Reading Flashcards
What problems do businesses face if they only focus on share prices and profits? (Handy, 2002)
Cutting expenses geared towards future profits gives short term gain but long term consequences.
Importance of fairness in business (Rubin, 2012).
-Fairness is a virtue, but is a businesses sole objective to make money?
-If a business acts unfairly, damage to reputation can be costly (despite short-term gains). Also employees satisfaction. May adversely impact sales and the business’ ability to attract top employees.
-Positive consequences outweigh the negative.
-E.g. NIKE- poor treatment of workers in Asia- mid 1990s. Subjecting employees to long working hours in substandard conditions for low wages.
Led to a series of protests.
-Lose loyal customers
What does it mean to be fair? (Rubin, 2012)
-Impartiality-similar claims or claimants should be treated the same
*How do you allocate scarce resources impartially?
-Consistency with community expectations
*Consider how others are treated in a similar situation, past practices, etc.
Have a reference transaction to base opinion on.
If a firm’s costs rise, it generally would be considered fair for the firm to raise prices or cut wages to maintain profit level. In absence of threat, it would be seen as unfair.
ACQUISITION UTILITY (Rubin, 2012)
Reflects the difference between the value of the specific item being purchased or sold and the price paid for it.
TRANSACTION UTILITY (Rubin, 2012)
Reflects elements of the deal other than price versus value of the the item exchanged.
How to be fair in distributing scarce resources (Rubin, 2012)?
Impartiality and consistency with community expectations.
“Impartiality” in this case means that similar claimants should be treated equitably and that any difference in treatment must be justified by morally relevant distinctions.
Common methods of allocation:
First come/first serve-impartial, everyone has equal opportunity. However, people may have conflicting obligations or claimants may not be able to travel to location or have access to computer.
Random allocation- Chance so impartial.
Allocations based on contribution, ability, or need- Impartial if satisfies the impartiality criterion if contribution, ability, or need were a morally relevant distinction.
Differences with family businesses (Cheng, 2014).
Family firms have unique characteristics.
1. Hold poorly diversified portfolios due to their concentrated ownership in family firms.
Within family firms in the S&P 1500 index, founding families hold 17% of the shares in their firms on average.
69.5% of founding families hold more than 5% ownership in their firms, and 24.7% of them hold more than 25%.
Due to high ownership and low diversification, founding families enjoy the benefit of good corporate decisions and at the same time bear the consequences of bad corporate decisions, and thus family owners have strong incentives to increase firm value.
- Longer investment horizons than other shareholders. Regard ownership as an asset to pass to future generations. Care about long term value of firm, rather than short term gain.
- Family members are actively involved in the management of their firms, either as top executives or as directors. On average, founding families hold the CEO position in 62% of family firms within the S&P 1500. Moreover, 98.4% if of founding families appoint at least one family member to their boards.
What is a family firm? (Cheng, 2014)
A firm in which the founders or descendants of the founding family continue to hold positions in the top management, serve on the board, or are blockholders.
Account for 44% of large firms in Western Europe.
Operate in a broad range of industries
What differentiates a family firm from others? (Dunn, 1996)
Review by Donckels & Frohlich- cross cultural study of managers in small and medium sized firms across eight European countries.
1.Tend to be more all rounders and organisers and fewer pioneers in terms of entrepreneurial style, leading to risk-aversion, less innovation and growth. Creativity and innovation were considered less important than in non family enterprises.
- Family businesses were more “inwardly directed” and described as “close family-related systems”.
- Family businesses needed fewer socio-economic networks, were perceived as “independent” and with “less interdependencies with the environment-culture and macro-economic situation”.
- Tended to pay higher wages than non-family firms and care significantly more about the satisfaction of their employees. However, they were “less progressive” in terms of human resource issues such as employee involvement.
- Strategic behaviour was defined as “conservative” with less exporting and internationalisation in evidence.
- Family conflict is an issue. Hiring and firing family members is a difficult issue- succession planning is often mismanaged or ignored. Decisions are often based around family issues may not make business sense to an outsider.
What Type II agency problems are there in family firm? (Cheng, 2014)
Type II- Conflict between majority (family) and minority shareholders.
- As they hold substantial ownership and have controlling positions in the firm, majority shareholders may seek private benefits at the expense of minority shareholders.
- Primary source is founding families’ concentrated equity holdings and substantial control in their firms, which gives them the opportunity to extract private benefits at the expense of other shareholders. May be both monetary and non-monetary.
- Capable of expropriating wealth from the firm through excessive compensation, related party transactions, or special dividends.
- Difference between their control rights and cash-flow rights. Founding families are the primary type of blockholders to hold control rights in excess of their cash-flow rights
Development of Chinese family businesses (Cheng, 2014)
- Chinese family firms are smaller and younger than US and UK family firms.
- Do not face as many succession issues- hence control is less diluted than in the UK and US. This means in general Chinese family businesses have larger block of family control and less independent directors hence they are more likely to suffer from Type II agency problems.
Impact of the differences of family businesses. (Dunn, 1996)
- More static with growth generally taking place incrementally.
- Cautious about taking risks- takes a longer term view.
- Consider how business decision fit with the family culture.
- Tend to have over-staffing due to staff loyalty and a willingness to find work for relatives of employees.
- If retained profits need to be used to buy back family shareholdings this can hinder growth.
- Take into account wider societal interests.
How do UK systems hinder family business? (Dunn, 1996)
- Family firms are the dominant type of organisation yet no specific support is provided for this type of enterprise.
- Much energy and resources are used regaining family control after dilution of ownership due to inheritance.
- Inheritance tax policies can significantly impact on family businesses ability to grow and survive.
- More research is needed to understand issues specific to family firms so that appropriate policies and support can be developed.
Why do the IASB wish to introduce IFRS for SMEs? (Perera and Chand, 2015)
- IASB believes IFRS for SMEs could enhance access to international finance through harmonisation of high quality information.
- More than 95% of companies globally are SMEs, hence need to develop appropriate framework.
What problems are there of implementation of IFRS for SMEs? (Perera and Chand, 2015)
-Inconsistency of global definition of SMEs- no universally accepted definition, may be different in different countries so difficult to enforce.
-Inconsistency between some treatment in full IFRS and IFRS for SMEs
-Decision usefulness theory suggests users should be primary group considered by the new standards, but not many users in consultation process.
-Although the aim is to allow access to international funding, SMEs are generally reluctant to seek outside capital.
-Enforcement issues across different jurisdictions
-IFRS for SMEs may be seen as a burden
-Transition from local GAAP could be costly, complex and prolonged for SMEs.
-Technical difficulties of applying IFRS for SMES
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