Ask the Business Doctor

NEPA economic crumble cake recipe - just add water

2009-03-22T06:48:00.001-07:00

The Times Leader announces that Vic Mars has mysteriously closed. It's really no mystery at all. NEPA's economy has been a recipe for disaster - all that was needed was just a catalyst to make people wake up and realize what kind of financial shithole we allowed ourselves to create here. I am about to share that recipe with you right now (I found it on allrecipes.com):

A generous helping of local power brokers keeping quality high-paying jobs out
2 cups of corrupt politicians
3 tablespoons of nepotism
1 tomato from Pittston
1/2 teaspoon of local young talent retention in the region
Mix well in an abondoned coal mine and just add water

Happy Thanksgiving

2008-11-27T06:51:00.000-08:00

No talk about business or taxes or this crappy economy we're in today... just reminding everyone that no matter what goes on in life, there's always something to be thankful for. Take a minute today to think about and count your blessings.

Questions about deductions

2008-11-03T07:04:00.000-08:00

A client had some questions for me about business deductions. Since these are common questions, I decided to post the client's questions below in anonymity and provide my answers:

We talked about billing magazine subscriptions to the corp and deducting them, but you mentioned I would have to have a place more like an office that has visitors, waiting area, etc... If I "rent" this space from them would this allow me to deduct magazine subscriptions?

Remember, there's a fine line between being aggressive and committing tax fraud. Deductions must be necessary and reasonable. If your line of work consists of face-to-face meetings at the clients' locations and there is no legitimate reason to have a waiting room, then magazine subscriptions are not deductable. Doctors' offices, for example, are different. There is a legitimate need for office space as well as a waiting room; however, the magazine subscriptions are still a grey area of the law. It would be difficult to prove to the IRS that a subscription to - for example - Playboy is a necessary and legitimate expense for a business. To make the deduction more acceptable and more to your advantage in the vent of an audit, try to subscribe to magazines related to your line of work. For example, if a doctor's office - a business with a legitimate reason to have a waiting room - subscribes to magazines to help patients pass the time while sitting in the waiting room, magazines such as Men's Health, Fitness, and the like could be argued to provide a benefit to the doctors as well as the patients - why wouldn't a doctor subscribe to such magazines (they promote healthy living, something doctors are concerned about)? My professional opinion is to keep away from magazine subscriptions UNLESS they are specifically trade subscriptions wherein you obtain key advice, trends, etc. regarding your line of work.

I recently started an S-corporation and have questions on meals expenses. A couple of scenarios:

I'm on the road and far from home and eat while there. Should I use the corp credit card to pay for the meal, or should I pay for the meal myself and keep the receipt for tax time, or should I pay for the meal and submit the receipt to the corp for a meal reimbursement?

I wouldn't pay for the meal myself and hold the receipt for tax time. Either having the company reimburse you at the end of the month or having the corporation picking up the check immediately works better. This avoids losing the receipt and guarantees your deduction. Since you own the corporation and the company's bottom line transfers on your return, you're better off taking the deduction through the company as opposed to claiming it as an unreimbursed employee expense at the end of the year on your personal return. Here's why. Unreimbursed employee expenses are not guaranteed. First, you have to qualify to itemize your personal deductions on your individual return (as opposed to taking the standard deduction). Every year, as you pay less mortgage interest and the standard deduction increases, it will become harder for you to take the option to itemize deductions. Secondly, unreimbursed employee expenses are subject to a special area of the tax law where they (along with other misc. deductions such as tax preparation fees and investment expenses) must exceed 2% of your adjusted gross income and only the amount above the 2% threshhold is elligible for deductability. For example, if you make $100,000 per year, your unreimbursed employee expenses and all other misc. elligible deductions must exceed $2,000 to be considered elligible. This is a gamble. By allowing the deduction through the corporation, you're lowering your corporation's bottom line. Since the bottom line is taxable on your personal return, your lowering your taxable income automatically and guaranteeing the deduciton. For example, your company's bottom line without unreimbursed meals is $60,000 and your allowable deduction for meals is $1,000. Using the $100,000 example above, you won't be able to deduct the $1,000 meals expense on your personal return as an itemized deduction because you need at least $2,000 in elligible expenses (and only anythin above that $2,000 threshhold is allowable). If you put the deduction through the corporation, your taxable bottom line that gets transfered on your personal return is $59,000. You guarantee the deduction, lower your income, and pay less tax. It's a win-win scenario.

My wife and I go to dinner. Since we're Pres and VP, when could we consider a dinner a "business expense", if at all? Since I'm on the road so much and barely see my wife during the week, pretty much every meal is truly a "working meal" where we go over work-related stuff, as well as personal/family stuff, of course. If there is a way to consider it a business expense?

Be careful here. According to the IRS, you can't call personal meals business dinners. There has to be a legitimate purpose for the business meal. For example, if you were to both be on the road working together, you can take the deduction. If you held a meeting over dinner and recorded your meeting minutes - it's a grey area. If you decide to go out for dinner and your wife asks, "how's business?" - it's not a legitimate deduction.

I purchase a lot of DVD and keep them at the office. I mostly play them as background noise, but others watch them and borrowe them. Are they deductable?

DVDs are not deductable for the sheer fact that you can view them at any time. I often purchase songs from itunes on my laptop to listen to the music while working and drown out background noise. However, since I am able to sync these songs to my ipod and listen to the songs while fishing, hunting, hiking, working out, doing yardwork, etc. It's not deductable. The same goes for clothing expense - if you can use the purchase elsewhere, it's not deductable. However, if you're searching for a deduction you can go to one of those embroidery places and get a few shirts made up with your company name on it. Here, you're advertising your business and/or buying uniforms. You obviously wouldn't wear these shirts anywhere else but when working or trying to drum up business.

My Birthday

2008-09-08T08:25:00.001-07:00

Today is my birthday, and although I don't believe that it's a national holiday (yet), I'm taking the remainder of the day off to enjoy some other aspects of life like trout fishing :)

IRS Stimulus Rebate

2008-08-20T07:57:00.000-07:00

I heard on the TV that the IRS will be giving out extra rebates in October. How do I qualify? (Anonymous, West Pittston, PA).

I am not certain where you received the information, but there is no second stimulus rebate payment. Qualifying taxpayers only receive one rebate check. What you may have heard is that taxpayers must file their 2007 income tax returns by October 15, 2008 in order to qualify for the economic stimulus rebate.

What to do if you haven't filed your return in years

2008-08-20T06:18:00.001-07:00

Question: I just received a letter from the IRS informing me that my husband never filed our tax returns from 2004. When I asked my husband about it he said he forgot to file the last 4 years. What do I do? (Anonymous)

First, I would gather up all your tax documentation from the previous four years and file the returns ASAP. If you cannot locate your documents (i.e., 1099s, W-2s, etc.), you can call the IRS on the number provided on the letter. If you misplaced the letter, you can call toll free at 1-800-829-1040 to speak to an agent (NOTE: don't call on Mondays or Fridays - these are the busiest days for the IRS and you will most likely become frustrated trying to get a hold of a live person). If you explain to the agent that you lost your documentation and need to complete your returns for 2004, 2005, 2006 & 2007 they can send you a transmittal that provides all the appropriate numbers needed to have your returns completed. Once you have the information needed to complete the returns, I advise that you seek a qualified tax professional to assist you in preparing these returns in a reasonable amount of time.

I stress qualified because there are many people and companies out there that prepare returns, but are not really qualified to prepare them. Most taxpayers are not aware that the Internal Revenue Service does not restrict non-licensed professionals from preparing income tax returns. In other words, according to federal regulations a paid tax preparer does not have to be a certified public accountant or enrolled agent to prepare taxes. In April, 2006 the Government Accountability Office published the results of a study it conducted that indicates that large tax preparation service companies contribute to error rate. It was noted in the report that most of the preparers at these companies are unenrolled, inexperienced, and have little or no background in tax preparaton. Such companies as H& R Block and Jackson Hewitt do not require that their employees or franchise owners to have any prior experience in tax preparation or a college degree in accounting. To make a long story short, before you find a tax professional, make sure that they have the background necessary to prepare your returns - a six-week crash course offered by H&R Blockhead is not sufficient. It takes years of experience and education just to begin the ins and outs of the tax law.

The second thing I would do is not accept the answer "I forgot to file" for four consecutive years. There are two reasons why someone doesn't file a return: sheer laziness or because they are afraid they owe and can't pay the bill. If you and your husband owe money, you will be subject to interest and penalties which will make the tax bill much higher. The IRS will not accept the excuse that you were not involved in your household's finances and tax matters. This makes you equally as liable for the debt as he is. To make matters worse, the IRS allows you 3 years from filing deadline date to complete your returns and claim your refund - so if you were due a refund for 2004, you lost your right to claim any part of it.

What's done is done and you can't change the fact that your taxes haven't been filed. To prevent this from happening again, I would begin engaging in conversations to openly discuss all financial matters and tax matters with your husband. Perhaps you should take over some of the responsibilities or plan a weekly time slot to do things together. I found in almost half of the cases where taxes haven't been filed, there are usually a few credit card bills or loan payments that have slipped through the cracks too.

Analysis of the Adelphia Acquisition

2008-08-19T07:04:00.001-07:00

In applying Swiderski’s taxonomy of financial theory to the above purchase strategy, it is noted that only two of the theories listed can be applied based on the information available from Form 8-K: Accounting Model of Valuation and Modgliani & Miller's Irrelevant Propositions (Swiderski, 2006). The Accounting Model of Valuation "contends that Wall Street sets share prices by capitalizing a company’s earnings-per-share (EPS) at an appropriate price/earnings multiple (P/E). " (Stewart, 2001 cited in Swiderski, 2006, p. 1). Modgliani & Miller's Irrelevant Propositions “argue[s] that a coporation's financial decisions and/or policies have no material impact on the value of its shares. The only decisions that do are those that are relevant, such as investment and operating decisions that directly affect the entity's cash flows” (Swiderski, 2006, p. 1). By focusing on key analysis, such as leverage ratios, Time Warner is projecting the impact of the acquisition on its consolidated financial statements. More specifically, the CFO is concerned with how the balance sheet will look like and how many shares the buyers will have upon close. In addition, through an increased market share and profitability through the classification of the buyout on the balance sheet as a purchased asset (Form 8-K, 2005), earnings are projected to be higher over time, which yields a higher EPS and P/E ratio. The CFO’s comments on From 8-K serve two purposes: first, to explain the implications of the buyout in financial terms and, secondly, to reassure investors that the company is not making a mistake purchasing Adelphia. Hence, there will be some salesmanship presented in his comments. When eliminating the sales puffery, one can see by reading the Form 8-K that the CFO is stating only relevant information related to the implications of the buyout and the concerns of the investment community. To be more convincing, a comparison in financial data indicating the projection for Time Warner with and without the buyout could be presented, thereby incorporating the Economic Model of Valuation, which determines the corporation’s real market value “by calculating the future cash flow from operations outside of any new capital invested for growth (future cash flows) back to a present value that reflects the rate of return needed to pay back investors for bearing risk (cost of capital)” (Stewart, 2001, paraphrased in Swiderski, 2006). There are other areas of additional research that could be presented or conducted (if not done so previously) which would provide useful to this case study. Key calculations, such as the internal rate of return (IRR) on the investment, would provide a better indication of how profitable the acquisition really is. A regression analysis of stock prices in response to any news/press releases relating to the acquisition may also provide some insight as to whether the investor perception is positive or negative. Finally, historical analysis of financial implications of acquisitions of similar companies within the industry may also provide some insight as to what the ramifications of this buyout may be. Post-transaction Analysis As of the time that this essay was written, the acquisition has not yet closed. The FCC is scheduled to vote on whether to approve the transaction on July 13, 2006. “[T]he FCC has been considering putting conditions on the sale that would require Comcast and Time Warner to provide competitors with access to their local sports programming. The conditions could be similar to those placed on News Corp.'s (NWS) acquisition of DirecTV Group Inc. (DTV). As part of that approval, the FCC stipulated that News Corp. couldn't use DirecTV to withhold programming from competitors, charge higher prices or refuse to carry competing programs. Regulators also stipulated that News Corp. submit to a neutral third-party arbitrator in case of program disputes with cable and satellite operators” (FCC to vote on Comcast, Time Warner’s Adelphia buy July 13, 2006, par. 2). One ramification for Adelphia is that “[i]f the deal fails to wrap up by Sept. 1, Adelphia could be required to pay Time Warner $382.85 million or lower its price by the same amount. The company would also have to pay Comcast $87.5 million” (FCC to vote on Comcast, Time Warner’s Adelphia buy July 13, 2006, par. 4). Upon successful completion of the acquisition, additional research should be conducted to determine the financial implications of the buyout. First, Swiderski’s taxonomy of financial theory should be reapplied to determine if the previously identified theories will still be applicable after the transaction, whether they were properly incorporated, and whether theories were omitted. Second, an analysis should be conducted to determine how the use (or misuse) of financial strategy and risk analysis affected the transaction. Finally, an objective analysis should be conducted to determine whether any of the arguments and theories presented herein appear to be supported upon the outcome of the acquisition. Implications and Conclusions In this essay, the buyout of Adelphia Communications Corporation was evaluated to determine why it has become an attractive purchase. More specifically, the purpose of this essay was to evaluate the acquisition of Adelphia Communications Corporation by Time Warner and Comcast. Upon presenting background information on the company, an evaluation of the processes enacted to complete the strategy was conducted. No data on the measures used to value the acquisition could be found, except for the information contained on the company’s Form 8-K. However, one should be hesitant to make the determination that no analyses outside those previously mentioned in this report were conducted. Such an assumption would be merely speculative and should be made pursuant to the successful closing of the deal. The assumption was made, based on data contained in the Form 8-K, that Time Warner has taken the necessary risk management precautions, yet further research should be conducted after the transaction is complete to test that hypothesis. Additional research upon close should also be conducted to determine what specific valuation techniques were employed that lead to Time Warner’s decision to acquire Adelphia, in conjunction with proposals for research discussed in the post-transaction analysis section of this report. Ample time after close should be given prior to conducting such research to produce more accurate and reliable data.
References Adelphia (2006). Wikipedia. Retrieved June 20, 2006, from the World Wide Web: http://en.wikipedia.org/wiki/Adelphia. Adelphia Communications Corporation (2006). Retrieved June 20, 2006 from the Datamonitor MarketLine Business Information Center. Corporate scandal (2006) [list of recent corporate scandals], Wikipedia. Retrieved July 5, 2006 from the World Wide Web: http://en.wikipedia.org/wiki/Corporate_abuse. FCC to vote on Comcast, Times Warner’s Adelphia buy July 13 (2006, July 7) [Market Watch online]. Retrieved July 7, 2006, from the World Wide Web: http://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=google&guid=%7BE04DE037-1D35-48C8-B4AD-A6CD6668EA6E%7D&keyword= Form 8-K [Time Warner, Inc., filed April 21, 2005] (2005). Retrieved July 4, 2006 from the World Wide Web: http://www.shareholder.com/Common/Edgar/1105705/ 1105705-05-33/05-00.pdf. Hay, D. A. & Liu, G. S. (1998, May). When do firms go in for growth by acquisitions? Oxford Bulletin of Economics & Statistics. 60(2). Retrieved from the EBSCOhost database on July 5, 2006. Higgins, J. M. (2006) Hey, Time Warner: Walk Away From Adelphia. Broadcasting & Cable 136(20). Retrieved from the EBSCOhost database on July 5, 2006. Swiderski, P. R. (2006). Taxonomy of Financial Theory.

In the midst of the multitude scandals of corporate corruption around the turn of the century, including those of Enron’s accounting fraud, Halliburton’s overcharging of government contracts, and the Compass Group’s bribery of the United Nations to win business (Corporate scandal, 2006), there have been a variety of financial ramifications. On one end of this spectrum, organizations ceased operations, while others have become bait for acquisition. What makes a company attractive to others to pursue a merger, acquisition or partnership after its downfall is an issue that needs further examination beyond typical speculative reasoning. In this essay, the buyout of Adelphia Communications Corporation is examined. As explained in subsequent sections, Adelphia made headlines in 2002 when it filed a petition for Chapter 11 bankruptcy after the Rigas family (then majority shareholders of the company) misused corporate assets. Currently, the company is under contract by multiple firms to sell its assets in the U.S. and Puerto Rico (Adelphia Communications Corporation, 2006). Rather than shutting down operations, the corporation underwent a serious restructuring effort. This essay examines why Adelphia has become an attractive purchase, rather than another company, such as Enron, that has closed its doors after its corporate scandal has made press. More specifically, the purpose of this essay is to evaluate the acquisition of Adelphia Communications Corporation by Time Warner and Comcast (Adelphia Communications Corporation, 2006). First, an overview of Adelphia is presented, providing a history of the company, summarized details of the events resulting in the company’s petition for bankruptcy, and the strategy used to restructure the corporation afterwards. The processes enacted to complete the acquisition will be also evaluated, including an identification of the key leadership and management transactions. Valuation strategies used by the buyers prior to acting and the financing method(s) used to perform the transactions will be assessed as well. The following section will examine applicable financial theories that relate to the purchase of Adelphia, as well as any theories that were omitted that could have benefited the buyers. Finally, a proposal for post-transactional analysis will be presented. Company Background Adelphia Communications Corporation, founded in 1952, provides a variety of services under the umbrella of telecommunications, including cable television, high speed Internet, and media services, to over 5 million customers in over 30 states and Puerto Rico. It is currently the fifth largest cable operator in the U.S and is under contract “with Time Warner and Comcast, to sell all of its US assets for $12.7 billion … [and] along with its Puerto Rican partner, ML Media Partners LP, [Adelphia] entered into an agreement with two private equity firms, Crestview Partners of New York, USA and MidOcean Partners of London to sell its jointly owned San Juan Puerto Rico cable operations for $520 million” (Adelphia Communications Corporation, 2006, par. 16). History The company incorporated in 1972. “In the early 1990s, the company began building fiber optic networks to deliver communications solutions to the business community. In 1999, Adelphia and its majority-owned subsidiary Hyperion Telecommunications… announced their decision to operate Hyperion under the name Adelphia Business Solutions” (Adelphia Communications Corporation, 2006, pars. 9 - 10). Adelphia expanded by acquiring competitors in various markets later in the same year and in 2000 (Adelphia Communications Corporation, 2006). “Adelphia launched Wink Interactive TV in 2001. In the same year, Gemstar-TV Guide International and Adelphia signed a 20 year agreement with a commitment to deploy TV Guide Interactive in substantially all Adelphia systems” (Adelphia Communications Corporation, 2006, pars. 10 - 12). Scandal Adelphia filed for Chapter 11 bankruptcy protection in 2002, after it became known that “John Rigas and his family, who earlier controlled a majority stake in the company's shareholding, fraudulently used the company's funds for personal loans, manipulated financial figures to conform with analysts' expectations, funded non-corporate projects using Adelphia's line-of-credit for personal purchases, creation of fictitious companies and sham transactions for inflating the company's earnings and concealed increasing debts” (Adelphia Communications Corporation, 2006, par 34). Several lawsuits have been filed against Adelphia in relation with the Rigas scandal. The Rigas family subsequently gave up their shares of the corporation. Restructuring The organization also worked on restructuring efforts, and it has filed four restructuring plans with the bankruptcy court, with its most recent amendment in July, 2006. In 2004, the entity announced that it has decided to sell all of its assets as part of its restructuring plan to satisfy its creditors. (Adelphia Communications Corporation, 2006). The acquisition agreement between Adelphia and its buyers was approved by the Federal Trade Commission and is awaiting approval from the Federal Communications Commission. A deadline for the sale of the company’s assets to Time Warner is set for July 31, 2006. In opposition to the sale are several of Adelphia’s key bond holders and some Wall Street analysts. Buyout Strategy Despite some analyst’s opinion that Time Warner should walk away from the deal, executives at Time Warner “remain confident that the value that drove this transaction in the first place is still there” (Britt, cited in Higgins, 2006). “Time Warner Cable will gain systems passing approximately 7.5 million homes, with approximately 3.5 million basic subscribers… [to increase its subscriber base to] approximately 14.4 million… Time Warner will own 84% of Time Warner Cable's common stock, and the cable company will become a publicly traded company at the time of closing. Comcast will emerge from these transactions with approximately 1.8 million additional basic subscribers… [to increase its subscriber base to] a total of approximately 23.3 million customers” (Form 8-K, 2005, p. 7). “We… are paying around $2,700 to $2,800 per basic subscriber. This is 9 to 11 times expected first full year Adjusted OIBDA, which reflects approximately $200 million of realized cost savings... On a free cash flow basis, we expect the transactions to be… around breakeven in the second year… approximately $11 billion of net debt [will be added] at the… consolidated parent company level... Most of [which]… will be funded by existing cash on hand of over $7 billion [through inter-company loan] and availability under current credit facilities… [L]everage ratios… [are estimated to] be at or below the low-end of… previously-stated target range of 2.25 to 2.75 times” (Pace, cited in Form 8-K, 2005, p. 20). It may be determined that ratio and free cash flow analyses were conducted to estimate the profitability of the acquisition and the impact on the consolidated financial statements. One may become concerned as the valuations expressed focus more on the perceived value from the investor point-of-view to prove that Time Warner can afford the acquisition and that the purchase will not significantly impact the buyer’s stock/company value, as quantitative values were used to ease the qualitative concerns of current and potential investors. By exploiting Jensen’s free cash flow theory, Time Warner is banking on the assumption “that shareholders may be willing to accept takeover bids for companies that they suspect of not using excess cash wisely” (Hay & Liu, 1998, par. 6). From a risk management standpoint, Time Warner’s use of research to defend its position and explain to investors that it is can effectively acquire Adelphia with insignificant perceived financial impact may ease the minds of some investors, which provides an excellent method of preventative risk management. Further Britt states that Time Warner “performed extensive operational, financial and legal due diligence, which has given us a good understanding of the assets we're acquiring… [and] we had our operating people in the field inspecting contiguous systems” (Form 8-K, 2005, p. 23). There is a good indication that Time Warner has a solid understanding of the risks involved, as many of the risks were identified in the Form 8-K.

Optimization Strategy for EchoStar Communications Corporation

2008-08-18T10:31:00.001-07:00

Optimal operations methodology requires a studied recognition of the constantly evolving, inextricably intertwined nature of organizational behavior (OB) practices and operations issues in the new global economy within which business functions. In reaching that studied recognition, paying attention to the manner by which national and cultural differences affect the operation and management of human resources is important. Implementing changes requires that management apply OB principles and leadership models; however, making such changes can be challenging in the midst of economic recession, especially for companies such as EchoStar Communications Corporation (Datamonitor, 2007).

The purpose of this essay is to provide an operational report for EchoStar that now looks to optimizing operations in the reality of the changed and changing domestic employee constituency. First, this essay discusses some of the operational organizational behavior issues facing EchoStar. The circumstances that the company now faces in light of the frequent changes in economy are then considered, and it will be noted whether there is, in fact, anyone in the company who is monitoring economic events and how they could have an impact on the operational plans for the future. A list of suggestions will be prepared for the company to prepare for combating the impact on operations of any sudden downturn in the economy, as well as a means to ameliorate any serious effects of any such downturn. Operational/organization behavior issues that are serious at the selected workplace will also be addressed. Finally, a plan to advise key personnel how to implement these recommendations in light of the fact that, in a depressed economy, finance professionals are reluctant to spend money.

About EchoStar Communications Corporation

EchoStar Communications Corporation (ECC) was founded in 1980 with Charles Ergen, Candy Ergen, and James De Franco (Dish Network, 2006; Dish Network, 2008; Marketline, 2007). In 1996, ECC began providing direct broadcast service under the DISH Network name. The same year, ECC became a publicly traded company (Marketline, 2007). In 2002, “EchoStar started offering DISH Network bundled DSL internet Service, Digital Satellite Television” (Marketline, 2007, par. 7), began offering high definition satellite television service two years later, and offered on-demand service in 2005 (Marketline, 2007).

Headquartered in Englewood, Colorado, ECC employs approximately 21,000 people (Marketline, 2008), and is “one of the leading providers of satellite delivered digital television services. The company's services include video, audio and data channels; interactive television channels; digital video recording; high definition television; international programming, professional installation and 24-hour customer service” (Marketline, 2008, par. 1).

As the company has grown, a hierarchical organization has formed to include executive, technical, research and development, corporate, international, sales, marketing, investment, accounting, human resources, and business development divisions; each consisting of their own hierarchy and structure. With the horizontal growth of an internal hierarchy, EchoStar has grown vertically as well, dividing into a hybrid organization consisting of nine separate functional organizations which are legal subsidiaries of the overall group (SEC, 2005). Figure 1 shows the organizational structure of ECC.

Organizational behavior issues facing ECC

EchoStar’s growth in an uncharted technological industry has created a need for diverse, unique employees who can assist in the process of growth at all levels of the organization.

As a result, ECC actively seeks out individuals who can appreciate the constantly changing and unique environment encouraging those who can offer their own perspective and innovative approach to solutions. In return, employees can expect to successfully shape their career according to their goals in relation to the organization (Hogan, 2006).

ECC has established educational programs in an effort to instruct employees in an industry without established guidelines and rules (Hogan, M. 2006). The organization is in a constantly changing mode of operations in order to keep pace with technology and competition (Datamonitor, 2007); hence all team members must remain flexible with the ability to move with the organization (Feurer, Chaharbaghi, Weber, et al, 2000; Jones, 2004).

The challenge of ECC is to continue the company’s growth while maintaining and expanding their employee and management teams. The organization needs to ensure the organizational system adjusts and realigns itself in order to keep pace with the environment (Feurer, Chaharbaghi, Weber, et al, 2000; Jones, 2004). Also, the firm’s executives to periodically assess the existing organizational structure to determine if the design is still applicable and can keep operations at an optimal level (Scott, 2003).

The problem that comes out when reading the various SEC and other business reports on the state of company affairs appears to lie in formulating a plan that is flexible yet definitive in meeting ECC’s goals of growth in an ever changing, competitive market (Davis, 2006; Farrell, 2006; Hogan, 2006; Powell, 1987; SEC, 2005). EchoStar has seemingly grown without a plan; however, the pressure of competition and technology may force management to create and follow a path.

Economic issues facing ECC

Adaptive ability of an organization, which is due in part to its organizational design, to meet the requirements of the environment is critical (Scott, 2003, p. 96), particularly when facing specific economic conditions, such as higher gas prices, economic slowdown, the lowering value of the US dollar and heavy debt.

Rising gas prices in the US is forcing many employees who have longer commutes to seek job opportunities closer to home in an effort to save money (Zuckerman, 2008). This can translate to employee turnover for ECC.

The primary market for ECC primarily is the US (Marketline, 2008). A continued economic slowdown and weak economic forecasts in the US could have a negative impact on the company’s revenues (Datamonitor, 2007).

Even though ECC is not a truly global company, the organization has contracts with foreign firms (Marketline, 2008). The lowering value of the US dollar can cause the prices of future contracts to increase (Grosse, 2000).

According to the EchoStar annual report, potential threats to the company include heavy debt (Dishnetwork.com). Higher debt, compared to other organizations in the industry, may negatively impact the organization’s liquidity position (Datamonitor, 2007).

Since the organization operates in an environment that is in a constant state of flux, having someone in the company who is monitoring economic events and how they could have an impact on the operational plans for the future would be presumed. However, no documentation could be located to indicate that such a position exists within ECC.

Recommendations

In an effort to optimize operations while facing economic changes, the following changes are recommended for ECC with respect to OB:

Executive management should increase the frequency of the organization’s situational analysis.

Focus on enterprise-wide planning, particularly in areas of human resource planning.

Offer (more) employees the option to telecommute.

Expand services into other forays of the world, and use a geocentric approach (Permutter, 1969).

Create a position within the company to monitor economic events.

Continue to foster an environment where leadership is promoted at all levels within an organization.

As discussed in previous sections, a concern for ECC is the perception that the company fails to conduct proper planning techniques. By conducting a periodic situational analysis, the organization can gauge environmental factors that may impact the direction of the company as well as plan for potential changes (Robbins & Coulter, 2007). The need for a plan, particularly in the area of human resources, is to determine whether the future economic outlook requires changes in manpower (Peter & Donnelly, 2005). Further, offering the ability for employees to telecommute may mitigate the risk that turnover will occur due to higher gas prices.

Expanding into other areas of the world will allow ECC to increase its customer base and its profitability (Gupta & Govindarajan, 2004), and using a geocentric approach will provide ECC the opportunity to recruit quality personnel beyond its borders (Permutter, 1969).

Lastly, having someone in place to monitor economic events and advise senior management how to proceed can help ECC in adjusting to the ever-changing environment.

OB issues

ECC is entrepreneurial and is characterized by high innovation and extreme risk taking. When it comes to people, ECC appears to emphasize diversity and capability and appears to be more closely guided by a creative, entrepreneurial leadership, which is also its ownership (Hogan, 2006). Ergen and DeFranco appear to directly influence their teams of engineering and sales to achieve through a desire to compete (Farrell, 2006). Ergen and DeFranco appear have successfully instilled a competitive, thrifty, and entrepreneurial spirit within ECC.

Along with written corporate governance and code of ethics, to a large extent the behavior of ECC is set by the ethical and hard working leadership (Hogan, 2006). ECC proves to be a community participator, and proves to be a model for individuals who like to see a rags-to-riches story. None of the literature reviewed surrounding ECC suggests that any significant OB issues exist that would adversely impact the organization’s performance, with the exception that executive management does not want to use its resources unless it adds value to the company’s customers (Hogan, 2006).

Implementation

Keeping in mind that the organization does not want to invest in additional resources unless they add value to the company and the customers, implementation of recommendations can be accomplished without adding a huge burden to ECC. Existing employees may be used to create additional teams or broaden the scope of teams already in place.

For example, the current members of executive management can either develop a planning team or add the aspect of enterprise-wide planning to its existing responsibilities. The benefit to frequent planning is that the organization can gauge environmental factors that may impact the direction of the company as well as plan for potential changes (Robbins & Coulter, 2007). By foreseeing issues before they occur, the organization, with its entrepreneurial mindset, can find innovative ways to cut or absorb costs without passing on costs, which could have been avoided, to the consumer. This is also why it is important to have someone in place to monitor economic events.

Offering telecommuting as an option to employees not only reduces turnover but also can reduce costs for the organization, as fewer resources are needed. It is recommended that a small percentage of customer support and technical support employees be allowed to telecommute as a measure to test the option. Success of implementation can yield the possibility to allow a higher percentage of employees to work from home.

Prior to expanding into the global economy, market research must be conducted to determine which countries would be most profitable while balancing risk. Management needs to acquire knowledge about the market conditions, as well as business and political infrastructures, of the countries ECC chooses to explore expanding into.

Conclusion

ECC operates in an environment that is in a constant state of flux. Its organizational design and culture foster and environment where leadership and innovation can adapt to changes quickly. In the midst of an economic downturn in the US, ECC must find new ways to optimize operations while continuing to seek ways to grow. The proposed recommendations for ECC will allow the organization to better pinpoint future threats to the company, as well as increase its customer base by entering the global economy. Further, the option to allow customer service and technical support staff to telecommute will reduce costs to offset possible future loss in revenues.

References

Datamonitor (May 23, 2007). SWOT analysis [EchoStar]. Retreived July 23, 2008 from the Marketline database.

Davis, J. (2006). Telecom’s back, and so are jobs wages, opportunity grow in metro area as pay TV thrives. Rocky Mountain News, July 24, p. 1B. Downloaded from galenet.galegroup.com, on August 26, 2006.

Dish Network (2006). About US. EchoStar Satellite L.L.C. Retrieved August 12, 2006 from http://www.dishnetwork.com/content/aboutus/index.shtml.

Dish Network (2008). Dish Network corporation timeline. Retrieved July 23, 2008 from http://www.dishnetwork.com/content/about_us/company_profile/our_history/ index.shtml.

Farrell, M. (2006). Adelphia execs cash in. Multichannel News, August 7, v27, i31, p. 6.

Feurer, R., Chaharbaghi, K., Weber, M., & Wargin, J. (2000, Winter). Aligning strategies, processes, and IT: A case study. Information Systems Management, 17(1), 23.

Grosse, R. E. (2000). Thunderbird on Global Business Strategy. Hoboken, NJ: John Wiley & Sons, Inc.

Gupta, A. K., & Govindarajan, V. (2004). Global Strategy and Organization. New York: John Wiley & Sons.

Hogan, M. (2006). Top EchoStar execs dish about the then and now. Multichannel News, April 24, v27, i17, p. 34. Downloaded from galenet.galegroup.com, on August 26, 2006.

Jones, G. R. (2004). Organizational theory, design, and change (4^th ed.). New York: Prentice-Hall, Inc. Downloaded from galenet.galegroup.com, on August 26, 2006.

Marketline (2007). EchoStar Communications Corporation [company history]. Retrieved July 23, 2008 from the Marketline database.

Marketline (2008). EchoStar Communications Corporation Overview. Retrieved July 23, 2008 from the Marketline database.

Permutter, H. V. (1969). Some management problems in spaceship earth: the magafirm and the global industrial estate. Academy of Management Journal. 12. 59. Retrieved from the ProQuest database on August 1, 2006.

Peter, J. P. & Donnelly, J. H. (2005). Preface to Marketing Management (9^th ed.). McGraw Hill: Boston.

Powell, W. W. (1987, Fall). Hybrid organizational arrangements: New form or transitional development? California Management Review, 30(1), 67.

Robbins, S.P. & Coulter (2007). Management, (9^th ed.). Pearson: Upper Saddle River, NJ.

Scott, W. R. (2003). Organizations: Rational, natural, and open systems (5^th ed.). New York: Prentice-Hall, Inc.

SEC (2005). EchoStar DBS Corporations and Subsidiaries: List of subsidiaries [(SEC) Form S-4, Registration Statement Under The Securities Act Of 1933, Exhibit 21,. Securities and Exchange Commission]. Retrieved August 14, 2006 from the World Wide Web: http://www.sec.gov/Archives/edgar/data/920431/000095013402007646/

d97763exv21.txt.

Zuckerman, S. (June 29, 2008). Costs are changing commutes: high gas prices cause workers to consider distances to jobs as well as salary when deciding on positions. San Francisco Chronicle online. Retrieved July 25, 2008 from: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/06/29/BUTU11FMOS.DTL.

Optimization of Operations in Small Business through Leadership

2008-08-18T10:29:00.000-07:00

Most scholarly articles on leadership and the applicability of models focus on large organizations, many of which are multi-national companies. A number of books and articles can be found to tell stories of CEOs of large multi-million dollar companies who have transformed an organization be either taking it to the next level or dramatically saving it from the clutches of near extinction. Textbooks make mention of the great accomplishments of leaders such as Sam Walton (founder of Wal-Mart), Tom Watson (known in the 1980’s for developing the IBM image of success), and Jack Welch (who’s innovative leadership broke the confines of beaurocracy and transformed GE) (Tichy & Cohen, 2003), but fail to discuss the importance of leadership in small business. A void in literature exists in this area.

The purpose of this essay is to develop a working leadership model that adopts and integrates existing theories to optimize operations in the present-day small business operational environment. First, the need for such a model is discussed. Second, the model itself is presented, and the existing leadership models that serve as the basis for it are identified. Finally, advantages and limitations of the model are presented.

Small business owners concerned with optimizing operations

Few scholarly articles exist concerning small business management, and none could be found tackling the issue of optimizing operations. An informal survey was conducted among ten small business owners in the Wilkes-Barre/Scranton area of Pennsylvania, each with fewer than 25 employees. Each business owner was asked to rate the operations of his/her business either as overall outstanding, satisfactory or in need of improvement and explain his/her answer. Data was tape recorded and transcribed. None of the business owners admitted to having outstanding operations, 60% stated that their operations were satisfactory, and 40% stated that operations were in need of improvement. Even those business owners who stated that their operations were satisfactory admitted that there was some room for improvement, and three common themes prevailed:

50% of the business owners surveyed indicated that they have difficulty getting employees to do more work when demand increased or when turnover occurs.

40% stated that they had difficulty finding ways to become more efficient.

20% indicated that employees were reluctant to learn new tasks.

Further conversations with these business owners indicated that employees did not have any specific job titles, but were hired and arranged to handle specific tasks. No formal hierarchy, policies or procedures were in place either. Nine of the businesses are structured with an autocratic style of leadership, “involv[ing] the use of commands and expected compliance” (Weiskittel, 1995, par. 2). All employees report to the business owner(s) and have little or no autonomy. The other business was structured under the team concept.

Small business optimization model

The autocratic model “is becoming obsolete in today’s world” (Weiskittel, 1995, par. 2). In small organizations, it is assumed that the owner really is the leader and that he/she requires others to follow. To a certain extent, the organization must grow according to the direction the owner wants to head in, and the subordinates are required to perform whatever functions are asked of them. Eventually, the owner must begin to trust his/her employees and empower them if the company is to move forward and implement changes. Hence, the business owners must move from the autocratic model to one that requires more post-modern application of transformational leadership.

The first step in the small business optimization model is to have the owner change first by transitioning from a manager role to that of a leader. While no solid definition of leadership exists (Weiskittel, 1999), a variety of characteristics set leaders apart from management. Managers plan, organize, staff, control, and solve problems, whereas leaders set directions, align people, motivate and inspire (Kotter, 2003). The transition may also require the business owner from transitioning his/her mindset from Theory X to Theory Y. Theory X

“assumes that most people dislike work and will try to avoid it if they can. Workers are seen as being inclined to restrict work output, having little ambition, and avoiding responsibility if at all possible. They are believed to be relatively self-centered, indifferent to organizational needs, and resistant to change. Common rewards cannot overcome this natural dislike for work, so management is almost forced (under Theory X assumptions and subsequent logic) to coerce, control, and threaten employees to obtain satisfactory performance" (Newstromm & Davis, 2002, p. 31).

Theory Y is in contradiction to Theory X and

"assumes that people are not inherently lazy. Any appearance they have of being that way is the result of their experiences with less-enlightened organizations, and if management will provide the proper environment to release their potential, work will become as natural to them as recreational play or rest and relaxation... [M]anagement believes that employees are capable of exercising selfdirection and self-control in the service of objectives to which they are committed. [Therefore] [m]anagement’s role is to provide an environment in which the potential of people can be released at work" (Newstromm & Davis, 2002, p. 32).

The purpose of the transition is to begin building trust between the owner(s) and the employees for the purposes of restructuring the organization as a team. This transition will require that the owner(s) shift gradually to a collegial role, which

“depends on management’s building a feeling of partnership with employees. The result is that employees feel needed and useful. They feel that managers are contributing also, so it is easy to accept and respect their roles in the organization. Managers are seen as joint contributors rather than as bosses" (Newstromm & Davis, 2002, p. 38).

The move to adopting the collegial paradigm from the autocratic style of leadership requires that the ownership move first adopt and transition through the custodial and supportive models. The custodial model involves the use of benefits and employee welfare programs to provide for employees' security needs (based on Maslow's theory of needs). The focus is on providing economic satisfaction in exchange for dependence on the employer (Newstromm & Davis, 2002). The supportive model is based on Linkert's principle of supportive relationships, the organization uses the concept of leadership to increase participation and unlock employees' individual potential, so that job performance and profits increase. Motivation is also a product of the supportive model (Newstromm & Davis, 2002).

Once ownership moves to the collegial paradigm, the company reorganizes as a team. Team members realize that working together as a team rather than relying on one particular individual makes the entity stronger. Members have a better sense of belonging and commitment to the organization. Ideas can be brought to the table and implemented. Cross training can also occur. The team leadership model still leaves room for the owners to maintain some control over the organization, as a team leader is required.

Once the team is established the small business owner(s) communicate a vision to remainder of the team while learning to balance control and autonomy. A business owner cannot grow an organization by him/herself. Rather, the need to trust in one’s staff and empower the right people becomes an important issue. What may not always be apparent is the importance of maintaining an open relationship with employees. This results in lower training costs, less turnover, and an employee base that will often support the right management decisions of the organization (Toney & Oster, 1998).

Benefits and limitations of the model

By transitioning from an autocratic form of organization to a team design, the small business can use the team leadership concept to solve problems with efficiency and get employees motivated. However, the model is limited to small businesses, as transforming the design of a larger entity in this manner is impractical. The model is also limited by the actions of the small business owner. The company cannot change if management refuses to commit to it.

Summary

The purpose of this essay was to develop a working leadership model that adopts and integrates existing leadership theories to optimize operations in the present-day small business operational environment. First, the need for such a model was presented. After conducting an in formal survey of small business owners, it was noted that the need to optimize operations was present. However, the outdated autocratic design was not practical for allowing the organization to change. Before the organization can optimize operations, ownership must commit to changing its design.

The small business optimization model requires that the organization transition from an autocratic to a team design. The gradual transition in leadership styles is necessary to avoid culture shock within the organization. Once management and employees embrace the collegial model, the organization can be redesigned to take exploit the advantages of team leadership. The model can be used for existing small businesses, but is not intended for larger organizations.

References

Kotter, J. P. (2003) What leaders really do. In Jossey-Bass (Series Ed.) Business Leadership (1^stSan Francisco: Jossey-Bass. ed., pp. 29-43).

Newstrom, J. W., & Davis, K. (2002). Organizational behavior (11th ed.). New York: McGraw-Hill Higher Education.

Tichy, N. M. & Cohen, E. (2003). Why are leaders important? In Jossey-Bass (Series Ed.) Business Leadership (1^st ed., pp. 4-28). San Francisco: Jossey-Bass.

Toney, F. & Oster, M. (1998, Winter). The leader and religious faith. Journal of Leadership Studies, 5(1), 135.

Weiskittel, P. (1999, October). The concept of leadership. ANNA Journal, 26(5), 467.

Double Tax Jeopardy Implications for Multi-National Companies from an Accountant’s Point of View

2008-08-18T10:28:00.000-07:00

As a result of entering the global economy and reaping the financial rewards, more U.S. multi-national companies (MNC) and their expatriates are finding themselves in a position where tax liabilities may be owed to two or more national jurisdictions based on foreign income earned. The issue of double tax jeopardy has caused officers of such organizations to consider the means whereby they can minimize overall tax liability accruing from all their global activities, their organizations, and their employees. Being American firms - often repatriating or directing funds to and from the United States - they usually look to the United States as the part of their global operations where they would be most familiar with tax consequences, thus seeking to minimize tax in the U.S.

The purpose of this paper is to examine the risks associated with using certain tax minimizing strategies in an effort to avoid double tax jeopardy. This paper first defines and discusses the issue of double tax jeopardy as it currently applies to U.S. employees working overseas and their US based employers. Next, the paper discusses how U.S. firms and their expatriate employees currently avoid double tax jeopardy, followed by a discussion on whether the techniques employed can be justified and/or are ethical. Also the risks associated with avoiding double tax jeopardy are identified, and implications of using tax minimizing techniques are discussed.

What is double tax jeopardy?

Double tax jeopardy is an issue that stems from the concept of double taxation, wherein income is taxed twice (Turnier, 2007; Wilkinson & Fancher, 2004). Double taxation can occur when:

The same tax authority taxes multiple entities’ income and/or assets (Wilkinson & Fancher, 2004; Encyclopedia of Small Business, 2002).

Multiple tax authorities tax the same entity’s income and/or assets (Reuven, 2005).

Income and/or assets can be taxed by the same tax authority, as evidenced with treatment of corporate dividends (Wilkinson & Fancher, 2004). Corporate dividends are paid out from retained earnings, an account which represents the cumulative impact of net incomes and losses since the entity’s inception (Horngren, Harrison & Bamber, 2005). Internal Revenue Service (IRS) regulations reflect the same principle, and common stock dividends cannot be paid unless a sufficient balance in the retained earnings account to cover payment exists (Horngren, Harrison & Bamber, 2005), indicating that dividends can only be declared on income that was previously or is currently being taxed. Also according to IRS regulations, corporate dividends are recognized as taxable income by the entity receiving the payment (Internal Revenue Service, 2008 [Instructions for Form 1120 U.S. corporate income tax return]; Internal Revenue Service, 2008 [1040 instructions 2007]; Internal Revenue Service, 2008 [2007 Publication 17]); however, the corporation neither receives a deduction for common stock dividends declared nor issued (Wilkinson & Fancher, 2004). Since the money that dividends are paid out from taxed income (Wilkinson & Fancher, 2004) is subject to tax again by entities receiving the dividend money, double taxation occurs.

An individual entity can be subject to double taxation by having income and/or assets taxed by multiple tax authorities. U.S. companies and individuals can be subject to double taxation simply by being located in a state that taxes income. On the corporate level double taxation is inevitable when a company is located in a state that charges a corporate income tax, since the IRS does not allow a deduction for taxes based on income taxes paid to a state or local tax authority (Internal Revenue Service, 2008 [Instructions for Form 1120 U.S. corporate income tax return]). On the individual level, however, double taxation can be avoided when the taxpayer(s) can use state and local taxes paid as an itemized deduction on Schedule A (Internal Revenue Service, 2008 [1040 instructions 2007]; Internal Revenue Service, 2008 [2007 Publication 17]) and in instances where the taxpayer(s) income falls within specific income guidelines to take advantage of state tax relief programs, if such provisions exist. An example of such a program is Pennsylvania Tax Forgiveness, where resident taxpayers can apply for a credit up to 100% of the state tax liability (Pennsylvania Department of Revenue, 2008).

Double taxation can occur in similar manners for U.S. entities involved in international commerce, although the more common method of double taxation stems from the situation where assets and/or income are subject to taxation under U.S. and foreign tax regulations. While Congress has taken steps in reducing the tax burden for U.S. MNCs, the IRS admits that a tax gap still exists (Internal Revenue Service, 2008 [The tax gap and international taxpayers].

Methods of minimizing international tax liabilities

U.S. entities involved in international commerce have several options to avoid international double taxation. Bilateral tax treaties are a common form of relief (Beck, 2002). U.S. entities can also shift their operations, assets or earnings abroad, which the current U.S. tax structure is trying to avoid (Graetz & Oosterhuis, 2001). A third option is to partake in tax arbitrage.

Bilateral tax treaties

According to Beck (2002):

“Most [tax treaties] are based on one of three models--the United States Model Income Tax Convention of September 20, 1996 (the U.S. Model), the United Nations Model Double Taxation Convention Between Developed and Developing Countries (the U.N. Model) or the Organization for Economic Cooperation and Development (OECD) Model Tax Convention on Income”(par. 1).

Under common international practices, the host country taxes the entity, while the home country provides the tax relief. In order to qualify for tax relief, the entity must meet residence and/or citizenship requirements (Beck, 2002). “No international consensus dictates the appropriate relief method; countries commonly use three--the deduction method, the exemption method and the credit method. Countries can use one method or a combination to provide relief from international double taxation” (Beck, 2002, par. 2).

“The deduction method (such as the U.S., under Sec. 164(a)(3)) allows residents/citizens to deduct foreign taxes paid in computing their taxable worldwide income. This treats the foreign taxes paid as a current expense; it is the least effective means of providing relief. Residents paying and deducting foreign taxes on foreign-source income are taxed at a higher combined rate than on domestic-source income.” (Beck, 2002, par. 3).

“Under the exemption method, a taxpayer's home country will tax its residents/citizens only on their domestic-source income. The country of residence exempts the taxpayer's foreign-source income from domestic taxation, leaving it to be taxed by the source country” (Beck, 2002, par. 4). The credit method provides relief by offering the entity a credit against the home country’s tax liability in an amount equal to the tax liability assessed or paid on foreign income. The credit taken cannot exceed the home country’s tax liability.

Shifting operations, assets, or earnings abroad

Existing U.S. laws dictate that domestic corporations are considered residents of the U.S. and that, if the organization has branches overseas, then the income earned in the other country(ies) is subject to the U.S. corporate tax as well as foreign income tax (Graetz & Oosterhuis, 2001). To avoid double taxation, the corporation can open a foreign subsidiary (i.e., a separate entity) which is not subject to taxes in the U.S., provided the subsidiary earns no income in the U.S. (Graetz & Oosterhuis, 2001). The earnings of the foreign subsidiaries are only subject to U.S. taxation when distributed to their U.S. owners in the form of dividends (Graetz & Oosterhuis, 2001).

International arbitrage

International arbitrage is known as “the exploitation of differences between or within national tax codes” (Haworth & Buchanan, 2005). In other words,

“international tax arbitrage arises when a taxpayer or taxpayers rely on differences between the tax rules of two countries to structure a transaction, entity or arrangement in a manner that produces overall tax benefits that are greater than what would arise if the transaction, entity or arrangement had been subject only to the tax rules of a single country (Reich, 2007, par. 1)”

Arbitrage can be obtained improperly via “incorrect or improper application of the tax laws of any country, transactions in which the taxpayers take inconsistent factual positions in their respective countries and other cases that are more appropriately viewed as abusive tax shelters” (Reich, 2007, par. 2). Below are a few examples of how a U.S. MNC can legitimately take advantage of international arbitrage:

“[S]eparate the foreign tax credit from the tax base to which it relates, so that the taxpayer can benefit from the credit without having to include the related income” (Reich, 2007, par. 10).

“[Taking advantage of] transactions that permit the effective duplication of tax benefits in two countries, usually because the United States treats the U.S. participant as the owner of the entity that pays the foreign income (or withholding) tax and allows it a foreign tax credit while a foreign country treats the nonU.S. participant as owning all or a substantial portion of the entity for purposes of its tax law” (Reich, 2007, par. 17). This is known as double dipping (Haworth & Buchanan, 2005).

Exploiting reverse foreign tax credit transactions, wherein “the non-U.S. participant claims the U.S. tax as a foreign tax credit in its home country, while the U.S. participant receives its share of the investment entity's profits without additional U.S. tax, as a result of the 100-percent dividends received deduction or filing a consolidated return with the investment entity” (Reich, 2007, par. 29).

Claiming U.S. withholdings tax paid “as a credit by both the U.S. participant and the foreign participant in their respective countries” (Reich, 2007, par. 33).

Justification of tax minimizing strategies

There is a fine line between using the tax law to one’s advantage and illegally abusing the tax laws. Tax avoidance is defined as “[t]he use of legal methods to modify an individual's financial situation in order to lower the amount of income tax owed” (Forbes, 2008). Tax evasion, however, is “[a]n illegal practice where a person, organization or corporation intentionally avoids paying his/her/its true tax liability” (Forbes, 2008). Provided that the entities that operate in the global economy did not violate any laws, the use of tax minimization strategies is not illegal, including taking advantage of bilateral tax treaties; shifting operations, assets, or earnings abroad; and/or international arbitrage. For example, timing dividend distributions from a controlled foreign subsidiary to take advantage of the U.S. foreign tax credit (Reich, 2007) is legal.

Organizations and individuals must be careful to stay abreast of changes in tax laws to avoid being in a situation where the entity is not complying with tax laws (Bauman & Mantzke, 2004), as even inadvertent violations are deemed to be methods of tax evasion (Corley, Reed, Shedd, et al, 2002). For example, the U.K. proposed anti-arbitrage rules in an effort to prevent double dipping and to protect its tax base in 2005 (Haworth & Buchanan, 2005). Also important to note is the fact that the IRS provides information on what the U.S. government considers abusive international tax schemes and tax shelters. Staying abreast of potential regulations will help a company stay legal.

Even if an entity is following all applicable laws, the individual or corporation may not necessarily be acting in an ethical manner – at least according to U.S. standards. For example, the presence of tax treaties may entice domestic companies to conduct business overseas while preventing the transfer of assets, operations, or income overseas from occurring (Graetz & Oosterhuis, 2001), the treaties allow U.S. corporations to participate in international arbitrage (Haworth & Buchanan, 2005). While international arbitrage is legal, it is not equitable, as it takes advantage of another country’s tax laws for the sake of profit – forcing one country to forsake its tax base. Also, if a company decides to transfer its operations, assets, and income to a foreign subsidiary it costs U.S. employees jobs.

The biggest risks in minimizing international tax liability are not ethics related; rather they are related to the failure to keep up with tax laws in the countries that the entity does business in. Failure to comply with tax regulations – whether home country or host country – can result in fines, penalties and/or imprisonment. The bottom line: consult a tax professional familiar with international tax laws.

References

Bauman, C. C. & Mantzke, K. L. (2004). An education and enforcement approach to dealing with unscrupulous tax preparers. Journal of Legal tax Research, 2. Retrieved October 11, 2006 from Business Source Complete.

Beck, A. M. (October, 2002). Relief from international double taxation. The tax Adviser, 33(10). Retrieved June 5, 2008 from the Gale Power Search database.

Corley, R. N., Reed, O. L., Shedd, P. J. & Morehead, J. W. (2002). The Legal and Regulatory Environment of Business, 11th Ed. McGraw-Hill: New York

Encyclopedia of Small Business, 2nd Ed. (2002). Hillstrom & Hillstrom. Retrieved June 5, 2008 from the Gale Power Search database.

Forbes (2008). Tax avoidance. Investopedia. Retrieved June 5, 2008 from http://

www.investopedia.com/terms/t/tax_avoidance.asp

Forbes (2008). Tax evasion. Investopedia. Retrieved June 5, 2008 from http://

www.investopedia.com/terms/t/taxevasion.asp

Graetz, M. J. & Oosterhuis, P. W. (December, 2001). Structuring an exemption system for foreign income of U.S. corporations. National Tax Journal, 54 (4). Retrieved June 5, 2008 from the Gale Power Search database.

Haworth, D. & Buchanan, H. (May, 2005). Clamping down on international arbitrage. International Tax Review. Retrieved June 5, 2008 from the ProQuest database.

Horngren, C. T., Harrison, W. T., & Bamber, L. S. (2005). Accounting, 6th Ed. Pearson Education: Upper Saddle River, NJ.

Internal Revenue Service (2008). Instructions for Form 1120 U.S. corporate income tax return. Retrieved June 5, 2008 from http://www.irs.gov/pub/irs-pdf/i1120.pdf.

Internal Revenue Service (2008). 1040 instructions 2007. Retrieved June 5, 2008 from http://www.irs.gov/pub/irs-pdf/i1040.pdf.

Internal Revenue Service (February, 2008). The tax gap and international taxpayers. Retrieved June 5, 2008 from http://www.irs.gov/businesses/article/

0,,id=180215,00.html.

Internal Revenue Service (2008). 2007 Publication 17: your federal income tax for individuals. Retrieved June 5, 2008 from http://www.irs.gov/pub/irs-pdf/p17.pdf.

Pennsylvania Department of Revenue (2008). PA personal income tax guide. Retrieved June 5, 2008 from http://www.revenue.state.pa.us/revenue/lib/revenue/

pitguide_chapter_20.pdf.

Reich, Y. Z. (March, 2007). International arbitrage: transactions involving creditable taxes. Taxes, 85 (3). Retrieved June 5, 2008 from the ProQuest database.

Reuven, S. A. (Fall, 2005). All of a piece throughout: the four ages of U.S. international taxation. Virginia Tax Review, 25(2). Retrieved June 5, 2008 from the Gale Power Search database.

Turnier, W. J. (Summer, 2007). Theory meets reality: the case of the double tax on material capital. Virginia Tax Review, 27(1). Retrieved June 5, 2008 from the Gale Power Search database.

Wilkinson, B. & Fancher, M. M. (August, 2004). Eliminating ‘double taxation’: the dividend imputation alternative. (tax policy analysis)(Jobs and Growth Tax Relief Reconciliation Act 2003). The CPA Journal, 74 (8). Retrieved June 5, 2008 from the Gale Power Search database.

Information Technology Risk Issues Facing US Companies Seeking Global Expansion

2008-08-18T10:27:00.002-07:00

Rewards and risks surround any organization considering the notion of going global, and identifying the potential risks of expansion can be challenging. One area that is often overlooked is that of information technology (IT) risk (Goodwill, 2006). The purpose of this essay is to discuss how the explosion of information technology and the incredible advances in global communications pose significant risks to American global organizations as they expand in the international environment. This essay examines four areas of IT risk: ineffective or nonexistent IT risk management programs, supply chain fraud, technology risk associated with entering into a joint venture (JV) and foreign protectionism practices. Each issue is discussed, as well as potential solutions to mitigate risk.

Poor IT Risk Management Programs

Lack of (effective) established IT risk management programs, especially in the financial services sector, creates an inherent risk in that it exposes data that is supposed to be privy and confidential. Ernst & Young issued a report in February, 2008 indicating that 22 percent of companies surveyed with assets over $10 billion have no formal IT risk management program, and that more than 40 percent of executives (Curtis, 2008) “did not feel their firm was effective in risk reporting and disclosure, risk and issues management, and trend analysis” (Curtis, 2008, par. 2). The issue of IT risk management is overlooked, as most companies focus on political, economic, environmental and regulatory risks (Curtis, 2008).

Supply Chain Fraud

Supply chain fraud is an issue that is currently on the rise (Anonymous, 2008), especially among international shippers (Hoffman, 2008). According to the Federal Bureau of Investigation supply chain fraud is costing US shippers an estimated $15 billion to $30 billion annually (Hoffman, 2008). “Vulnerabilities for companies increase as they expand and globalize, add new information-technology systems, and as their supply chains become more extended and complex” (Anonymous, 2008, par. 2). Also, “[s]ince it is relatively cheap and easy to store information electronically, companies are holding on to data (and) information longer, which increases risks for fraud due to the increased volume" (Demichelis, cited in Hoffman, 2008, par. 2). Lastly, the supply chain is open to fraud “because of global growth and increased outsourcing, according to a recent Global Fraud Report released by Kroll, the New York-based risk consulting firm” (Yoo-chul, 2008, par. 3). Most of the incidents of fraud are considered to be carried on from the inside (Hoffman, 2008).

Joint Ventures

Entering into a JV is an inherently risky decision, as A JV, in essence, is a partnership between two or more entities. Partnerships do have a high degree of risk due to joint and several liability of the entity’s owners, which is why many international JVs fail (Borgonjon & Hoffman, 2008). “Nearly 30 years of experience has taught foreign investors that, when possible, it is better to go it alone” (Borgonjon & Hoffman, 2008, par. 3). This is not to say that JVs aren’t attractive in certain markets, though. The easiest way to enter the Chinese market and share in the rewards (i.e., increased profitability, higher market share, and exploitation of technology) is via JV (Collins, 2007; Borgonjon & Hoffman, 2008). The disadvantage to sharing technology is that existing intellectual property is difficult to protect once it is shared by the JV, especially in China (Collins, 2007).

Technological Protectionism

US firms attempting to expand into other areas of the world may encounter practices of protectionism, which are designed to restrict foreign trade (Gupta & Govindarajan, 2004). Protectionism of technology occurs when a country establishes its own unique technical standards for the purposes of shutting out foreign competition (China Post, 2008). This puts US based and other companies at an unfair disadvantage. “Many American companies have expressed concern about security standards for information technology products that made it costly for them to enter the Chinese market” (Padilla, cited in China Post, 2008). JapanChina is using this method of protectionism to provide its companies with a competitive advantage (China Post, 2008). attempted this practice in the 1980s, and it failed (China Post, 2008). Currently,

Combating IT Risk

In terms of IT risk management programs, it is important to first have an effective system of internal controls in place. An established, written system of checks and balances is a good start to mitigating risk (Robbins & Coultier, 2007), but it is not enough to have written policies and procedures. Internal controls must be carried through and enforced from the top down (Kinney, 2000), and management must refrain from overriding controls (Horngren, Harrison, & Bamber, 2006)

Also, the design of the IT Risk management system should be carefully considered.

The problem with many IT risk management programs that leads to their ineffectiveness is the fact that most large companies place risk in the various silos of the organization. Many international organizations are designed to have multiple lines of business, each with its own IT systems. Even though the processes from multiple silos overlap – due to common processes and services – there is no common, binding understanding and/or assessment of the IT risks involved in the organization as a whole. The need for convergence – or at minimum integrated risk management - exists (Curtis, 2008).

The problem with converging systems is the fact that most risk management solutions vendors and software packages are designed for specific aspects of the organization: there is no blanket package yet available to facilitate an integrated approach (Curtis, 2008; Goodwill, 2006). However, the push towards a more holistic approach to IT risk management is starting to be met by market demands:

“There is a movement toward automating the risk management process to make it lower in cost and more efficient… The tools supporting risk management are evolving and becoming more integrated. This is where we see opportunity, [in part] by implementing acommon risk language to roll up and report risk to an organization (Barrett, cited in Curtis, 2008, par. 16).

The holistic approach can be a viable solution to other areas of IT risk, such as supply chain fraud. “[S]hippers and service providers invest heavily in security guards, fences, access controls and locks” (Hoffman, 2008, par. 6), but a level of internal controls deemed adequate from a textbook approach is not enough to deter fraud. The human element is being ignored (Hoffman, 2008). Chains, locks, and a well-documented system of internal controls is sufficient to be in compliance with “Customs-Trade Partnership Against Terrorism and Transported Assets Protection Association security programs” (Hoffman, 2008, par. 7), but the controls will not prevent “a part-time warehouse worker

with temporary access codes who knows when the high-value cargo is leaving” (Hoffman, 2008, par. 7) from engaging in fraudulent activity.

“The lesson is that you really have to approach protecting your business and supply chain with a very holistic approach… There has to be some actual human element to try to beat those systems once you're compliant. There is no silver bullet (Hoffman, 2008, par. 8).

The holistic approach can also work well when deciding whether to do business in China, but it should be in used in conjunction with every effort to carefully and properly plan expansion. Any US company seeking to expand into the Chinese market should consider placing tight controls over the supply chain management, constantly monitoring and reviewing quality control programs, as well as finding the right company to do business with (Canning, 2008).

“U.S. companies looking to do business with China, therefore, would be wise to adopt the famous Boy Scout motto: ‘Be Prepared.’ Armed with the right information and resources, they will be able to reap financial and other rewards from relationships with respectable Chinese manufacturers. To ensure the highest quality and safety of the private label end products, Bi [sourcing specialist in China] recommends that companies thoroughly research the industry to identify highly qualified manufacturers. An expert who’s bilingual in English and Chinese is critical to this effort and should be involved from the very beginning. After the deal is authorized, the U.S. buyer should put someone in place to monitor the production on a continuous basis” (Canning, 2008, par 20-22).

Companies that do not have the resources necessary to effectively set up operations in China should seek a sourcing agent who can assist the U.S. organization in finding reputable companies to do business with (Canning, 2008). Much like finding the right business partner, employee, or investor, the U.S. company seeking to go into a JV with a Chinese firm should find someone who can be trusted. Despite China’s reputation, a perfect marriage in business can be attained (Cunningham, Cunningham, and Park, 2008).

Careful consideration should also be taken when dealing with China’s stance on technological protectionism. When faced with this issue, U.S. companies wishing to do business with the Chinese have three options:

Invest the necessary resources to effectively enter the Chinese market.

Postpone the decision to do business in China until the short-term effects of protectionism are short lived.

Consider entering into another country.

Summary

This essay discusses how the explosion of information technology and the incredible advances in global communications pose significant risks to American global organizations as they expand in the international environment by examining four areas of IT risk: ineffective or nonexistent IT risk management programs, supply chain fraud, technology risk associated with entering into a joint venture (JV) and foreign protectionism practices. Textbook solutions and hasty decisions are not adequate to hedge IT-related risks. Rather, careful planning and a holistic approach are favored.

Anonymous (May 12, 208). Report: supply chains are at greater risk for fraud. Shipping Digest, 85 (4446). Retrieved May 24, 2008 from the EBSCOHost database.

Canning, K. (April, 2008). Risky business. Private Label Buyer, 24 (11). Retrieved May 24, 2008 from the EBSCOHost database.

China Post. (May 10, 2008). U.S. warns China of technological isolation. China Post. Retrieved May 24, 2008 from the EBSCOHost database.

Collins, M. (December, 2007). Outsourcing: the good, the bad, and the ugly. Industrial Maintenance & Plant Operation, 68(12). Retrieved March 3, 2008 from the EBSCOhost database.

Cunningham, M. G., Cunningham, D. B. & Park, D. (March 2008). Reflections on doing business in China: a case study. International Journal of Management, 25 (1). Retrieved May 24, 2008 from the EBSCOHost database.

Curtis, C. E. (March 17, 2008). Emphasis on IT risk management driving new solutions. Securities Industries News, 20(11). Retrieved May 24, 2008 from the EBSCOHost database.

Goodwill, B. May 16, 2006). Get IT integrated for risk management, bosses told. Computer Weekly, 00104787. Retrieved May 24, 2008 from the EBSCOHost database.

Grosse, R. E. (2000). Thunderbird on global business strategy. New York: John Wiley & Sons.

Gupta, A. K., & Govindarajan, V. (2004). Global Strategy and Organization. New York: John Wiley & Sons.

Hoffman, W. (May 12, 2008). Fighting supply chain fraud. Traffic World, 272 (19). Retrieved May 24, 2008 from the EBSCOHost database.

Horngren, C. T., Harrison, W, & Bamber, L. Accounting. Upper Saddle River, NJ: Prentice Hall, 2006.

Kinney. W. R. Information Quality Assurance and Internal Control for Management Decision Making. New York: McGraw-Hill, 2000.

Koremans, S. (October 19, 2007). Outsourcing: how to make it work. B&T Weekly, 57(2633). Retrieved March 3, 2008 from the EBSCOhost database.

Robbins, S.P. & Coulter (2007). Management, (9^th ed.). Pearson: Upper Saddle River, NJ.

Schultz, R. A. (2006). Contemporary issues in ethics and information technology. Hershey, PA: Idea Group, Inc.

Yoo-chul, K. (May 5, 2008). Supply chain fraud top concern for firms. World News Connection. Retrieved May 24, 2008 from the EBSCOHost database.

Are American Female Executives a Risk Factor in the Global Economy?

2008-08-18T10:27:00.001-07:00

In order for an organization to effectively manage risk, executive management must examine all potential factors that may have an impact on its ability to achieve goals, satisfy shareholders, and – among other aspects – maintain a positive perceived image among its supply chain. One of the pivotal areas of interest and risk is the manner with which American global organizations perceive their female executives in global roles. In an increasingly-interlinked world, organizational/employee constituencies will be made up of female executives, especially within management cadres (given the numerical growth of women in the domestic workforce). The purpose of this paper is to address the possible issues inherent in this shift. More specifically, the risk of assigning female staff persons to pivotal roles in an organization’s global effort and where exactly the female executive fits in the global endeavor, considering that sometimes perceptions found in the global environment may pose risk to the potential success of an organization, will be discussed. First, the issue of risk management is presented and areas of risk management are discussed, followed by a presentation of potential risks associated with female executives in the global business world. In addition, the person(s) who might be in the organization’s charge becomes extraordinarily important and redolent with risk will be identified. Finally, an assessment on the risks of placing female executives in global companies and the issue of organizational fit, as described above, will be presented.

A risk management assessment from a global approach should be taken from more angles than a U.S. organization that operates solely on a domestic level. First, a company that conducts its business on a domestic level can obtain its information easier than one that wishes to expand its operations into new soil. For example, should a local firm decide to expand its operations into different areas of the Commonwealth of Pennsylvania the management of the company would already be familiar with the laws and regulations of the Commonwealth, so the task is less daunting. Much more research is needed prior to entry into the global market. A company wishing to expand its operations into a different domestic region may not need to be as concerned with establishing relationships with the region’s existing business leaders, members of local communities, and government officials as a firm would if it were to expand globally to alleviate concerns of the region (Gupta & Govindarajan, 2004). Companies wanting to enter the global market must launch a public relations campaign to help gain the foreign public’s trust and respect while maintaining relations with the local communities and government. Opting-in to create a global posture is not always the best strategy. The culture of the foreign region, people, and business and political leaders whom management will form a relationship with may advise otherwise. The inclusion of female executives into the mix of management may also yield a potential risk.

One of the pivotal areas of interest and risk is the manner with which American global organizations perceive their female executives in global roles. American, as well as British, firms find women executives to be an asset in the global economy, especially in terms of preaching diversity (Streel & White, 2003). Cultural differences between the two nations may indicate potential risk factors, though. American women executives and those trying to climb the corporate ladder tend to have more ambition than those from the U.K. and can be perceived as overbearing – or manly – in some cultures (Emling, 2004). In some countries, the inability for a woman – regardless of beaurocratic level – to act feminine may indeed be a risk factor one not considered by American women. The perception of sending a woman to do a man’s job may seem offensive to foreign executives, although female managers and executives are commonly accepted in the U.S. In short, foreign executives may not feel comfortable dealing with women while conducting business (Fingar, 2001). “Europe is not… ready to embrace the unconflicted businesswoman. A survey of European directors shows that stereotypes of women's abilities and a lack of female role models are among the top barriers to advancement.” (Foroohar & Radcliffe, 2003, par. 11).

Domestic companies have taken strides in breaking the glass ceiling in the United States, but the global business world is still perceived to be a man’s world (Fingar, 2001). U.S. companies are giving women opportunities they may not have otherwise had 50 years ago, as indicated by a study conducted by “Catalyst, a New York-based research firm that studies workplace issues that affect women” (Fingar, 2001, par. 2), noting that “women now represent nearly half of the U.S. managerial labor pool” (Fingar, 2001, par. 3). U.S. companies are still cautious about sending women overseas due to the global perception that the international business world is still a man’s world. Women are willing to take on global assignments, but the apparent risks associated with sending women and lack of acceptance in the global business community need to be addressed. Currently, the risk containment strategy used by domestic organizations is to keep women moving up the corporate ladder in the U.S. and limiting their exposure abroad. This tactic, however, has a major drawback: more large companies are requiring that executive and high level management positions be filled with people who have some global experience (Fingar, 2001). Failure to provide women the opportunity to participate in the global environment can lead to backlash, leaving existing corporate directors and executives in a quandary.

Acceptance and American attitude in the foreign board room, particularly with women executives, are the result of perception and cultural differences. In parts of the world, where women are not accepted in leadership, such as the Middle East, sending a female executive to conduct business may give the domestic company the perception that it is weak or not serious about doing business. The culture and government of the United States have taken great strides in giving women the opportunity to be placed in leadership roles and break into the global economy. The rest of the world, however, may not be as ready. Even though companies in the U.K., New Zealand, Germany, and other countries are bringing women into the boardroom, they are still far behind the times when compared to U.S. companies (Jellnek & Adler, 1988; Fingar, 2001; & Emiling, 2004).

Risk containment by allowing only a small percentage of women in foreign board rooms is not a permanent solution. The problem lies in how the global business environment can be changed to accept women as equals. Organizations in developed countries have either implemented or are in the process of implementing programs to train women to become global executives (Fingar, 2001), but these training programs do not solve the issue of fostering an environment where women can succeed in every corner of the world: cultural barriers will remain. Breaking down these glass walls is a daunting task and leads to additional questions:

Should existing executives take a more proactive role in changing the attitudes and/or perceptions of individuals in lesser developed countries to accept women executives in the board room?

Would government intervention via international relations tools, tariffs, and incentives create a more level playing field?

Should domestic companies soften women executives to become more accepted in foreign board rooms?

Is the only solution to be patient and allow ample time for other countries’ cultures to become more tolerant and acceptable of women leaders?

The answers to these questions on how the environment should be changed and who should be responsible for making changes are outside the scope of this report and may become considered as the bases for additional studies. This report aimed to examine the possible issues inherent in bringing female executives to the forefront of international business. The risk of assigning female staff persons to pivotal roles in an organization’s global effort and where exactly the female executive fits in the global endeavor, considering that sometimes perceptions found in the global environment may pose risk to the potential success of an organization, were discussed. First, the issue of risk management was presented and areas of risk management were discussed, followed by a presentation of potential risks associated with female executives in the global business world. It was noted that acceptance and American attitude in the foreign board room, particularly with women executives, are the result of perception and cultural differences and that the only solution provided by American companies for risk containment is to limit the number of women executives overseas. The global environment needs to change before more women executives can be brought onto the international scene.

References

De Streel, M. & White, E. (2003, May 7). Burberry CEO delivers an encore to top list of women executives. The Wall Street Journal. Retrieved May 13, 2008 from http://www.marcusventures.com/press/wsjwomen.htm.

Fingar, C. (2001, January). Stay-at-home careers? Export Today''s Global Business, 17(1), 62.

Foroohar, R. & Radcliffe, L. (2003, November 17). Unless you're queen. Newsweek, 142(20), E28.

Gupta, A. K., & Govindarajan, V. (2004). Global Strategy and Organization. New York: John Wiley & Sons.

Jellnek, M. & Adler, N. J. (1988, February). Women: World-class managers for global competition. Academy of Management Executive, 2(1), 11.

How Ethics and the U.S. Government Increase Global Risk for American Companies

2008-08-18T10:26:00.000-07:00

Much like a small business expanding its operations, a domestic organization seeking to enter the global market should be aware of the risks associated with spreading out into different corners of the world. A thorough analysis of the financial, market, political, and other risks should be conducted before deciding to enter the global arena (Gupta & Govindarajan, 2004). When conducting a risk assessment, the issue of ethics should be examined, as ethical differences between cultures and the decision to enter the global market can lead to ethical implications. The purpose of this paper is to analyze how ethics (or lack thereof) creates significant risk for American global business endeavors. More specifically, this essay focuses on the risks American businesses face by outsourcing manufacturing to Southeast Asia and attempting to enter into contracts where bribery is an accepted form of practice. Each of these trends is discussed in detail, followed by an assessment on the risks a U.S. company may face by choosing to participate in the global economy in these manners. A discussion on how the existing U.S. federal legal and regulatory environment contributes to increasing the risks that domestic firms face when attempting to enter the global arena is also presented.

Outsourcing manufacturing to Southeast Asia

In an effort to increase profitability, U.S. firms are outsourcing their manufacturing operations to companies in Asia, where manufacturing costs are significantly lower than in the United States (Schwartz & Gibb, 1999). The latest major U.S. manufacture to announce plans to outsource manufacturing to the Pacific region is Pfizer, Inc., which plans to outsource up to 30% of its production (Associated Press, 2007). Other U.S. based companies that have already decided to outsource their manufacturing to Southeast Asian firms have seen the benefits of doing so, including Mattel, Nike, and Philips (Knight Ridder, 2006).

Aside from cost savings and improving the bottom line, outsourcing blue collar jobs can also allow a company to operate around the clock without incurring overtime costs (Koremans, 2007). Outsourcing to foreign countries has its list of disadvantages as well. Approximately 50% of outsourcing operations are estimated to fall below expectations (Collins, 2007). There are also “branding, regulatory, social, geopolitical, human capital and legal risks that companies may not anticipate” (Collins, 2007, par. 7) which can end up costing the organization greatly (Collins, 2007). American companies can also face problems defending intellectual property rights once they enter the Asian arena:

“Intellectual property is a big issue when dealing with China and in the Asian Pacific region in general. Copying, reverse engineering and even counterfeiting products is not an unusual business practice in these countries. It is now obvious to most U.S. companies that the Asian view of business ethics is much different than the U.S. view of business ethics. Even a signed contract may be no protection (Collins, 2007, par. 8).

Lastly, there is the issue of poor quality. In 2007, China was subject to embarrassment, and companies who rely on Chinese manufacturers began to see the financial risk of relying on substandard quality. News about lethal petfood, lead paint in children’s toys and poor quality tires gave China a bad reputation (Hilton, 2008), which lead to a fall in consumer confidence with companies who did not manufacture their toys within the country.

The use of bribery to land contracts.

Outsourcing manufacturing is just one way a company can break into the global economy. Organizations specializing in engineering, consulting, or construction find themselves biding on overseas projects. U.S. firms engaging in this activity are not as successful as those in other countries due to existing regulations, primarily the Foreign Corrupt Practices Act (FCPA) which makes it illegal for a U.S. firm doing business outside of the United States to use any form of bribery to influence business.

“Bribery alone is causing U.S. firms to lose billions of dollars in overseas contracts. Since 1994, the U.S. government has learned of almost 100 cases of foreign firms using bribery to undercut U.S. firms' efforts to win international contracts worth about $45 billion. The foreign firms that offer bribes typically win about 80 percent of the deals” (Anonymous, 1996, par. 4).

Inability to bribe due to the constraints of the FCPA makes it difficult to compete with other countries where bribery is not only accepted, it is also an allowable expense on the foreign firms’ financial statements (Anonymous, 1996). This leaves U.S. firms at a disadvantage in terms of auditing standards. Should a domestic company decide to engage in such practices it would be required to report the activity in its financial statements, either on the income statement or as a supplemental note to the financial statements, as required under the disclosure principal (Horngren, Harrison, & Bamber, 2006).

Other countries bidding for these projects employ aggressive tactics to attract foreign business and contracts. For example, France

”uses government lobbying--such as phone calls, letters, and high-level visits--as well as generous Financing packages and trade shows to win market share in foreign countries. The French promote exports in all of the major growth sectors, especially high-technology projects such as high-speed trains, nuclear power plants, and telecommunications” (Anonymous, 1996, par. 6).

“United Kingdom… uses high-level visits more frequently than any other rival… Approximately one-fifth of British diplomats abroad are engaged full-time in commercial work, and London is expanding the provision of favorable financing through its Export Credit Guarantee division. The United Kingdom has also developed strategic initiatives that target geographic areas, including its "North America Now," "Priority Japan," and "Know-How Fund" (focusing on Central Europe) programs” (Anonymous, 1996, par. 7)

Germany also uses the tactic of frequent high-level visits (Anonymous, 1996) “with particular emphasis on infrastructure and machinery. Economic Minister Rexrodt stated that promoting exports will be at "the very top of the priority list" of the German government and that all politicians must actively support German enterprises in expanding their markets” (Anonymous, 1996, par. 8).

While a firm is not expected to earn every contract bid upon, a 20% success rate among all U.S. based companies is low, indicating that the risks involved in bidding are high in terms of the time and effort spent developing blueprints and the actual bid itself. The risk of failure to obtain the bid and the risk of loss of time and money invested in preparing the contract are high.

Existing legislative environment

The U.S. federal government has played an active role in encouraging major domestic corporations to enter the global economy, specifically countries that practice protectionism, by way of trade agreements (Gupta & Govindarajan, 2004) and tax incentives (anonymous, 2000). At the same time, the federal government failed to enact its own level of protectionisms to protect its people and American jobs. Faulty tires, lethal dogfood, and lead-tainted toys have been allowed to enter the country in support of global trade and for the sake of lowering a trade deficit. Business ethics between U.S. firms and those in developing countries are often not on the same level, and, while most U.S. companies have taken matters into their own hands, there are still a number of companies that continue to allow harmful, defective products to reach into the hands of the American consumer. When U.S. businesses fail to push for ethics reform, it then becomes the responsibility of the federal government to enact appropriate regulation. Lack of appropriate government involvement in this matter has been a contributing factor. The U.S.U.S. companies to compete more effectively in the global marketplace. Lastly, the U.S. government failed to create its own laws of protectionism to deal with a growing base of displaced American workers. government is also a contributing factor to the failure of domestic firms’ bidding by enforcing the FCPA and not amending it to allow

Summary

The purpose of this paper was to analyze how ethics (or lack thereof) creates significant risk for American global business endeavors. More specifically, this essay focused on the risks American businesses face by outsourcing manufacturing to Southeast Asia and attempting to enter into contracts where bribery is an accepted form of practice.

U.S. companies who wish to take advantage of lower manufacturing costs in Southeast Asia as well as other parts of the world must be aware that there are risks involved that may outweigh the improved bottom line. There are socio-political regulatory, and geographic, factors to consider. Also, as with any decision to outsource, the issue of controlling quality of the product must be considered. As was witnessed in the fall of 2007, consumer confidence fell with companies who outsourced their manufacturing operations to China and brought back substandard products. Organizations bidding on overseas projects step onto an uneven playing field. They cannot compete effectively due to the FCPA, which prohibits bribery.

The U.S. federal government failed to enact its own doctrine of protectionism to safeguard its people and American jobs and repeatedly failed to appropriately regulate domestic companies doing business overseas. The U.S. government is also a contributing factor to the failure of domestic firms’ bidding by enforcing the FCPA and not amending it to allow U.S. companies to compete more effectively in the global marketplace. Perhaps changing regulations to punish corporations that are doing the wrong thing may enforce companies to employ a standardized level of conduct across their respective corners of the globe.
References

Anonymous. (1996, October). Foreign practices. Across the Board, 33(9), 11-12.

Anonymous. (2000, December 16). Finance and economics: Going too far in support of trade. The Economist, 357(8201), 88.

Associated Press (December 1, 2007). Pfizer considers outsourcing manufacturing to Asia. The Grand Rapids Press. Retrieved March 3, 2008 from the ProQuest database.

Collins, M. (December, 2007). Outsourcing: the good, the bad, and the ugly. Industrial Maintenance & Plant Operation, 68(12). Retrieved March 3, 2008 from the EBSCOhost database.

Gibb, B., & Schwartz, P. (1999). When good companies do bad things: Responsibility & risk in an age of globalization. New York: John Wiley & Sons.

Gupta, A. K., & Govindarajan, V. (2004). Global Strategy and Organization. New York: John Wiley & Sons.

Hilton, I. (February, 2008). When bad news is good news. Ecologist, 38(1). Retrieved March 3, 2008 from the EBSCOhost database.

Horngren, C. T., Harrison, W, & Bamber, L. Accounting. Upper Saddle River, NJ: Prentice Hall, 2006.

Knight Ridder (September 18, 2006). Philips to consolidate HQ in NCR by ’08. Knight Ridder Tribune Business News. Retrieved March 3, 2008 from the ProQuest database.

Koremans, S. (October 19, 2007). Outsourcing: how to make it work. B&T Weekly, 57(2633). Retrieved March 3, 2008 from the EBSCOhost database.

Nike - just do it?

2008-08-18T10:22:00.000-07:00

Swiderski & Associates, LLC is a small accounting firm consisting of five professionals from northeastern Pennsylvania. Its owner, Paul Swiderski (hereinafter referred to as the “subject”), considers himself to be an ethical leader and stresses making ethical decisions within the enterprise. In a previous report, the subject’s personal approach to a business ethical decision was transformed into an ethical leadership decision making plan/model from which his employees can draw upon when faced with a business ethics issue.

The purpose of this essay is to apply this model to a current global business situation. More specifically, this report examines the ethical decision making process as it applies to Nike’s child labor practices in Southeast Asia. First, the issue of Nike’s child labor practices is discussed, followed by an application of the ethical decision making process to analyze and make recommendations for leadership action.

About Nike

“Nike is the largest seller of athletic footwear and apparel in the world. The company is primarily engaged in the design, development, and worldwide marketing of footwear, apparel, equipment, and accessories. The company operates in the US, Europe, Asia Pacific, the Middle East and Africa. It is headquartered in Beaverton, Oregon” (Marketline, 2007, par. 1). In 1996, Nike was accused of allowing unfair labor practices in Southeast Asia, including the employment of unethical child labor practices (Jenkins, 2003). More information is presented in the following sections.

Child Labor Practices in Southeast Asia

In the 1990’s, activist groups and charities focused their attention on unfair labor practices in Southeast Asia, including child labor violations (Jenkins, 2003, Zadek, 2004). These groups targeted Nike because of its high-profile brand, not because its business practices were any worse than its competitors' “(Zadek, 2004, par. 16). Nike’s initial reaction was to counter “with public statements showing that it required all contractors to sign, abide by and document compliance with a Memorandum of Understanding that commits its contractors to follow all local laws about wages, benefits, child labor, equal opportunity, working conditions, etc.” (Jenkins, 2003, par. 9).

When Nike’s initial attempts to counter public statements with their own failed, the company hired firms to conduct independent investigations into the issue. However, the firms retained by Nike were either unqualified or lacked appropriate credibility (Jenkins, 2003, Zadek, 2004). “In 1997, the company asked Andrew Young, a U.S. civil rights leader and former United Nations ambassador, to carry out an independent audit of Nike contractors' labor practices. Young examined 12 factories and reported favorably for Nike, finding no evidence of widespread abuse or mistreatment, but did comment that Nike could do better” (Jenkins, 2003, par. 10). Pressure from activist groups continued (Jenkins, 2003, Zadek, 2004).

Finally, Nike became proactive in this matter by “creating its first department specifically responsible for managing its supply chain partners' compliance with labor standards. And in 1998, Nike established a Corporate Responsibility department, acknowledging that acting responsibly was far more than just reaching compliance; it was an aspect of the business that had to be managed like any other”(Zadek, 2004, par. 17).

Business Discipline

There are two dominant disciplines involved in this case: corporate social responsibility, and supply chain management. Both are intermingled in with international business theories.

Decisions to Be Made

Nike had to make a clear decision to alleviate pressure from activist groups. When public statements and appeasement (by way of independent investigations) fail, Nike’s executives were required to think of a different way to truly solve the issue from a long-term perspective.

International Regulations

This case deals with child labor; however, no standardized international code of child labor laws exists. Nike would have to resort to complying with the labor laws of the individual foreign countries in which it operates and/or supply chain members reside.

Potential Issues Involving Disparate Legal Systems and Practices

The following questions/issues arise:

Can a company establish and enforce policies on supply chain members?

Should the company use the host country’s or supply chain member’s, or develop a higher, standardized policy for all supply chain members to follow?

Application of Critical Thinking Approach

Revised business ethics decision model for Swiderski & Associates, LLC

I.	Gather the facts and determine what the issue is. Ask questions if necessary.
II.	Identify all possible solutions to the issue/problem.
III.	Examine each solution and identify:
	A.	Applicable laws/regulations, if any
	B.	Interpretation of existing laws/regulations, if identified in A, above
	C.	Legal reasoning
	D.	Legal ramifications, if any
	E.	Consistency in application
	F.	Appropriateness
	G.	Long-term ramifications for client and firm
	H.	Ethical norms
	I.	Advantages
	J.	Disadvantages
	K.	Audit Risk
IV.	Select solutions and discuss options with client.

The predominant issue, based on the facts presented, is that Nike’s supply chain members violated child labor laws. As a result of these findings, activist groups and non-profit organizations pressured Nike to make changes by using the press as their medium. In such cases, there are three solutions: ignore the issue (or do little outside issue press releases); hire independent investigators to validate data; or engage leadership to take a proactive approach in dealing with the issue. The first two options have proven to fail, while the third option lead to more positive results for the company over the long-run.

References

Jenkins, A. (April/May, 2003). What would you do. Communication World, 20(3). Retrieved September 5, 1007 from the EBSCOHost database.

Marketline (2007). Nike [company information]. Retrieved September 5, 2007 from the Marketline database.

Zadek, S. (December, 2004). The Path to Corporate Responsibility. Harvard Business Review, 82(2). Retrieved September 5, 1007 from the EBSCOHost database.

Organization Behavior Analysis of an Acquisition

2008-08-18T10:21:00.000-07:00

In this essay, the organizational behavior (OB) strategy related to the buyout of Adelphia Communications Corporation is examined. Included in the discussion is the evaluation of the overall organizational design approach, an assessment of the short and long term effectiveness of the design strategy, the anticipated internal and external environmental, political, sociological, psychological, and fiscal changes (positive and negative), and the anticipated impact of change on the business’ organizational behavior and structure. Recommendations for a future business of this nature will also be made.

Company Background

Adelphia Communications Corporation, founded in 1952, provides a variety of services under the umbrella of telecommunications, including cable television, high speed Internet, and media services, to over 5 million customers in over 30 states and Puerto Rico. Adelphia filed for Chapter 11 bankruptcy protection in 2002, after it became known that “John Rigas and his family [then majority shareholders]… fraudulently used the company's funds for personal loans, manipulated financial figures to conform with analysts' expectations, funded non-corporate projects using Adelphia's line-of-credit for personal purchases, creation of fictitious companies and sham transactions for inflating the company's earnings and concealed increasing debts” (Adelphia Communications Corporation, 2006, par 34). The organization filed five restructuring plans with the bankruptcy court, with its most recent amendment in August, 2006 (Adelphia Files Fifth Amended Plan of Reorganization and Related Disclosure Statement Supplement, 2006). On July 31, 2006, the entity announced that it closed a deal on July 31, 2006 with Comcast and Time Warner Cable (Adelphia Closes Asset Sale to Time Warner Cable and Comcast, 2006) to sell its assets for $12.7 billion (Adelphia Communications Corporation, 2006, par. 16).

Organizational behavior strategy evaluation

Current OB strategy

Now that the acquisition deal is closed, and Adelphia has been sold to Time Warner Cable and Comcast, the post-transactional transition begins. Much needs to be thought of during this period of time, including infrastructure, technology integration, and the decision as to whether retain Adelphia employees. To ease the transition from the closing of the deal to actual implementation of the buyout, teams were established by representatives of each involved party.

It is estimated that close to 13,000 Adelphia employees will be transferred to the buying companies (Adelphia Closes Asset Sale to Time Warner Cable and Comcast, 2006). No specifics can be found as to which jobs or job types will be sustained. The former Adelphia employees will need to be introduced to a new way of doing things, and it is presumed that Time Warner Cable and Comcast will conduct some form of orientation for the newly acquired human resources.

Strategy Assessment

Organizational Design

Being in the same industry, the buyers and the seller have similar organizational structures. The current organizational design for both Time Warner Cable and Comcast is that of a traditional bureaucracy as defined by Weber, comprised of executive leadership who fill well defined roles (cmcsk.com). The same can be said of the former Adelphia. Weber spoke about a rational-legal authority, and positions based upon merit of individuals; thus, Weber clearly distinguished a separation between the person, who may enter and leave a position, versus the position, who’s function remains in the bureaucracy (Jones, G. R., 2004). Because the companies are structured similar to each other, the transition from Adelphia to the buying companies’ structures should be relatively smooth as far as becoming accustomed to the human resource infrastructure, with the only short-term setback being the orientation of the former Adelphia employees to new policies and procedures. Upon successful hurdle of the learning curve, these employees should become accustomed to the changes and new environment. At the same time, though, management of the acquiring companies must work on maintaining a satisfactory level of retention among the Adelphia employees, as job security becomes a lingering thought among newly acquired employees.

The key difference between Adelphia and its acquirers is that the latter never entered the Voice Over IP telephone service market, which proved to be profitable for Comcast and Time Warner (Adelphia Buyout Boosts Cable in Bundling War with Satellite and Telcos; Acquisition Will Spur Cable VOIP Availability and Adoption, 2006). This could pose training challenges for the former Adelphia employees in the areas of training and technical competency. A successful training program, through mentoring and/or formal training, should ensure a knowledgeable staff among former Adelphia employees over the long run.

One key area to examine is that of the customer service personnel and technical training personnel, as the former Adelphia had a “poor record for retaining customers” (Adelphia Buyout Boosts Cable in Bundling War with Satellite and Telcos; Acquisition Will Spur Cable VOIP Availability and Adoption, 2006, par. 1). The length of time it takes for Adelphia emploees to improve on their retention is dependent on several factors, including the strength of the training programs and leadership capabilities of Comcast and Time Warner Cable, willingness of Adelphia employees to embrace change, and successful infusion of organizational philosophies.

Anticipated Changes in OB and Structure

The obvious change in the organizational structure of Adelphia deals with the fact that when transition is complete, the company will no longer exist. The structure of the company will transform from a traditional bureaucracy to nonexistence. Those human resources which will be transferred to Comcast or Time Warner Cable will still be employed, but by a different firm with similar organizational structure. Typical changes in employees when faced with an acquisition include job security and motivation.

Job security

Job security refers to being able to work within an organization for an indefinite period without worrying about being terminated. When some organizations are acquired, fewer positions are made available. Also some positions within the organization will be duplicated and many positions may be eliminated. This may cause various departments to downsize, in which employees may be moved around to other areas or possibly laid off of their jobs. The futures of the employees may become uncertain and many employees will become scared.

Motivation

Reinforcement theory argues that “reinforcement conditions behavior… Significant research indicates that people will exert more effort on tasks that are reinforced than on tasks that are not. Reinforcement is undoubtedly an important influence on work behavior. What people do on their jobs and the amount of effort they allocate to various tasks are affected by the consequences of their behavior” (Robbins, 2000, 115). By positively reinforcing model behavior and negatively reinforcing inappropriate workplace behavior through the use of feedback and other tools, managers can mold employees to increase performance, efficiency, and raise production. In order to improve on one’s performance, an individual must know where the areas of improvement lie. Robbins suggests that “[t]oo much information as well as too little can lay the foundation for conflict” (2000, p. 265) Hence, it is management’s responsibility to determine how much feedback is to be provided and whether to provide less feedback to those who wish to receive less. Alternately, management may wish to find out what other motivations theories may assist in motivating these two employees so as to not disturb the status quo, especially if the potential for conflict is considered high.

The Equity theory states “that employees weigh what they put into a job situation (input) against what they get from it (outcome) and then compare their input-outcome ratio with the input-outcome ratio of relevant others. If they perceive their ratio to be equal to that of the relevant others with whom they compare themselves, a state of equity is said to exist. They feel that their situation is fair, that justice prevails. If the ratios are unequal, inequity exists; that is, the employees tend to view themselves as under-rewarded or over-rewarded. When inequities occur, employees will attempt to correct them” (Robbins, 2000, p. 116).

The inequities can also be referred to as tension. The tension that is created usually affects employees in a number of ways. The under-rewarded employee has two options. First, their efforts may decrease resulting in lower productivity or poorer quality of out put, because they feel that they are not being paid adequately for the work they do. Secondly, the under-rewarded employee may produce a higher quantity of output, because they want to increase their equity or input. The latter statement is most important to this research. Although the under-rewarded employee is being paid less than his colleague for doing the same job, the tension that exists will make the employee change his work habits, thus motivating him to perform and possibly increasing his output. The same principle holds true for the over-rewarded employee. The over-rewarded employee will increase their output to justify the input side of the equation. This employee is motivated by the positive tension created by his inflated salary, thus the employee does not want to jeopardize losing his job or any portion of his salary, so he will consistently perform at a higher level of production. There are some unanswered questions in the equity theory, but researchers have proven that this theory has been used to motivate employees.

In the 1960’s, Victor Vroom developed the expectancy theory of motivation. It refers to the “the strength of a tendency to act in a certain way depends on the strength of an expectation that the act will be followed by a given outcome” and depending on how appealing the outcome is to the individual (Robbins, 2001). There are three variables of the expectancy theory. The possible reward that can be gained on the job is significant to the employee. This is known as attractiveness. Performance-reward linkage is the belief that performing on a certain level will allow the employee to gain a desirable outcome. When the employee believes that the more effort put forth leads to performance, this is referred as effort-performance linkage. According to Richard Scholl, a professor at the University of Rhode Island, there are three additional variables that affect the expectancy perception, self-efficacy, goal difficulty, and perceived control over performance (2002). Self-efficacy is the employee’s belief regarding his or her skills and goals required to perform in a satisfactory manner. In situations where the employee believes goals are set too high and the performance level is too difficult, expectancy perceptions and motivation become low. This is goal difficulty within an organization. Under the “perceived control over performance” theory, expectancy is high when the employee thinks they have some type of control over the outcome. If the employee perceives that he or she cannot control a given situation, motivation is low.

As management informs employees of their progress while working on a task within an organization, many become motivated if the progress is positive. If the progress is negative, it gives the employee a chance to discuss the situation with management and make an effort to improve before the task is complete. Scholl suggests that these types of individuals believe that they have control over the outcome; therefore expectancy is high within the organization. But when employees feel they have not control of the outcome of a situation, expectancy and motivation is low (2001).

In terms of this acquisition, it is important to note that Adelphia employees who do not receive enough communication, too much communication, or feel substandard when compared to Time Warner or Comcast employees may be less motivated in their new work environments.

Additional Analysis

Several questions remain including:

Did the organization conduct appropriate research in developing its organizational behavior strategy?

Did the organization effectively analyze environmental impacts?

At the time this essay was written, no data could be found to answer these questions. However, one can assume, based on the analysis written by Strategy Analytics, Inc. that the acquisition was well thought out and carefully planned by all three parties. Time will be a determining factor in determining the effectiveness of the acquiring companies’ research.

Implications and Recommendations for Further Analysis

As of the time that this essay was written, the acquisition has closed and the post-transactional phase of implementation began. Therefore, an analysis of the post-implementation period could not be conducted.

Upon successful transition, additional research should be conducted to determine the OBOB theory should be applied to determine if any theories will be applicable, whether they were properly incorporated, and whether theories were omitted. Second, an analysis should be conducted to determine how the use (or misuse) of design strategy and OB principles affected the implementation. Finally, an objective analysis should be conducted to determine whether any of the arguments and theories presented herein appear to be supported upon the outcome of the transition.
References and design implications of the buyout. First, Swiderski’s taxonomy of

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A Historical Perspective on Leadership

2008-08-18T10:14:00.000-07:00

When a discussion on business leadership arises, people generally tend to think of CEOs of large multi-million dollar companies who have transformed an organization be either taking it to the next level or dramatically saving it from the clutches of near extinction. Textbooks make mention of the great accomplishments of leaders such as Sam Walton (founder of Wal-Mart), Tom Watson (known in the 1980’s for developing the IBM image of success), and Jack Welch (who’s innovative leadership broke the confines of beaurocracy and transformed GE) (Tichy & Cohen, 2003), but fail to discuss the importance of leadership for small business. Little, if any, application of leadership models for the management and growth of a small business is provided in such texts.

The underlying intent of this essay is to research and find leadership models that, either in whole or in part, can be used for the benefit of small business development. Applicable models will be used as a guide for future dissertation research to determine whether they are being currently taught in entrepreneurial programs. Leadership models from the pre-classical, classical, modernism, and post-modernism eras are examined, and it is the purpose of this essay to compare and contrast the models presented herein. The leadership models are introduced via an historical perspective to illustrate how they were developed and their effectiveness for their originating timeframe. Then, they will be compared and contrasted, at which time relationship among models and their respective points of convergence and/or divergence will be discussed. Finally, the more resonant theories will be assessed for their application to today’s small business environment.

Pre-classical Era

In early civilizations, there was no real distinction between leadership and management.

Initially, early man lived with one’s family, and the individuals rested in the authority of either a matriarch or a patriarch. Eventually, man’s group association evolved from a family to a national level, where people relied on their ruler, or king, for authority (Wren, 2005).

It is in this time frame where the autocratic leadership model has its roots. Autocratic leadership, as defined by Weiskittel (1995) “involves the use of commands and expected compliance. The leader is dogmatic and uses power to give or withhold rewards and punishment” (par. 2), which was much in line with the legalist philosophy in ancient China (Wren, 2005).

Not all individuals in the pre-classical era believed that the autocratic system was the best method of leadership, however. Marinoff (2004) argues that:

[T]he three most influential philosophers of the ancient world -- Aristotle, Buddha and Confucius -- taught the ABCs of virtue ethics. Together, they laid the foundation not only for identifying "best practices" of leadership and governance, but also for applying these practices to the daily lives of individuals and organizations” (par. 16).

Aristotle believed that the exercise of any virtue is through the use of reason to solve problems by finding middle ground. Buddha believed that passion can be channeled for the benefit of the greater good. Confucius believed in harmony and (Marinoff, 2004) and “advocated cultivating and improving the moral nature of people to secure cooperation” (Wren, 2005, p. 15).

Another proponent of virtue was Xenophon, who believed that:

· “[G]ood leaders should know their individual followers and their needs” (Hutchinson, 2000, paraphrased by Humphreys, 2003, par. 7).

· “[G]ood morale was essential and it was best accomplished by matching followers’ skill sets and tasks” (Humphreys, 2003, par. 8).

· “[E]nhanced morale and performance were driven by inspirational words or symbols” (Humphreys, 2003, par. 9)

· “[F]ollower motivation was a leadership responsibility” (Humphreys, 2003, par. 10).

Classical Era

During the early part of the middle ages, economies and business philosophies were static (Wren, 2005). No significant developments in leadership theory arose either. Autocratic leadership was the method most commonly prescribed during this time as evidenced through the feudal system. The latter part of the classical era was marked by one of revitalization and reformation. The practices of the Roman Catholic Church were protested, and new denominations arose. As a result, new theological principles and theories developed, and protestant capitalists and managers began applying these new principles to business. The Protestant ethic was born (Wren, 2005).

Associating religious authority with management was not a new principle, though. Autocratic leaders of early civilizations had the responsibility of not just being a governmental authority, but also shared the burden of being a religious authority as well (Wren, 2005). The Protestant reformation, however, broadened the application of religious beliefs into other areas of society, including commerce. As a result of this new way of thinking, managers began implementing a certain work ethic based on their denominational religious beliefs. One can argue that the Protestant ethic is the foundation for the religious leadership model, which entails the application of an individual’s religious values to one’s management and/or leadership style (Toney & Oster, 1998).

The Modern Era

The Protestant reformation was a contributing factor to the onset of the Industrial Revolution (Wren, 2005), which is often known for the rapid growth of manufacturing and processing due to the advancement of technology. What few people realize is that the Industrial Revolution, at least in the beginning of the era, had its share of problems, including managing and training a skilled workforce, motivating employees, and discipline. As a result, entrepreneurs began to develop and study management principles to find ways to resolve these issues.

Leadership was not a distinguished principle during the Industrial Revolution; rather, the focus was on the development of managerial skills and theories, such as staffing, organizing, planning and controlling (Wren, 2005). Nonetheless, early management theorists realized that they could not ignore the human element in managing a workforce, which eventually lead to the study of human behavior in organizations and application of psychology in the workplace. Towards the latter part of the modern era, significant strides have been made in understanding how management can attain desired results through behavior modification with attention to specific areas such as motivation, influence and organizational changes. The studies of the human element not only lead to the development of the field of organizational behavior, but also became the stepping stone for the study of leadership.

Post-modernism

As the Industrial Revolution lead to the technological age, many new business trends came about, including the focus on replacing people with machines, streamlining processes, and real-time reporting. Such organizational change requires a good deal of knowledge of organizational behavior, as well as the ability to lead an organization through change. The study of leadership began to take precedence among management scholars.

Leadership as a concept became more defined, and it slowly began to become distinguished from positional authority. While no solid definition of leadership exists (Weiskittel, 1999), a variety of characteristics set leaders apart from management. Managers plan, organize, staff, control, and solve problems, whereas leaders set directions, align people, motivate and inspire (Kotter, 2003).

A number of models were developed as a result of the study of leadership. As with any other theory, some of the models were proven to be more effective than others during certain eras, while others may have been ahead of their time. Certain models are considered to be obsolete, while a few have lasted the test of time, given a few minor modifications. Three leadership models, of which the foundations were discussed in preceding sections of this essay, are the autocratic, religious and Marinoff’s three-dimensional leadership model (based on the virtues of Aristotle, Buddha and Confucius).

Comparison of Leadership Models

The autocratic leadership model has been in existence since the pre-classical era, and has been the dominant theory through most of the middle ages. Weiskittel (1995) argues that “[t]his style of leadership is becoming obsolete in today’s world” (par. 2). Furthermore, this model can only be applied to those in positional authority, not across varying levels within an organization.

The notion that a leader can be guided by one’s god can be first seen in early civilizations, when rulers, such as divine kings, had governing as well as religious authority. This is not to say that all such leaders in early civilizations ruled with principle, though they were granted divine authority to govern. The religious leadership model takes its true form during the protestant reformation period when business owners applied biblical and denominational teachings to their individual styles of leadership/management. While not a dominant theory, this model is still in use today, not only by Christian small business owners, but CEOs of medium and large corporations as well.

Marinoff’s three-dimensional leadership model (based on the virtues of Aristotle, Buddha and Confucius), much like the other two models discussed above, also has its foundation rooted in the pre-classical age. It was not a dominant model in ancient civilizations, nor is it a leading theory in today’s world, even though some of the principles found within it can be found in other leadership theories, such as the grass-roots, transactional and combat leadership models.

Application to Small Business

Each of the three models has a place in helping small businesses develop leaders. The autocratic leadership model, while obsolete for large organizations, can help a small company of less than three people grow. In such small organizations, it is assumed that the owner really is the leader and that he/she requires others to follow. To a certain extent, the organization must grow according to the direction the owner wants to head in, and the subordinates are required to perform whatever functions are asked of them. This will only take a company so far. Eventually, the owner must begin to trust his/her employees and empower them if the company is to grow further. Hence, the autocratic leadership model is applicable for smaller organizations experiencing initial growth.

From inception, a company should be representative of its ownership, and its philosophies, values and beliefs should mirror that of the management of the entity. This representation is important in all phases of business, including growth and divesture. Leading by virtue is important. This is why the religious and Marinoff’s three-dimensional leadership models are applicable to small businesses.

Summary

The underlying intent of this essay was to research and find leadership models that, either in whole or in part, can be used for the benefit of small business development. Three models were found from the pre-classical, classical, modernism, and post-modernism eras and were compared and contrasted. In addition, each model was assessed for their application to today’s small business environment. While it was found that each model can be applied to small business growth, it was concluded that the autocratic leadership model is of limited use and should not be considered for further research, whereas the religious and Marinoff’s three-dimensional leadership models are applicable to small businesses and should be studied further.

References

Bergmann, H. (1999, October - December). Introducing a grass-roots model of leadership. Strategy & Leadership, 27(6), 15.

Harrison, B. (1999). The nature of leadership: Historical perspectives & the future. Journal of California Law Enforcement, 33(1), 24-30.

Kotter, J. P. (2003) What leaders really do. In Jossey-Bass (Series Ed.) Business Leadership (1^st ed., pp. 29-43). San Francisco: Jossey-Bass.

Humphries, J. H. (2003). Xenophon as leadership theorist: an early model of leader behavior and follower work motivation [electronic version]. Academy of Management Procedings D(6).

Marinoff, L. (2004, January). The ancient art of modern leadership. Global Agenda, (2).

Tichy, N. M. & Cohen, E. (2003). Why are leaders important? In Jossey-Bass (Series Ed.) Business Leadership (1^st ed., pp. 4-28). San Francisco: Jossey-Bass.

Toney, F. & Oster, M. (1998, Winter). The leader and religious faith. Journal of Leadership Studies, 5(1), 135.

Weiskittel, P. (1999, October). The concept of leadership. ANNA Journal, 26(5), 467.

Wren, D. A. (2005). The History of Management Thought (5^th ed.). Hoboken: Wiley