What's a business for?

In the wake of the recent corporate scandals, it's time to reconsider the assumptions underlying American-style stock-market capitalism. That heady doctrine--in which the market is king, success is measured in terms of shareholder value, and profits are an end in themselves--enraptured America for a generation, spread to Britain during the 1980s, and recently began to gain acceptance in Continental Europe. But now, many wonder if the American model is corrupt. The American scandals are not just a matter of dubious personal ethics or of rogue companies fudging the odd billion. And the cure for the problems will not come solely from tougher regulations. We must also ask more fundamental questions: Whom and what is a business for? And are traditional ownership and governance structures suited to the knowledge economy? According to corporate law, a company's financiers are its owners, and employees are treated as property and recorded as costs. But while that may have been true in the early days of industry, it does not reflect today's reality. Now a company's assets are increasingly found in the employees who contribute their time and talents rather than in the stockholders who temporarily contribute their money. The language and measures of business must be reversed. In a knowledge economy, a good business is a community with a purpose, not a piece of property. If, like many European companies, a business considers itself a wealth-creating community consisting of members who have certain rights, those members will be more likely to treat one another as valued partners and take responsibility for telling the truth. Such a community can also help repair the image of business by insisting that its purpose is not just to make a profit but to make a profit in order to do something better.     

What's the matter with business ethics?

The more business ethics secures its status in campuses across the country, the more bewildering it appears to actual managers. It's not that managers dislike the idea of doing the right thing. As University of Toronto Assistant Professor Andrew Stark argues, far too many business ethicists just haven't offered them the practical advice they need. Before business ethics became a formal discipline, advocates of corporate social responsibility claimed that the market would ultimately reward ethical behavior. But ethics and interests did not always intersect so fruitfully in the real world. And when they did not, managers were left in the dark to grope for the right ethical course. In the 1970s, the brand-new field of business ethics came onto the scene to address this issue. Critical of the "ethics pays" approach, academics held that ethics and interests can and do conflict. Still, scholars took an equally unrealistic line. To them, a manager's motivation could be either altruistic or self-interested, but never both. In short, ethicists still weren't addressing the difficult moral dilemmas that managers face on a day-to-day basis, and only recently have they begun to do so. After some initial stumbles, ethicists are getting their hands dirty and seriously considering the costs of doing the right thing. Finally, a new business ethics is emerging that acknowledges and accepts the messy world of mixed motives. As a result, novel concepts are springing up: moderation, pragmatism, minimalism, among others.(ABSTRACT TRUNCATED AT 250 WORDS)     

‘Wait-and-See’ business cycles?

Are shocks to firms' profitability risk, propagated by physical capital adjustment costs, a major source of business cycle fluctuations? This paper studies this question using a heterogeneous-firm dynamic stochastic general equilibrium model, where firms face fixed capital adjustment costs. Surprise increases in idiosyncratic risk lead firms to adopt a ‘wait-and-see’ policy for investment. The model is calibrated using a German firm-level data set with broader coverage than comparable U.S. data sets. The main result is that time-varying firm-level risk through ‘wait-and-see’ dynamics is unlikely a major source of business cycle fluctuations.     

Is American business working for the poor?

At first glance, poverty seems to have little to do with business. When most people--managers included--think about poverty, they assume that people are poor because they are isolated from the mainstream economy, not productive participants in it. But according to Harvard University professors Mary Jo Bane and David Ellwood, this is a misleading image of the true face of poverty in the United States today. Most poor adults--and a full 90% of poor children--live in families where work is the norm, not the exception. Poor people often work or want to work. But at the low-wage end of the American economy, having a job is no guarantee of avoiding poverty. Poverty is a business issue, then, because the American poor are part of the American work force. And this poses a problem for managers. In a more competitive and fast-changing economic environment, the performance of companies increasingly depends on the capabilities of their employees. In response to this human-resource challenge, more and more managers are embracing the language of "empowerment". And yet how can low-wage employees believe empowerment when their experience of work is, quite literally, impoverishment? It is unlikely that American companies can create the work force of the future with the poverty policies of the past. Fortunately, there are some simple policy mechanisms that can assist the working poor without putting an undue burden on business. Enacting them, however, requires managers to see poverty policy as one part of a national human-resource strategy that links the strategic concerns of companies to a broad social agenda.     

London‘best for global business’Urges

London must not be complacent1about its continuing pre-eminence as a financial centerbutt hea vailabilityo f skilleds taff,f lexiblelabour markets and comparatively lightregulation now make the city the bestplace for global institutions to do business,acc…     

Can science be a business? Lessons from biotech

In 1976, Genentech, the first biotechnology company, was founded by a young venture capitalist and a university professor to exploit recombinant DNA technology. Thirty years and more than 300 billion dollars in investments later, only a handful of biotech firms have matched Genentech's success or even shown a profit. No avalanche of new drugs has hit the market, and the long-awaited breakthrough in R&D productivity has yet to materialize. This disappointing performance raises a question: Can organizations motivated by the need to make profits and please shareholders successfully conduct basic scientific research as a core activity? The question has largely been ignored, despite intense debate over whether business's invasion of basic science-long the domain of universities and nonprofit research institutions- is limiting access to discoveries, thereby slowing advances in science. Biotech has not lived up to its promise, says the author, because its anatomy, which has worked well in other high-tech sectors, can't handle the fundamental challenges facing drug R&D: profound, persistent uncertainty and high risks rooted in the limited knowledge of human biology; the need for the diverse disciplines involved in drug discovery to work together in an integrated fashion; and barriers to learning, including tacit knowledge and murky intellectual property rights, which can slow the pace of scientific advance. A more suitable anatomy would include increased vertical integration; a smaller number of closer, longer collaborations; an emphasis by universities on sharing rather than patenting scientific discoveries; more cross-disciplinary academic research; and more federal and private funding for translational research, which bridges basic and applied science. With such modifications, science can be a business.     

A rejoinder to commentaries on “Why DCF capital budgeting is bad for business and why business schools should stop teaching it”

This paper examines the effects of exposing accounting graduate students to professional ethics. First, a method of instruction that encourages students to consider the ethical implications of business decisions was developed. This instruction included exposure to Kohlberg's theory of moral development, study of professional codes of ethics, and extensive use of written and video ethics cases. Next, instructional effectiveness was assessed through a pre-post-test with control group design. An accounting-specific test instrument was developed and validated. This instrument contains decision scenarios designed to elicit and identify students' stages of ethical reasoning, Test results revealed that students receiving ethics instruction demonstrated gains in ethical reasoning within the decision context. Appropriately designed ethics modules can thus foster consisitent consideration of ethical issues in decision making.     

Risky business—reconceptualizing risk and innovation in public services

This paper explores the relationship between risk and innovation in public services, presenting the state of the literature across different disciplines and the academic and policy literature. It suggests a novel framework to approach risk, emphasising the importance of differentiating between different types of risk and risk management. The paper offers a typology of risk types and management approaches that indicates different effects on the type of public service innovation. It concludes by considering the implications for theory and practice.     

“Grand” corruption and the ethics of global business

The paper explores the ethical obligations of global business to refrain from corruption. Corruption is harmful for the growth prospects of host countries and can introduce inefficiencies and inequities. I argue that business corporations have an obligation to refrain from illegal payoffs as part of the quid pro quo implied by the laws that permit corporations to exist and to operate. The paper goes on to consider how firms might respond, and isolates situations where anti-corruption policies can be profitable for firms. It concludes with an analysis of international efforts to deter transnational bribery and with suggestions for additional international initiatives.     

Effects of audit partners on clients’ business risk disclosure

We empirically investigate audit engagement partners’ involvement in business risk disclosure. Specifically, we examine whether the quality of business risk disclosure is influenced by engagement partner tenure and knowledge. We also examine whether the effects of partner tenure and knowledge are similar for Big 4 audit firms and non-Big 4 firms. Since fiscal year 2003, listed companies in Japan have been required to disclose business risk information. Although the business risk information is not audited, auditors concerned about their audit quality may seek to influence clients’ business risk disclosure practices. Giving advice to management on the narrative business risk disclosure can contribute to improving the perceived value of the auditor’s services which can be a competitive advantage. Using a sample of Japanese listed companies from 2003 to 2010, we find that if the engagement partners’ tenure is shorter, a company discloses more business risk information and the disclosure is more detailed. Furthermore, companies with audit partners who have a larger number of client engagements disclose larger amounts of business risk information in more detail. However, the engagement partner effects are mitigated if they belong to a Big 4 firm.     

Does familiarity with business segments affect CEOs' divestment decisions?

We examine the impact of familiarity with business segments on CEOs' divestment decisions. We find CEOs are less likely to divest assets from familiar than from non-familiar segments. We attribute this effect to CEOs' comparative information advantage with respect to familiar segments. Consistent with this information advantage, we document that the familiarity effect is particularly strong in R&D intensive industries. We further find the familiarity effect to be most pronounced for longer-tenured CEOs who have built up sufficient political power over the course of several years in office to enable implementation of their preferred divestment choices. We also document the value effects of divestments and show that familiarity affects returns on divestment announcements.     

Who owns the long term? Perspectives from global business leaders

Day-to-day management is challenging enough for CEOs. How do they manage for the long term as well? We posed that question to four top executives of global companies. According to Maurice Levy, chairman and CEO of Publicis Groupe, building the future is really about building the present and keeping close to the front line--those who deal with your customers and markets. He also attributes his company's success in large part to knowing when to take action: In a market where clients' needs steer your long-term future, timing is everything. UPS Chairman and CEO Mike Eskew emphasizes staying true to your vision and values over the long run, despite meeting obstacles along the way. It took more than 20 years, and many lessons learned, to produce consistent profits in what is today the company's fastest-growing and most profitable business: international small packages. Wulf H. Bernotat, CEO of E.ON, examines the challenges facing business leaders and politicians as they try to balance energy needs against potential environmental damage. He calls for educating people about consumption and waste, and he maintains that a diverse and reliable mix of energy sources is the only way to ensure a secure supply while protecting our environment. Finally, Marianne Barner, the director of corporate communications and ombudsman for children's issues at IKEA, discusses how the company is taking steps to improve the environment and be otherwise socially responsible. For example, it's partnering with NGOs to address child labor issues and, on its own, is working to help mitigate climate change. IKEA's goals include using renewable sources for 100% of its energy needs and cutting its overall energy consumption by 25%.     

What business are you in? Classic advice from Theodore Levitt

For all the talk about management as a science, experienced executives know that strategic decisions and tactics depend heavily on context. No one understood this better than Theodore Levitt (1925-2006). A Harvard Business School professor renowned as a founder of modern marketing, he sought above all to use his knowledge to serve the needs of businesspeople. In a series of powerfully insightful--and delightfully written--essays in Harvard Business Review, he provoked readers to reexamine their settled thinking about vital issues so that they could better meet the needs of customers. Levitt had the gifts of provocation and generalization, offering ideas that startled readers but compelled them to think creatively and intelligently about their companies. Writing in a period when business was held in far less esteem than it is today, he rejected the easy contempt that many intellectuals had for managers and consumers. Levitt carried that practical approach to his tenure at Harvard Business Review from 1985 to 1989. As one of HBR's most intellectual and most populist chief editors, he understood that the magazine's main purpose was to serve as a kind of sophisticated translation, clarifying authors' raw-and sometimes rough-ideas for impatient, time-pressed readers. This tribute, a look into one of business's great minds, offers excerpts from six of Levitt's most influential HBR articles: "Marketing Myopia" (July-August 1960) "After the Sale Is Over..."(SeptemberOctober1983) "Marketing Success Through Differentiation-of Anything" (January-February 1980) "Production-Line Approach to Service" (September-October 1972) "The Globalization of Markets" (May-June 1983) "Creativity Is Not Enough" (May-June 1963).     

Teaching capital budgeting as multi-attribute decision-making. A commentary on “Why DCF capital budgeting is bad for business and why business schools should stop teaching it”

Colleges and universities worldwide have benefited from the growth of the stock market of the 1990s. Many universities have seen marginal increases in their endowments. Accounting programmes have been among the beneficiaries of endowment growth and a concurrent increase in the number of endowed chairs. The primary purposes of this study are to: (1) examine the nature and status of endowments in accounting programmes worldwide; (2) determine objectives, criteria, benefits, and challenges of establishing endowed chairs; and (3) establish benchmarks for universities worldwide for assessing the credentials and qualifications necessary to obtain endowed chair positions. Findings indicate that: (1) the primary purpose of the endowed chair is to enhance the reputation and provide better recognition for the college or university; (2) research is considered the most important objective; (3) although excellence in teaching is considered important, this is not always reflected in the time spent on professional activities; (4) professional and college service is considered an important part of the duties of the chaired professor; and (5) the amount of time spent on teaching activities is less than that spent on research and service. The results of this study should help accounting programmes worldwide in both assessing existing endowed chairs and in establishing new chaired professorships.     

Are structural VARs with long-run restrictions useful in developing business cycle theory?

No, unless technology shocks account for virtually all of the fluctuations in output.     

Nonconvex factor adjustments in equilibrium business cycle models: do nonlinearities matter?

Recent empirical analysis has found nonlinearities to be important in understanding aggregated investment. Using an equilibrium business cycle model, we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs. We find that, while such costs lead to nontrivial nonlinearities in aggregate investment demand, equilibrium investment is effectively unchanged. Our finding, based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity, is robust to the introduction of shocks to the relative price of investment goods.     

Does gender matter in bank–firm relationships? Evidence from small business lending

In this paper we study the relevance of the gender of the contracting parties involved in lending. We show that female entrepreneurs face tighter credit availability, even though they do not pay higher interest rates. The effect is independent of the information available about the borrower and holds if we control for unobservable individual effects. The gender of the loan officer is also important: we find that female officers are more risk-averse or less self-confident than male officers as they tend to restrict credit availability to new, un-established borrowers more than their male counterparts.     

Does debtor protection really protect debtors? Evidence from the small business credit market

This paper analyzes how different levels of debtor protection across US states affect small firms’ access to credit, as well as the price and non-price terms of their loans. We use an individual-specific measure of debtor protection that has its maximum value when the borrower’s home equity is lower than the state homestead exemption (the debtor’s home equity is fully protected), and is decreasing in the difference between the home equity and the homestead exemption (the amount that the creditor can seize). We find that unlimited liability small businesses have lower access to credit in states with more debtor-friendly bankruptcy laws. In addition, these businesses face tighter loan terms - they are more likely to pledge business collateral, have shorter maturities, and borrow smaller amounts. For limited liability small businesses, we also find a reduction in credit availability, but of smaller magnitude, together with an increase in the loan rate.     

The impact of accruals and lines of business on analysts’ earnings forecast superiority

In this paper, we examine the linkage between analyst advantage (AA) (compared to the seasonal random walk model) in the prediction of quarterly earnings-per-share (EPS) and a broad set of economic determinants. Specifically, we employ a pooled cross-sectional time-series regression model where AA is linked to a set of firm-specific economic determinants that have been employed in extant work (e.g., Brown et al. in J Account Res 22:49?C67, 1987; Kross et al. in Account Rev 65:461?C476, 1990). We refine this set of independent variables by including a new variable (RATIODEV) based upon Sloan (Account Rev 71(3):289?C315, 1996) who documents that differential levels of accruals impact future earnings performance. This variable is particularly salient in explaining AA since analysts may be in a position to identify the permanent component of accruals via fundamental financial analysis. Additionally, we refine the measurement of lines of business??consistent with the reporting requirements of SFAS No. 131 relative to extant work that operationalized proxies for this variable based upon SFAS No. 14. Parameters for these aforementioned variables are significantly positively related to AA, consistent with theory.     

Do banks price discriminate spatially? Evidence from small business lending in local credit markets

In this paper we explore the effects of bank–borrower physical proximity on price and non-price aspects of small business lending in local credit markets. Along the price dimension, our analysis reveals that interest rates increase with bank–borrower distance and decrease with the distance between borrower and other competing banks. Along the quantity dimension, we observe that more distant borrowers are more likely to experience binding credit limits. We also show that the quantity effects of bank–borrower distance are concentrated among less transparent firms. Our findings are consistent with pricing based on marginal costs that reflect information-based factors, and are in contrast to the established paradigm, where banks adopt spatial discriminatory pricing rules when lending to small-sized enterprises.