Organizational Development and Change

Module 7 DQ 1
The topic materials article, "Proven Ways to Increase Share Value," describes several ways to increase the value of an organization. Which of these might be applicable to your organization and why?
WEEK 7 LECTURE NOTES
Financial Management
Introduction
Financial reporting has come under much attack in recent years because of the many corporate scandals that have hit the headlines. Names like Enron, Nortel, and Anderson Consulting conjure up images of greed, corporate irresponsibility, fines, and pending jail terms. All this begs the question: What has happened with our free market system that worked so well for so many years in this country?
Much of the answer to this question resides with the pivotal role that Wall Street and the need for positive quarterly results plays in our market economy. According to Fuller and Jensen, Corporate America has gotten caught up in a relentless game of meeting the "Street's expectations," so much so that managers and executives often stretch their numbers to meet what the Wall Street analysts expect. Unfortunately, this sets the firm up for failure. Expectations are driving results rather than the other way around. Somehow, the relationship between analysts and management has turned around, and investors are caught in the middle. Fuller and Jensen (2002) conclude that overstated earnings are as problematic as understated earnings.
The underlying problem can only be addressed by balancing short-term results with long-term sustainability. Management has to have the fortitude to set realistic budgets and goals, despite what the analysts might predict. The price of shares must reflect the real value of the firm, and not be artificially propped up by overly optimistic forecasts. The long-term viability of the firm depends upon responsible short-term reporting. Enron and WorldCom are clear examples of what happens when management plays the short-term game with careless disregard for the long-term interests of its employees, customers, or shareholders. The inevitable fall out of these scandals has been increased government intervention and investor scrutiny.
The Securities Exchange Commission and Sarbanes-Oxley
The primary mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors and maintain the integrity of the securities markets. The role of the SEC is more important than ever because of the recent corporate scandals, and because more Americans are investing in the securities market than ever before. Anyone who owns mutual funds or stocks as a way to secure their futures, pay for their homes, and send children to college are investors and need the protection of the SEC.
The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. To ensure this, the SEC requires public companies to disclose financial information that allows investors to make sound investment decisions.
The SEC also oversees the key players in the securities world. These include investment advisors and mutual funds managers. The SEC is primarily interested in promoting the disclosure of important information, the enforcing of securities laws, and protecting investors. The SEC is, in essence, an enforcement authority. Each year the SEC brings between 400-500 civil enforcement actions against individuals and companies that break the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.
In 2002, Congress passed the Sarbanes-Oxley Act. The Act came into effect in 2004 and requires all publicly traded companies to submit an annual report covering the effectiveness of their internal accounting controls to the SEC. The major provisions of the Sarbanes-Oxley Act include criminal and civil penalties for noncompliance violations, certification of internal auditing by external auditors, and increased disclosure regarding all financial statements. Penalties differ depending upon the section violation, and range from a fine to prison sentences of up to 20 years. Penalties apply to corporate officers who knowingly or unknowingly violate the act.
Executive Compensation and Ethical Behavior
Executive compensation frequently makes today's news headlines. Executives in the United States are, on average, the highest-paid executives in the world. A cost-benefit analysis of these highly paid individuals begs the question: Does the value they contribute to the organization justify the high costs of their compensation? This can be difficult to determine. If an executive succeeds in turning around a failing company, what is that worth? The company survives, jobs are saved, society benefits. If there were insufficient bonuses or other benefits, would this same executive take the risks necessary to turn a losing enterprise into a profitable concern? When GE anointed Jack Welch as CEO, they expected him to turn the old GE into one of the most powerful, admired companies in the world. His compensation and retirement package have been scrutinized and criticized, but no one would question the enormous impact Welch had on GE perhaps it rightly reflects his accomplishments? No one would argue that he created significant wealth for GE, its employees, its shareholders, and the U.S. economy in general.
The level of compensation is one issue; however, the way in which executives are compensated must also be considered. Executives who have their salaries or bonuses tied to short-term company performance may be tempted to manipulate financial information when it suits their needs. This creates an ethical dilemma for executives in which their own interests may actually be in conflict with the long-term interests of the firm. In a sense, executives have an incentive to seek stellar short-term results in order to pad their annual bonus rather than concern themselves with longer-term results that may not materialize until long after they have moved on to new responsibilities or left the firm altogether. Another manifestation of this dilemma occurs when the firm is in trouble and has to cut costs. Most often, we see downsizing and job cuts; less often do we see cuts in executive salaries. The longer-term costs associated with layoffs are substantial. Not only does this lower employee morale, there are significant costs associated with rehiring and bringing new people up the learning curve when the firm finally turns around. A percentage reduction in executive compensation might have considerably less negative impact on the firm.
Conclusion
Organizational leaders are responsible for the ethical use of the firm's assets and resources. This responsibility implies transparency and accuracy in the reporting of corporate results to investors and employees alike. Executives must avoid the temptation to overstate results as a way to meet the expectations of Wall Street and industry analysts. Highly paid executives may be tempted to manipulate the books of a company to suit their own needs. We have seen this most recently with companies such as Enron and WorldCom. As a result, the U.S. government has imposed much stricter guidelines on companies to make sure the information they provide to the public is legitimate. The passing of Sarbanes-Oxley in 2002 has made management more accountable for their reporting procedures and forced individual executives to take more responsibility for the consequences of their actions.
References
Chen, A. H., Conover, J. A., and Kensinger, J. W. (2002, Spring/Summer). Proven ways to increase share value. Journal of Applied Finance, 12(1), (p. 89). Retrieved October 26, 2005, from EBSCOHost database. AN: 6808798.
Fuller, J., and Jensen, M. (2002). Just say no to Wall Street. Retrieved December 13, 2009, from http://web(dot)archive(dot)org/web/20040618043757/http://www(dot)monitor(dot)com/binary-data/MONITOR_ARTICLES/object/136.pdf
U.S. Securities and Exchange Commission. (2005). Retrieved December 13, 2009, from http://www(dot)sec(dot)gov