planning: 1. It ensures adequate funds. 2. It ensures that outflow and inflow of funds is balanced and maintained. 3. It ensures availability of fund resources. 4. It provides a framework of long-term plans such as growth and expansion programs. 5. It reduces uncertainties of running out of funds during economic and market down trends. 6. Availability of funds through planning aids in the stability and profitability of the firm. Objectives of Financial Planning: 1. Determine capital requirements – Financial planners should look into whether the financing is for short-term or long-term purposes. They need to consider the costs involved in the activities. 2. Determine capital structure – Financing may be sourced out from both debt and equity so that planners need to decide on the debt-equity ratio. Also, they need to determine if financing is from short-term or long-term. 3. Frame financial policies – In the course of financial planning, managers can frame policies on cash management, borrowing, and capital financing. 4. Maximize resources – Financial planning aims to maximize the use of scarce resources with maximum returns on investment at the least cost. Meanwhile, financial control refers to the policies and procedures that organizations use to monitor and control the direction, allocation, and utilization of their financial 5 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  resources. Actual results are compared with the short, medium, and long-term objectives and plans. This is to ensure that the activities are carried out as planned. It not, it helps identify if there is a need to adjust the earlier plans. Anomalies, irregularities, and unforeseen events that were not considered during the planning stage may also be identified. e. Support in risk management Risk management includes the identification and analysis of risks associated with businesses. More importantly, the response by attempting to control the risks, possible losses, and their potential impact on the business. This has to be proactive to ensure mitigation of risks rather than reacting to risks and losses that were already incurred. The acceptance or rejection of risks depend on the risk tolerance level of the organization. Large and stable organizations possibly have higher risk tolerance level than young and growing organizations. Importance of Risk Management: Risk management empowers firms as they are equipped to identify and deal with potential risks. If they can identify and analyze risks, they can create an action plane to address the potential impact and occurrence of such risks. Moreover, the managers are provided the necessary information needed in making decisions. Risk Analysis Process 1. Identify risks: Risk identification requires collection of information. It involves doing research and brainstorming of employees. When risks are identified, these are arranged to enable the management to prioritize which ones to take and mitigate. This is to ensure that those risks that may potentially harm the business or that need to be dealt with more urgently are prioritized. 2. Assess risks: Assess how the risk may potentially harm or bring losses to the business, the amount involved, what possibly cause the risk, and how the risks affect the business. 3. Control risks: Decide on the proper actions and develop appropriate response to mitigate the risks and to prevent their recurrence. An organization’s response to risk may take the following forms:  Avoidance – An organization may opt not to take the risk by avoiding the activity with associated risk.  Mitigation – The organization may take the risk but tries to lower the impact and possibility of occurrence of the risk.  Acceptance – An organization may accept the risk if it is prepared to absorb or mitigate the impact of the risk. 4. Review Controls: Evaluate whether the controls that are put in place are able to mitigate the risks. Review if these controls can be utilized when the same risks occur in the future. 6 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  f. Assist the firm in its communication with its stakeholders Stakeholders include investors, shareholders, employees, labor unions, customers, suppliers, the community, and government authorities. They have different interests and needs in the company, different attitudes and priorities. Effective communication with the stakeholders is essential in making sure that their needs and priorities are met. There are several rules that may be considered when communicating to stakeholders. 1. The management must exhibit basic understanding of where the stakeholders are coming from. They must be able to “speak various languages” to connect with these stakeholders 2. Apply the right format at the right time with the right audience. Be ready to adjust if deemed necessary. Keep an open mind to understand their concerns because both parties may actually help create solutions. 3. Constantly educate the stakeholders. They must be always informed of changes in policies, rules and procedures, and whenever there are changes in company plans. Get them involved. 4. Provide the stakeholders feedback on how their concerns, issues, and problems have been addressed 5. Be transparent. Make information available at all appropriate levels. The more informed the stakeholders, the more they take time to comprehend the objectives of the company and how these may affect them. 6. Keep a record of all communications at all times. A recorded history of communications will help avoid problems and misunderstandings in the future. Financial advisors assist in the communication efforts of the firm and its managers. As financial experts, we can see the accounting reports and provide areas of emphasis for communication to the stakeholders. By serving as an external party, we can provide a different perspective on the performance of the firm. g. Support in the creation of strategies for achieving financial goals Different organizations have different financial goals and so are their strategies in achieving these goals. Strategies build roadmaps for reaching the financial goals. They reflect the unique business climate in trying to achieve the companies’ vision and goals. Financial goals include increased revenue, increased market share, decreased costs, improved margins, improving debt management, and cash flow management, etc. Below are a few of the strategies to achieve these financial goals. 1. Prioritize 2. Determine costs 3. Calculate and track cash inflows, outflows, and savings 7 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  4. Manage finances 5. Track your progress Things to consider when developing financial strategies: 1. Current financial position 2. Potential risks to the company with its current financial situation 3. Need for financing of projects and operations 4. Income and financial goals (short-term and long-term) 5. Sources to increase income 6. Relationships (partnerships, acquisitions, tie up with suppliers, etc.) needed to achieve the objectives 7. Skills needed to attain the financial objectives 8. Balance between spending and saving 9. Fitting finance in the business strategy When developing a company’s goals and objectives, there is a need to understand where finances fit into the puzzle. Financial advisors may likely have the skill to solve the puzzle. A high-growth start-up with venture capital funding has very different financial needs than a well-established organization. No matter the financial objectives, there is a need to have a clear picture of the company’s financial health. Vacation policy, real estate assets, retirement policies, and other aspects of business policy and decisions are integrated into the company’s finances. They reflect a company’s values and they need to be integrated into any business strategy. How does the strategic plan fit with the business plan? A financial strategic plan implements and manages the strategic direction of an organization and is generally written for long-range goals. It often covers three to five years. On the other hand, a business plan is generally developed to start a business or obtain financing. A financial strategy can exist within a business plan. The two can be used in conjunction, but play very different roles within an organization. Who should be involved in the planning process? The size of an organization will determine who should be involved in developing the company’s financial strategy. A small company might have the owner, a bookkeeper and an outside CPA firm. A larger organization could have senior leadership, the chief financial officer and an outside financial advisor. If lending is part of the plan, talk with a bank or financing company. It is best to have the important decision makers at the table during the planning process. 8 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  AE 321 COURSE LEARNING OUTCOMES At the end of the module, you should be able to: Explain the ethical dimensions in business, their relations to the financial manager's role, how this links to conflicts between stakeholder interests and how financial decisions may impact on sustainability/ environmental issues.  Explain the importance of ethics.  Define business ethics or corporate ethics.  Describe the different functions in business and how ethics is important in these. Unit 1: Financial Strategy  Discuss the importance of ethics and and Corporate Objectives code of conduct in financial policies. Part 2. The Ethical  Identify stakeholder conflicts and how these can be resolved. Dimensions in Business 9 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  THE ETHICAL DIMENSIONS IN BUSINESS Ethics pertain is concerned with acceptable or unacceptable human behavior based on conventional morality. Business ethics consists of a set of moral principles and values that govern the behavior of the organization with respect to what is right and what is wrong. It also contains the prohibitory actions at the workplace. Business ethics is the behavior that a business adheres to in its daily dealings with the world. The ethics of a particular business can be diverse. They apply not only to how the business interacts with the world at large, but also to their one-on-one dealings with a single customer. a. The Importance of Ethics Ethical behavior, be it at the organizational, professional or individual level, is a direct representation of the principles and values that govern the individual and the organization they represent. Organizations create an internal culture, which is reflected externally as organizational values. These values impact the relationships within the organization, productivity, reputation, employee morale and retention, legalities, and the broader community in which they operate. As a result, most organizations generate a statement of organizational values and codes of conduct for all employees to understand and adhere to. Motivating and reinforcing positive behavior while creating an environment that avoids unethical behavior is a critical responsibility of both managers and employees. Before we learn more of the ethical aspects and the functional areas of the firm, we have to know the different functional areas of the firm. b. Business Ethics Business ethics, also called corporate ethics, is a form of applied ethics or professional ethics that examines the ethical and moral principles and problems that arise in a business environment. It can also be defined as the written and unwritten codes of principles and values, determined by an organization’s culture, that govern decisions and actions within that organization. It applies to all aspects of business conduct on behalf of both individuals and the entire company. In the most basic terms, a definition for business ethics boils down to knowing the difference between right and wrong and choosing to do what is right. Ethics are of critical importance to organizations, as they can potentially have enormous impacts on their communities. Ethics are a central concern for businesses, organizations, and individuals alike. Behaving in a way that adds value without inappropriate conduct or negative consequences for any other group or individual, organizational leaders in particular must be completely aware of the consequences of certain decisions and organizational trajectories, and ensure alignment with societal interests. There are many examples of ethical mistakes in which organizational decision 10 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  makers pursued interests that benefited them at the cost of society. The 2008 economic collapse saw a great deal of poor decision-making on behalf of the banks. The Enron scandal is another example of individuals choosing personal rewards at the cost of society at large. These types of situations are extremes, but they highlight just how serious the consequences can be when ethics are ignored. c. Functional areas of the firm and the importance of ethics in each c.1. Administrative function The administration is a support function required by all businesses. Their function is not limited to keyboarding or filing. Senior administrators carry out a wide range of tasks, from monitoring budgets to interviewing new staff for their departments. Routine administrative tasks include opening the mail, preparing and filing documents, sending emails and faxes. Others require more creativity and flexibility, such as arranging travel or important events, from staff meetings to visits by foreign customers. Most administrators also deal with external customers who judge the business on the way their inquiry is handled. Poor or sloppy administration can be disastrous for a company’s image and reputation. Efficient administration means that everything runs smoothly, and managers can concentrate on the task of running the business. c.2. Customer Service Function All businesses must look after customers or clients who have an inquiry, concern, or complaint. When people contact a business, they expect a prompt, polite, and knowledgeable response. Unless they get a high level of service, they are likely to take their business elsewhere in the future. Businesses normally have customer service departments with staff who are trained to handle customers professionally. Those tasked to engage with customers must also be equipped with the necessary technical knowledge and skills if they are presenting products. Organizations that manufacture and sell complex industrial products usually employ technical specialists or engineers in customer service to give detailed advice and information. c.3. Marketing, Sales, Distribution, and Customer Service Functions Marketing involves increasing the awareness of potential customers about the firm’s offerings. Sales involve the direct engagement with the customer in the transfer of the goods to them by the firm. Distribution means ensuring that goods are delivered to the right place on time and in the right condition. Lastly, customer service deals with the continuous support given to customers to maintain and improve their satisfaction with the firm’s products. All of these as a continuous chain of processes is the source of revenues of the firm. The purpose of the firm is to provide goods and services that are acceptable both in terms of quality and price. Fair marketing practices should be observed. These include transparency about environmental risks, product ingredients (genetically 11 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  modified organisms), possible health risks, or financial risks; respect for consumer privacy and autonomy; advertising truthfulness; and fairness in pricing and distribution. Defects should be identified and addressed. Care must be maintained in the delivery process. Lastly, customers must be well-informed about the goods and their rights as customers buying these goods. c.4. Finance Function From the investors’ point of view, this is the most important function in the business because businesses need a regular stream of income to pay the bills. All financial transactions must be fully recorded and accounted for so that managers would know how the business is doing. They know how much profit or loss they are making, how much cash they have, when their debts are due and whether they have the required amount to settle these debts, etc. This will enable decision makers to act more rapidly and accurately based on available information. Large business organizations employ several financial experts.  Management accountants monitor departmental budgets and current income from sales, prepare cash flow forecasts, and specialize in analyzing day-to-day financial information and keeping senior managers informed.  Financial accountants are concerned with the preparation of the statutory accounts. All companies must provide a Balance Sheet and Profit and Loss Account each year, and most produce a cash flow statement as well.  A credit controller monitors overdue payments and takes action to recover bad debts.  Finance staff supports the accountants by keeping financial records, chasing up late payments, and paying for items purchased. Some finance departments prepare the payroll and pay staff salaries, but other businesses outsource this to a specialist bureau. Businesses will often need money to fulfill specific aims and objectives linked to growth, expansion, or simply updating their equipment or machinery. Ethical dilemmas and ethical violations in finance can be attributed to an inconsistency in the conceptual framework of modern financial-economic theory and the widespread use of a principal-agent model of relationship in financial transactions. The financial-economic theory that underlies the modern capitalist system is based on the rational-maximizer paradigm, which holds that individuals are self-seeking (egoistic) and that they behave rationally when they seek to maximize their own interests. The principal- agent model of relationships refers to an arrangement whereby one party, acting as an agent for another, carries out certain functions on behalf of that other. Such arrangements are an integral part of the modern economic and financial system, and it is difficult to imagine it functioning without them. 12 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  The ethical dilemma presented by the problem of conflicting interests has been addressed in some areas of finance, such as corporate governance, by converting the agency relationship into a purely contractual relationship that uses a carrot-and-stick approach to ensure ethical behavior by agents. In corporate governance, the problem of conflict between management (agent) and stockholders (principal) is described as an agency problem. Economists have developed an agency theory to deal with this problem. The agency theory assumes that both the agent and the principal are self- interested and aim to maximize their gain in their relationship. A simple example would be the case of a store manager acting as an agent for the owner of the store. The store manager wants as much pay as possible for as little work as possible, and the store owner wants as much work from the manager for as little pay as possible. This theory is value-free because it does not pass judgment on whether the maximization behavior is good or bad and is not concerned with what a just pay for the manager might be. It drops the ideas of honesty and loyalty from the agency relationship because of their incompatibility with the fundamental assumption of rational maximization. "The job of agency theory is to help devise techniques for describing the conflict inherent in the principal-agent relationship and controlling the situations so that the agent, acting from self-interest, does as little harm as possible to the principal's interest" (DeGeorge, 1992). The agency theory turns the traditional concept of agency relationship into a structured (contractual) relationship in which the principal can influence the actions of agents through incentives, motivations, and punishment schemes. The principal essentially uses monetary rewards, punishments, and the agency laws to command loyalty from the agent. The 2008 financial crisis caused critics to challenge the ethics of the executives in charge of U.S. and European financial institutions and regulatory bodies. Previously, finance ethics was somewhat overlooked because issues in finance are often addressed as matters of law rather than ethics. Fairness in trading practices, trading conditions, financial contracting, sales practices, consultancy services, tax payments, internal audits, external audits, and executive compensation also fall under the umbrella of finance and accounting. Specific corporate ethical/legal abuses include creative accounting, earnings management, misleading financial analysis, insider trading, securities fraud, bribery/kickbacks, and facilitation payments. c.4. Human Resources Functions The human resources of a business are its employees. Wise organizations look after their staff on the basis that if they are well trained and committed to the aims of the business, the organization is more likely to be successful. HR is responsible for recruiting new employees and ensuring that each vacancy is filled by the best person for the job. This is important because the recruitment process is expensive and time-consuming. Hiring the wrong person can be costly and cause problems both for the individual and the firm. Arranging appropriate training and assisting with the continuous professional 13 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  development of stall: is another aspect of HR. Training may be carried out in-house, or staff may attend external courses. HR aims to ensure that the business retains good, experienced staff. Analyzing staff-turnover figures will show the rate at which people leave the organization. If these are high, it is important to identify and remedy any problem areas. While people may leave for justifiable reasons, such as moving to another area or for promotion elsewhere, dissatisfaction with the job or the company should be investigated. On the other hand, employees normally have the basic expectations of their employers. They expect to be treated and paid fairly, to have appropriate working conditions, to have training opportunities, which will improve their promotion prospects, and support if they are ill or have serious personal problems. They also want a varied and interesting job and praise when they have worked particularly hard or well. These factors help motivation, which means the staff is keen to work hard, and this benefits everyone. HR staff must ensure that the business complies with current laws and stays up to date with legal changes and developments. Discrimination by age (preferring the young or the old), gender, sexual orientation, race, religion, disability, weight, and attractiveness are other common ethical issues that the HR manager must deal with. d. Ethics and Code of Conduct Organizational ethics is how an organization ethically responds to an internal or external stimulus. Organizational ethics express the values of an organization to its employees and other entities, irrespective of governmental and/or regulatory laws. There are at least four elements that make ethical behavior conducive within an organization: 1. A written code of ethics and standards 2. Ethics training to executives, managers, and employees 3. Availability for advice on ethical situations (e.g., advice lines or offices) 4. Systems for confidential reporting. Code of Conduct First and foremost, the code of conduct demonstrates the organization’s overarching ethical attitude and its system-wide emphasis on ethics and compliance with all applicable policies, laws, and regulations. The code is meant for all employees and all representatives of the organization, not just those most actively involved in known compliance and ethics issues. This includes the board, management, staff, vendors, suppliers, and independent contractors, which are frequently overlooked groups. From the board of directors to volunteers, everyone must receive, read, understand, and agree to abide by the standards of the code of conduct. The code should be written in a simple and concise manner that is reader friendly. It is not recommended that an organization include policies and procedures in its code. 14 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  The code of conduct provides a process for proper decision-making—for doing the right thing. It elevates corporate performance in basic business relationships and confirms that the organization upholds and supports proper compliance conduct. Managers should be encouraged to refer to the code of conduct whenever possible, even incorporating elements or standards into performance reviews, and compliance with the standards must be enforced through appropriate discipline when necessary. Disciplinary procedures should be stated in the standards, and the penalty—up to and including termination—for serious violations of the standards of conduct must be mentioned to emphasize the organization’s commitment. Policies and Procedures Whereas a code of conduct provides guidelines for business decision-making and behavior, the compliance and ethics policies and procedures are specific and address identified areas of risk. Most organizations already have an employee manual that outlines all human resource-related policies and procedures, and they may have other operational policies and procedures specific to certain business practices or operations. Whenever possible, compliance policies and procedures should be integrated into existing policies, and all policies within an organization should be consistent with laws, regulations, industry requirements, and general compliance. In fact, as part of the implementation of a compliance and ethics program and while in the process of drafting compliance policies and procedures, all other policies within the organization should be reviewed and revised as necessary. While it is imperative that the organization have policies and procedures, it cannot be emphasized enough that the only thing worse than not having a policy is having a policy and not following it. Organizations should have a policy on policies that guides the development of policies. Take care that they are realistic, measurable, and enforceable. Lofty goals and platitudes may seem appealing, but they are too frequently open to interpretation. Involve those that are affected by the policy in the development of the policy. Assure that the policies have a stated timeline for revisions and that someone is identified as accountable for the policy. Two types of compliance policies and procedures should be developed by every organization: structural and substantive. The structural policies create the framework— “nuts and bolts” of how the compliance and ethics program will operate. The substantive policies define the applicable regulations that apply to the organization and how to operate compliantly within those regulations. They also indicate the risk areas applicable to an organization and describe appropriate and inappropriate behaviors about those risk areas. Both the structural and the substantive policies and procedures are essential to a compliance and ethics program so that the rules to which employees will be held accountable and the method for enforcing the rules are clearly documented. 15 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.  e. Stakeholder conflict Stakeholders have different interests and priorities that can conflict. Some owners look forward to regular payment of dividends while the management may be considering retention of earnings for future projects. Owners seek for high profits while the employees ask for wage hikes. Management decisions to establish operations in low labor cost nations are good for the owners as profits increase. However, this may result to loss of jobs to existing laborers. Customers and debtors want to pay goods at the longest possible time while the suppliers demand payment at the shortest possible time. While there are conflicts in the interests of stakeholders, they have common interests. They want the business to succeed. Their interests could be interdependent. Managers need provision of stocks by suppliers while suppliers need managers to buy their stocks. Borrowers need funds from financial institutions while the financial institutions need borrowers to acquire funds from them. Owners need employees to work for them to produce goods and deliver services while the employees need the owners to provide them with wages. Owners need customers to buy their goods and bring them good profit while the customers need the owners to provide them the goods and services they need. Conflicts between stakeholders are structural, cognitive and emotional.  Structural conflicts occur when there are inequities of structures.  Cognitive conflicts arise from differences in beliefs.  Emotional conflicts stem from feelings. Individuals with different cognitive and emotional states run business organizations. Strategies for the resolution of stakeholder conflict Conflicts of interest can be resolved through negotiation. The competing parties have to meet in the middle and they may have to compromise a part of their interest for resolution. It has to be emphasized though that competing parties may still have interdependent interests that will help resolve the conflict. To resolve structural conflicts, reorganization, revolution or redistribution of power may be necessary. Since cognitive conflicts result from differences in beliefs, the parties involved must engage in a learning process from one another. This will give them the opportunity to understand where each one is coming from. Meanwhile, better understanding and education of the things surrounding the business, event, and individuals aid in resolving emotional conflicts. Sometimes, misinformation result to undue emotional stress and unnecessary conflict that can be avoided with proper education. Acknowledgement, accountability, and forgiveness are also good resolutions to emotional conflict. 16 Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited.