JMAA 2014.10

Volume 10, Number 10, October 2014 (Serial Number 113)

Journal ofModern Accounting and Auditing

David Publishing Company

www.davidpublishing.com

PublishingDavid

Publication Information: Journal of Modern Accounting and Auditing is published monthly in hard copy (ISSN1548-6583) and online (ISSN1935-9683) by David Publishing Company located at 240 Nagle Avenue #15C, New York, NY 10034, USA. Aims and Scope: Journal of Modern Accounting and Auditing, a monthly professional academic journal, covers all sorts of researches on accounting research, financial theory, capital market, audit theory and practice from experts and scholars. Editorial Board Members: Avis Andoni, Albania. Benedetta Siboni, Italy. Brad S. Trinkle, USA. Daniela Cretu, Romania. Drazen Koski, the Republic of Croatia. Elisabete Fátima Simões Vieira, Portugal. Emmanuel Attah, Ghana. Fabrizio Rossi, Italy. Haihong He, USA. Joanna Błach, Poland. João Paulo Torre Vieito, Portugal. Liang Song, USA. Lindita Rova, Albania. Mohammed Al-Omiri, Saudi Arabia. Mohamed Rochdi Keffala, Tunisia. Mohammad Talha, Saudi Arabia. Monika Wieczorek-Kosmala, Poland. Narumon Saardchom, Thailand.

Peter Harris, USA. Philip Harris Siegel, USA. Philip Yim Kwong Cheng, Australia. Rosa Lombardi, Italy. Sabina Hodzic, Croatia. Selim Mekdessi, Lebanon. Sheikh Abdur Rahim, Bangladesh. Thomas Gstraunthaler, South Africa. Tita Djuitaningsih, Indonesia. Tiziana Di Cimbrini, Italy. Tumellano Sebehela, United Kingdom. Valdir de Jesus Lameira, Brazil. Valerio Pesic, Italy. Vintilescu Belciug Adrian, Romania. Wan Mansor W. Mahmood, Malaysia. Yezdi H. Godiwalla, USA. Zeynep Özsoy, Turkey.

Manuscripts and correspondence are invited for publication. You can submit your papers via Web Submission, or E-mail to [email protected]. Submission guidelines and Web Submission system are available at http://www.davidpublishing.com. Copyright©2014 by David Publishing Company and individual contributors. All rights reserved. David Publishing Company holds the exclusive copyright of all the contents of this journal. In accordance with the international convention, no part of this journal may be reproduced or transmitted by any media or publishing organs (including various websites) without the written permission of the copyright holder. Otherwise, any conduct would be considered as the violation of the copyright. The contents of this journal are available for any citation, however, all the citations should be clearly indicated with the title of this journal, serial number, and the name of the author. Abstracted/Indexed in: Database of EBSCO, Massachusetts, USA Universe Digital Library Sdn Bhd, Malaysia Australian ERA ProQuest CSA-Natural Sciences, USA Chinese Database of CEPS, Airiti Inc. & OCLC Google Scholar Ulrich’s Periodicals Directory CiteFactor, USA Social Science Research Network (SSRN), USA

Polish Scholarly Bibliography Database of Summon Serials Solutions, USA Turkish Education Index Academic Keys Electronic Journals Library Chinese Scientific Journals Database, VIP Corporation, Chongqing, P.R. China Scholar Steer Scientific Indexing Services

Subscription Information: Price (per year): Print $640; Online $480; Print and Online $800 David Publishing Company 240 Nagle Avenue #15C, New York, NY 10034, USA Tel: 1-323-984-7526, 323-410-1082; Fax: 1-323-984-7374, 323-908-0457 E-mail: [email protected], [email protected]

David Publishing Company

www.davidpublishing.com

DAVID PUBLISHING

D

Journal of Modern Accounting and Auditing

Volume 10, Number 10, October 2014 (Serial Number 113)

Contents Accounting, Corporate Governance & Finance

International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) Convergence Project: Where Are They Now? 991

Aida R. Lozada

Evaluating Board Roles Performance in Adopting Corporate Social Responsibility (CSR) Practices 1005

Mohammed Naif Z Alshareef, Kamaljeet Sandhu

The Prospect of Ethical Consulting 1021

Luu Yin, Safia Wemah

Bankruptcy Prediction for Chinese Firms: Comparing Data Mining Tools With Logit Analysis 1030

Wikil Kwak, Xiaoyan Cheng, Jinlan Ni, Yong Shi, Guan Gong, Nian Yan

Performance Evaluation & Business Ethics

University-Business Cooperation in Education: Real and Perceived Performances 1038

Massimo Bianchi, Laura Tampieri, Daniele Valli Casadei, Gabriella Paganelli

Learning Business Ethics in Schools 1048

Helen Wong, Raymond Wong

Organizational Management & Human Resource Management

Female Leadership and Organizational Climate in a University Institute 1055

Paula Ponce Lázaro, Selene Viridiana Pérez Ramírez, Silvia Cartujano Escobar, Roque López Tarango, Crisóforo Álvarez Violante, Braian Real Bahena

Human Resource Management in the Building Industry: International Comparison 1060

Filip Bušina, Martin Šikýř

Journal of Modern Accounting and Auditing, ISSN 1548-6583 October 2014, Vol. 10, No. 10, 991-1004

International Accounting Standards Board (IASB) and Financial

Accounting Standards Board (FASB) Convergence Project:

Where Are They Now?∗

Aida R. Lozada University of Puerto Rico, San Juan, Puerto Rico

The convergence project between the International Accounting Standards Board (IASB) and the Financial

Accounting Standards Board (FASB) in the United States (US) was signed on September 18, 2002 in Norwalk,

Connecticut in the US. The first is responsible for issuing International Financial Reporting Standards (IFRS)

nowadays, which were created 40 years ago. More than one century ago, local regulations are used in the US. The

boards differ in years of experience. With the signing of the agreement, both institutions are working to reduce the

divergence of accounting. Although they have made a significant progress, it is appropriate to examine whether the

difference in approaches to accounting will affect the achieved agreements. It is relevant to investigate whether the

years leading the standards adopted in different countries will impact the final result. The date of completion of the

project has been postponed and still has not indicated the date of termination. This research is an analysis of the

importance of the convergence of accounting standards at a global level. The study presents statistics on the status

of the adoption of international standards by country. The study shows a summary of the expressions made by the

directors of both boards about the future of the project.

Keywords: convergence, full International Financial Reporting Standards (IFRS), little IFRS, International

Accounting Standards Board (IASB), Financial Accounting Standards Board (FASB)

Introduction

Several years ago, a transformation in accounting procedures has been seen so as to cope with the changes that have occurred around the world in an organized way. Some countries have been able to adapt to and face the consequences of these changes, for others, it has become more difficult. This is because that there are various economic social factors that affect nations in different ways. The evolution of these procedures is largely due to globalization. This has generated pros and cons for the countries. Globalization has made countries that lacked certain resources enter into agreements with other countries by exchanging goods,

∗ Acknowledgment: We express our sincere gratitude to the Accounting Students Association from the University of Puerto Rico, Río Piedras Chapter and to Hedliam J. Robles Arbelo, Alejandra D. Álvarez Ruiz, Jorge L. Vega Rodríguez, Wilfredo Caparrós García, Kevin A. Bultrón Clemente, Carlos J. Castro Pérez, Scarlett J. Figueroa Toledo, Jennifer Martínez, Diomel Castillo Batista, Andrés N. Rosa Aponte, Alice H. Abboud Chalhoub, Manuel A. Cecilio González, Erick D. Hernández Delgado, Eliezer A. Julián, Omar Barreto, Jesús Calderón, Luis Cabrera, Yanet G. Vázquez, Alicia Lozada, Rodolfo A. Rivera, Enara Lorenzo, Andrea del Valle, Berenice Morales Rosario, Alexis Izquierdo, and Jonathan Fardonk for their contributions to the completion of this paper.

Aida R. Lozada, professor of International Accounting and director of Development Business Program of the Faculty of Business Administration, University of Puerto Rico. Email: [email protected].

DAVID PUBLISHING

D

IASB AND FASB CONVERGENCE PROJECT

992

services, and/or expertise. They have also brought with them the evolution in technology, learning new methods and styles of doing business. It has also led to the increase in communication among countries through commercial agreements. It has generated greater awareness of other cultures and it has led to the exchange of production processes. These relations among the countries have generated new business transactions. The exchange of financial information is necessary for the integration of countries and stock markets. It also allows constant communication among users. With the emergence and proliferation of multinational enterprises (MNEs), information flow has been increasing, since MNEs generate large amounts of transactions that are the products of local and international trade relations.

In 2009, the United Nations Conference on Trade and Development’s (2011) World Investment Report reported an average of 82,000 MNEs with more than 810,000 affiliated overseas. In 2013, there were 319 commercial agreements in force; they approved the exchange of goods, services, education, and knowledge among practically all the countries of the world (World Trade Organization, 2013). The mechanism created by companies and governments facilitated to international investors the process of investing and carrying on with international transactions. The number of users of financial information has increased, which requires uniform information for timely decision-making (Del Valle, Magarini, & Onali, 2010). Therefore, the activity on various international stock exchanges is greater. In 2012, an average of 10,500 companies listed in America, 22,700 in Asia, and 13,300 in Europe and Africa respectively (World Federation of Exchanges, 2012).

Another sector that also generates a large amount of financial information is small and medium-sized enterprise (SME) (Pacter & Scott, 2012). Local and international financial institutions use accounting reports to establish the collateral and interest rates. Other users around the world who use the information are credit rating agencies, investors, and suppliers (International Financial Reporting Standards [IFRS], 2009).

To maintain the communication among international users, accounting norms that provide uniformity, utility, and quality are necessary. This way, it will establish a universal accounting language that allows everyone to meet the disclosure requirements of the users. In addition, the accounting harmonization facilitates the way companies raise foreign capital and make alliances with other companies in different countries around the world according to Meeks and Swann (2009). Also, Chen, Jiang, Lin, and Tang (2010) concluded that uniform accounting rules create greater efficiency in transactions generated in different international stock exchanges.

However, the accounting diversity that currently exists is created by diversity in the legal system, tax regulations, among others. This affects decision-making and implies that companies consume more resources to implement their strategies and achieve their goals. According to Doupnik and Perea (2012), it is necessary to reduce the diversity at the accounting level to generate comparability in the financial statements. This will allow a group of standards that provide uniformity to be adopted.

In addition, the need for a harmonization of the accounting standards had already been mentioned during the decades of the 50s and 60s (Financial Accounting Standards Board [FASB], 2013b). In the United States (US), during 1972, there was a talk of accounting consistency. During the congress, “The Tenth International Congress of Accountants”, which was held in Sydney in September 1972, the American Institute of Certified Public Accountants (AICPA) President hoped for the creation of a governing body that regulated the international standards (Camfferman & Zeff, 2007).


993

To meet the demands of users who require uniform information, the International Accounting Standards Committee (IASC) is created in 1973, with this begins the era of accounting convergence. Then in 2001, the International Accounting Standards Board (IASB) was created. The IASB is the entity that currently regulates the IFRS for public companies, full IFRS. Later in July 2009, the IASB published the version of the IFRS for SMEs, little IFRS.

Today, more than 100 countries have adopted the IFRS (IFRS, 2013c). One of the most recent cases is that of Canada which adopted the IFRS for public and private companies in 2011. This is a very particular case, since this country moves from the local rules of the US Generally Accepted Accounting Principles (GAAP) to the IFRS (Blanchette & Desfleurs, 2011).

The resistance to change and keep the tradition is an impediment to global convergence, particularly in the US (Damant, 2006; Gornik-Tomaszewski & Showerman, 2010). This country is still in the process to converge its accounting standards with the IASB. The convergence project began more than one decade ago with the FASB.

The users, companies, and the government in the US are in a waiting period that duplicates the efforts and consumes more resources. SMEs in the US can apply IFRS (Lozada & Ríos, 2013); however, it is forbidden for public enterprises to apply IFRS, which means that MNEs have to prepare their reports using the US GAAP and apply IFRS to its subsidiaries.

The universities in the US offer students education emphasized in the US GAAP. However, the issue of the convergence is critical for which they have proliferated teaching courses and research on IFRS. Given that the US has an active market for the exchange of values (New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotation (NASDAQ)) and the convergence project is of great importance for all sectors in the US, it is relevant to study the current status of this project. It is also important to know what the advantages and disadvantages of this project are.

To develop a proper analysis, below is a review of the literature related to IFRS and the convergence project.

Theoretical Foundations and Review of Literature

Importance of Accounting Information

Accounting is defined as a system of information that collects, analyzes, and communicates financial information on an entity to facilitate decision-making. The execution of the accounting profession is necessary for the internal control of the company. This is one of the oldest professions, as evidenced by the Code of Hammurabi and its contents based on tax data (Vitez, 2013). The main objective of accounting is to provide useful information; this enables the users of financial statements to assess the company and evaluate its execution.

Companies are currently developing beyond a local level. In 2011, the US established a record with 302,000 exporting companies, and they reported 33% of the exports in that country (International Trade Administration, 2011). This new challenge changes the way that companies divulge the information. Users come from local and international markets, so that new trends in the accounting treatment and disclosure are aimed to satisfy the demands of a global market. The uniformity in the accounting processes and the disclosure of information is essential to maintain the flow of information, allowing communication among members of the international markets (Holthausen & Watts, 2001). The informative value and veracity of disclosures are necessary to maintain confidence in the capital markets (Barth, Beaver, & Landsman, 2000; Landsman & Maydew, 2002; Veith & Werner, 2010).


994

Evolution of Accounting

In the 19th century, with the development of the industry in Europe, especially in England, and the emergence of economic liberalism, preached by Adam Smith, accounting began its transformation. With the passage of time, accounting methods have evolved, starting with the simplest one where a person could do all of his/her business records, until more recently where computers perform most of these tasks. With the increase of MNEs and the proliferation of trade agreements, the volume of transactions and the disclosure of business are greater today. This information has changed, because through the years, some exogenous variables to the exercise of accounting have developed and generated diversity. The policies, legal system, culture, and other factors in different institutional settings have forced regulators to create various accounting standards in order to meet the demands of users over time (La Porta, López-de-Silanes, & Shleifer, 2008; Graff, 2008; Zeff, 2006; Hofstede, 1983).

Each country contributed to the development of accounting. During 1880 in England, the Institute of Accountants was created. At the beginning of the 20th century around the world, began to emerge associations of accountants, which, in addition to its own standards, established a set of conventions for the exercise of accounting activities. In 1899, a regulatory body was created in Sweden and Switzerland in 1916 and in Japan in 1917. In the US, accounting was also developing as a profession since 1887. From 1895, in the US, because of the economic blockade of England, they began to use a series of inventions and technological innovations in the industry and agriculture. Accounting, parallel to this development, was institutionalized, becoming an academic activity at the University of Pennsylvania in 1881 and a professional guild through the American Association of Public Accountants (AAPA) in 1887. The same year is the birth of what is now the AICPA in the US. Later on, the banking and the stock exchanges began to demand the financial statements to be certified by an independent public accountant. The AICPA met with academic groups to study accounting programs, emerging in 1934, the first six rules of accounting principles today (AICPA, 2012).

During 1950, the integration of markets and promotion of the flow of international capital were emphasized. The emphasis lay in the harmonization of accounting standards, and its purpose was to eliminate the differences. In 1973, the IASC began the path of uniform accounting standards at a global level. The concept of convergence whose objective is to develop a single set of high-quality standards with a universal application (FASB, 2013b) was adopted in 2001 with the creation of the IASB. Accounting and the disclosure of information have evolved over time because of different factors; however, the essential characteristic of these is the utility it provides to its users (Barth, Landsman, & Lang, 2008).

Accounting Diversity

Financial statements should be presented in a uniform manner so that there is comparability among them, and this is an advantage for users (Hail, Leuz, & Wysocki, 2010). At present, there is still accounting diversity. This is caused by differences that exist among countries in terms of measurement and recognition of the accounting transactions. These differences, even the smaller ones, represent a difficulty for users who analyze the different financial statements (Choi & Levich, 1991). Companies must identify and minimize the causes of diversity to avoid comparison problems that limit investment opportunities. Diversity affects not only the strategies of the company in short and long term but also its ability to compete in the international market (Miller, 1999).


995

Global Accounting Convergence

Studies have shown advantages and disadvantages about the convergence of standards (Ball, 2006). The IFRS is a common global accounting language for business purposes. These allow the financial information to be comparable regardless of international borders. IFRS arises in response to the needs of the growing number of international shareholders who generate economic activities globally. IFRS is gradually replacing the various local rules of each country (PricewaterhouseCoopers [PwC], 2012).

Importance of the Global Convergence

The global convergence of standards through the adoption of IFRS is a relevant issue for MNEs. A company may present its financial statements on the same basis as its competitors abroad. This allows comparisons and analysis of international financial reports. In addition, companies with subsidiaries in countries that require or permit IFRS may be able to use a common accounting language. Companies can also benefit by using the IFRS if they want to raise capital abroad.

Regulators of the Process of International Convergence The Accountants International Study Group (AISG) was founded at the beginning of the 1970s. The

objective of this group was initially to publish books on accounting studies, but later helped in the process of setting international standards. As time goes by, 28 countries join the AISG, each represented by two people, all with the common purpose of creating a uniform set of accounting rules. The IASC is created later in London on June 28, 1973. A document called “the Agreement”, which consisted of an agreement and a constitution, was signed the day after the creation of the IASC. It was also established that each country would contribute one ninth of the budget to subsidizing the operations of the organization (Camfferman & Zeff, 2007).

Table 1 shows the IAS created by the IASC. Initially, there were 41, of which less than 30 are still in force (Doupnik & Perea, 2012). All of them have been revised. The latest revision was in 2007. Up to September 2013, the IASB has created 13 IFRS. In January 1975, the IAS 1 was published. The publication of the first rule in a suitable time frame gave the opportunity to the IASC to show that they were working to achieve its purpose of publishing standards within a reasonable time. The next issues that had priority for the IASC were valuation of inventory, consolidated statements, depreciation of fixed assets, and basic disclosure of the financial statements. These themes became IAS 2, IAS 3, IAS 4, and IAS 5 respectively. The publication of these four standards fulfilled a goal of the IASC, which was to publish 3-4 standards annually. The standards published so far have been seen by the IASC as basic and not sophisticated allowing it to be published quickly. Issues with more difficulty began with IAS 6, Accounting for Inflation. Although the standard was published in 1977 because of the debate that it caused, it was not until 1981 when IAS 15 was approved that the IASC was able to expand more on the subject and make more specific changes. IASC achieved notoriety with the publication of IAS 7 until IAS 13. In the early 1980s, IAS 14 (Reporting by Segments), IAS 17 (Accounting for Leases), and IAS 19 (Retirement) were published. These standards’ benefits provided solid accounting practices which served as a guide for many countries where these issues did not have any direction. Later, IASC decided to take the issue of fair value, so it published IAS 16, IAS 17, and IAS 18. Then, productivity was reduced, which in large part is because that the basic issues had already been covered (Camfferman & Zeff, 2007).


996

The IFRS is currently used in more than 100 countries (Lozada & Ríos, 2013). These are developed through the process of international consultation called “due process”, which involves individuals and organizations around the world.

Table 1 IAS and IFRS to January 2013

Standard Year issued (Revised) Standard Year issued

(Revised) Standard Year issued (Revised)

IAS 1 Disclosure of Accounting Policies

1975 (1993, 2003, 2007)

IAS 16 Property, Plant, and Equipment

1982 (1993, 1998, 2003, 2007)

IAS 24 Related Party Disclosures

1984 (2003, 2007)

IAS 2 Valuation and Presentation of Inventories in the Context of the Historical Cost System

1975 (1993, 2003) IAS 17 Accounting for Leases 1982 (1997,

2003)

IAS 26 Accounting and Reporting by Retirement Benefit Plans

1987

IAS 7 Statement of Changes in Financial Position

1977 (1992, 2007) IAS 18 Revenue Recognition 1982 (1993)

IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries

1989 (2003, 2007)

IAS 8 Unusual and Prior Period Items and Changes in Accounting Policies

1978 (1993, 2003, 2007)

IAS 19 Accounting for Retirement Benefits in Financial Statements of Employers

1983 (1997, 2000, 2007)

IAS 28 Accounting for Investments in Associates

1989 (1998, 2003, 2007)

IAS 10 Contingencies and Events Occurring After the Balance Sheet Date

1978 (1999, 2003, 2007)

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

1983 (2007)

IAS 29 Financial Reporting in Hyperinflationary Economies

1989 (2007)

IAS 11 Accounting for Construction Contracts

1979 (1993, 2007)

IAS 21 Accounting for the Effects of Changes in Foreign Exchange Rates

1983 (1993, 2003, 2007)

IAS 32 Financial Instruments: Disclosure and Presentation

1995 (2003, 2007)

IAS 12 Accounting for Taxes on Income

1979 (1997, 2000, 2007)

IAS 23 Capitalization of Borrowing Costs 1984 (1993) IAS 33 Earnings per

Share 1997 (2003, 2007)

IAS 34 Interim Financial Reporting 1998 (2007)

IFRS 1 First-Time Adoption of International Financial Reporting Standards

2003 (2007) IFRS 8 Operating Segments 2006

IAS 36 Impairment of Assets 1998 (2004) IFRS 2 Share-Based Payment 2004 IFRS 9 Financial

Instruments 2009

IAS 37 Provisions, Contingent Liabilities, and Contingent Assets

1998 (2005) IFRS 3 Business Combinations 2004 IFRS 10 Consolidated Financial Statements 2011

IAS 38 Intangible Assets 1998 (2004, 2007) IFRS 4 Insurance Contracts 2004 (2007) IFRS 11 Joint

Arrangements 2011

IAS 39 Financial Instruments: Recognition and Measurement

1998 (2000, 2003, 2004, 2007)

IFRS 5 Non-currents Assets Held for Sale and Discontinued Operations

2004 (2007) IFRS 12 Disclosures of Interests in Other Entities 2011

IAS 40 Investment Property 2000 (2003, 2004, 2007)

IFRS 6 Exploration for and Evaluation of Mineral Resources

2004 IFRS 13 Fair Value Measurement 2011

IAS 41 Agriculture 2000 (2007) IFRS 7 Financial Instruments: Disclosures 2005

Table 1 presents the standards created by the IASC (IAS) and the IASB (IFRS). The revisions are also presented in parentheses. The period covers since 1975 to the last created by the IASB in 2011, for a total of 36 years of creation and revision of accounting standards.


997

To create IFRS, the due process consists of six steps: setting the agenda, project planning, development of the proposal, publishing the document for discussion, elaboration and publication of the standard draft, and development and publication of a rule after the exposure of a standard.

In 2003, the IASB created IFRS 1, First-Time Adoption of International Financial Reporting Standards. In 2011, it created IFRS 13, Fair Value Measurement. Of the 13 existing IFRS, the IASB revised in 2007 the following ones: IFRS 1, IFRS 4 (Insurance Contracts), and IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations). In the short term, IFRS is expected for leases, revenue recognition, and impairment.

To meet the needs of a uniform disclosure of the credit sector and creditors on July 9, 2009, the IASB published IFRS for SMEs or little IFRS. This event was the culmination of a 5-year project designed to reduce the complexity of implementing IFRS in private companies. The implementation guidelines reduced substantially when compared with the IFRS for public companies and the US GAAP (Carfang, 2010; Miller, 2010). The adoption of these new standards will provide cost and time savings in the preparation and audit of financial reporting for SMEs (Kemp, 2009).

Use of IFRS vs. US GAAP

The US has, on average, 27 million small businesses that can apply the US GAAP or little IFRS. Only 17,000 companies are registered with the Securities and Exchange Commission (SEC) and apply local standards (Love, 2011). When comparing the use of local standards in the US with the implementation of IFRS in the EU, it is observed that about 5 million companies apply full IFRS (Needles & Powers, 2013).

Around the world, 111 countries use IFRS in companies that are listed, of which 102 countries require the application and nine allow the application. In America, 20 countries require companies to apply the full IFRS and only three permit it (PwC, 2012). On the other hand, the US does not allow the implementation of full IFRS in public enterprises with American base; however, it allows the use of IFRS for SMEs (Lozada & Ríos, 2013).

Table 2 shows a comparison of the countries of North America that require (R) or allow (P) the use of little IFRS and full IFRS.

Table 2 Use of Full IFRS and Little IFRS in Countries of North America in December 2012

Country Is full IFRS required or permitted to publicly traded companies?

Is full IFRS required, permitted, or prohibited for statutory purposes?

Is small IFRS required, permitted, or prohibited for statutory purposes?

Canada R R* PR Mexico R P PR US Not Not P Notes. Source (PwC, 2012). This table presents the status of North American countries in relation to the full IFRS in companies listed in the stock exchanges and for statutory purposes. In addition, this table presents the status of the countries for the small IFRS for statutory purposes. R = Required. R* = Required with some exceptions. P = Allowed. PR = Forbidden.

Convergence Process in America

It has been 126 years since the AAPA was founded in the US in 1887, which was later changed to AICPA in 1957 (AICPA, 2013a). These agencies have been responsible for the development of accounting in the US. In 2002, the convergence project or Norwalk Agreement was signed. In 2003, the SEC issued a statement


998

reaffirming the FASB as the issuer of accounting standards of the private sector in accordance with the Sarbanes-Oxley Act (SOX) of 2002. In the same statement, the SEC also said that it supports the project of convergence between the FASB and the IASB. In 2005, the SEC issued a proposal for the elimination of the reconciliation requirement or Form 20-F. Since 2007, the SEC allowed foreign companies that were listed on American stock exchanges to submit their financial statements using IFRS. Previously, these companies submitted the Form 20-F to reconcile the differences between the two standards (Amir, Harris, & Venuti, 1993). The agreements reached between both boards are updated for 2008 and 2010. Currently, the SEC and the FASB follow the path of convergence. However, in the US, the date for the adoption of the IFRS has not been established (Becker, 2014).

Despite the belief of some in various sectors in the US of the inevitability of the global acceptance of IFRS, others believe that US GAAP is the gold standard and that a certain level of quality will be lost with the adoption of IFRS. Other users of local standards who do not keep a large number of operations or customers abroad can resist the adoption of IFRS. This happens, because they do not have an incentive in the market to prepare financial statements using IFRS. In addition, they consider that the costs outweigh the benefits associated with the adoption (AICPA, 2013b).

Convergence Project: IASB and FASB

For 11 years, the boards have worked together to reduce the divergence of both existing financial reporting standards. They also coordinate their work in order to ensure that the compatibility reached is maintained. The convergence project seeks to align rules; however, they maintain a degree of divergence as both accounting rules are not identical (Instituto Nacional de Contadores Públicos [INCP], 2013).

In 2002, the Convergence Agreement settled the following initiatives: working altogether, directing efforts in the short term to reduce the differences, and encouraging the coordination of future work. In 2004, the FASB issued the SFAS 123 (revised 2004) Stock-Based Payments, SFAS 151, Inventory Costs, and SFAS 153 Exchange of Non-monetary Assets. These were promoted by the initiative of both boards to submit projects in the short term (IFRS, 2013a). In 2005, the SEC proposes to eliminate the requirement of reconciliation, the Form 20-F.

The Memorandum of Understanding (MoU) was published in February 2006 by the FASB and the IASB. It describes the advances expected to be achieved by 2008. In the MoU, the two boards reaffirmed their common objective of developing high-quality and common accounting standards (IASB, 2002).

In 2007, the SEC removed the requirement of reconciliation for foreign companies that are traded on the American stock exchanges. On August 6 of that year, the SEC issued the “Concept Release” to allow the issuers in the US to prepare the financial statements in accordance with the IFRS.

In September 2008, the boards published an update of the MoU to report the progress made since 2006 and to set convergence targets until 2011. In 2008, the SEC issued a document proposing a route for the adoption of IFRS in the US and a proposal for a regulation on the optional use of IFRS in 2014. It was established that the SEC would decide in 2011 if the adoption of IFRS served the public interest and would benefit investors. The SEC also proposed that US issuers who meet certain criteria can file their financial statements prepared using IFRS starting from December 15, 2009. Also in 2008, the first phase of the creation of the new conceptual framework ended (IASB, 2008).


999

In March 2009, the FASB reiterated their support in creating quality standards and recommended evaluating strengths, weaknesses, costs, and benefits that the US could face to advance towards the objective of convergence. Also, the boards established in the same year the Financial Crisis Advisory Group (FCAG) for the purpose of providing recommendations to improve the standards setting process (IASB, 2009). In that year, the Financial Accounting Foundation (FAF) in collaboration with the AICPA and the National Association of National Accounting Boards began the process of creating a panel (Blue Ribbon) for the study and improvement of the accounting rules in private companies. This new panel was created three years later.

In February 2010, the SEC issued a statement in support of convergence and global accounting standards. In April 2010, the boards published a quarterly report on the progress of the work. In addition, they agreed to work for the implementation of a plan that studied the effects of the adoption of IFRS in several areas and examining the regulatory environment that may be affected by the new rules, among others. In June 2010, the FASB and the IASB agreed to modify its work plan and give priority to the most important projects that were agreed upon in the MoU in 2006.

In 2011, the boards reviewed strategies and discussed technical IASB projects and joint projects between this one and the FASB (IFRS, 2013b). In addition, IASB conducted an inquiry and identified that they must work with the conceptual framework, so it provides a consistent and practical way of creating IFRS. They also have to improve some rules so that they respond to the needs of the users. It was also identified as necessary to strengthen the process of creating standards. The next conference will be held in 2015.

The SEC reported, in 2012, that IFRS in the US would not yet be used in public enterprises (FASB, 2103a). The work plan discussed in July of that year did not discuss the voluntary adoption. Moreover, the SEC did not indicate when and how these standards will be incorporated into the American accounting system. They did not provide full support to the adoption; however, they reported that the SEC is exploring other methods to incorporate IFRS into the US GAAP. We can deduce from the expressions of the SEC executives that the US still shows its disposition to stay involved in the process of convergence. However, it is understood that the convergence era is about to end (PwC, 2013b). With the collaboration of the FAF and the AICPA, the Private Company Council was created in 2012. The Private Company Council, together with the FASB, determines the modifications to the US GAAP that are needed to meet the needs of users of private companies (PwC, 2013b).

The members of the IASB in October 2012, as a response to the final work plan of the SEC, disclosed that they recognized that the US economic system is unique and that this represents major challenges for the implementation of IFRS. They also recognized that these challenges can be overcome with appropriate policies.

By 2013, the foundation of IFRS, which is responsible for overseeing the processes in the IASB, created the Accounting Standards Advisory Forum (ASAF) to expand the collaborative efforts of the IASB. The FASB is one of the 12 members (FASB, 2013a). In the same year, the AICPA also announced its plan to establish a framework of financial reporting for SMEs (PwC, 2013c).

For the last quarter of 2013, the future of the convergence project is uncertain, because both boards are giving attention to their particular agendas. However, although the compulsory adoption or voluntary adoption in the US is not in sight in the near future, the IFRS continues to be an important issue for American companies. Currently, IFRS is still influencing changes in the US GAAP (PwC, 2013c).

The boards are still working together. In addition, they still maintain separate agendas. Table 3 shows the rules and amendments that both boards are working together on and the approximate date of issuance. Tables 4 and 5 present the projects in which the boards worked individually in October 2013.


1000

Table 3 Projects of IASB and FASB Summarized in October 2013 Joint project Standards and amendment Responsible board Anticipated issuance:

2013 Anticipated issuance: 2014

Emissions trading schemes Financial instruments (classification and measurement)

Joint Joint

ED ED

F F

Impairment Joint ED F Hedge accounting Joint F Financial instruments Financial statement presentation

Joint Joint ED

Insurance contracts Leases

Joint Joint

ED ED

Revenue recognition Joint F Notes. Source: PwC. ED = Exposure draft. F = Final.

Tables 4 and 5 present the status of the IASB projects and the approximate date of completion for projects in process.

Table 4 Summarized Projects of IASB in October 2013 Project Anticipated issuance: 2013 Anticipated issuance: 2014 Conceptual framework Rate-regulated activities DP Annual improvements: 2010-2012 cycle F Annual improvements: 2011-2013 cycle F Annual improvements: 2012-2014 cycle ED Notes. Source: PwC. DP = Discussion paper. ED = Exposure draft. F = Final.

Table 5 Summarized Projects of FASB in October 2013 Project Anticipated issuance: 2013 Anticipated issuance: 2014 Research projects Private company decision-making framework C Discontinued operations C Consolidation Disclosure framework Technical corrections and improvements F Definition of a non-public entity Disclosure of uncertainties about an entity’s going concern presumption

C C

Transfers and servicing: repurchase agreements and similar transactions F Notes. Source: PwC. C = Comment deadline. F = Final.

Implications

IASB and FASB

Barth (2008) suggested that even when a single set of standards is a goal for the boards, convergence rather than adoption creates some obstacles. This is due to the difference in styles and their particular agendas. Also, if implementation guidance for applying those standards is not the same in all jurisdictions, both sets of accounting standards will not be comparable (Schipper, 2005).


1001

Universities

US universities should prepare students on the topic of IFRS. The method of teaching should emphasize the principle-based approach rather than the rules-based approach. This will allow evaluating the theories on which the financial statements are based. This will help the students to exercise their judgments (Barth, 2008).

US Companies

Convergence between IFRS and US GAAP provides benefits for US companies. Both standards represent a high quality, mitigate information asymmetry, and provide information for valuation. In terms of equivalent financial reporting quality, the results are not conclusive (Bradshaw, Callahan, Ciesielski, Gordon, Hodder, Hopkins, & Stocken, 2010). One important benefit for US companies and investors is the increase in comparability of financial disclosure (Ball, 2006). However, until the convergence is not achieved, the obstacles in the process of comparing information remain.

US Capital Markets

The creation of the SOX has caused high costs on businesses to comply with the new requirements. The capital markets have experienced volatility due to the new changes. The adoption of IFRS can again provide reliability in the markets and reduction of costs in the companies (Bradshaw et al., 2010).

Conclusions

After 11 years of the signing of the Norwalk Agreement, some convergence projects have been completed successfully. Several projects have been partially completed and others were discontinued. In some cases, there was no consensus between the boards and different standards were created. To date, some projects are still in process. The opinion of the auditing and consulting firm PwC is that a single set of global international standards is necessary; IFRS is better positioned than others to achieve this goal. In addition, it emphasizes that the users should be bilingual in accounting terms, which will serve to create standards that would better serve users. The SEC still has not decided when the IFRS will be adopted in the US.

Those interested in the topic in the US want clarity about the conduct of the IASB and the FASB with the process of convergence. Other users outside the American nation want greater commitment from the nation with the adoption of the IFRS and are waiting for substantial progress. Accounting service providers understand that both boards are keeping their commitment with the convergence project. However, the completions of projects together are a priority and will not be completed until beyond 2014. They also understand that a fast mandate of change is needed by the government, business, and other sectors (PwC, 2013a). The members of the IASB understand that there are still differences that can be reconciled.

However, although the IFRS will not be immediately adopted in the US, it is advisable that the American companies be kept informed of the process. It is important that they know in what way it will affect transactions such as mergers and acquisitions. In addition, it is necessary to disclose information of subsidiaries using IFRS to users abroad. Finally, it is important that users in the US understand that future changes in the US GAAP are based on joint efforts between the IASB and the FASB.

Based on a review of the literature, we concluded that a move to an international set of financial reporting standards is a desirable goal for the SEC and the FASB. Material differences continue to exist between IFRS and US GAAP. Also, efforts must be directed to both sets of standards in order to be informationally equivalent. The joint work of the boards is recommended, since in this way it generates competition and collaboration in


1002

standard setting which may aid in improving the quality of the standards. However, both boards face different political pressures and maintain different priorities and literature. In addition, their styles and the level of detailed guidance are not equal. These differences make the convergence process more difficult. It is important that US universities teach IFRS at a rigorous level in preparation for the adoption.

Recommendations

To the extent that markets increase their global presence, the number of foreign investors in American companies will increase. These shall require the IFRS-based financial statements. In addition, the American companies that have subsidiaries overseas should report their financial statements as required by each country. It is, therefore, recommended that MNEs and SMEs in the US stay informed of the changes in IFRS and also implement the agreement achieved in the convergence project. These companies should immediately identify what they can do to keep an understanding and mitigate the negative impact, if any, that new changes can bring with IFRS. It is advisable that the executives of the companies participate in the standard creation process. This is because that as more complex transactions arise, the accounting standards require changes and new IFRS will be created. These changes directly affect the activities between American and foreign companies. They also affect the taxes arising from these mergers and transactions generated jointly and separately.

Both boards should establish accounting guidelines for the disclosure of financial information that reflects the economic substance of the transactions, for timely decision-making. It is pertinent that the FASB prioritizes issues where simplification is needed and where the current information does not provide useful information anymore to meet the changing needs of users in the US.

References American Institute of Certified Public Accountants [AICPA]. (2012). Evolution of the CPA profession. The first 100 years.

Retrieved from http://www.aicpa.org/career/marketing/downloadabledocuments/2012-cpa-poster-timeline-hr.pdf American Institute of Certified Public Accountants [AICPA]. (2013a). AICPA history. Retrieved from

http://www.aicpa.org/Pages/default.aspx American Institute of Certified Public Accountants [AICPA]. (2013b). Disadvantages of the adoption of IFRS in the US. IFRS

Resources. Retrieved from http://www.ifrs.com/ifrs_faqs.html#q6 Amir, E., Harris, T., & Venuti, E. (1993). A comparison of the value-relevance of U.S. versus non-U.S. GAAP accounting

measures using form 20-F reconciliations. Journal of Accounting Research, 31, 230-264. Ball, R. (2006). International financing reporting standards (IFRS): Pros and cons for investors. Accounting and Business

Research, 36(1), 5-27. Barth, M. E. (2008). Global financial reporting: Implications for US academics. The Accounting Review, 83(5), 1159-1179. Barth, M. E., Beaver, W., & Landsman, W. (2000). The relevance of the value relevance research. Paper presented at the 2000

Journal of Accounting & Economics Conference. Barth, M. E., Landsman, W., & Lang, M. (2008). International accounting standards and accounting quality. Journal of

Accounting Research, 46(3), 467-498. Becker, L. (2014, July 30). The death of an accounting dream. Risk Magazine. Blanchette, M., & Desfleurs, A. (2011). Critical perspectives on the implementation of IFRS in Canada. Journal of Global

Business Administration, 3(1), 2-17. Bradshaw, M., Callahan, C., Ciesielski, J., Gordon, E. A., Hodder, L., Hopkins, P. E., & Stocken, P. (2010). Response to the SEC’s

proposed rule roadmap for the potential use of financial statements prepared in accordance with international financial reporting standards (IFRS) by US issuers. Accounting Horizons, 24(1), 117-128.

Camfferman, K., & Zeff, S. A. (2007). Financial reporting and global capital markets: A history of the International Accounting Standards Committee, 1973-2000. Oxford: Oxford University Press.

Carfang, T. A. (2010, October 25). IFRS and SMEs. Accounting Today.


1003

Chen, H., Jiang, Y., Lin, Z., & Tang, Q. (2010). The role of international financial reporting standards in accounting quality: Evidence from the European Union. Journal of International Financial Management and Accounting, 21(3), 220-278.

Choi, F., & Levich, R. (1991). International accounting diversity: Does it affect market participants? Financial Analysts Journal, 47(4), 73-82.

Damant, D. (2006). Discussion of “International financial reporting standards (IFRS): Pros and cons for investors”. Accounting and Business Research, 36(1), 29-30.

Del Valle, A., Magarini, R., & Onali, E. (2010). Assessing the value relevance of accounting data after the introduction of IFRS in Europe. Journal of International Financial Management and Accounting, 21(2), 85-119.

Doupnik, T., & Perea, H. (2012). International accounting. New York, NY: McGraw-Hill/Irwin. European Commission. (2010). International trade by enterprise characteristics. Retrieved from

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/International_trade_by_enterprise_characteristics Financial Accounting Standards Board [FASB]. (2013a). International convergence of accounting standards: Overview. Retrieved

from http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156245663 Financial Accounting Standards Board [FASB]. (2013b). International convergence of accounting standards: A brief history.

Retrieved from http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156304264 Gornik-Tomaszewski, S., & Showerman, S. (2010). IFRS in the US: Challenges and opportunities. Review of Business, 30(2),

59-71. Graff, M. (2008). Law and finance: Common law and civil law countries compared. An empirical critique. Economica, 75(297),

60-83. Hail, L., Leuz, C., & Wysocki, P. (2010). Global accounting convergence and the potential adoption of IFRS by the US (Part I):

Conceptual underpinnings and economic analysis. Accounting Horizons, 24(3), 355-394. Hofstede, G. (1983). The cultural relativity of organizational practices and theories. Journal of International Business Studies,

14(2), 75-89. Holthausen, R., & Watts, R. (2001). The relevance of the value-relevance literature for financial accounting standard setting.

Journal of Accounting and Economics, 31(1-3), 3-75. Instituto Nacional de Contadores Públicos [INCP]. (2013). Qué han logrado los esfuerzos de convergencia del IASBy el FASB

(What IASB and FASB convergence efforts have been achieved)? Instituto Nacional de Contadores Públicos. Retrieved from http://www.incp.org.co/document

International Accounting Standards Board [IASB]. (2002). Memorandum of understanding—FASB and IASB: “The Norwalk Agreement”. Retrieved from http://www.iasb.org/

International Accounting Standards Board [IASB]. (2008). Discussion paper: Preliminary views on an improved conceptual framework for financial reporting: The reporting entity. Retrieved from http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/DPMay08/Documents/discussion_paper_reporting_entity.pdf

International Accounting Standards Board [IASB]. (2009). Financial crisis advisory group publishes wide-ranging review of standard-setting activities following the global financial crisis. Retrieved from http://www.ifrs.org/news/press-releases/Pages/financial-crisis-advisory-group-publishes-wide-ranging-review-of-standard-setting-activities-followi.aspx

International Financial Reporting Standards [IFRS]. (2009). Fundación IASC. Material de formación sobre las NIIF para PYMES: Módulo 1 PYMES.

International Financial Reporting Standards [IFRS]. (2013a). International financial reporting standards and technical bulletins. Retrieved from http://www.ifrs.org/Pages/default.aspx

International Financial Reporting Standards [IFRS]. (2013b). Convergence between IFRSs and US GAAP. Retrieved from http://www.ifrs.org/Use-around-the-world/Global-convergence/Convergence-with-US-GAAP/Pages/Convergence-with-US-GAAP.aspx

International Financial Reporting Standards [IFRS]. (2013c). IFRS application around the world. Retrieved from http://www.ifrs.org/Use-around-the-world

International Trade Administration. (2011). US exporter in 2011: An statistical overview. Retrieved from http://www.trade.gov/mas/ian/smeoutlook

Kemp, S. (2009). A look at IFRS for SMEs. Charter, 80, 64-66.


1004

La Porta, R., López-de-Silanes, F., & Shleifer, A. (2008). The economic consequences of legal origins. Journal of Economic Literature, 46(2), 285-332.

Landsman, W., & Maydew, E. (2002). Has the information content of quarterly earnings announcements declined in the past three decades? Journal of Accounting Research, 40(3), 797-808.

Love, V. J. (2011). Private company accounting: A concept whose time has come. CPA Journal, 81(2), 16-18. Lozada, A., & Ríos, C. (2013). IFRS for SMEs: Fashion movement or route to convergence. Global Business Journal, 8(2),

1183-1185. Meeks, G., & Swann, G. (2009). Accounting standards and the economics of standards. Accounting and Business Research, 39(3),

191-210. Miller, D. (1999). The market reaction to international cross-listing: Evidence from depositary receipts. Journal of Financial

Economics, 51(1), 103-123. Miller, R. S. (2010). Is IFRS for SMEs for your company? Financial Executive, 26(5), 16. Needles, B., & Powers, M. (2013). International financial reporting standards (3rd ed.). Mason, OH: Cengage Learning. Pacter, P., & Scott, D. (2012). The IFRS for SMEs. The IFRS Conference, Dubai, September 13, 2012. Retrieved from

http://www.ifrs.org/IFRS-for-SMEs/Documents/1209SMEsDubai.pdf PricewaterhouseCoopers [PwC]. (2012). IFRS adoption by country. Retrieved from

http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-status-country.jhtml PricewaterhouseCoopers [PwC]. (2013a). IFRS developments: IFRS in the US. US IFRS resources. Retrieved from

http://www.pwc.com/usifrs PricewaterhouseCoopers [PwC]. (2013b). Point of view: The future of US standard-setting. The road ahead. Retrieved from

http://www.pwc.com/us/en/cfodirect/publications/point-of-view/future-us-standard-setting.jhtml PricewaterhouseCoopers [PwC]. (2013c). IFRS and US GAAP: Similarities and differences. Retrieved from

http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2013.pdf Schipper, K. (2005). The introduction of international accounting standards in Europe: Implications for international convergence.

European Accounting Review, 14(1), 101-126. United Nations Conference on Trade and Development. (2011). World investment report 2011: Non-equity modes of international

production and development. Retrieved from http://www.unctad-docs.org/files/UNCTAD-WIR2011-Full-en.pdf Veith, S., & Werner, J. R. (2010). Comparing value relevance across countries: Does the return window specification matter?

Retrieved from http://www.frankfurt-school.de/clicnetclm/fileDownload.do?goid=000000276207AB4 Vitez, O. (2013). Historia de los sistemas contables administrativos (Administrative and accounting system history). Retrieved

from http://www.ehowenespanol.com/historia-sistemas-contables-administrativos-hechos_89304/ World Federation of Exchanges. (2012). Market highlights. Retrieved from http://www.world-exchanges.org/statistics World Trade Organization. (2013). Regional trade agreements information system (RTA_IS). Retrieved from http://rtais.wto.org Zeff, S. (2006). Political lobbying on accounting standards: National and international experience. In C. Nobes, & R. Parker

(Eds.), Comparative international accounting. London: Prentice Hall.


Evaluating Board Roles Performance in Adopting Corporate

Social Responsibility (CSR) Practices

Mohammed Naif Z Alshareef, Kamaljeet Sandhu University of New England, Armidale, Australia

The purpose of this paper is to evaluate the board roles that make a board effective in the performance of adopting

corporate social responsibility (CSR) practices. This paper examines directors’ perceptions of the three main roles:

monitoring, service, and strategic, which provide tools for critically understanding how the board adds the value in

moving the organization towards more CSR practices. The stakeholder theory is used to distinguish the influence of

the three main roles on the adoption of CSR practices. Primary data were collected for this research by conducting

structured questionnaires with a sample of 461 directors from Saudi listed companies for study purpose. The results

show that an appropriate mix of directors’ roles and the development of sound board monitoring and service roles

are the most crucial determinants of CSR adoption in Saudi listed companies. As the extant corporate governance

and CSR literatures do not provide a clear perspective with contradictory outcomes about board roles in influencing

CSR practices, the originality of this research is its contribution by evaluating the directors’ perceptions of

developing a direct relationship between the board roles and the adoption of CSR practices. Furthermore, the use of

the stakeholder theory provides additional insights into identifying the most influential board role factors enhancing

stakeholders’ expectations of CSR practices.

Keywords: corporate social responsibility (CSR), board monitoring role, board service role, board strategic role

Introduction A vast amount of literature concentrates on diverse matters associated with the stakeholders of the

organization (Jones, 1995; Freeman, 2001; Jensen, 2002; Freeman, Wicks, & Parmar, 2004). The major issues are: To what level is management of stakeholders affected by corporate governance in business organizations? How do boards of directors perform their roles in managing their stakeholders within organizations? And finally, what is the most influential role of directors in protecting the interests of their organizations’ stakeholders and enhancing the adoption of the best corporate social responsibility (CSR) practices? In responding to all these questions, this study tries to fill up the gap in the corporate governance and CSR literatures by examining the influence of three board roles (monitoring, service, and strategic) on the adoption of CSR practices in Saudi listed companies.

Ayuso and Argandoña (2009), along with Kolk and Pinkse (2006), stated that due to CSR violations, the role played by board of directors (BOD) in violation of CSR practices has raised many questions. Samy and

Mohammed Naif Z Alshareef, Ph.D. candidate, UNE Business School, University of New England. Email:

[email protected]. Kamaljeet Sandhu, senior lecturer, UNE Business School, University of New England.

DAVID PUBLISHING

D

EVALUATING BOARD ROLES PERFORMANCE IN ADOPTING CSR PRACTICES

1006

Bampton (2014) suggested that these CSR violations are the outcomes of CSR structures, policies, and executions. For instance, code of directorship is one of the CSR policies, while code of ethics and business standards have been included in the CSR structures which have been devised by BOD. These problems related to CSR have directed many investigators to identify the need to examine the role played by BOD in CSR (Huse & Rindova, 2001; Bear, Rahman, & Post, 2010; Hung, 2011).

In a nutshell, the basic aim of this study is to investigate the role played by board in adopting CSR practices from the perspective of corporate governance. In other words, the role played by BOD in scheming and applying the CSR is the main focus of research. Apart from that, it will provide an insight into the ways companies administrate themselves in the international market arena. This study will also enhance the knowledge and understanding of the interaction between corporations and their stakeholders. Various studies suggest that this is due to the significant roles played by them in amplifying the system of corporate governance in Saudi companies, such as monitoring, strategic, and service roles (Judge & Zeithaml, 1992; Ruigrok, Peck, & Keller, 2006; Hillman, Nicholson, & Shropshire, 2008). Therefore, Revathy (2012) stated that CSR violations are reduced as a result of enhancement in CSR structures and implementations. Thus, this study tries to fulfill the gap in management literature by recognizing as well as examining the role played by BOD in adopting the CSR practices.

Literature Review

Middleton (1987) and Hillman, Cannella, and Paetzold (2000) highlighted that a significant role is played by corporate directors and their boards, as periphery straddling and control units in administrating interaction of information and resources. Three sets of interconnected tasks performed by principal boards were also identified, which were strategy, service, and control (Pearce & Zahra, 1991). The foremost role is preparing and publicizing corporate objectives and strategies as well as allocating obligatory resources to execute board’s strategies. The subsequent role is corporate control, which comprises scrutinizing and gratifying managerial achievement and performance. Zahra and Pearce (1989) identified that the final role is associated with the institutional task of managerial boards, which consists of advocating the organization’s awareness in society, connecting the organization with external surroundings, and protecting vital assets. Similarly, organizations react to their exterior surroundings with societal actions and the company’s directors can assist their firm through suitable societal accountability actions (Cooper & Owen, 2007; Kotler & Lee, 2008). Societal accountability roles performed by corporate directors are defined as the roles of directors while taking up the CSR actions to generate or encourage organizational, societal, and public policy results that are supportive in meeting the stakeholders’ anticipations (Zeithaml, Keim, & Baysinger, 1988; Hillman, Keim, & Schuler, 2004). These roles can also be believed as a rivulet of board level resolutions which can persuade an incorporated set of actions deliberated to generate societal outcomes, favorable for both the firm’s welfare and the society (Roberts, 1992).

Board Monitoring Role

The agency theory highlights that the role should be played by board in scrutinizing the actions of managers to protect the stakeholders’ interests (Donaldson & Davis, 1991; Fama & Jensen, 1983; Eisenhardt, 1989). Zahra and Pearce (1989) stated that the most governance literature of view that has directed researchers on corporate boards is the agency theory. The agency theory was developed by big companies to tackle the


1007

contradictory association between owners and managers (Berle & Means, 1932; Eisenhardt, 1989; Lan & Heracleous, 2010). The academics supporting the agency theory perspective consider increasing the stakeholders’ wealth as a crucial standard for estimating the corporate performance and how board can further facilitate corporate performance. Boards curtail the agency cost and maximize the wealth of stakeholders. Functionally, boards also scrutinize and assess the performance of companies and chief executive officers (CEOs). Stakeholder-agency theory was the extension of the agency theory proposed by Hill and Jones (1992) to elucidate the association with other stakeholders. Lorsch and MacIver (1989) and later Savage, Nix, Whitehead, and Blair (1991) suggested that in the context of stakeholder’s model, corporate board is a potential and significant system for resolving stakeholders’ problems. Moreover, the organizations that overlook and fail to counter the stakeholders’ problems relinquish the remunerations of favorable repute, compassionate surroundings, and lesser agency, team, and transactions costs (Pfeffer & Salancik, 1978; Jones, 1995; Post, Preston, & Sauter-Sachs, 2002). Fama and Jensen (1983) advocated that corporate board and corporate control market are two alternative control systems, out of which corporate board is the economical option. Similarly, to address the issues of stakeholder, corporate boards are more competent and economical mechanisms as compared with varying competitive situations of company concerning various stakeholder groups. Recognizing the stakeholder’s interests and specialized proficiency in management control are key factors in measuring the efficacy of board (Forbes & Milliken, 1999). In procession with this viewpoint, corporate directors are viewed as the agents to the office by the appointing authority. This stance assists in emphasizing the role of directors as “agents” supporting the extensive groups and interests. Eisenhardt (1989) and Preston and Sapienza (1991) confirmed that various corporations, ecologists, consumers, and civil society groups help in managing social problems which are directly related to companies. Peripheral components have stipulated confirmation that boards are enthusiastic to confront management’s verdicts on their behalf (Gulati & Westphal, 1999). Hillman and Keim (2001) identified, in a study comprising 20 firms consisting of 3,268 board members, that the prevalence of stakeholder directors is positively allied with the performance of stakeholders and efficacy of managerial control. Substantiating this aspect, a custodian role is performed by directors in retaining the stakeholders’ interests that can be influenced by the organizations. This study focuses on Saudi companies where some designated directors may delegate certain stakeholder groups and fulfill the permissible liability to concentrate on their respective interests.

Board Service Role

Extensive literature has illustrated the service role performed by board. Huse and Rindova (2001) suggested that the board acts as the resource for offering services to the organizations and its administration. Lately, this perspective has become a component of the framework for resource-based view of company and related theories, whereas the tactical resource role is played by board influencing the performance of the company. Resource-based approach and resource dependency approach are associated in their deliberation of board members who act as linking and legitimizing medium. Provan (1980), along with Borch and Huse (1993) and Ingley and McCaffrey (2007), stated that tasks performed by boards from the service viewpoint are usually the provision of advice and information and a medium for supplying networks. Supplying the CEO and higher management team with proficient guidance and access to resources and information comprises the service roles performed by directors. The role chiefly curtails from the resource dependence approach and to some degree from the stewardship theory. According to resource dependence approach, BOD acts as a medium for


1008

designating with companies with which the external organizations are co-dependent (Pfeffer & Salancik, 1978). From this perspective, four distinguished service roles of BOD were recommended by Mintzberg (1983): (1) appointing exterior persuaders; (2) creating acquaintances (and heaving funds) for the business; (3) enhancing the organization’s standing; and (4) providing guidance and counsel to the business. Particularly, the final role refers to the possible provision of advanced guidance to the CEO by the board. Due to their respective links and contacts with stakeholder groups and also because of proficient and personal kudos in these groups, directors act as the company’s resource. Connection of directors is defined as the capability of providing appropriate information and also communicating the information to the environment about the organization by directors. Murray (2003) suggested that the repute of a company is guarded in a similar manner by corporate directors as they guard the stakeholders’ interest contributing to diverse societal activities. The manner in which directors assist the company by contributing to societal activities to enhance a positive perception about organizations’ images in the society comprises the social participation role (Mattingly, 2004). According to stakeholder theory, it is anticipated from board members to protect precious resources and assets of the company (Pfeffer & Salancik, 1978). Furthermore, stakeholder theory accentuates the role performed by the board in synchronizing and harmonizing the value for stakeholders engaged in a firm (Hillman & Keim, 2001). The academic plurality initiating from a broad set of service roles suggests a number of precise activities, such as provision of guidance and advice for CSR initiatives, legitimization, contribution in devising CSR initiatives, networking and synchronizing expectations of stakeholders that can be differentiated (Huse, 2000; Chun, 2005).

Board Strategic Role

Historically, there are various contradictory views on the strategic role performed by board. Various academic approaches comprise the strategic role of board. The literature of board strategy role is divided into two schools of thoughts on the basis of boards’ participation in strategy referred to as active and passive (Judge & Zeithaml, 1992; Golden & Zajac, 2001). The advocates of the active school of thought consider BOD as an autonomous body that assists in formulating companies’ strategic routes and directs the administration to accomplish organizations’ missions and objectives (Hung, 2011; Stiles, 2001). Contrary to that, the passive school of thought suggests that board members have very little or no influence on formulating companies’ strategies and act as a tool of management. The board strategic role is directly connected to vigorous action and performance dimension. It is considered to be the chief role of corporate directors and can aid in explaining the attributes of boards and distinguish between the board and management work (Stiles & Taylor, 1996). Miller (1992) suggested that the board leading the company should formulate the framework of its plans, strategies, and objectives and also institute polices requires to manage and administer company.

Various management intellectuals agree that active contribution is important for corporate directors in concluding the future of the company (Pugliese, Bezemer, Zattoni, Huse, Van den Bosch, & Volberda, 2009). Stiles (2001), after detailing an investigation of 51 directors and 121 secretaries of UK-based public companies, recommended that strategic actions of organizations can be influenced by directors. In order to successfully perform a board strategic role, apprehension for stakeholders is imperative for corporate directors. Russo and Fouts (1997) stated that for example, companies can fulfill stakeholders’ demands for decreasing contamination either by mounting new filtering paraphernalia or re-designing their manufacturing procedures. A survey


1009

comprising 2,300 American directors was conducted to investigate the orientation of directors from stakeholders’ perspective and it was found that discreet stakeholder groups existed in the perception of directors (Wang & Dewhirst, 1992). The directors with elevated orientation towards stakeholders were more worried about them. Thus, the first hypothesis is developed on the basis that the concern for stakeholders is positively associated with the perception about the significance of the strategic role performed by corporate directors.

Different postulations formulate a variety of viewpoints about the corporate board’s nature as a governing body. These multiple postulations focus on various board roles. Although, various board and sub-board roles are specified, they are generally recapitulated in three major roles, namely, control, strategic, and service (Zahra & Pearce, 1989). Different suppositions about board’s nature and its relation to a range of stakeholders direct the importance on one role over another and discrepancy about board’s availability in order to execute their tasks in adopting CSR practices. Thus, this study advocates opinions about the roles performed by BOD in adopting CSR practices that integrated multiple stakeholders such as employees, customers, shareholders, suppliers, environment, and local community.

Methodology

The research work comprised an extensive project, that is, corporate governance factors influencing the adoption of CSR practices and financial performance. The methodology of this study is parallel to that of Ingley and Van Der Walt (2002; 2005) and has been adopted. In accordance with previous work, it consisted of four stages.

Stage 1: Organize Several Case Studies in Foundation of Interviews Consisting of Experienced Directors

and Senior Managers to Authenticate Conceptualization of Research Various studies from Saudi listed organizations were used to achieve two purposes: to verify the concepts

recognized from literature for addition in survey instrument and verify the results which were obtained from the mail survey. The beginning various case studies were assembled from chairpersons (CPSs), senior directors (SDs), executive directors (EDs), and non-executives (NEDs). The studies were conducted across various organizations and different industrial sectors. These various case studies consisted of interviews which were conducted with 33 NEDs, EDs, and SDs. The conversation from interviews highlighted the main concerns of directors to facilitate the advancement of a conceptual framework for research.

Stage 2: Attainment of Access to an Appropriate Sample of Directors for Mail Survey

This study was highly desirable due to the high interest of directors and senior management community of all Saudi listed companies. This study is also highly relevant and it is desirable to examine the entire population, however, it cannot be achieved due to lack of data on CSR practices in some companies. Hence, it was decided to confine this research to only six listed Saudi companies in six sectors, namely: agriculture and food industries; multi-investment; real estate development; cement, energy, and utilities; industrial investment; and building and construction and petrochemical industries. The major reasons for selecting these sectors are: Firstly, these sectors signify all those companies which are ecologically susceptible in their daily operating activities. Also, companies in such sectors are highly identified for their social and ecological harms. Secondly, all these companies are listed on Saudi stock exchange and observe the rules of the Saudi capital market authority which imposes necessary corporate governance codes on all listed companies.


1010

Stage 3: Development and Supervision of Survey Instrument

O’Reilly (1982) stated that the evaluation of manager’s insight is permitted by survey method. Clover and Balsley (1984) highlighted that this method uses structured mail questionnaires which are appropriate for attaining respondents’ views on performance-related data. Studies also identified that the professionals and white-collar workers are normally willing to respond to mail questionnaires (Sudman & Bradburn, 1982). Colver and Balsley (1984) proposed that mailed questionnaires were suitable for use when the population consists of homogenous groups of people with parallel interests, socio-economic background, and education. This decisive factor was also confirmed by directors on board. Frequently established theoretical definitions were used to develop the survey items for the constructs. They were also affected by the work of others who tried to further use similar constructs.

Pilot testing was used to trial questionnaire, and for that reason, a small sample of respondents was used. The reactions and responses of sample were scrutinized (Clark & Watson, 1995). A pre-test of 33 superior directors and professionals related to corporate governance and CSR was conducted for companies. Respondents made propositions for modification and amplification of questions and items with respect to gist and clarity of each statement, significance, and sufficiency of items and any tribulations or doubts while finishing the questionnaire. Payne (1951) highlighted problems regarding whether the respondents have sufficient information about the subject of questionnaire design to suggest astute feedback. Schilling and Steensma (2002) suggested that those respondents who have information and knowledge should be selected and they should also be concerned with the issues related to the field of enquiry. The content of instrument was also validated and the questionnaire was circulated among 15 senior academics in Saudi universities with extensive experience in research survey that could critically evaluate the content (Sudman & Bradburn, 1982; Schilling & Steensma, 2002). These propositions by experts during questionnaire development and revision guaranteed a close match between final and pre-test versions of the instrument. Established constructs developed by Maignan and Ferrell (2004) were used in this study.

The final questionnaire comprised a total of 16 sets of statements with 43 questions along with seven demographic statements with a total of seven questions. Broad variety of behavioral functions was measured by three sets of statements consisting of 19 dimensions in questions. A range of items included in CSR practices in terms of shareholder responsibility, community responsibility, ecological responsibility, employee responsibility, product and customer responsibility, and supplier responsibility were measured using six sets of statements containing 17 questions. The items used to measure the control and service roles of board were indistinguishable to those used by Cornforth (2011) in his study of board effectiveness in non-profit organizations. Ruigrok et al.’s (2006) items were used to measure the strategic role of board. Eight items were used to evaluate the construct of board monitoring on a 5-point Likert scale ranging from 1 = strongly disagree to 5 = strongly agree. The construct covers issues related to omission of financial management and control, supervision of firm and CEO performance, responsibility to stakeholders, and execution of legal obligations. Evaluation of board service construct was conducted with five items on a 5-point Likert scale ranging from 1 = strongly disagree to 5 = strongly agree that envelop concerns such as support and recommendation to management, delegation of stakeholders, evaluation of board performance, and connection with important groups and organizations in lieu of company. Review of board strategic construct was conducted with six items


1011

on a 5-point Likert scale ranging from 1 = strongly disagree to 5 = strongly agree that wrap problems such as identifying the firm’s missions and values, firm’s vision and objectives, firm’s strategic direction, determining and enforcing company policies, determining corporate and financial options, firm’s structure and strategy execution, and performance management. A 17-item scale was used to measure six CSR practices, namely, community responsibility, ecological responsibility, employee responsibility, investor responsibility, customer responsibility, and supplier responsibility. It was enquired from the respondents to specify the extent to which each item echoed their organizations on a 5-point Likert scale ranging from 1 = strongly disagree to 5 = strongly agree.

Final survey was conducted in February 2012 and questionnaires were distributed in one time only as the data were cross-sectional in nature. It was anticipated that the sample was sufficient. It was identified by Anderson and Niebuhr (1986) that for mail questionnaire, it is mandatory to attach covering letters in order to introduce the researcher and legitimize the survey. Prologue and validation were attained through two approaches: firstly, the article in boardroom—the transporting vehicle for the questionnaire—and secondly, on envelop of the questionnaire itself. This helped to acknowledge the basic reason for conducting research and also identified the importance of the work with an aim to raise a productive argument and further provoke opinions concerning the involvement of directors in organizations. The survey swathe provoked and motivated contribution from participants by advising on the worth and value of the questionnaire as a tool for manifestation on participants’ own boards, demonstrating the time required to complete a survey and also promising respondents secrecy and discretion. The survey questionnaire also consisted of freepost return envelops along with contact details of the researcher in case of any questions regarding the research. A total of 900 surveys were distributed among all listed companies out of which only 58 were returned due to erroneous address. Supplementary copies of questionnaires were requested by various companies to be completed by other boards that had terms and relations with directors. A total of 570 questionnaires were returned in a period of five months out of which 461 responses were useable with a response rate of 67%. The major reason for lack of responses from directors was unavailability due to business reasons. This made it impossible for them to complete and return the questionnaire. The other reasons for non-response were mainly: misplacement of questionnaire or being returned too late to be included in analysis; directors were either retired or not presently holding a directorship; and finally, missing answers for some questions.

Stage 4: Data Analysis and Interpretation

The software used for analyzing the data was the “Statistical Package for Social Sciences (SPSS) 21.0”. A semantic differential 5-point Likert scale ranging from 1 = strongly disagree to 5 = strongly agree was used for statements other than any single responses. Initial analysis of data was completed using normal descriptive statistics in order to spot any oddities in frequencies. Introductory cross-tabulations were also conducted. Means were used as the central tendency measure and the scales were treated as metric level data. Interpretation is similar to system of confirmation of data used by Schilling and Steensma (2002). Additional information was summoned to remark and validate the results of research as a reasonable indication of a director’s experience of board roles (scrutinizing, service, and strategic) and CSR performance with provision of supplementary quantitative insights through this authority.


1012

Result and Discussion

The Directors’ Perception on the Monitoring Role of CSR Activities

Huse and Rindova (2001) argued that the board plays an important role in implementing CSR practices effectively. The various roles played by board and their inclination towards adopting the CSR practices have been specified by the survey conducted for Saudi listed companies. The survey includes three board roles which are board monitoring, service, and strategic roles (Fama & Jensen, 1983; Ingley & McCaffrey, 2007; Ruigrok et al., 2006). In the context of stakeholder approach, Ayuso and Argandoña (2009) identified that good and accountable corporate governance ensures effective CSR adoption. Table 1 illustrates the influence of board monitoring role on CSR adoption. Zona and Zattoni (2007) stated that board monitoring role is one of the main tasks performed to safeguard the rights of stakeholders. The board monitoring role comprises eight constructs and respondents have been asked to rate the importance of each item on a 5-point Likert scale ranging from 1 = strongly disagree to 5 = strongly agree. Table 1 shows the value of Cronbach’s alpha, mean, and standard deviation for the items used to compute board monitoring role. The value of Cronbach’s alpha is used to test the internal reliability of various items used to measure a variable (Tavakol & Dennick, 2011). The value of alpha should be greater than 0.7 to reliably calculate the items (Hinton, Brownlow, McMurray, & Cozens, 2004). From Table 1, it is clear that values of all the individual items are greater than 0.9, showing high reliability of the items ranging from 0.926 to 0.941. The overall value of alpha is 0.941 which explains that the items are competently measuring the board monitoring role. The value of mean in Table 1 explains the average inclination of respondents whereas the standard deviation states the dispersion or spread of data from the mean. Table 1 also shows that the value of mean for all the items is between 3 and 4 showing response which is either agree or strongly agree. The respondents placed great importance on members’ effective monitoring and evaluation of top management in performance of CSR activities (BMR1) as the value of mean is 4.66 and is in accordance with the work of Clarkson (1995). Responses also identified that board effective evaluation of non-financial report of CSR activities (BMR2) is also of great importance which is in alignment with the work of Perrini (2006) who highlighted the importance of financial evaluation and performance in achieving organizational sustainability. Finally, respondents placed importance on the factor that members are kept informed on the financial report of CSR activities (BMR5). This finding is also consistent with the work of previous studies and the value of mean is 4.54 showing the agreement of respondents (Morsing & Schultz, 2006). Only one item, that is, board members’ active involvement in defining behavioral guidelines for CSR managers (BMR9) having a mean of 2.79, is the only construct which is of least importance for respondents. The other constructs, which are ensuring accountability to the organization’s stakeholders (BMR3), effectively monitoring and evaluating CSR budget (BMR4), and ensuring that the organization has adequate CSR financial systems and procedures (BMR8), have means greater than 3, showing a response between neutral and agreement which is also in accordance with previous studies (Morsing & Schultz, 2006; Rasche & Esser, 2006). The individual percentages for responses were high for agree and strongly agree which are 38.1% and 22.2%, showing that most responses were agreeing. The overall mean is 3.79 showing that the respondents agreed that board monitoring role has an effect on the adoption of CSR practices (Zandstra, 2002). The standard deviation is 0.44 which is close to the mean, showing that the data are less dispersed.


1013

Table 1 Cronbach’s Alpha, Means, Standard Deviations, and Responses (%) to the First Board Role—Board Monitoring Role

Code Factor: board monitoring role α Mean Standard deviation SD (%) D (%) N (%) A (%) SA (%)

BMR1

Our board members effectively monitor and evaluate top management in CSR activities performance

0.929

4.66

0.53

0

0

2.8

28.5

68.7

BMR2

Our board members evaluate the non-financial report of CSR activities

0.929

4.34

0.60

0

0

7

52.6

40.4

BMR3

Ensuring accountability to the organization’s stakeholders

0.929

3.60

0.52

0

1.3

37.6

60.9

0.2

BMR4

Our board members effectively monitor and evaluate CSR budget

0.941

3.11

0.45

0

5.2

78.3

16.5

0

BMR5

Our board members are kept informed on the financial report of CSR activities

0.937

4.54

0.58

0

0

4.6

36.5

58.9

BMR6

Our board members effectively monitor and evaluate CSR operations performance

0.935

3.91

0.53

0

0.4

17.8

72.4

9.3

BMR8

Our board members ensure that the organization has adequate CSR financial systems and procedures

0.933

3.34

0.54

0

3.3

59.3

37.4

0

BMR9

Our board members are actively involved in defining behavioral guidelines for CSR managers

0.926

2.79

0.42

0

21.5

78.3

0.2

0

Total 0.941 3.79 0.44 0.0 4.0 35.7 38.1 22.2 Notes. SD = Strongly disagree; D = Disagree; N = Neutral; A = Agree; SA = Strongly agree.

The Directors’ Perception on the Service Role of CSR Activities

Table 2 demonstrates the influence of board service role on CSR adoption. Huse and Rindova (2001) identified that the board acts as a facilitator in providing services related to information and suggestions. Du, Bhattacharya, and Sen (2010) stated that board service role can positively change stakeholder’s attitude and fortify the long-term relation. Table 2 demonstrates that the alpha for items ranges from 0.881 to 0.904 and the overall value is 0.890 showing high consistency of items in measuring board service role. The result findings highlighted that respondents placed great importance on board members’ effective provision of advice and counsel in discussions for formulation of CSR activities with top management (BSR1) and the mean value is 4.72. This is parallel to the findings of the work done by Ingley and McCaffrey (2007) which highlighted the importance of board members in facilitating information in and out of social networks. Another important factor highlighted by respondents is members’ effective provision of advice and counsel in CSR financial issues (BSR2) with a mean of 4.59 showing that most respondents agreed with the statement. The research finding by Nicholson and Kiel (2004) also stated that effective good governance by board helps to resolve legal issues and increase organizational performance. Finally, responses also showed that board members effectively provide assistance in obtaining knowledge and information of CSR activities from outside the company (BSR5) which is in accordance with the work of Ingley and McCaffrey (2007) and has a mean of 4.03. The only item that has not been highlighted as a major factor in measuring the board service role is BSR4, stating that, “Board members effectively provide the firm with external legitimacy and reputation”. The overall mean is 3.88, showing that board service role affects the adoption of CSR practices (Hillman et al., 2008). The data are also less fluctuated as the standard deviation is 0.46, showing that the responses of individuals were less divergent from the mean responses.


1014

Table 2 Cronbach’s Alpha, Means, Standard Deviations, and Responses (%) to the Second Board Role—Board Service Role

Code Factor: board service role α Mean Standard deviation SD (%) D (%) N (%) A (%) SA (%)

BSR1

Our board members effectively provide advice and counsel in discussions of formulation of CSR activities with top management

0.881

4.72

0.57

0.2

0.7

3

19.6

76.5

BSR2

Our board members effectively provide advice and counsel in CSR financial issues

0.904

4.59

0.62

0.2

0.7

3.7

31.1

64.3

BSR3

Our board members effectively provide linkages to important external stakeholders (banks, suppliers, customers, government, and shareholders)

0.886

3.18

0.52

0.4

4.6

71.5

23.5

0

BSR4

Our board members effectively provide the firm with external legitimacy and reputation

0.897

2.88

0.41

0.9

12.4

84.6

2.2

0

BSR5

Our board members effectively provide assistance in obtaining knowledge and information of CSR activities from outside the company

0.882

4.03

0.56

0.2

1.1

10

73.3

15.4


The Directors’ Perception on the Strategic Role of CSR Activities

Table 3 explains the influence of board strategic role on the adoption of CSR practices. Board strategic role means the actions performed by members in formulating and implementing the strategies (Papadakis, Lioukas, & Chambers, 1998). Table 3 explains that the value of alpha for items is greater than 0.8, showing high internal reliability among items in measuring the board strategic role (Tavakol & Dennick, 2011). The significant construct is board members’ effective monitoring of the top management in CSR strategic decision-making whose mean value is 4.16, showing that most respondents consider it important for measuring the board strategic role. This is similar to the findings of Forbes and Milliken (1999) which highlighted the role that board members play in monitoring and decision-making of top management. This shows that in order to adopt CSR practices, it is important for board members to properly monitor and assist the manager’s decision-making (Ruigrok et al., 2006). The value of mean for items like board members effectively set the organization’s CSR mission and values (BST1), board members are effectively involved in implementing long-term CSR strategic decision-making (BST2), and board members effectively make proposals on the CSR long-term strategies and main goals (BST3) is between 2.15 and 2.82 showing responses ranging between disagree and strongly disagree. The aggregated value of mean is 3.22 showing a neutral reply that board strategic role has an effect on the adoption of CSR practices (Hillman et al., 2008). The percentages of response rates, that is, 23.0% and 42.3% respectively, also show that responses were either disagreeing or neutral. The standard deviation is 0.48 explaining less dispersion of responses from the mean.


1015

Table 3 Cronbach’s Alpha, Means, Standard Deviations, and Responses (%) to the Third Board Role—Board Strategic Role

Code Factor: board strategic role α Mean Standard deviation SD (%) D (%) N (%) A (%) SA (%)

BST1

Our board members effectively set the organization’s CSR mission and values

0.914

2.82

0.48

1.5

16.7

79.3

2.4

0

BST2

Our board members are effectively involved in implementing long-term CSR strategic decision-making

0.911

2.64

0.53

2

32

66.1

0

0

BST3

Our board members effectively make proposals on the CSR long-term strategies and main goals

0.919

2.15

0.45

3

78.5

18.5

0

0

BST4

Our board members effectively monitor top management in CSR strategic decision-making

0.898

4.16

0.67

0.2

2

8.7

59.6

29.6

BST5

Our board members review CSR objectives to match the mission and values and to form the basis of company strategy

0.906

3.07

0.51

0.9

7

75.7

16.3

0

BST6

Our board members adapt performance measures to monitor the implementation of strategy, policies and plans, and the legal/fiduciary obligations affecting the business and the board

0.903

4.46

0.70

0.2

1.7

5.4

37.4

55.2


The Directors’ Perception on the Adoption of CSR Activities

Table 4 illustrates the importance of adopting the CSR practices for good corporate governance. CSR practices are the responsibility of the organization to value the stakeholders and humanity (Hemphill, 2004). Simmons (2004) stated that good corporate governance influences the CSR activities and board tasks play a major role in that scenario. Table 4 shows that the overall value of alpha is 0.970 and individual values of alpha are also greater than 0.9 showing high consistency among the items (Tavakol & Dennick, 2011). Mean of the items is greater than 3 showing that the responses ranged between agree and strongly agree. The construct, measuring the organization’s environmental performance (CA6), is important and has a mean of 4.34 which is also parallel to the finding of previous work (Russo & Fouts, 1997). Respondents also highlighted that the means of items like incorporating the interests of all our investors into business decisions (CA12), providing all investors with a competitive return on investment (CA13), seeking the input of all our investors regarding strategic decisions (CA14), providing all customers with the information needed to make sound purchasing decisions (CA16), and adapting products or services to enhance the level of customer satisfaction (CA18) are greater than 4, showing that those items are highly important (Barsky & Labagh, 1992; Day, Shocker, & Srivastava, 1979; Papadakis et al., 1998). On the other hand, CA21 is the only construct for which responses were in disagreement. The overall mean is 3.8 showing a response between neutral and agreement. The value of standard deviation is 0.42 showing less fluctuation of data from the mean.


1016

Table 4 Cronbach’s Alpha, Means, Standard Deviations, and Responses (%) for the Directors’ Perception on the Adoption of CSR Activities

Code Factor: CSR adoption α Mean Standard deviation SD (%) D (%) N (%) A (%) SA (%)

CA1

Giving money to charities in the communities where we operate

0.968

3.80

0.50

0

0.4

12.6

72.6

14.3

CA3

Financially supporting community activities where we operate (arts, culture, sports, and education)

0.968

3.91

0.50

0

0

8.3

64.3

27.4

CA4

Incorporating environmental performance objectives into organizational plans

0.968

4.01

0.54

0

0

6.5

53

40.4

CA5

Financially supporting environmental initiatives

0.968

4.19

0.57

0

3.7

67

29.3

0

CA6

Measuring the organization’s environmental performance

0.967

4.34

0.60

0

2.8

51.1

46.1

0

CA7

Treating all employees fairly and respectfully, regardless of gender or ethnic background

0.968

3.26

0.52

0

0.9

33.5

64.3

1.3

CA8

Providing all employees with salaries that properly and fairly reward them for their work

0.967

3.43

0.55

0

7.1

85.5

7.4

0

CA9

Supporting all employees who want to pursue further education

0.968

3.66

0.52

0

0

5.4

41.5

53

CA11

Incorporating the interests of all employees into business decisions

0.97

3.00

0.38

0

0

3.3

32

64.8

CA12

Incorporating the interests of all our investors into business decisions

0.966

4.48

0.60

0

0

2.4

22

75.7

CA13

Providing all investors with a competitive return on investment

0.967

4.62

0.55

0

2.2

44.3

53.3

0.2

CA14

Seeking the input of all our investors regarding strategic decisions

0.968

4.73

0.49

0

0

6.3

50

43.7

CA15

Providing all customers with very high quality service

0.967

3.52

0.55

0

0

1.7

18.7

79.6

CA16

Providing all customers with the information needed to make sound purchasing decisions

0.967

4.37

0.60

0.4

49.8

49.8

0

0

CA18

Adapting products or services to enhance the level of customer satisfaction

0.968

4.78

0.46

2.4

94.3

3.3

0

0

CA19

Providing all suppliers of products and services with a commitment to a future relationship

0.968

2.49

0.51

0

0.4

12.6

72.6

14.3

CA21

Incorporating the interests of all suppliers of products and services into business decisions

0.971

2.01

0.24

0

0

8.3

64.3

27.4


Conclusions

The results demonstrate that board monitoring and service roles played a key role in comprehending the perception of directors on adoption of CSR practices. The high overall means for monitoring and service roles explain their importance in adopting the CSR practices. The results of evaluating the monitoring role revealed that directors are more concerned with monitoring and evaluating top management in CSR activities and monitoring the financial and non-financial reports of CSR activities. These significant and influential sub-roles increase the efficacy of the BOD in adopting the CSR practices. In the service role context, this research has


1017

demonstrated the importance of the three roles that have enhanced the adoption of CSR practices by providing advice and counsel in discussions of formulation of CSR activities with top management and CSR financial issues as well as providing assistance in obtaining knowledge and information of CSR activities from outside the company. It is also highlighted from the findings that board strategic role does not play a momentous role in making board more competent in adopting CSR practices. Only two constructs, which are the board members’ effective monitoring of top management in CSR strategic decision-making and board members’ adoption of the performance measures to monitor the implementation of strategy, policies and plans, and the legal/fiduciary obligations affecting the business and the board, tend to effectively measure the strategic board role. The results for strategic role are insignificant and are parallel to the passive involvement approach of board’s strategy role. The board strategy role is divided into two schools of thoughts which are active and passive (Golden & Zajac, 2001). The intellectuals who support the passive school of thought suggest that board has little or no influence on the strategy formulation process. Contrary to that, the active viewpoint suggests that a major role is played by board members in strategy formulation in order to fulfill the company’s mission and objectives. So, this explains the reason for the insignificant results for board strategic role, because findings show that respondents are of passive viewpoint and do not consider that an influential role is played by board members in the strategic formulation process and issues.

References Anderson, J. F., & Niebuhr, M. A. (1986). Questionnaires: Design and use. Metuchen, NJ: Scarecrow Press. Ayuso, S., & Argandoña, A. (2009). Responsible corporate governance: Towards a stakeholder board of directors? IESE Business

School Working Paper No. 701. Barsky, J. D., & Labagh, R. (1992). A strategy for customer satisfaction. The Cornell Hotel and Restaurant Administration

Quarterly, 33(5), 32-40. Bear, S., Rahman, N., & Post, C. (2010). The impact of board diversity and gender composition on corporate social responsibility

and firm reputation. Journal of Business Ethics, 97(2), 207-221. Berle, A., & Means, G. (1932). The modern corporation and private property. London: Macmillan. Borch, O. J., & Huse, M. (1993). Informal strategic networks and boards of directors. Entrepreneurship Theory and Practice,

18(1), 23-36. Chun, R. (2005). Corporate reputation: Meaning and measurement. International Journal of Management Reviews, 7(2), 91-109. Clark, L. A., & Watson, D. (1995). Constructing validity: Basic issues in objective scale development. Psychological Assessment,

7(3), 309-319. Clarkson, M. E. (1995). A stakeholder framework for analyzing and evaluating corporate social performance. Academy of

Management Review, 20(1), 92-117. Clover, V. T., & Balsley, H. L. (1984). Business research methods (3rd ed.). New York, NY: John Wiley & Sons. Cooper, S. M., & Owen, D. L. (2007). Corporate social reporting and stakeholder accountability: The missing link. Accounting,

Organizations, and Society, 32(7), 649-667. Cornforth, C. (2011). Nonprofit governance research: Limitations of the focus on boards and suggestions for new directions.

Nonprofit and Voluntary Sector Quarterly, 41(6), 1117-1136. Day, G. S., Shocker, A. D., & Srivastava, R. K. (1979). Customer-oriented approaches to identifying product-markets. The

Journal of Marketing, 43(4), 8-19. Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian

Journal of Management, 16(1), 49-64. Du, S., Bhattacharya, C. B., & Sen, S. (2010). Maximizing business returns to corporate social responsibility (CSR): The role of

CSR communication. International Journal of Management Reviews, 12(1), 8-19. Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57-74. Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301-325.


1018

Forbes, D. P., & Milliken, F. J. (1999). Cognition and corporate governance: Understanding boards of directors as strategic decision-making groups. Academy of Management Review, 24(3), 489-505.

Freeman, R. E. (2001). A stakeholder theory of the modern corporation. In L. P. Hartmann (Ed.), Perspectives in business ethics (3rd ed.). New York, NY: McGraw-Hill.

Freeman, R. E., Wicks, A. C., & Parmar, B. (2004). Stakeholder theory and “the corporate objective revisited”. Organization Science, 15(3), 364-369.

Golden, B. R., & Zajac, E. J. (2001). When will boards influence strategy? Inclination × power = strategic change. Strategic Management Journal, 22(12), 1087-1111.

Gulati, R., & Westphal, J. D. (1999). Cooperative or controlling? The effects of CEO-board relations and the content of interlocks on the formation of joint ventures. Administrative Science Quarterly, 44(3), 473-506.

Hemphill, T. A. (2004). Corporate citizenship: The case for a new corporate governance model. Business and Society Review, 109(3), 339-361.

Hill, C. W., & Jones, T. M. (1992). Stakeholder‐agency theory. Journal of Management Studies, 29(2), 131-154. Hillman, A. J., & Keim, G. D. (2001). Shareholder value, stakeholder management, and social issues: What’s the bottom line?

Strategic Management Journal, 22(2), 125-139. Hillman, A. J., Cannella, A. A., & Paetzold, R. L. (2000). The resource dependence role of corporate directors: Strategic

adaptation of board composition in response to environmental change. Journal of Management Studies, 37(2), 235-256. Hillman, A. J., Keim, G. D., & Schuler, D. (2004). Corporate political activity: A review and research agenda. Journal of

Management, 30(6), 837-857. Hillman, A. J., Nicholson, G., & Shropshire, C. (2008). Directors’ multiple identities, identification, and board monitoring and

resource provision. Organization Science, 19(3), 441-456. Hinton, P. R., Brownlow, C., McMurray, I., & Cozens, B. (2004). SPSS explained. London: Routledge. Hung, H. (2011). Directors’ roles in corporate social responsibility: A stakeholder perspective. Journal of Business Ethics, 103(3),

385-402. Huse, M. (2000). Boards of directors in SMEs: A review and research agenda. Entrepreneurship and Regional Development,

12(2), 271-290. Huse, M., & Rindova, V. P. (2001). Stakeholders’ expectations of board roles: The case of subsidiary boards. Journal of

Management and Governance, 5(2), 153-178. Ingley, C. B., & McCaffrey, K. (2007). Effective governance for start-up companies: Regarding the board as a strategic resource.

International Journal of Business Governance and Ethics, 3(3), 308-329. Ingley, C., & Van Der Walt, N. (2002). Board dynamics and the politics of appraisal. Corporate Governance: An International

Review, 10(3), 163-174. Ingley, C., & Van Der Walt, N. (2005). Do board processes influence director and board performance? Statutory and performance

implications. Corporate Governance: An International Review, 13(5), 632-653. Jensen, M. C. (2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly,

12(2), 235-256. Jones, T. M. (1995). Instrumental stakeholder theory: A synthesis of ethics and economics. Academy of Management Review,

20(2), 404-437. Judge, W. Q., & Zeithaml, C. P. (1992). Institutional and strategic choice perspectives on board involvement in the strategic

decision process. Academy of Management Journal, 35(4), 766-794. Kolk, A., & Pinkse, J. (2006). Stakeholder mismanagement and corporate social responsibility crises. European Management

Journal, 24(1), 59-72. Kotler, P., & Lee, N. (2008). Corporate social responsibility: Doing the most good for your company and your cause. Hoboken,

NJ: John Wiley & Sons. Lan, L. L., & Heracleous, L. (2010). Rethinking agency theory: The view from law. Academy of Management Review, 35(2),

294-314. Lorsch, J. W., & MacIver, E. A. (1989). Pawns or potentates: The reality of America’s corporate boards. Boston: Harvard School

Press. Maignan, I., & Ferrell, O. C. (2004). Corporate social responsibility and marketing: An integrative framework. Journal of the

Academy of Marketing Science, 32(1), 3-19.


1019

Mattingly, J. E. (2004). Redefining the corporation: Stakeholder management and organizational wealth. Academy of Management Review, 29(3), 520-530.

Middleton, M. (1987). Non-profit boards of directors: Beyond the governance function. In W. W. Powell (Ed.), The nonprofit sector. New Haven: Yale University Press.

Miller, S. (1992). Establishing an effective board of directors. A speech given at the Seminar on Establishing an Effective Board of Directors, August 4, 1992.

Mintzberg, H. (1983). Power in and around organizations. Englewood Cliffs, NJ: Prentice Hall. Morsing, M., & Schultz, M. (2006). Corporate social responsibility communication: Stakeholder information, response, and

involvement strategies. Business Ethics: A European Review, 15(4), 323-338. Murray, J. (2003). The global context: Multinational enterprises, labor standards, and regulation. In L. P. Hartman, D. G. Arnold,

& R. E. Wokutch (Eds.), Rising above sweatshops: Innovative approaches to global labor challenges. Westport: Preager. Nicholson, G. J., & Kiel, G. C. (2004). A framework for diagnosing board effectiveness. Corporate Governance: An International

Review, 12(4), 442-460. O’Reilly, C. A. (1982). Variations in decision makers’ use of information sources: The impact of quality and accessibility of

information. Academy of Management Journal, 25(4), 756-771. Papadakis, V. M., Lioukas, S., & Chambers, D. (1998). Strategic decision-making processes: The role of management and

context. Strategic Management Journal, 19(2), 115-147. Payne, S. L. (1951). The art of asking questions. Princeton, NJ: Princeton University Press. Pearce, J. A., & Zahra, S. A. (1991). The relative power of CEOs and boards of directors: Associations with corporate

performance. Strategic Management Journal, 12(2), 135-153. Perrini, F. ( 2006). The practitioner’s perspective on non-financial reporting. California Management Review, 48(2), 73-103. Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations: A resource dependence perspective. New York, NY:

Harper and Row. Post, J. E., Preston, L. E., & Sauter-Sachs, S. (2002). Redefining the corporation: Stakeholder management and organizational

wealth. Stanford, CA: Stanford University Press. Preston, L. E., & Sapienza, H. J. (1991). Stakeholder management and corporate performance. Journal of Behavioral Economics,

19(4), 361-375. Provan, K. G. (1980). Board power and organizational effectiveness among human service agencies. Academy of Management

Journal, 23(2), 221-236. Pugliese, A., Bezemer, P. J., Zattoni, A., Huse, M., Van den Bosch, F. A., & Volberda, H. W. (2009). Boards of directors’

contribution to strategy: A literature review and research agenda. Corporate Governance: An International Review, 17(3), 292-306.

Rasche, A., & Esser, D. E. (2006). From stakeholder management to stakeholder accountability. Journal of Business Ethics, 65(3), 251-267.

Revathy, B. (2012). Corporate social responsibility: An implementation guide for business. Far East Journal of Psychology and Business, 6(2), 15-31.

Roberts, R. W. (1992). Determinants of corporate social responsibility disclosure: An application of stakeholder theory. Accounting, Organizations, and Society, 17(6), 595-612.

Ruigrok, W., Peck, S. I., & Keller, H. (2006). Board characteristics and involvement in strategic decision making: Evidence from Swiss companies. Journal of Management Studies, 43(5), 1201-1226.

Russo, M. V., & Fouts, P. A. (1997). A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal, 40(3), 534-559.

Samy, M., & Bampton, R. (2014). A phenomenological study of CSR policy making and implementation in developed countries: The case of the Netherlands and Sweden. Journal of Global Responsibility, 5(1), 138-159.

Savage, G. T., Nix, T. W., Whitehead, C. J., & Blair, J. D. (1991). Strategies for assessing and managing organizational stakeholders. Academy of Management Executive, 5(2), 61-75.

Schilling, M. A., & Steensma, H. K. (2002). Disentangling the theories of firm boundaries: A path model and empirical test. Organization Science, 13(4), 387-401.

Simmons, J. (2004). Managing in the post-managerialist era: Towards socially responsible corporate governance. Management Decision, 42(3/4), 601-611.

Stiles, P. (2001). The impact of the board on strategy: An empirical examination. Journal of Management Studies, 38(5), 627-650.


1020

Stiles, P., & Taylor, B. (1996). The strategic role of the board. Corporate Governance: An International Review, 4(1), 3-10. Sudman, S., & Bradburn, N. M. (1982). Asking questions: A practical guide to questionnaire design. San Francisco: Jossey Bass. Tavakol, M., & Dennick, R. (2011). Making sense of Cronbach’s alpha. International Journal of Medical Education, 2, 53-55. Wang, J., & Dewhirst, H. D. (1992). Boards of directors and stakeholder orientation. Journal of Business Ethics, 11(2), 115-123. Zahra, S. A., & Pearce, J. A. (1989). Boards of directors and corporate financial performance: A review and integrative model.

Journal of Management, 15(2), 291-334. Zandstra, G. (2002). Enron, board governance, and moral failings. Corporate Governance, 2(2), 16-19. Zeithaml, C. P., Keim, G. D., & Baysinger, B. D. (1988). Toward an integrated strategic management process: An empirical

review of corporate political strategy. In Strategic management frontiers (Vol. 10., pp. 377-393). Greenwich, CT: JAI Press. Zona, F., & Zattoni, A. (2007). Beyond the black box of demography: Board processes and task effectiveness within Italian firms.

Corporate Governance: An International Review, 15(5), 852-864.


The Prospect of Ethical Consulting

Luu Yin University for Development Studies, Navrongo, Ghana

Safia Wemah University for Development Studies, Tamale, Ghana

Ethical consulting is a critical professional activity that is very critical to the very survival of the corporate world

and is thus likely to boom within the shortest possible time in the future. This predictive statement is based on the

consequential effect of the bankruptcy of Enron and WorldCom and its aftermath legislature, Sarbanes-Oxley Act

(Lander, 2004). The main issues boarder on how ethics influence organizations’ operations and to what extend

these influences can be coded and managed to enhance objectivity and minimize fraud. The methodology applied in

this paper was an exploratory approach under the qualitative design. It encapsulates a thorough review of literature

on the subject matter and draws inferences to address the research objectives. It was found that ethical consulting

was possible and consultants venturing into the area need to be strategically diversified to enable them to design

and develop customized ethical codes for the heterogeneous clientele with appropriate supporting monitoring and

compliance procedures.

Keywords: ethics, compliance, gatekeeper, consultancy

Introduction

Ethics are human-based faculties that guide our decision-making processes and aid us to relate effectively with our neighbors and the society as a whole. It provides us with some guiding principles to deal with both conflict and opportunity in human relationships as well as how our decisions, actions, and inactions affect other people.

Research Problem

Ethics and integrity are important components of a profession. In today’s business environment, it is not uncommon for ethically challenging issues to arise in an organization. Several years after Sarbanes-Oxley, companies face ever-increasing regulatory compliance demands and new ethical challenges raised by a more complex and global business environment. In a hypothetical organization chart would include finance, human resource, and operations among others as functional managers. It is, however, not common to see a functional manager or even a sub-manager in charge of ethics, thus, ignoring the root cause of fraud and misbehavior of staff within the organization, as well as how the organization relates with its externalities.

Using a hypothetical organogram as a theoretical framework (see Figure 1), the absence of an ethics consultant or functional manager in the organization exposes the operations and management of the organization to various risks that can generate fatal consequences that are capable of challenging the going concern status of the organization.

Luu Yin, lecturer, Department of Mathematics, Faculty of Mathematical Sciences, University for Development Studies. Email: [email protected].

Safia Wemah, chartered accountant, Finance Office, Central Administration, University for Development Studies.

DAVID PUBLISHING

D

THE PROSPECT OF ETHICAL CONSULTING

1022

Just as discipline is the key success factor for the development of the individual, so are ethics core to the development of any organization. Irrespective of the strategies, management styles, and the qualities of the human resources, the absence of ethical values is like a man who prophesies faith and hope without love (Holy Bible, I Corinthians 13:1-3, Thomas, 1985). The absence of ethical functionality and its policing in organizations is causing persistent corruptibility and fraudulent acts by well-intended chief executive officers (CEOs) in particular.

Figure 1. A modified hypothetical organogram.

Research Questions and Objectives

In an attempt to assess the possibility of ethical consulting, this paper addressed the following questions. What is the relevance of ethics in the management of organizations? Can the achievement of organizational goals be significantly influenced by the ethical status of the organization? What ethical issues would consultants be addressing for their clients?

When these questions are effectively discussed, the results therein would address: the relevance of ethics in managing organizations, the influence of ethics on organizational successes, and the ethical issues that consultants may need to address for their clients. The problem tree concept is our adopted logical framework for this study.

The core problem is identified as the lack of ethical functionality in the organization (see Figure 2). This problem is caused by several factors, but the immediate ones include: ignoring ethical standards and values at the strategic plan formulation and/or implementation of the organization, sidelining the relevance of ethics in effective management and therefore omitting it from the organogram, and undermining the influences that ethical standards have on the success of the business by not assigning an officer to police the compliance of the companies’ ethical standards.

Notes: => Functional unit available

=> Functional unit proposed

=> Flow of management instructions and decision

=> Flow of ethical codes and compliance monitoring

Executive Director

Deputy Executive Director

Finance

Manager

Marketing

Manager

HR

Manager

R&D

Manager

Operations

Manager

Operations

Manager

Ethics Consultant/Functionality


1023

The effects of these root causes produced the core problem. The problem then yields many effects, the ultimate of which is the company getting into financial distress and possibly folding up or suffering series of failures and bankruptcy. The immediate effects of the problem are that the lack of or weakly enforced ethical standards may yield blind obedience to orders, uncontrolled conflict of interest, and non-commensurate remuneration. These effects severally and jointly generate some other effects and finally corporate failures.

Figure 2. Conceptual framework of the study (problem tree).

Literature Review

To answer the questions and, for that matter, assess the type of nutrients in the soil that is nurturing the roots of this unhealthy tree, this paper centered its discussions on the collapses of Enron and WorldCom and its aftermath legislature, Sarbanes-Oxley.

Effe

cts o

f the

Abs

ence

of E

thic

al F

unct

iona

lity

on a

n O

rgan

izat

ion

Roo

t Cau

ses o

f the

Pro

blem

Corporate Failure/Liquidation/Bankruptcy

Depletion of Company’s Resources Over-Estimation of Corporate Net Fair

Value and Viability

Fraudulent Deals: Pilfering and

Embezzlement

Subjective Decision-Making

Accounting Dishonesty:

Window Dressing

Non-commensurate Remuneration

Uncontrolled Conflict of Interest

Situational Factors, Blind Obedience

Core Problem: Lack of Ethical

Consultancy/Functionality

Ethical Function/Unit Not Integrated in the

Organogram

No Ethical Consideration in the Vision and Mission

Statement

No Specific Officer/Functional

Unit Responsible for Monitoring Ethical

Compliance


1024

One would have expected that after about 14 years of the Sarbanes-Oxley behind us, companies would have learnt the lessons they needed to learn (Suchan, 2004). In spite of the details of the work that had to go into compliance under the Sarbanes-Oxley, a lot of companies did, in fact, find that they were not as disciplined as they could be. That is one of the main lessons that finance learned, and it is a message that finance people should be delivering to other functions in the company. Sarbanes-Oxley put finance into the position of having to reach out to all sorts of functions in the organization, because they had to get input from so many people. And this is also what ethics and compliance officers have to do: reach out and collect information from the various departments and businesses within the company to get a clear picture of the ethics and compliance pulse of the organization.

The Relevance of Ethics in Managing Organizations

Management in general is packed with ethical challenges. Each functional unit is periodically confronted with these challenges. Top management in choosing the management styles they wish to exercise in the running of their organizations face the dilemma of being either task-oriented, people-oriented, or function as a combination of both (Cole, 2003). Whatever the style, ethical standards are necessary ingredients for effectiveness. Thompson and Strickland (1998) asserted that the key success factor of implementing a management strategy is the presence of ethical standards and values into the corporate culture of the organization. Values and ethical standards do not necessarily need to be in written documents. Thompson and Strickland (1988) stated that companies steeped in with a rich folklore to draw on rely on word-of-mouth indoctrination and the power of tradition to instill values and enforce ethical conduct. According to Humble, Jackson, and Thompson (1994), the written or coded values and ethical standards explicitly define what the company intends and expects, and they serve as benchmarks for judging both company policies and actions and individual conducts.

The Influence of Ethics on Business Successes

Castleberry (2004, p. 2) quoting Dennis Kozlowski, ex-CEO of Tyco, stated that:

The most damage in recent cases has been to the reputation of the position of CEO. We’ve been made out to be freewheeling jet setters, playboys reliving our adolescent years. We are offended most by the perception that we would waste the resources of a company that is a major part of our life and livelihood, and that we would be happy with directors who would permit that waste.

There was no slightest doubt in corporate United States of America (USA) that Kozlowski will ever stumble and fall into the pit of his own words.

There are many other ethical challenges that confront all levels of management and thus influence organizations’ success. These include situational factors as in Zimbardo (2007), which confirms his earlier assertion that when the individual is confronted by some situational factors, his/her human values may be suspended, self-concepts are challenged, and finally, the ugliest, most base, and pathological side of human nature surfaced. The next set of ethical challenges border on subordinates working under the instructions of authority. Zimbardo (2004) asserted that only a few are able to resist the command of authority that challenged their ethical standing. Peterson (2001), in citing Milgram (1963; 1974) on the Nuremberg Trial of the Nazi leaders in the period of 1945-1949, concluded that responsible individuals can blindly obey authority and become very unethical in their actions. Interestingly enough, top management also fall prey to this blind obedience when conflict of interest sets in with promising personal benefits.


1025

The Ethical Issues That Consultants May Need to Address for Their Clients

A true understanding of people’s actual ethical decision-making goes beyond the ideals on which normative approaches rest. Thus, many of today’s attempts to understand real-life ethics discriminate among stages in the ethical decision-making process. These approaches stress that to act ethically, professionals have to proceed through a series of steps (Jones, 1991; Rest, 1986): identify an ethical dilemma, judge what is ethical (a normative dimension), intend to act ethically, and act ethically (Jones, Massey, & Thorne, 2003). Ethical professionals (consultants) would be encountering heterogeneous ethical demands under varying ontologies (worldviews) and axiology (values and aesthetics).

Research Methodology

Qualitative research design was applied for this study. No primary data was collected. Various publications on the subject matter were reviewed and findings are deduced from them and discussed in relation to the objectives of this study.

Findings and Discussions

The Relevance of Ethics in Managing Organizations

In the United States (US), the fall of Enron has been understood primarily as a failure of the gatekeepers, meaning the intermediaries who provide verification and certification services to the investors (e.g., securities analysts and especially the auditors). If these gatekeepers were ethically compliant, the fraudulent acts that generated the collapse of Enron and WorldCom might have not occurred at all. Better still, if the policies and management of these companies were ethically firm, the conflict of interest that degenerated into fraudulent deals would not have come up let alone triggering ethical demands on the gatekeepers.

Any corporate axiology that is not built on strong ethical standards easily gives way to corruptibility, biases, nepotism, and all the unwanted flaws and mishaps. Kozlowski of Tyco, as reported by Castleberry (2004), eventually fell prey to the very criticism he made in 1995 concerning CEOs’ corruptibility. He was jailed 25 years for defrauding Tyco some millions of US dollars (Sorkin & Bayot, 2005).

Like Dennis Kozlowski, many CEOs worldwide fell prey to some ethical challenges mostly associated with some conflict of interest and situational factors (Zimbardo, 2007) that led them running down their organizations. According to Castleberry (2004), CEOs portrayed as “sinners” include Ken Lay (Enron), Bernie Ebbers (WorldCom), John Rigas (Adelphia), Richard Grasso (New York Stock Exchange (NYSE)), Dennis Kozlowski (Tyco), Richard Scrushy (HealthSouth), and even the golden boy CEO of the 1990s, Jack Welch (General Electric (GE)).

There is no question that globalization of capital is on the rise. Countries and companies that seek to attract investors will need to attain much higher scores by rating systems, such as Standard and Poor’s (S&P), if they are to obtain low cost of financing. Long-term investors will seek markets where their legal rights are known and protected and where those using their money can be held accountable (Dubnick, 2007).

To protect investors’ interest as well as attract low cost capital, we need to reduce conflicts of interest in our organizations (Gompers, Ishii, & Metrick, 2003). Thus, we need firm ethical policies to support greater democracy both at the top, i.e., in the accountability of boards and CEOs, and at the bottom in the form of increased ownership and participation by employees. Strict compliance of ethical standards and corporate axiology is a relatively good measure of a reliable corporate accountability.


1026

These are confirming the relevance of an ethical functionality or unit to enhance ethical compliance and objective decision-making for corporate well-being. Where professional ethics and for that matter ethical standards are compromised, either as a result of ignorance or fraudulent pretence, it adversely affects the effective and efficient management of the organization.

The Ghana Stock Exchange (GSE) and the Securities and Exchange Commission, in the light of these, had developed some standards to guide companies seeking to be listed. For instance, public companies limited by shares must at least release not less than 25% of their issued capital to the public before they would be considered for either first- or second-class listing. For a first-class listing, the stated capital must not be less than GH¢1 million and half a million for a company applying for second-class listing (Ghana Securities and Exchange Commission, 1993). Many other regulatory measures are put in place to control possible violations of the ethics by stakeholders of the industry. These confirm the relevance of ethics in management.

The Influence of Ethics on Organizational Successes

Organizational successes can be looked at from the perspective of the corporate objective of the organization concerned. A typical profit-oriented organization is to maximize the owners’ (shareholders) equity interest. In the case of not-for-profit organizations such as companies limited by guarantee and government institutions, their objectives may be to provide services to some class of vulnerable persons or for the general good of the public respectively. To attain the set goals and possibly sustain some defined growth trend and/or operational capacity of the organization, corporate policies must not shy away from the ethical concerns of the corporate world.

A well-defined ethical policy and its accompanying remedies (rewards and punishments) can effectively influence the operational capabilities of an organization in the following ways:

(1) Selfless oriented decision-making process; (2) People and task orientation; (3) Transparency and accountability. Ethics influence selfless oriented decision-making process, people’s task orientation management style,

and transparency and accountability by injecting discipline into management so that management trades their personal interests for the benefits of the organization and its stakeholders. Under the German labor or stakeholder-oriented model of corporate governance (Hansmann & Kraakman, 2000), the auditor is not only understood as a gatekeeper, assuring the interest of the investing public (the so-called “Kontroll funktion” or “Garantie-funktion”), but also acts as an assistant for the supervising board in its internal control of the management. This complementary role does not necessarily trigger different approaches with respect to corporate governance but focuses on the auditor’s independence as the key to effective ethical compliance in corporate governance.

Under the United Kingdom (UK) approach, there is the co-coordinating group on audit and accounting issues and a review team being conducted into corporate governance (Derek Higgs and Sir Robert Smith). As a result of the developments initiated both before and after the collapse of Enron, the new system is to regulate the UK accountancy profession. This was established by the Accountancy Foundation setting the agenda for the future regulation of UK audit and corporate governance.


1027

In the Ghanaian context, reforms were undertaken in the public sector with the promulgation of the following acts:

(1) Internal Audit Agency Act 2003 (Act 658); (2) Financial Administration Act 2003 (Act 654); (3) Public Procurement Act 2003 (Act 663). These were geared towards enhancing efficiency, accountability, and transparency in the management of

the resources in the public sector. These will only be successful if the implementers are ethically balanced. It has been revealed by the World Bank that accounting and auditing standards in Ghana suffered from

international weaknesses in regulation, compliance, and enforcement which have the tendency to undermine good corporate governance in the country (World Bank, 2008). That is, the timely provision of good quality information, a clear and credible corporate decision-making process, and shareholders giving a proper consideration to the information provided and making considerate judgments.

Ethical Issues That Consultants May Need to Address for Their Clients

From the above discussions, it is clear that ethics is a core element to the success of most management-related issues. Most of the causes of failure of laudable corporate, group, and even individual strategies are challenges associated with ethics. A firm and resolute ethical policy of an individual, a group of persons, and/or corporate bodies is not only necessary but also sufficient to propel any strategic plan to success. The ethical issues that consultants may need to address in their professional careers with respect to ethical issues in organizations include modeling strategic or customized ethical codes and their respective monitoring procedures to ensure their compliance.

Businesses may vary in ontology (corporate culture and worldview) and even axiology (values and esthetics) although they may belong to the same industry and are seen as competing organizations. Because of these variations, ethical codes that consultants may develop for their clients need not to be homogenous or straight jacket. Each set of codes should be tailored to the specific ontology of each client. In likewise manner, the systems of monitoring the compliance of such codes should be in conformity with the organizations’ various worldviews, values, and esthetics. Nonetheless, all these heterogeneous ethical codes should focus on sustaining objectivity at work at all levels with zero tolerance of biases or selfish interest of staff and board members.

Talking of monitoring procedures to ensure the compliance of ethical issues, it is worth thinking of a department of ethics and compliance just like the counseling units in our universities or even the very common internal audit departments in most big organizations across the globe. This proposed ethics and compliance department, when given the mandate, will operate as a corporate management gatekeeper. It will ensure that management decision-making processes are free from biases and override conflicts of interest. Management styles and strategies will be balanced to encapsulate the pursuit of high productivity with a human face, thus not departing widely from the functional or action-centered leadership, also known as the functional model of leadership (Cole, 2003). This model addresses the needs of the task, the group, and the individual in the context of a total leadership situation.

Realizing the importance of integrating ethical models to guide management and boards of organizations, it is also realistic that such models should reflect the worldviews of the various organizations without ignoring the worldviews of the external environments.


1028

Conclusion

The UK, US, German, and the Ghanaian corporate governance shares a common platform that the independence of auditors is paramount for the auditor’s operation within the system. A supervisory board or audit committee is tasked in dealing with auditors and audit partners within the audit firms have to rotate to allow a “fresh look”.

Ethics like auditing is a relevant element in the human faculty that is kept alive to guide him or her in every decision-making. Incorporating it into the organization’s policies and functionalities may generate operational objectivity amidst management’s conflict of interest and biases.

The consultant on ethical issues faces the challenges of designing customized ethical codes to address the heterogeneous organizational demands. These must be accompanied with specific monitoring and compliance procedures (Chartered Financial Analyst Institute, 2013) to facilitate the effectiveness of the gatekeeper.

It must be noted that in this era of information technology and the domestication of global issues, the investing public needs the intermarriage of the rules and regulations of countries to enhance investors’ confidence in corporate governance. Thus, the surplus spenders want to invest in organizations that have ontology and axiology that are in consonance with the external environments where they operate.

Simply said, if you want someone’s money, you have to stick to their rules. In as much as the paper lay emphasis on the need for an ethical function or unit in an organization, we also

have in mind the possible collapse due to blind obedience to orders which can easily be triggered by lack of independence, compensation flaws, and the same conflict of interest which is a common human character.

Recommendation

Having effectively deduced from existing research and justified the need for an ethical function or unit in an organization (whether it is being outsourced or integrated in the organogram), we strongly recommend an empirical assessment of this need in the Ghanaian context, to either consolidate or reject the findings in this paper.

References Castleberry, S. B. (2004). Executive compensation: Sinners or saints? MBA 8111—Business, Government, and Society. Retrieved from

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB0QFjAA&url=http%3A%2F%2Fwww.d.umn.edu%2F~scastleb%2FCases%2520for%2520Ethics%2FCEO%2520Compensation%2520for%2520class.doc&ei=XishVLHpJ4r2yQTTgoL4AQ&usg=AFQjCNErTM0WrZSJV3s0LgqwaH15plW7MQ&sig2=uQEs9_evmz_s2Mr2toll6Q

Chartered Financial Analyst Institute. (2013). Code of ethics and standards of professional conduct. Cole, G. A. (2003). Management theory and practice. London: Ashford Colour Press. Dubnick, M. J. (2007). The dynamics of capital market governance: Evaluating the conflicting and conflating roles of compliance,

regulation, ethics, and accountability. Sarbanes-Oxley and the Search for Accountable Corporate Governance Australian National University Canberra, AU.

Ghana Securities and Exchange Commission. (1993). Ghana stock exchange listing rules and securities industry law (PNDC 333). Accra: Assembly Press.

Gompers, P. A., Ishii, J. L., & Metrick, A. (2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118(1), 107-156.

Hansmann, H., & Kraakman, R. (2000). The end of history for corporate law. Yale Law School Working Paper No. 235; NYU Working Paper No. 013; Harvard Law School Discussion Paper No. 280; Yale SOM Working Paper No. ICF-00-09.

Humble, J., Jackson, D., & Thompson, A. (1994). The strategic power of corporate values. Long Range Planning, 27(6), 3-12.


1029

Jones, J., Massey, D. W., & Thorne, L. (2003). Auditors’ ethical reasoning: Insight from past research and implications for the future. Journal of Accounting Literature, 22, 45-103.

Jones, T. M. (1991). Ethical decision making by individuals in organizations: An issue-contingent model. Academy of Management Review, 16(2), 366-395.

Lander, G. P. (2004). What is Sarbanes-Oxley? New York, NY: McGraw-Hill. Milgram, S. (1963). Behavioral study of obedience. Journal of Abnormal and Social Psychology, 67(4), 371-378. Milgram, S. (1974). Obedience to authority: An experimental view. New York, NY: Harper & Row. Peterson, R. A. (2001). On the use of college students in social science research: Insights from a second-order meta-analysis.

Journal of Consumer Research, 28(3), 450-461. Rest, J. R. (1986). Moral development: Advances in research and theory. New York, NY: Praeger. Sorkin, R. A., & Bayot, J. (2005, September 20). Ex-Tyco officers get 8 to 25 years in prison. New York Times. Suchan, S. W. (2004). Post-Enron: U.S. and German corporate governance. Cornell Law School J.D. Student Research Papers,

Paper 4. Retrieved from http://scholarship.law.cornell.edu/lps_papers/4 Thomas, N. (1985). The holy bible. New King James Version, Compact Reference Edition. Thompson, A. A., & Strickland, A. J. (1988). Corporate ethics: A prime asset. The Business Roundtable Report. Thompson, A. A., & Strickland, A. J. (1998). Strategic management: Concepts and cases (10th ed.). USA: Irwin McGraw-Hill. World Bank. (2008). Corporate governance and economies. Zimbardo, P. G. (2004). A situationist perspective on the psychology of evil: Understanding how good people are transformed into

perpetrators. In A. G. Miller (Ed.), The social psychology of good and evil (pp. 21-50). New York, NY: Guilford Press. Zimbardo, P. G. (2007). The Lucifer effect: Understanding how good people turn evil. New York, NY: Random House.


Bankruptcy Prediction for Chinese Firms: Comparing Data

Mining Tools With Logit Analysis

Wikil Kwak, Xiaoyan Cheng, Jinlan Ni University of Nebraska, Omaha, USA

Yong Shi Graduate University of the Chinese Academy of Science, Beijing, China

University of Nebraska, Omaha, USA Guan Gong

Shanghai University of Finance and Economics, Shanghai, China

Nian Yan Nebraska Furniture Market, Omaha, USA

China’s capital market is different from that of the US in economic, political, and socio-cultural ways. China’s

dynamic and fast growing economy for the past decade entails some structural changes and weaknesses and as a

consequence, there are some business failures. We propose bankruptcy prediction models using Chinese firm data

via several data mining tools and traditional logit analysis. We used Chinese firm data one year prior to bankruptcy

and our results suggest that the financial variables developed by Altman (1968) and Ohlson (1980) perform

reasonably well in determining business failures of Chinese firms, but the overall prediction rate is low compared

with those of the US or other countries’ studies. The reasons for this low prediction rate may be structural

weaknesses resulting from China’s fast growth and immature capital market.

Keywords: China, bankruptcy, data mining, logit analysis

Introduction

China’s capital markets have grown rapidly since the commencement of economic reform. Capital markets promote the development and allocation of market-oriented economic resources, resulting in increased business competition. The intense competition in China’s capital markets inevitably entails some business failures. Past research (Kwak, Shi, & Cheh, 2006; Mansi, Maxwell, & Zhang, 2012) documents business failures in the US quite some time, but the numbers of academic research on business failures in China are relatively small. In this study, we employ both data mining and logit model approaches to investigate bankruptcy predictions

Wikil Kwak, professor, Department of Accounting, College of Business Administration, University of Nebraska. Email:

[email protected]. Xiaoyan Cheng, assistant professor, Department of Accounting, College of Business Administration, University of Nebraska. Jinlan Ni, associate professor, Department of Economics, University of Nebraska. Yong Shi, director, Graduate University of the Chinese Academy of Science; College of Information Science and Technology,

University of Nebraska. Guan Gong, professor, School of Economics, Shanghai University of Finance and Economics. Nian Yan, manager, Nebraska Furniture Market.

DAVID PUBLISHING

D

BANKRUPTCY PREDICTION FOR CHINESE FIRMS

1031

using 1999-2007 Chinese financial data. We also investigate the validity of US bankruptcy models in different socio-economic contexts.

The usefulness of financial statement data in predicting bankruptcy has been examined in different countries, since corporate bankruptcy can be financially devastating for investors and therefore, stakeholders such as bankers, investors, and regulators are interested in assessing bankruptcy risk via bankruptcy prediction models. Like most Asian firms such as Korean and Japanese firms, Chinese firms have a low bankruptcy rate, because the government usually is heavily involved in bankruptcy processes and the bankruptcy law in China encourages negotiations among involved parties instead of promoting liquidation as a way to resolve financial distress (Fan, Huang, & Zhu, 2008). In addition, local government protection leads to fewer bankruptcy cases in China (Huang & Wang, 2009). This study uses Chinese firm data to predict bankruptcy in China’s capital market that may not be the same as that of the US capital market due to the socio-economic or political environment.

Our data mining and logit analysis results show that overall prediction rates are lower than those in studies of the US and other countries. We need to investigate the lower prediction rates of Chinese bankruptcy firms in a future study. However, our overall results suggest that financial variables used in previous US bankruptcy studies are still valid in the context of the Chinese business environment. Our paper is organized as follows. The next section reviews previous bankruptcy studies and relevant data mining and logit studies. The third section describes data collection processes. The following section presents our results. The last section summarizes and concludes our paper with limitations of our paper and future research avenues.

Literature Review

Data mining is a tool that can be used to predict business problems, such as bankruptcy, credit card default, and consumer purchase behavior based on past data (Chan & Lewis, 2002). Recently, Song, Ding, Huang, and Ge (2010) proposed a generic algorithm-based (GA) approach and statistical filter approaches for the best features for the support vector machine in a case of Chinese bankruptcy study. Chen and Hu (2011) employed preference ranking organization methods with Altman’s (1968) five ratios in predicting bankruptcy in Taiwan. Peat and Jones (2012) introduced a neural net model to predict bankruptcy, and Sung, Chang, and Lee (1999) used the decision tree approach for bankruptcy prediction. In addition, Alali and Romero (2013) performed a traditional survival analysis by applying 24 factors to predict US commercial bank failure.

Altman (1968) used multiple discriminant analysis (MDA) to predict bankruptcy based on financial ratios. Altman, Haldeman, and Narayanan (1977) later proposed the zeta model, but their assumptions of data being normally distributed can be a problem when applying this model.

Ohlson (1980) used a logit model that does not require any assumptions about the prior probability of bankruptcy or the distribution of predictor variables. Assumptions about the knowledge of prior probabilities and group distributions make both of the above techniques very restrictive in bankruptcy prediction studies. Grice and Ingram (2001) empirically replicated Altman’s (1968) study using a small sample of 33 manufacturing firms with an equal number of control firms and reported 83.5% overall accuracy. However, Altman’s model using the 1988-1991 test period showed that the overall correct classification rate dropped to 57.8%. Begley, Ming, and Watts (1996) also re-estimated both Altman’s (1968) and Ohlson’s (1980) models using 1980’s data and reported that Ohlson’s model showed a Type I error rate of 29.2% and a Type II error rate of 14.9% at the cutoff point of 0.061. Here, the Type I error refers to the false rejection error. For a


1032

bankruptcy prediction model, we reject a firm as a non-bankruptcy firm even though this firm is actually a bankruptcy firm. In bankruptcy cases, this cost is higher than Type II error costs. They suggested that both models’ accuracy rates drop as they are applied in different time periods, but Ohlson’s model is a preferred one. Besides, Altman’s (1968) model may have an upward bias by selecting an equal number of matching control firms. Shumway (2001) proposed a survival model using time-series data, but in most bankruptcy cases, the firm’s financial data and other variables are not available near bankrupt time periods. Therefore, the logit model is the preferred choice in most accounting or finance literature.

Pompe and Feelders (1997) compared machine learning, neural networks, and statistics using experiments to predict bankruptcy. However, their results are not conclusive as to which method outperforms the other methods. Shin and Lee (2002) proposed a GA in bankruptcy prediction modeling and their approach is capable of extracting rules that are easy to understand for users like expert systems. Their accuracy rate of bankruptcy prediction is 80.8% of both training and hold-out samples. Park and Han (2002) proposed a case-based reasoning (CBR) with the feature weights derived by an analytic hierarchy process (AHP) for bankruptcy prediction since AHP incorporates both financial ratios and non-financial variables into the model. They reported an accuracy rate of 84.52%. However, we cannot generalize this study to firms in the US or in other countries, because Korea went through an economic turmoil in 1997.

McKee (2000) suggested a rough set theory to develop a bankruptcy prediction model. Neural networks can be characterized as a “black box” model that decision makers may not understand. The rough set model, however, is easily understandable and supported by a set of real examples. Rough set analysis provides better results when the attributes are continuous variables. In this case, non-financial variables are not easy to incorporate. In addition, McKee’s study assumed equal costs for both bankruptcy and non-bankruptcy misclassifications. As suggested by Nanda and Pendharkar (2001), GA provides the best performance in terms of reducing Type I error costs. They reported that goal programming and GA had the highest correct classification rate using a decision maker explicitly incorporating costs of Type I and Type II errors. This is a more realistic assumption. In the real world, Type I error costs are much higher than Type II error costs in bankruptcy cases.

The purpose of this study is to examine the effectiveness of a set of financial variables used previously by Altman (1968) and Ohlson (1980) in predicting Chinese business failure by comparing data mining tools with logit analysis. We use Chinese financial data. The Chinese capital market may not be the same as that of the US market because of social, cultural, and political differences. The Chinese capital market has experienced a major transition from a planned economy to a market-orientated economy. The privatization of Chinese firms does not have a positive effect on Chinese firms (Wai-Ming & Lam, 2004). Chinese culture leads people to save more for future uncertainty and thus a large amount of money could be invested. So far, much of the investment is being performed by the state-owned banking system. The banking system was controlled by the central bank but now has more independent control over its management decisions. A recent capital market reform “Guiding Principles for the Healthy Development of Capital Markets” by “the State Council” is intended to make China’s capital markets much more diverse, structured, and transparent.

This study uses survey data. Our financial data are one year before the firm declares bankruptcy as in most prior studies. We extend the literature by empirically testing whether our models of logit and data mining tools using Chinese financial data perform as effectively as they did using US financial data.


1033

Data Collection and Research Design

Our dataset comes from the National Bureau of Statistics (NBS). The Annual Survey of Industrial Production includes all state-owned firms and private firms with at least 5 million Yuan in annual sales from 1999 to 2007. For each year, we looked for the operational status indicating bankruptcy to identify bankrupt firms. We deleted observations in years 2001 and 2004, because our survey data labeled “cancellation” combined bankrupt firms with other exit firms in those years. We checked data consistency and excluded observations with missing information. We also excluded outliers by deleting the lower and upper 1% of financial variables, given that results may be misleading due to the excessive influence by outliers. Our final sample consists of 394 bankrupt firms and 726 matching control firms based on size and industry from 1999 to 2007.

Empirical Results

Tables 1 and 2 present the descriptive statistics of Chinese bankrupt and non-bankrupt firms between 1999 and 2007. Turning first to the measures of liquidity, the means of total liabilities/total assets (TL_TA) and total current liabilities/current assets (CL_CA) in bankrupt firms are significantly higher than in non-bankrupt firms. The mean of working capital/total assets in bankrupt firms (WCA_TA) is much lower than that of non-bankrupt firms. Second, compared with non-bankrupt control firms, bankrupt firms have worse ratios of firm profitability in terms of net income (NI_TA), retained earnings (RE_TA), and sales (SALE_TA). In sum, our results indicate that bankrupt firms have liquidity and financial performance problems. Our findings are consistent with the literature documented in previous studies (Ni, Kwak, Cheng, & Gong, 2014).

Table 1 Descriptive Statistics of Chinese Bankrupt Firms Between 1999 and 2007

Variable No. Mean Std. dev. Min. Max. t-value Total capital 394 235.0711 300.0165 5.7838 2,003.43 0.1201 Size 394 4.8317 1.1793 1.7551 7.6188 0.6618 TL_TA 394 0.723 0.3464 0.008 2.8207 4.4920*** WCA_TA 394 0.0055 0.3665 -1.7621 0.8353 -3.4676*** CL_CA 394 1.6717 3.6393 0 46.2741 3.2162*** OENEG 394 0.1904 0.3931 0 1 5.1837*** NI_TA 394 0.0212 0.1413 -0.6839 1.3664 -3.2109*** INTWO 394 0.2335 0.4236 0 1 2.0109** RE_TA 394 -0.0209 0.3617 -2.3477 0.875 -3.5272*** BV_TD 394 2.0444 9.374 -0.6455 140.5453 -0.0102 SALE_TA 394 1.574 1.9421 0 16.937 -2.5667** CHGIN 394 -0.0753 0.7211 -1 1 -3.6549*** TP_TL 394 0.3436 1.7398 -0.7528 22.5 -1.9219* Notes. *: p < 0.10; **: p < 0.05; and ***: p < 0.01. Size = Total assets/gross domestic products; TL_TA = Total liabilities/total assets; WCA_TA = Working capital divided by total assets; CL_CA = Total current liabilities/total current assets; OENEG = If TL_TA > 1, then OENEG = 1, otherwise OENEG = 0; NI_TA = Net income/total assets; INTWO = If net income < 0 or lag (net income) < 0, then INTWO = 1, otherwise INTWO = 0; RE_TA = Retained earnings/total assets; BV_TD = Market value of equity/book value of total debt; SALE_TA = Sales/total assets; CHGIN = (Net income − lag (net income))/[absolute (net income) + absolute (lag net income)]; and TP_TL = Earnings before interest and taxes/total liabilities.


1034

Table 2 Descriptive Statistics of Chinese Non-bankrupt Firms Between 1999 and 2007

Variable No. Mean Std. dev. Min. Max. Total capital 726 232.8161 300.0925 5.0771 2,475.82 Size 726 4.7832 1.1573 1.684 7.7878 TL_TA 726 0.6304 0.296 0.0172 2.7258 WCA_TA 726 0.0809 0.3088 -1.3054 0.8805 CL_CA 726 1.068 1.0826 0 15.1672 OENEG 726 0.0758 0.2648 0 1 NI_TA 726 0.0519 0.1717 -0.6586 1.9939 INTWO 726 0.1818 0.386 0 1 RE_TA 726 0.0553 0.313 -2.825 0.7628 BV_TD 726 2.05 7.3443 -0.4183 126.57 SALE_TA 726 1.9129 2.3879 0 22.8649 CHGIN 726 0.0815 0.6151 -1 1 TP_TL 726 0.657 3.7058 -0.7897 80.1

Tables 3-8 present the results of the logit model with defined financial variables (from 1999 to 2007). Table 3 reports the results using Ohlson’s eight variables. As shown in Table 3, the coefficients on variables CL_CA, OENEG, and CHGIN are significant and the overall prediction rate is 66.69% (see Table 4). This rate is lower than that of most US studies. Table 5 shows the results using Altman’s five variables and variables RE_TA and SALE_TA are significant. We find that, as expected, the overall prediction rate is 65.35% in this model (see Table 6). Table 7 presents the results with the combined Ohlson and Altman variables and all of the abovementioned variables are significant except for RE_TA. This variable may be correlated with variable

SALE_TA. The overall prediction rate is 67.23% in this combined model (see Table 8).

Table 3 Logit Regression Using Ohlson’s Eight Variables

Analysis of maximum likelihood estimates Parameter Estimate Std. dev. Wald Chi-square Pr. > Chi-square Intercept -0.9336 0.3528 7.0011 0.0081 WCA_TA 0.2518 0.2433 1.0707 0.3008 Size -0.0039 0.0551 0.005 0.9434 TL_TA 0.1822 0.2932 0.3862 0.5343 CL_CA 0.1002 0.0482 4.3235 0.0376 NI_TA -0.717 0.4875 2.1627 0.1414 INTWO 0.0137 0.1744 0.0062 0.9373 OENEG 0.8647 0.2498 11.9784 0.0005 CHGIN -0.3172 0.1025 9.5771 0.002 Max-rescaled R-square 0.0682 No. of observations 1,120

Table 4 Overall Prediction Rate Using Ohlson’s Eight Variables

Correct Incorrect Total Bankruptcy 65 329 394 Non-bankruptcy 682 44 726 Overall prediction rate 0.6669


1035

Table 5 Logit Regression Using Altman’s Five Variables

Parameter Estimate Std. dev. Wald Chi-square Pr. > Chi-square Intercept -0.4268 0.0825 26.7337 < 0.0001 WCA_TA -0.1694 0.1786 0.8994 0.3429 RE_TA -0.4851 0.1842 6.9401 0.0084 TP_TL -0.0093 0.0432 0.0459 0.8303 BV_TD 0.00075 0.0103 0.0053 0.942 SALE_TA -0.0999 0.0339 8.6995 0.0032 Max-rescaled R-square 0.0335 No. of observations 1,120

Table 6 Overall Prediction Rate Using Altman’s Five Variables


Table 7 Logit Regression Using Combined Altman and Ohlson Variables

Parameter Estimate Std. dev. Wald Chi-square Pr. > Chi-square Intercept -0.5487 0.3958 1.922 0.1656 WCA_TA 0.2228 0.2424 0.8448 0.358 RE_TA -0.0868 0.2251 0.1487 0.6997 TP_TL -0.0052 0.0442 0.0139 0.906 BV_TD 0.00155 0.0109 0.0201 0.8874 SALE_TA -0.0885 0.0397 4.9643 0.0259 Size -0.0502 0.0598 0.7057 0.4009 TL_TA 0.1436 0.3303 0.1889 0.6638 CL_CA 0.0944 0.0467 4.0859 0.0432 NI_TA -0.0148 0.5722 0.0007 0.9793 INTWO 0.0016 0.1753 0.0001 0.9927 OENEG 0.8432 0.2546 10.9692 0.0009 CHGIN -0.3284 0.1025 10.2684 0.0014 Max-rescaled R-square 0.0749 No. of observations 1,120

Table 8 Overall Prediction Rate Using Combined Altman and Ohlson Variables


Table 9 shows prediction rates of data mining models. Decision tree, Naive Bayes, simple logistic, neural networks, and nearest neighbor show overall prediction rates of 65.18%, 63.66%, 68.04%, 65.89%, and 62.95%, respectively. Nearest neighbor has the worst prediction rate. As we can see from these results, bankruptcy


1036

prediction models of Chinese firms using data mining are similar to those of traditional logit models. Overall prediction rates are lower than those of other studies because of China’s macro-economic factors. From our empirical results, the bankruptcy prediction models for Chinese firms are as effective as our traditional logit analysis data mining models. Usually, from data mining models’ outputs, we cannot tell which factor contributed to the prediction rates due to the “black box” process. However, the logit analysis can show which factors are contributing to improving the prediction rates and it is easy for managers or other decision makers to focus on their companies’ financial factors. The same will be true for the survival models if longitudinal data are available.

Table 9 Prediction Rates for Data Mining Models

Method Accuracy Confusion matrix

Decision tree 65.18% a, b <-- classified as 600, 126|a = Non-bankrupt 264, 130|b = Bankrupt

Naive Bayes 63.66% a, b <-- classified as 622, 104|a = Non-bankrupt 303, 91|b = Bankrupt

Simple logistic 68.04% a, b <-- classified as 676, 50|a = Non-bankrupt 308, 86|b = Bankrupt

Neural networks 65.89% a, b <-- classified as 569, 157|a = Non-bankrupt 225, 169|b = Bankrupt

Nearest neighbor 62.95% a, b <-- classified as 556, 170|a = Non-bankrupt 245, 149|b = Bankrupt

Notes. All the variables are normalized with min-max normalization: x' = (x-min)/(max-min). So all the values are between [0,1]. Attached are the normalized data: There are 726 non-bankruptcy and 394 bankruptcy cases in the training set. The 10-fold cross-validation was used for evaluation.

Summary and Conclusions

In this paper, we adopt the logit and data mining models to predict bankruptcy in China. Using 1999-2007 Chinese bankruptcy data, our results suggest that Chinese firms with current liquidity problems and firms experiencing a decline in profits are more likely to file for bankruptcy. Overall prediction rates are lower than those of previous US, Japanese, or Korean bankruptcy studies as shown in studies of Kwak, Shi, Eldridge, and Kou (2006) and Kwak, Shi, and Kou (2012). However, the financial variables developed by Altman (1968) and Ohlson (1980) perform reasonably well in determining business failures of Chinese firms. In addition, the traditional logit model is as good as other data mining models in the context of the Chinese business environment. China’s capital market has become more dynamic and diverse. We may need to incorporate productivity enhancement and effective strategy implementation for Chinese firms to improve bankruptcy prediction rates (Bryan, Fernando, & Tripathy, 2013). In addition, we may use time-series data as suggested by Shumway (2001) and macroeconomic factors to improve our bankruptcy model (Nam, Kim, Park, & Lee, 2008). Limitations of our study include the use of a subset of data from 1999 to 2007. Observations in years 2001 and 2004 were deleted to ensure a clean sample for testing. Our results may be caused by a “selection bias”. As a result, our results should be interpreted with appropriate caution. Future studies may use recent data (2008-2014) to investigate bankruptcy in China.


1037

References Alali, F., & Romero, S. (2013). Characteristics of failed US commercial banks: An exploratory study. Accounting and Finance,

53(4), 1149-1174. Altman, E., Haldeman, R. G., & Narayanan, P. (1977). ZETA analysis: A new model to identify bankruptcy risk of corporations.

Journal of Banking and Finance, 1(1), 29-54. Altman, E. (1968). Financial ratios, discriminant analysis, and the prediction of corporate bankruptcy. The Journal of Finance,

23(3), 589-609. Begley, J., Ming, J., & Watts, S. (1996). Bankruptcy classification errors in the 1980s: An empirical analysis of Altman’s and

Ohlson’s models. Review of Accounting Studies, 1(4), 267-284. Bryan, D., Fernando, G. D., & Tripathy, A. (2013). Bankruptcy risk, productivity, and firm strategy. Review of Accounting and

Finance, 12(4), 309-326. Chan, C., & Lewis, B. (2002). A basic primer on data mining. Information Systems Management, 19(4), 56-60. Chen, H., & Hu, Y. (2011). Single-layer perception with non-additive preference indices and its application to bankruptcy

prediction. International Journal of Uncertainty, Fuzziness, and Knowledge-Based Systems, 19(5), 843-861. Fan, J., Huang, J., & Zhu, N. (2008). Distress without bankruptcy: An emerging market perspective. Working Paper 6/2005, Hong

Kong Institute of Monetary Research. Grice, J. S., & Ingram, R. W. (2001). Tests of generalizability of Altman’s bankruptcy prediction model. Journal of Business

Research, 54(1), 53-61. Huang, J., & Wang, H. (2009). Government protection and corporation risk management in China. Chinese Economy, 42(2), 7-29. Kwak, W., Shi, Y., & Cheh, J. (2006). Firm bankruptcy prediction using multiple criteria linear programming data mining

approach. Advances in Investment Analysis and Portfolio Management, 2, 27-49. Kwak, W., Shi, Y., & Kou, G. (2012). Bankruptcy prediction for Korean firms after the 1997 financial crisis: Using a multiple

criteria linear programming data mining approach. Review of Quantitative Finance and Accounting, 38(4), 441-453. Kwak, W., Shi, Y., Eldridge, S. W., & Kou, G. (2006). Bankruptcy prediction for Japanese firms: Using multiple criteria linear

programming data mining approach. International Journal of Business Intelligence and Data Mining, 1(4), 401-416. Mansi, S. A., Maxwell, W. F., & Zhang, A. J. (2012). Bankruptcy prediction models and the cost of debt. Journal of Fixed Income,

21(4), 25-42. McKee, T. E. (2000). Developing a bankruptcy prediction model via rough sets theory. Intelligent Systems in Accounting, Finance,

and Management, 9(3), 159-173. Nam, C., Kim, T., Park, N., & Lee, H. (2008). Bankruptcy prediction using a discrete-time duration model incorporating temporal

and macroeconomic dependencies. Journal of Forecasting, 27(6), 493-506. Nanda, S., & Pendharkar, P. (2001). Linear models for minimizing misclassification costs in bankruptcy prediction. Intelligent

Systems in Accounting, Finance, and Management, 10(3), 155-168. Ni, J., Kwak, W., Cheng, X., & Gong, G. (2014). The determinants of bankruptcy for Chinese firms. Review of Pacific Basin

Financial Markets and Policies, 17(2), 1-23. Ohlson, J. (1980). Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research, 18(1), 109-131. Park, C. S., & Han, I. (2002). A case-based reasoning with the feature weights derived by analytic hierarchy process for

bankruptcy prediction. Expert Systems With Applications, 23(3), 255-264. Peat, M., & Jones, S. (2012). Using neural nets to combine information sets in corporate bankruptcy prediction. Intelligent

Systems in Accounting, Finance, and Management, 19(2), 90-101. Pompe, P. P. M., & Feelders, J. (1997). Using machine learning, neural networks, and statistics to predict corporate bankruptcy.

Microcomputers in Civil Engineering, 12(4), 267-276. Shin, K. S., & Lee, Y. J. (2002). A genetic algorithm application in bankruptcy prediction modeling. Expert Systems With

Applications, 23(3), 321-328. Shumway, T. (2001). Forecasting bankruptcy more accurately: A simple hazard model. Journal of Business, 74(1), 101-124. Song, X., Ding, Y., Huang, J., & Ge, Y. (2010). Feature selection for support vector machine in financial crisis prediction: A case

study in China. Expert Systems, 27(4), 299-310. Sung, T. K., Chang, N., & Lee, G. (1999). Dynamics of modeling in data mining: Interpretive approach to bankruptcy prediction.

Journal of Management Information Systems, 16(1), 63-85. Wai-Ming, F., & Lam, K. C. K. (2004). Privatization and performance: The experience of firms in China. Chinese Economy, 37(4),

5-27.


University-Business Cooperation in Education: Real and

Perceived Performances∗

Massimo Bianchi, Laura Tampieri, Daniele Valli Casadei, Gabriella Paganelli

University of Bologna, Forlì, Italy

The purpose of this paper is to describe and demonstrate the validity of a methodology to distinguish, in the

performances of high education institutions (HEIs), real from perceived performances. The extension of

accountability to the evaluation of educational programs involves significant topics concerning the gap between

perceived and real performances. It means that, since many actors such as teachers, students, and external

stakeholders are involved in the process, the research on methodologies to distinguish subjective from objective

parameters is still on the floor. Debate about performance evaluation in this collaboration is still in progress

particularly as it concerns the proposal of several parameters and indexes to quantify the topic and reduce the

subjectivism in the assessment and the gap between real and perceived performances. After describing and

discussing an evaluation model based on three interdependent typologies of indexes, this will be tested in two

Tempus projects having the purpose of activating Ph.D. and masters courses. The results encourage deepening

researches in this direction and disseminating this methodology and extending and enriching the validation

process.

Keywords: performance evaluation, effectiveness, efficiency, adequacy, project management

Introduction

This paper investigates the gap between real and perceived performances in educational process of the

DOCSMES (Regional Joint Doctoral Programme in Entrepreneurship and SME Management for Western

Balkan Countries1) and CHTMBAL (Network for Post Graduate Masters in Cultural Heritage and Tourism

∗ Although this paper is the result of a joint collaboration, sections “The Performance Evaluation in Educational Programs” and “The Quality From the Teachers’ Perspective” are attributed to Laura Tampieri, section “Effectiveness, Efficiency, and Adequacy: From Effective to Perceived Performance” to Massimo Bianchi, section “The Quality From the Students’ Perspective” to Daniele Valli Casadei, and section “The Quality From the External Audit” to Gabriella Paganelli.

Massimo Bianchi, full professor of Business Management, School of Economics, Management, and Statistics, University of Bologna. Email: [email protected].

Laura Tampieri, research fellow, School of Economics, Management, and Statistics, University of Bologna. Daniele Valli Casadei, didactical tutor, School of Economics, Management, and Statistics, University of Bologna. Gabriella Paganelli, didactical tutor, School of Economics, Management, and Statistics, University of Bologna.

1 The project started on October 15, 2010 and finished on July 14, 2014 (Duration: 36 months with an extension of nine months). The applicant was the University of Bologna. Partners were: Dardania University (Economics Faculty); Agency for Promotion of Entrepreneurship of the RM; Macedonian Chambers of Commerce; Seavus Dooel Skopje; Konfederata e Industrive te Shqiperise-Albanian Confederation; University “St. Kliment Ohridski” Bitola (Economics Faculty); Universitat Autonoma de Barcelona (Economics and Business Administration); University of Tirana (Faculty of Economics); University of Nice Sophia Antipolis (Faculty of Law, Political Science, Economics, and Management); Agricultural University of Tirana (Economy & Agribusiness Faculty); and South East European University (Business Administration Faculty).

DAVID PUBLISHING

D

UNIVERSITY-BUSINESS COOPERATION IN EDUCATION

1039

Management in Balkan Countries2) financed respectively within 2010 and 2011 Tempus programme.

For this purpose, the research aims to apply a model of performance evaluation once used for the control

of performances in public administrations (Bianchi, 2010) to compare the gap between the effective and

perceived educational performances considering the main actors involved in the process such as teachers,

students, and external audit committed in the evaluation of the effectiveness, efficiency, and adequacy of high

education institutions (HEIs).

The Performance Evaluation in Educational Programs

In recent years, the high diffusion of project management culture in HEIs affected a wider range of

activities with a continuous evolution of techniques and tools used for the evaluation of project performance.

As defined by Archibald (2004), the project management is the systemic management of a

complex, unique, and of limited duration initiative, aimed at achieving a clear and defined target through a

continuous process of planning and control of different resources under the constraints of time, costs, and

quality.

The increasing request to reduce the gap between the competencies demanded by the market and the ones

delivered by HEIs introduces, in the design of courses, a project management approach whose diffusion was

enforced by the wider involvement of international projects for the creation of new initiatives in master and

Ph.D.. In these projects were involved educational organizations side by side with non-academic bodies and

international commitment.

With particular regard to performance evaluation in educational projects, we have to state that, from a

managerial point of view, this evaluation is the result of a continuous process realized by the project manager

together with the partners at the beginning, intermediate, and final phase of the project. At the initial phase of

the project, performance indicators are defined and a quality committee is established with the purpose of

monitoring the project progresses.

In educational project management, there are many evaluation tools such as reports, indicators, interviews,

and questionnaires that are required by the commitment or by the same project manager who has to coordinate

and supervise the control of project activities and outcomes.

There are many different aspects that concern the performance: Bates and Holton (1995) underlined a

multidimensional perspective that derives by many factors giving to performance an organizational complexity.

Brumbach (1988) also considered behaviours and results in the performance evaluation. This last definition

points out that the behaviours are not intended only in terms of tools addressed to obtain results but they are

results themselves. In this way, the evaluation of behaviours has to be realized independently by the same

results (Armstrong, 2000).

It is generally recognized that in higher education, the main sources of the performance are teachers,

students, and the environment (see Figure 1).

2 The project started on October 15, 2011 and will finish on October 14, 2014 (Duration: 36 months). The applicant was the University “G. d’Annunzio” Chieti-Pescara. Partners were: Aleksander Moisiu University of Durres (Albania); Institut I Monumenteve te Kultures “Gani Strazimiri” (Albania); Economic Faculty Shkodra University “Luigj Gurakuqi” (Albania); World University Service Kosova Committee Kosovo (Kosovo); University of Prizren (Kosovo); University of Bologna (Italy); Università Telematica “Leonardo da Vinci” (Italy); Antiquity of Southeastern Europe Research Centre, University of Warsaw (Poland); and Institut Català d’Arqueologia Classica (Spain).


1040

Figure 1. The sources of performance: teachers, students, and the environment.

From this framework, a “mixed model” of performance evaluation emerged considering both inputs

(behaviours, capacities, and skills) and outputs (results) (Hartle, 1997).

This model is coherent with the indicators system of performance evaluation that is based on effectiveness,

efficiency, and adequacy. These take into consideration the expected or achieved results and the resources

providing useful information for the correct management of educational project.

These indicators (Mazzara, 2006) refer to a conceptual framework based on a wide variety of concepts as

stated in the literature (Zuliani, Mancini, & Filacchione, 1993; Farneti, Mazzara, & Savioli, 1996; Silvi, 1996;

Fontana, 1993) mainly in terms of nature: quantitative, qualitative, monetary, physical, scientific, financial,

technical, and administrative (Blazevic, 2007). Moreover, effectiveness, efficiency, and adequacy are declined

in many expressions of productivity, sustainability, punctuality, quality, ethics, etc. (Bianchi, 2007; Rebora,

1999; Mercurio & Testa, 2000).

As an evolution of these researches, a hypothesis was tested concerning the gap between the effective

performance calculated on the basis of the system of indexes and the perceived one. Problems of perceptions

mainly refer to applied psychology but also have relevance in management owing to the influences on

evaluations and motivations.

The researches were undertaken on projects carried out in transition countries (Bianchi, 2006; Tampieri,

2008) and concern the problem of effective outcome of initiatives having the purpose of implementing economic

democracy and entrepreneurship. The result was a perceived performance, measured by the adequacy, constantly

lower than the effective one.

Students Performance

Evaluation

• Evaluation

• Tests

• Final Thesis

Teachers Performance

Evaluation

• Questionnaire

• Didactical

• Institutional Activity

• Research Activity

University Performance

Evaluation

• Services

• Information

• Employment After Graduation (%)

• Students/Teachers (Ratio)


1041

Effectiveness, Efficiency, and Adequacy: From Effective to Perceived Performance

The paradigm on which the analysis is based derives from two connected models. The first is the

multi-dimensional approach to the evaluation of HEIs (mainly represented by universities), which considers the

quality level from three points of view: academic staff (AS), represented by teachers, students (ST), and the

environment, represented by an external audit (EN) who respectively represents: the service producers, the

destinataries of educational services, and the final users of the product.

Aside from this model, we have to consider the index system applied to evaluation processes and

composed by the parameters of targets, resources and results and effectiveness (Ec), efficiency (Ez), and

adequacy (Ad) as index typologies (see Figure 2). The assumption to establish a relationship between the two

models is the connection: ST ↔ Ec; AS ↔ Ez; EN ↔ Ad.

In few words, the evaluation coming from students is considered as a matter of effectiveness as the

orientation of educational process involves results toward its targets. The perception of AS could be assumed as

concerning the efficiency of the delivery of educational services in terms of the ratio between results and

resources. The adequacy would measure the response of resources used by HEIs to the commitment received

by the environment and made by an external audit.

Research hypothesis refers to the possibility of measuring the gap between the perceived Adp performance,

detected directly from evaluation actors and the effective one, Ade, derived from the formula (Bianchi &

Tampieri, 2008):

/e p pAd Ec Ez= (1)

with Ecp and Ezp detected as Adp from questionnaires and reports fit by the three groups of actors individuated

by Figure 1.

Figure 2. The framework of analysis.

The purpose of this methodology is to answer the question: Is there a gap between the effective and

perceived educational performances in master courses realized by the international cooperation in transition

countries?

Effectiveness

Students Evaluation

Adequacy

Third Part Evaluation

Efficiency

Teachers Evaluation

Effectiveness

Results/Objectives

Adequacy

Resources/Objectives

Efficiency

Results/Resources


1042

The examined cases are the DOCSMES project in the period of 2009-2013 and the CHTMBAL project in

the period of 2012-2013.

The indexes of Ecp, Ezp, and Adp measured and described as above were standardized to the unity. In this

way, they could be compared and operated to calculate the Ade.

This methodology was applied by authors in different fields of study and in different collaborative

researches (see Table 1).

Table 1

Previous Researches on Perceived and Effective Performances Undertaken by Authors

No. Typology of performance analyzed

Year of survey

Value of perceived performance

Value of effective performance

Gap perceived effective

Linked research

1

Practice management

2014

0.9

0.83

0.07

Bianchi, Tampieri, Gualdi, and Paganelli (2014)

2

European projects

2008

0.74

0.94

-0.20

Bianchi and Tampieri (2008)

3

Public services, self local governments

2006

0.5

1.01

-0.51

Bianchi and Tampieri (2006)

4

Union Valconca municipalities

2006

0.11

0.997

-0.89

Tampieri (2007)

5

Project management, humanitarian, business

2005

0.20

1

-0.80

Bianchi (2006)

6

Project work, Project Durazzo

2005

0.60

0.91

-0.31

Tampieri (2006)

Almost till the present research, results underlined the constant superiority of the effective performance on

the perceived one, with the exception of practice management analysis that showed an effective performance

value (0.83) lower than the perceived one (0.9). This result could be linked to: (1) a different approach used to

detect the performance from the students’ point of view, concerning the outcome of courses quantified by the

optimism perspective received. For this purpose, a different perspective has been used in previous researches

that underlined a questionnaire based on different questions focusing on the conditions of the learning/teaching

process; and (2) the level of perceived adequacy which in the examined case was significantly higher than in

previous one in which this index was from a minimum of 0.11 to a maximum of 0.88.

These issues created new perspectives to be used for analysing the real and perceived performances in HEIs.

The Quality From the Students’ Perspective

The detection of quality from students derives from a questionnaire accomplished by students within the

quality assurance processes applied in DOCSMES and CHTMBAL. They were distributed by the master tutor

appointed by the scientific committee board at the end of each semester for each teaching module assigned to

lecturers. The questionnaire was fit by students in the classroom with the attendance of the master tutor but

without the presence of lecturers involved in the evaluation. The survey results were gathered by the tutor

separately for each lecturer.


1043

At the beginning of the course, the master director explained the purposes and the methodology of the

questionnaire and a reminder was done also by tutors at the beginning of each survey.

The fit questionnaires were inserted in a separated envelope for each lecturer, closed, sealed, and sent or

delivered to the position in charge of implementation of the quality process or its designate person.

Table 2

The Students Evaluation DOCSMES CHTMBAL

No. Students item 1st/2nd semester score (A)

Maximumscore (B)

(A/B) No. Students item 1st/2nd semester score (C)

Maximum score (D)

(C/D)

1

Have you received the lecture materials on the web?

66

68

0.97

1

Course syllabus

573

764

0.75

2

Do the lecture materials concern the lecture subject?

66

68

0.97

2

Regular/punctual presence

585

764

0.77

3

The material was clear.

66

68

0.97

3

Well prepared

729

764

0.95

4

Was the lecture coherent with Ph.D. objectives?

63

68

0.93

4

Cooperative

705

764

0.92

5

Were subject lectures managed in an in-depth approach?

61

68

0.90

5

English language

663

764

0.87

6

Have the professor tried to involve you in the lecture subject?

60

68

0.88

6

Disposal for consultation

728

764

0.95

7

Do you consider the lecture subject difficult?

45

68

0.66

7

Students’ chance to participate in the discussions

720

764

0.94

8

Were classroom premises adequate to lecture objectives?

66

68

0.97

8

Topics presented in an appropriate way

671

764

0.88

9

Do teachers use English language during the lecture?

67

68

0.99

9

Course well organized

674

764

0.88

10

Does the lecture start at the scheduled time?

66

68

0.97

10

Access to learning resources

705

764

0.92

11

Has the lecture increased your previous knowledge?

64

68

0.94

11

Course practice-oriented

699

764

0.91

12

Do you think that the time dedicated to the lecture subject was enough?

56

68

0.82

12

Relevant for future

709

764

0.93

13 Teaching methods 690 764 0.90

14 Syllabus 730 764 0.96

15 European standards 738 764 0.97

Ecp 0.91 0.90


1044

The evaluation was carried out by elaborating the results of this survey in the first and second semesters.

Fifteen items have been defined for CHTMBAL students, while for DOCSMES 12 items, with four possible

answers: strongly agree, agree, disagree, and strongly disagree to which a score of 4, 3, 2, and 1 respectively

has been assigned.

For each item, the total score was the sum of those single of individual answer. The obtained result was

compared with the maximum obtainable identified with the score 4 (strongly agree) multiplied for the number

of total students.

In CHTMBAL, the index Ecp (0.90) is the average of the ratio between the 1st and 2nd semester students

score and the maximum one achieved in all items as indicated in Table 2 while in DOCSMES, the Ecp is 0.91.

The Quality From the Teachers’ Perspective

The teachers questionnaire was delivered to each lecturer at the end of his/her module and sent back to the

project partner in charge of the quality assurance.

The evaluation has been realized with the same procedure of the student ones. In particular, eight items

were used with the score ranging from 4 = strongly agree, 3 = agree, 2 = disagree to 1 = strongly disagree.

As indicated in Table 3, for CHTMBAL, the Ezp is 0.89 as a result of the average of the ratio between the 1st

and 2nd semester teachers score and the maximum score achieved in all items, while in DOCSMES, it is 0.93.

Table 3

The Teachers Evaluation

No. AS item

DOCSMES CHTMBAL 1st/2nd semester score (A)

Maximum score (B)

(A/B) 1st/2nd semester score (C)

Maximum score (D)

(C/D)

1

Timetable of the lectures announced well in advanced

46

48

0.96

69

72

0.96

2

The teacher has been informed in time of the timetable of the lectures

47

48

0.98

69

72

0.96

3

The room to hold the classes has been adequate for the lecture

47

48

0.98

65

72

0.90

4

Equipments and didactical materials

47

48

0.98

66

72

0.92

5 Administrative performance 45 48 0.94 69 72 0.96

6 Students’ participation 45 48 0.94 66 72 0.92 7

Students interact with the teachers

43

48

0.90

57

72

0.79

8

Students demonstrate to grip the English language

38

48

0.79

49

72

0.68

Ezp 0.93 0.89

The Quality From the External Audit

The external didactical audit was made for DOCSMES by a peer review composed by three academicians

not involved in the project and no more in consortium universities. In CHTMBAL, the third part evaluation

was held by the staff of World University Service (WUS) Kosovo, according to the orientations of the Scientific

Project Committee (see Table 4). In each project, some items (17 for DOCSMES and 8 for CHTMBAL) were


1045

evaluated on the basis of a rank ranging from 1 to 4 points. Then, the result was calculated in percentage of the

maximum score attributed to each item.

Through this procedure of analysis, the Adp in CHTMBAL was 0.8750, while in DOCSMES, it was

0.8824.

Table 4

The External Audit Evaluation

Project Evaluated score (A) Maximum score (B) (A/B)

DOCSMES 60 68 0.8824

CHTMBAL 28 32 0.8750

Conclusions

We can compare the external audit evaluation concerning the AS results with the one expressed directly by

teachers (see Table 5).

Table 5

The Comparison Among Performance Indexes

Category Index value

DOCSMES CHTMBAL

External audit (Adp) 0.883 0.884

Teachers (Ez) 0.93 0.89

Students (Ec) 0.91 0.90

This evidently shows a different perception from evaluators, as the value achieved by teachers is higher

than the one of the external audit.

Formula (1), Ade = Ecp/Ezp, allows us to define in detail the gap existing between the perceived and the

real levels of quality, and it confirms a negative value as the perception of the level of quality is lower than the

effective one (see Table 6).

Table 6

The Gap Between the Perceived and Real Levels of Quality

Level of quality Value

DOCSMES CHTMBAL

Ade 0.985 1.026

Adp 0.88 0.88

Gap Adp − Ade -0.10 -0.14

This result confirms the situation stated by previous researches in which the perceived performance is,

in similar projects and locations (transition countries), lower than the effective one, opening the way to more

extended validations. Some of these considerations were about the capability of donor countries to evaluate

correctly the real results fulfilled by the projects they support (mainly pessimistic) and the perspective in which

the results have to be located (with a more optimistic approach).

3 0.8824. 4 0.8750. 5 Ade = 0.91/0.93 = 0.98. 6 Ade = 0.90/0.89 = 1.02.


1046

References Archibald, R. D. (2004). Project management: La gestione di progetti e programma complessi (Project management: Projects and

complex programs management). Milano: Franco Angeli. Armstrong, M. (2000). Performance management (2nd ed.). USA: Kogan Page. Bates, R. A., & Holton, E. F. (1995). Conputerised performance monitoring: A review of human resource issues. Human Resource

Management Review, 5(4), 267-288. Bianchi, M. (2006). La valutazione delle performance nei progetti di imprese culturali nei Paesi in Transizione: Le due culture del

cambiamento in Albania (Performance evaluation in projects of cultural enterprises in transition countries: The two cultures of change in Albania). Atti del Workshop dei Docenti e Ricercatori di Organizzazione Aziendale “Organizzazione Regolazione e Competitività” (Proceedings of Teachers and Researchers Workshop of Business Management “Management, Regulation, and Competitiveness”), February 2-3, Salerno.

Bianchi, M. (2007). Il sistema organizzativo e le funzioni aziendali (The organizational system and business functions). Torino: Giappichelli.

Bianchi, M. (2010). Toward a simplification of performance indexes and a balanced system of evaluation for public organizations facing the turmoil era. Paper presented at the EURAM Conference, May 19-22, Rome.

Bianchi, M., & Tampieri, L. (2006). Percezione e coerenza degli indicatori di performance nel quadro dell’ applicazione dei princìpi contabili (Perception and coherence of performance indicators in the frame of accounting principles application). In G. Farneti, & S. Pozzoli (Eds.), I principi di reporting per le pubbiche amministrazioni (Principles of reporting for public administrations). Milano: Franco Angeli.

Bianchi, M., & Tampieri, L. (2008). Performance effettiva e performance percepita nei progetti di cooperazione decentrata per lo sviluppo dei sistemi locali (Effective and perceived performance in projects of decentralized cooperation for local systems development). III Workshop Nazionale di “Azienda Pubblica” (III National Workshop of “Public Company”) (pp. 1-16), June 5-6, Salerno.

Bianchi, M., Tampieri, L., Gualdi, D., & Paganelli, G. (2014). Distance learning in practice management. Real and perceived performances. Paper presented at the International Multidisciplinary Conference on “ICT Education, Knowledge Society, and Open Governance”, April 25-26, Tirana, Albania ICTEA 2014.

Blazevic, S. (2007). Indicators for establishing the extent of knowledge in the Republic of Croatia. Paper presented at the 4th International Conference: Global Challenges for Competitiveness: Business and Government Perspective (pp. 16-27), September 27-29, Pula, Croatia.

Brumbach, G. B. (1988). Some ideas, issues, and predictions about performance management. Public Personnel Management, 17(4), 387-402.

Farneti, G., Mazzara, L., & Savioli, G. (1996). Il sistema degli indicatori negli Enti Locali (The system of indicators in self local government). Torino: Giappichelli.

Fontana, F. (1993). L’amministrazione pubblica locale. Linee evolutive (The local public administration). Torino: Giappichelli.

Hartle, F. (1997). Transforming the performance management process. London: Kogan Page. Mazzara, L. (2006). Il processo di formulazione della strategia: Uno schema di analisi (The process of strategy elaboration: A

scheme of anlysis). Azienditalia, 6, 417-426. Mercurio, R., & Testa, F. (2000). Organizzazione, assetto e relazioni nel sistema di business (Management, set-up, and relations

in business system). Torino: Giappichelli. Rebora, G. (1999). La valutazione dei risultati nelle Amministrazioni Pubbliche (The evaluation of results in public

administrations). Milano: Guerini e Associati. Silvi, R. (1996). La misurazione della performance: Criteri di analisi e di progettazione (Performance measurement: Criteria of

analysis and planning). Economia & Management, 4, 15-27. Tampieri, L. (2006). Un’applicazione sperimentale della Balanced Scorecard alla riorganizzazione di un Corridoio logistico. Il

caso del Corridoio Paneuropeo n. 8 (An experimental application of balanced scorecard to the reorganization of a logistic corridor. The case of paneuropean corridor n. 8). In I Processi di Standardizzazione in azienda. Aspetti istituzionali, organizzativi e manageriali, finanziari e contabili (The processes of standardization in company. Institutional, organizational, managerial, financial, and accounting aspects) (pp. 553-566). Franco Angeli.


1047

Tampieri, L. (2007). Rating territoriale e assetti organizzativi. La percezione dell’Adeguatezza della Amministrazioni Pubbiche in tema di responsabilita sociale. Il caso dell’Unione Valconca (Territorial rating and organizational assets. The perception of adequacy of public administrations on social responsibility. The case of Valconca Union). In AAVV, La responsabilita sociale negli Studi economico-aziendali (The social responsability in economic-business studies). Atti del XI Convegno nazionale AIDEA Giovani (Proceedings of XI AIDEA Young National Conference) (pp. 788-804), Università degli Studi G. D’Annunzio Pescara, March 24-25. Milano: Franco Angeli.

Tampieri, L. (2008). The perceived and effective performance evaluation of SMEs development projects in transition countries. In I. Paraskakis, & A. Luneski (Eds.), Infusing research and knowledge in South-East Europe (Vol. 1, pp. 37-51).

Zuliani, A., Mancini, A., & Filacchione, G. (1993). Sistemi di controllo e valutazioni di efficienza negli enti locali italiani (Systems of efficiency control and evaluation in Italian self local government). Bologna: Il mulino.


Learning Business Ethics in Schools

Helen Wong The Hong Kong Polytechnic University, Hong Kong, China

Raymond Wong The Chinese University of Hong Kong, Hong Kong, China

Business ethics is a contemporary issue among business professionals. To enhance business ethics in the long run,

educating future business professionals in colleges (i.e., college students) is one of the starting points. This paper

aims to investigate students’ perceptions on business ethics, such as their perceived importance of business ethics,

knowledge of and interest in business ethics, their preferred method of introducing business ethics, and the

perceived usefulness of learning business ethics in lessons. Focus groups will be used to collect feedback on these

issues from students with different gender and seniority in colleges. This study will give insights into the students’

perceptions on business ethics and suggest ways/methodology to increase the awareness of business ethics in

colleges. Business professionals and educators can make reference to the findings to develop relevant materials on

business ethics to their employees and students.

Keywords: business ethics, students’ perceptions, business ethics education

Introduction

Business ethics is always an interesting topic to business community. Various reports or articles are addressing the topic and its importance to both government and business. To educate young future business professionals when they are in study, colleges have attempted to teach them business ethics through courses, guest talks, seminars, and presentations. Numerous business-related professional bodies have code of ethics and issue ethics standards for professionals to serve public interest. For instance, the International Ethics Standards Board for Accountants (IESBA) sets high-quality ethical standards for professional accountants and facilitates the convergence of international and national ethical standards. Davis and Welton (1991) commented that one way to improve business ethics is through education. This study examines the perceptions of students on business ethics and suggests ways to teach and learn business ethics effectively. This study also investigates whether there is a difference in perceptions between male and female students and between junior and senior year students.

Literature Review

Ethics is originated in the area of philosophy. Business ethics is a form of applied ethics that examines ethical rules and principles within a business context, the various moral or ethical problems that arise in business community, and special duties or obligations that apply to persons in business setting (Christensen, Peirce, Hartman, Hoffman, & Carrier, 2007).

Helen Wong, senior lecturer, Hong Kong Community College, The Hong Kong Polytechnic University. Email: [email protected].

Raymond Wong, lecturer, School of Accountancy, The Chinese University of Hong Kong.

DAVID PUBLISHING

D

LEARNING BUSINESS ETHICS IN SCHOOLS

1049

In the studies of Purcell (1985) and Davis and Welton (1991), they defined ethics as applying to business and demanding every corporation be concerned with the rightness and wrongness of human action, and business ethics can be summed up as a concern for fairness. The focus is on people of the organization. Ethics can be influenced by power. Studies have indicated that the senior management has an influence over those in their employ (Davis & Welton, 1991).

In the study by Touche Ross & Co (1988) about business ethics, 97% of the respondents believed that businesses operate ethically and 15% of these respondents believed that businesses are highly ethical. While other studies of business ethics got different results. A study by an executive search firm found that 25% of the respondents believe that ethical behavior would hinder success, and there is a sense that ethical behavior at the personal level is not ideal.

In a study by Finn, Chonko, and Hunt (1988) on certified public accountants, the result indicated that 3% of the respondents believe that anyone in their firms ever performs unethically and some often engage in unethical activities.

In a business environment, senior management can greatly influence the ethics of the organization (Davis & Welton, 1991). To penetrate to all areas of an organization, management has to set formal reviews and evaluations of ethical policies. In an organization, having a code of ethics may be a starting point, and employee participation is also important (Berenbeim, 1988). Education may be another way to improve ethical behavior, and ethics education may be carried out during college (Davis & Welton, 1991). Exposure to different points of view about ethics is important to a young adult (Kohlberg, 1973).

Rohatyn (1987) agreed that ethics education must be embedded early at home, in school, and in church. Thurow (1987) shared a similar view and he believed that society has the responsibility to teach ethical behavior. Most researchers on business ethics agreed that for training to be effective, it must be repetitive (Davis & Welton, 1991). Hence, ethics education is more likely to affect employee behavior if it begins during their college study and continues during their careers. More companies are incorporating ethics topics into their training programs, and more ethics consultants are in demand in the business community (Davis & Welton, 1991).

To uplift the ethics standards in the accounting profession, the IESBA is an independent standard-setting board that develops and issues high-quality ethical standards for professional accountants worldwide (IESBA, 2013). In Hong Kong, the Hong Kong Institute of Certified Public Accountants (HKICPA) collaborates closely with the IESBA for the adoption of international ethics standards in Hong Kong. The HKICPA has its own ethics committee to develop local ethics standards and work closely with the IESBA. Similar practices are adopted in various countries in the accounting profession.

Business curricula incorporating ethics courses continue to grow and educators believe that ethics training will make a difference (Davis & Welton, 1991). Various universities and colleges integrate business ethics into course work gradually. In the study of Christensen et al. (2007), the result indicated that 25% of the responding schools require MBA students to study ethics as a stand-alone subject and 27.27% of the responding schools teach ethics in combination with corporate social responsibility (CSR) and sustainability. The study also found that 65.9% of the responding schools stated that they have a center relating to ethics, CSR, and/or sustainability. For some schools, the lack of specific centers on ethics does not mean that they are lack of interest in it. For instance, the Schulich School of Business at York University in Toronto does not have a center on ethics, however, the school is a famous leader in the CSR and sustainability field and has created endowed chair in


1050

business ethics, CSR, and sustainability. The result reported that the Rotterdam School of Management, Erasmus University has a new program, called the “Living Management Assignment” which integrates six business functional areas with ethics and sustainability for MBA students, and the two topics are graded 25% of the total grade in each functional area. At the Graduate School of Business at the Columbia University, the topic of ethics is covered extensively during orientation and supported by extra-curricular and curricular activities, while the MBA program at the University of Michigan engages new students in a one-week leadership program that has a heavy focus on ethics.

Universities and colleges in Hong Kong have either incorporated business ethics into their curricula as a stand-alone subject or integrated it with other business subjects. It is valuable to understand the following areas in Hong Kong education:

(1) The importance of introducing business ethics in education; (2) The interest of students in learning business ethics; (3) The knowledge of students in business ethics; (4) The preferred teaching and learning methods by students in learning business ethics; (5) The expected usefulness of learning business ethics.

Research Methodology and Analysis

This study is based on primary data. Focus group discussion instead of questionnaire was used, because focus group interviews can collect more in-depth qualitative information. Participants in the focus group discussion can express and exchange their views freely in a relaxing environment. Furthermore, the time and cost incurred for focus group discussion are shorter than individual interview.

The researchers conducted focus group interviews with 12 university students in Hong Kong. The students consisted of six males and six females. Among them, six were studying senior years of a 4-year business degree and six were studying junior years of a 4-year business degree. To make the discussion easier, the students were divided into two groups with six students each mixing with different gender and seniority. A one-hour discussion was conducted with each group. Same questions were asked in each group to maintain consistency (Neumark-Sztainer & Perry, 1999). Some questions were adapted from the studies of Adkins and Radtke (2004) and H. Wong and R. Wong (2013). The questions were reviewed to ensure that there was no ambiguity in understanding the questions by participants. The discussions were summarized in the following sections.

Importance of Introducing Business Ethics in Education

During the discussion, two questions were asked in both groups: “How important is ethics in the business community and/or company?” and “How important is ethics in business courses?”.

Concerning the first question, “How important is ethics in the business community and/or company?”, the answers of the participants are as follows:

Participant 3: “Business ethics is important in business community, because it affects fairness”. Participant 5: “Yes, it is important. For instance, the unethical activities of Enron affected a lot of people”. Participant 12: “There may be fraud and theft if employees have no ethics in the company”. Participant 8: “More corruption will happen if there is no ethics in business environment”. Participant 10: “Sure, it is important. For instance, accountants cannot make questionable adjustments to

financial records, because it will affect profit of the company and decision of shareholders. Or if the salesperson accepts customer with questionable credit, it will affect the collectable amount of the company”.


1051

Participant 2: “I don’t really understand what business ethics is and how it affects the business”. Participant 9: “I think profit-making is more important than ethics to a company”. Participant 11: “I don’t know. I think some managers or supervisors may violate company policy and ask

subordinates to follow their orders. Subordinates may not want to lose jobs and do not dare to tell senior management”.

Concerning the second question, “How important is ethics in business courses?”, their comments are as follows:

Participant 5: “It is good to learn business ethics in school, because we need to handle ethical issues in workplace”.

Participant 1: “Yes, I think it is important for business students to learn ethics, because a lot of unethical activities happen in real life”.

Participant 6: “I think it is important, because we have heard a lot of unethical behaviors in business world”.

Participant 8: “Yes, we need to learn it, because this is part of professional examination”. Participant 7: “I do not think it is important, because whether one has ethics is something internal to

him/her and cannot be taught”.

Interest of Learning Business Ethics

During the discussion, two questions were asked as to whether students are interested in learning business ethics and whether they would like to have business ethics as a course or not.

Concerning the first question, “Are you interested in learning business ethics?”, participants’ answers varied:

Participant 4: “I think it is interesting to learn more about it”. Participant 10: “Yes, I am interested in learning ethical cases in real business world”. Participant 8: “Good, I am interested to learn current ethical cases in real life and how we should handle

the unethical situations”. Participant 5: “Yes, it is because we need to answer some questions about ethics in examination or

coursework”. Participant 3: “Quite interested in it, because it will help me to understand how business runs and make

sound investment decisions”. Participant 6: “Yes”. Participant 9: “Not sure”. Concerning the second question, “Would you like to have business ethics as a course in your study?”, the

answers of the participants are as follows: Participant 10: “Yes, because it is part of my professional examination”. Participant 1: “It is good to have it as a course, because we may need to learn more in order to handle

similar cases when we go out to work”. Participant 9: “No, we have a lot of subjects to study already”. Participant 11: “It may be too heavy to have a separate course on business ethics”. Participant 3: “I enjoy listening to business ethics issues. I don’t mind having such course in my study”. Participant 4: “No special preference”.


1052

Knowledge of Business Ethics

During the discussion, two questions were asked concerning whether the students have heard about business ethics and where did they get the knowledge.

Concerning the first question, “Have you heard about business ethics?”, the answers of the participants are as follows:

Participant 9: “Yes, in internet”. Participant 11: “In financial news”. Participant 6: “Teachers mentioned it in lessons”. Participant 1: “We have subjects teaching business ethics”. Participant 5: “We have a separate subject on business ethics”. Participant 3: “In professional magazines and textbooks”. Concerning the second question, “Where did you get the knowledge of business ethics?”, their answers

are: Participant 6: “In classroom sessions”. Participant 4: “During lessons, teachers taught it. We learn it in ‘Financial Accounting’”. Participant 7: “I heard that we will have business ethics in some advanced subjects”. Participants 1 and 12: “We got the knowledge in ‘Financial Accounting’, ‘Intermediate Accounting’, and

‘Advanced Accounting’”. Participant 8: “I have taken course in business ethics. We have a separate course called ‘Business Ethics’”. Participant 3: “We did assignment covering business ethics”. Participant 5: “We learn it in ‘Auditing’”.

Preferred Teaching and Learning Methods of Learning Business Ethics

During the discussion, two questions were asked on how the students would prefer in learning business ethics and whether the teachers should introduce it as a core or an elective course.

Concerning the first question, “How would you prefer in learning business ethics?”, the answers of the participants differ:

Participant 1: “Teachers can ask us to do some research ourselves before lessons. We can discuss our viewpoints on business ethics in tutorial lessons”.

Participant 5: “Case study is better”. Participant 3: “Simulations and role plays are good to learn business ethics”. Participant 10: “Teachers have to teach us the basic concepts and principles, and they can then give us

problem-based assignments for application and discussion”. Participant 8: “I think discussion and case study will be more effective”. Participant 12: “Teachers have to tell us some real life examples for easier understanding”. Participant 10: “Doing group project is also good”. Participant 2: “I think the current method of incorporating into ‘Financial Accounting’ is enough”. Participant 11: “I think integrating it into subjects is a good way to teach business ethics. Otherwise, it is

very boring”. Concerning the second question, “Should the teachers introduce business ethics as a core course or an

elective course?”, their answers are as follows:


1053

Participant 5: “I prefer it as a core course, because it is interesting”. Participant 1: “In order to have more understanding about business ethics, I prefer it to be taught as a

separate core subject and assessed in 100% coursework, such as presentation and case analysis”. Participant 8: “It is important to learn business ethics, and I think a core course is more suitable”. Participant 10: “Good to be core”. Participant 12: “It is good to have it as a core course, because we have professional examination in this

area”. Participant 2: “To me, I think an elective course would be enough”. Participants 6 and 11: “Either one is fine”.

Expected Usefulness of Learning Business Ethics

One question was asked during a discussion on the expected usefulness of learning business ethics, namely, “What is the expected usefulness of learning business ethics?”. Concerning this question, the participants’ answers are as follows:

Participant 1: “It helps us to make ethical decisions”. Participant 5: “It helps us to handle unethical people”. Participant 8: “It may help me to handle unethical behavior of colleagues and supervisors”. Participant 12: “It tells me what I can do and what I cannot do”. Participant 10: “It may teach me how to make managerial decisions”. Participant 4: “It can tell us what ethical decision is”. Participant 11: “I heard from senior students that learning business ethics is needed for taking professional

examination”.

Findings

Most of the participants are aware of business ethics. First, both male and female students have similar views on the importance of business ethics. Most of them agreed that business ethics is important, especially for the senior students. Senior students in general agreed that ethics is important in business community and/or company, and it is important to have ethics in business courses. Second, most participants, both male and female students, indicated their interest in learning business ethics and would like to have business ethics as a course in their study. Students of senior years than junior years showed a stronger interest in learning business ethics, for instance, senior students wanted to learn business ethics for preparing them in workplace and professional examination. Third, both male and female students have some knowledge of business ethics, and they knew it through financial news, professional magazines, textbooks, etc.. According to the discussion, senior students have a clearer idea where they got the knowledge about business ethics, for instance, they knew more about which subjects cover business ethics. Fourth, the majority of male and female students shared similar views on the preferred learning and teaching methods for learning business ethics. Senior students suggested various ways to teach and learn business ethics, such as case studies, simulations, role plays, group projects, etc., while junior students were quite silent in this part. Senior students also preferred that teachers should introduce business ethics as a core course. Finally, both male and female students shared similar views on the expected usefulness of learning business ethics. Again, senior students provided more ideas on the expected usefulness, such as helping them to handle unethical people, helping them to make ethical decisions, helping them to make managerial decisions, etc..


1054

Implications and Conclusion

Hong Kong students are eager to learn business ethics. Business schools should introduce business ethics as a separate course or integrate it with other subjects. For junior years, schools can incorporate the business ethics into various subjects, such as Financial Accounting, Intermediate Accounting, Advanced Accounting, Auditing, etc.. For senior years, schools can have an individual subject teaching business ethics, because senior students should have better analytical and critical thinking skills in discussing the ethical issues. Schools can also adopt various methods to teach business ethics, such as group projects, case analysis and simulations, etc.. Professional bodies can offer seminars providing both students and professionals with updated ethical issues and standard development. There will be a demand for academic professionals with the knowledge of business ethics as well. Conferences can also be arranged for academics and professionals sharing ideas and development on business ethics.

Limitations and Future Research

This study was conducted with limited participants and in a local context. Future research can be conducted in different sections of the populations, and survey questionnaire can be used to catch more respondents. Similar research can also be conducted in business entities in order to collect information for getting insights into in-house training.

References Adkins, N., & Radtke, R. R. (2004). Students’ and faculty members’ perceptions of the importance of business ethics and

accounting ethics education: Is there an expectation gap? Journal of Business Ethics, 51(3), 279-300. Berenbeim, R. E. (1988). An outbreak of ethics. Across the Board, 25(5), 14-19. Christensen, L. J., Peirce, E., Hartman, L. P., Hoffman, W. M., & Carrier, J. (2007). Ethics, CSR, and sustainability education in

the Financial Times Top 50 global business schools: Baseline data and future research directions. Journal of Business Ethics, 73(4), 347-368.

Davis, J. R., & Welton, R. E. (1991). Professional ethics: Business students’ perceptions. Journal of Business Ethics, 10(6), 451-463.

Finn, D. W., Chonko, L. B., & Hunt, S. D. (1988). Ethical problems in public accounting: The view from the top. Journal of Business Ethics, 7(8), 605-615.

International Ethics Standards Board for Accountants [IESBA]. (2013). Proposed strategy and work plan, 2014-2018. Consultation Paper, IESBA.

Kohlberg, L. (1973). Collected papers on moral development and moral education (Laboratory of Human Development, Harvard University).

Neumark-Sztainer, D., & Perry, C. (1999). Factors influencing food choices of adolescents: Findings from focus-group discussions with adolescents. Journal of the American Dietetic Association, 99(8), 929-937.

Purcell, T. (1985). Institutionalizing business ethics: A case history. Business and Professional Ethics Journal, 4(2), 39-51. Rohatyn, F. G. (1987, June 3). Ethics in America’s money culture. New York Times, p. A27. Thurow, L. C. (1987, June 14). Ethics doesn’t start in business schools. New York Times, p. E25. Touche Ross & Co. (1988). Ethics in American business: A special report. New York, NY: Touche Ross & Co. Wong, H., & Wong, R. (2013). An empirical study: Adoption of International Financial Reporting Standards (IFRS) in Hong Kong

education. Journal of Management Research, 5(4), 98-107.


Female Leadership and Organizational Climate in a University

Institute

Paula Ponce Lázaro, Selene Viridiana Pérez Ramírez, Silvia Cartujano Escobar, Roque López Tarango, Crisóforo Álvarez Violante, Braian Real Bahena

State University of Morelos, Morelos, Mexico

This paper addresses the case of the Professional Institute of the Southern Region (IPRES), an institute of higher

education in the State University of Morelos, with the aim of showing the measurement results of organizational

climate before and after the change of the principal to know some internal features and describe the organizational

climate of workers’ perception in a transition stage; besides, the influence of the current director’s leadership is

analyzed in the achievement of organizational goals and how the perception of organizational climate or working

environment can be affected by female leadership is also dealt with. In Mexico, there are more and more

women running various organizations, including those belonging to the field of education, and universities are no

exception. On the other hand, the type of leadership being exercised can promote or hinder the proper performance

of the institute and may be a factor of distinction and influence the behavior of those who integrate it; therefore,

knowing how it works provides feedback about the processes that determine organizational behavior and the

working environment.

Keywords: organizational climate, female leadership, perception, leadership styles

Introduction

The organizational climate directly impacts the performance of the functions of any organization, in other words, the worker’s perception of the environment where he/she works influences his/her behavior, so having an instrument to evaluate the female principal’s management and identify the characteristics of her leadership role will allow us to assess the climate and establish mechanisms for improving the working environment.

On the other hand, the working environment is influenced by several factors: those that have been identified as constituents of the objective reality of organizational development, which refer to the organizational structure, policies and procedures, interpersonal and group relations, a task and physical environment in which leadership (Alves, 2000) develops, and it is the influence of leadership factor related to organizational climate that is discussed in the present work.

Paula Ponce Lázaro, research professor, the Southern Professional Institute, State University of Morelos. Email: [email protected].

Selene Viridiana Pérez Ramírez, research professor, the Southern Professional Institute, State University of Morelos. Silvia Cartujano Escobar, research professor, the Southern Professional Institute, State University of Morelos. Roque López Tarango, research teacher, the Southern Professional Institute, State University of Morelos. Crisóforo Álvarez Violante, research professor, the Southern Professional Institute, State University of Morelos. Braian Real Bahena, student degree in Administration, the Southern Professional Institute, State University of Morelos.

DAVID PUBLISHING

D

FEMALE LEADERSHIP AND ORGANIZATIONAL CLIMATE IN A UNIVERSITY INSTITUTE

1056

There is no doubt that the style of leadership exercised by principals influences workers’ perceptions of organizational climate; in this paper, the measurement results of working environment are shown during the management (2008-2011) and the period (2011-2014), in order to see if there is any change in the perception of the working environment from female leadership which currently holds at the Professional Institute of the Southern Region (IPRES).

Review of the Literature

The organizational climate or environment refers to a set of characteristics in the workplace, perceived by individuals who work there and serve as the primary force which influences their work behaviors (Hodgetts & Altman, 1994). Several factors contribute to organizational climate, but different authors have not agreed as to the type of dimensions that have to be evaluated in order to have an explanation as accurate as possible of what climate is (Brunet, 1997). Among these multiple factors is management style or leadership as the principal determinant of climate. However, it is important to note that there is a controversy regarding the above statement, although it is commonly accepted that the organizational climate is strongly determined by the leadership style being performed in the organization (Brunet, 1997). In the following paragraphs, the main leadership theories are mentioned to establish the organizational climate and leadership relationship.

The leadership field is diverse and includes a wide range of theories, among the best known are: the leadership trait theory such as the great man theory or behavioral models such as the University of Ohio’s (Stogdill, Goode, & Day, 1962) situational models such as the theory of leader-follower exchange (Schriesheim, Castro, & Cogliser, 1999), contingency theory (Fiedler, 1967), the target-path model (Evans, 1970; House, 1971; House & Dessler, 1974; House & Mitchell, 1974), and the situational leadership model (Hersey & Blanchard, 1982), among others, which took into account variables of the environment and the person for analysis (Yukl, 2002).

Starting form behavioral studies to analyze leadership, a number of theories that describe leadership styles appeared. “All of them mainly recognized two general types of behavior: (1) those task-oriented; and (2) those people-oriented” (Ayoub, 2011).

Methodology

The Population

To determine the status of the working environment of the IPRES, an instrument was applied to 47 staff working on campus for the first time in 2009 and to 51 staff later in 2012.

In 2013, an instrument to evaluate the management of the principal and to identify the characteristics of the leadership that a female exerts was designed, which was applied to 55 workers.

The Instrument

To measure the working environment, the instrument used was called: Organizational Climate Scale (EDCO, for its acronym in Spanish). It was decided to use this instrument mainly due to the characteristics of the population, because it allows us to establish a scale of uniform measurement and “free sample” that can be applied to individuals and groups of very different skill levels and allows testing how the working environment is in organizations.


1057

Results

The results shown in this section are those obtained from the instrument applied in 2009, for the management period (2008-2011).

Figure 1. First measurement of the working environment (IPRES).

As one can see, 83% of the population surveyed rate the organizational climate at a high level, which means that the majority of workers have a favorable perception regarding rules, policies, and leadership styles of their boss (see Figure 1). As regards the type of leadership in that period, the respondents report that the leader is not involved directly in the tasks, there was no oversight of them, and he showed detached personality, so it is considered that this style adheres to the so-called laissez-faire and they recognized that this led to an inefficient operation.

In the second measurement of the climate, the survey was applied to 51 workers. On the other hand, it is important to note that the results shown are for managing director, who is a woman and who shall serve for the period from 2011 to 2014 and at the time of measurement had seven months directing the institute.

Figure 2. Second measurement of the working environment (IPRES).

0

10

20

30

40

50

Low level Average level High level

0%

100%

0%

Low level Average level High level

Evaluation of the working environment in 2012

Satisfaction level

17%

83%

0%

Evaluation of the working environment in 2009


1058

This time, IPRES workers described the organizational climate at a medium level, which shows that the workers’ perceptions changed and noticed a less favorable working environment compared with 2009 (see Figure 2).

The results in the second measurement showed that the workers’ perceptions changed because of, among other factors, the change of the principal and consequently the change in the leadership style. In this second period analyzed, it was observed with respect to leadership style that the policies and work techniques are planned, devolved, and directly supervised by the leader of the organization, who sometimes allows discussion of decisions within the group, although mostly it is the leader who makes decisions, leaving little margin to subordinates, although some recognize that she sometimes promotes the welfare of the group and asks for advice.

In 2013, in order to identify the characteristics of female leadership in the institute, an instrument was designed and applied, which allowed us to measure the quality and level of communication, relationships, and conflict management among others, in order to identify differences between the former principal and the female principal who currently runs the institute.

According to the results obtained by the instrument, it is by and large concluded that workers’ perceptions regarding the management of the female principal in the IPRES is that a female leader is more efficient in the work of the organization and that 47% of respondents believe that the operation of the institute has improved compared with the previous principal, as shown in Figure 3.

Figure 3. Respondents’ opinions on the operation of the institute (IPRES).

Although workers recognize that the performance has improved, they also consider that the communication is poor, causing conflicts and dissatisfaction in the teaching and administrative staff, who feel displaced and undervalued, behavior that is reflected in 46% of the surveyed population, who believe that the institute remains the same in terms of efficiency.

Moreover, according to the qualities of the leader, 42% said that she listens respectfully and accepts subordinates’ opinions, and they also consider her to be a leader who faces and solves conflicts.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Worsened Remains the same Improved

7%

46% 47%


1059

Conclusion

The results show that the perceptions of employees on organizational climate are strongly influenced by leadership style, as can be seen from the results; the working environment has been declining from a high level to a medium level, which implies a decline in the satisfaction level of employees and some characteristics of leadership style which currently holds should be analyzed. Also, it can be seen in this case that the laissez-faire style affected tasks and organizational outcomes, although influenced in a positive direction with respect to the fact that most study subjects perceived a highly favorable climate.

In the second measurement of the working environment, the combination of the autocratic and democratic leadership styles influenced the perceptions of workers in a negative sense, which made respondents in this case assess the work environment at a medium level, however, 47% of the surveyed population recognize that the operation of the organization has improved compared with the previous period where there was less supervision in the tasks.

Female leadership in this particular case showed better results in the task approach but it has deficiencies in communication and motivation of IPRES workers.

References Alves, J. (2000). Leadership and organizational climate. Journal of Sport Psychology, 9. Ayoub, P. J. L. (2011). Leadership styles and effectiveness in the Mexican public administration. Raleigh, NC: Lulú Enterprises. Brunet, L. (1997). The climate of work organizations. Mexico: Trillas. Evans, M. G. (1970). The effects of supervisory behavior on the path-goal relationship. Organizational Behavior and Human

Performance, 5(3), 277-298. Fiedler, F. E. (1967). A theory of leadership effectiveness. New York, NY: McGraw-Hill. Hersey, P., & Blanchard, K. H. (1982). Management of organizational behavior. Englewood Cliffs, NJ: Prentice Hall. Hodgetts, R., & Altman, S. (1994). Behavior in organizations. Mexico: McGraw-Hill. House, R. J. (1971). A path goal theory of leader effectiveness. Administrative Science Quarterly, 16(3), 321-339. House, R. J., & Dessler, G. (1974). The path-goal theory of leadership: Some post-hoc a priori test. In J. Hunt, & L. Larson (Eds.),

Contingency approaches to leadership (pp. 29-55). Carbondale, IL: Southern Illinois University Press. House, R. J., & Mitchell, T. R. (1974). Path-goal theory of leadership. Journal of Contemporary Business, 3, 81-97. Schriesheim, C. A., Castro, S. L., & Cogliser, C. C. (1999). Leader-member exchange (LMX) research: A comprehensive review

of theory, measurement, and data-analytic practices. The Leadership Quarterly, 10(1), 63-113. Stogdill, R. M., Goode, O. S., & Day, D. R. (1962). New leader behavior description subscales. Journal of Psychology, 54(2),

259-269. Yukl, G. A. (2002). Leadership in organizations. Englewood Cliffs, NJ: Prentice Hall.


Human Resource Management in the Building Industry:

International Comparison

Filip Bušina

Moscow State University of Technology “STANKIN”, Moscow, Russia

Martin Šikýř

Czech Technical University in Prague, Prague, Czech Republic

This paper summarizes the results of the international questionnaire survey which took place at the start of 2013

in order to examine, judge, and compare the implemented concept and procedures of human resource management

in the questioned building companies operating in the Visegrad Four countries (the Czech Republic, Hungary,

Poland, and the Slovak Republic) and the Federal Republic of Germany, and proposes an optimal approach to

human resource management in the context of the current and expected economic development. The questionnaire

survey was based on the assumption that effective human resource management is a condition of the successful

function of each building company and that human resource management is that area of management which

distinguishes the successful building companies from the unsuccessful ones. In total, 202 companies from the

Czech Republic, 105 companies from Hungary, 100 companies from Poland, 102 companies from the Slovak

Republic, and 99 companies from the Federal Republic of Germany took part in the questionnaire survey. The

results of the questionnaire survey showed that among the building companies questioned in individual countries,

there was no substantial difference in the overall concept and in the partial procedures of human resource

management. The implemented concept and procedures in the questioned building companies show significant

merits and surprising shortcomings, whereas it is difficult to prove an unequivocal connection between the

efficiency of human resource management and the success of building companies. This relationship is determined

by a series of other political, economic, legal, social, cultural, technical, demographic, and natural effects which

are not related to the efficiency of human resource management or to the performance of the workforce of

building companies.

Keywords: building industry, human resource management, competitiveness

Introduction

Human resource management represents theoretical starting points and practical approaches to the

management and leadership of people in an organization. The general aim of human resource management is

to ensure that an organization is able to meet its objectives through people (Armstrong, 2007). The aim of

human resource management in building companies is to find an optimal method of implementing the required

Filip Bušina, Ph.D., MBA, Faculty of Economics and Management, Moscow State University of Technology “STANKIN”.

Email: [email protected]. Martin Šikýř, Ph.D., Department of Engineering Education, Masaryk Institute of Advanced Studies, Czech Technical

University in Prague.

DAVID PUBLISHING

D

HUMAN RESOURCE MANAGEMENT IN THE BUILDING INDUSTRY

1061

construction works and achieving the expected strategic objectives of the building company (sustainable

development, long-term prosperity, constant competitiveness, etc.) with the help of people and employees

who work in the building company and to look for possibilities of satisfying their own needs (perspective

employment, fair income, professional development, etc.). Expedient human resource management is,

therefore, naturally directed at finding an effective balance between the economic and social objectives of a

building company, or effective achievement of the objectives of a building company and satisfaction of the

needs of the employees. Of course, a precondition of success is the optimal concept of human resource

activities (planning, recruitment, selection, appraisal, remuneration, or training of employees), which enable

managers and human resource officers to systematically acquire, utilize, and develop employees to perform

the required work and achieve the expected performance (Marchington & Wilkinson, 2005). Managers and

human resource officers need to know which human resource activities are to be implemented and in what

way and for what purpose they have to implement such activities in order to optimally manage other

employees. In this context, it is evident that employees represent the most valuable source and the greatest

wealth of any organization (Koubek, 2007) and many surveys have also shown the effect of various policies

and procedures in human resource management on the performance of employees and the organization

(Gerhart & Milkovich, 1990; Huselid, 1995; Rizov & Croucher, 2009).

As shown in analyses of the building industry in the Visegrad Four countries (the Czech Republic,

Hungary, Poland, and the Slovak Republic) which are regularly drawn up by CEEC Research (2013a; 2013b;

2013c; 2013d) based on data obtained from personal and telephone interviews with the chief executive officers

and members of the board of directors of the selected small, medium-sized, and major building companies in

building construction and structural engineering, the unfavorable economic situation associated with the

significant fall in the number and size of the building contracts in several past years has forced most building

companies to significantly reduce human resource costs. Individual building companies usually make surplus

employees redundant, reduce wages, or use outsourcing of employees. In all cases, this concerns fundamental

human resource decisions which affect the operation of the entire building company. The facts show a clear

link between human resource management and the performance of building companies and it is human resource

management which is that area of management that distinguishes the successful companies from the

unsuccessful ones (Brandenburg, Haas, & Byrom, 2006).

The need to optimally safeguard human resource management in the building industry is based not only on

the diversity of construction works in individual areas of building production (building construction, structural

engineering), or the demands of working conditions in the building industry (seasonal and sporadic nature,

complexity, responsibility and severity of construction works, difficulty of the working cycles, or harmfulness

and risk of the working environment), but mostly on the difficult political, economic, legal, social, cultural,

technical, demographic, and natural conditions (Maloney, 1997) in which building companies compete for their

place on the building market and naturally influence the approach of building companies to safeguarding

human resource management and individual human resource activities.

The aim of this paper is to summarize the results of the international questionnaire survey which took

place at the start of 2013 in order to examine, judge, and compare the implemented concept and procedures of

human resource management in the questioned building companies operating in the Visegrad Four countries

(the Czech Republic, Hungary, Poland, and the Slovak Republic) and the Federal Republic of Germany, and to

propose an optimal approach to human resource management in the context of the current and expected


1062

economic trend. The questionnaire survey was based on the assumption that effective human resource

management is a condition of the successful function of each building company and it is human resource

management that is this area of management that distinguishes the successful companies from the unsuccessful

ones.

The Visegrad Four countries are close partners and direct competitors. They have similar business

conditions and market opportunities and they deal with similar economic and social problems and challenges.

The Federal Republic of Germany is a developed economic country with an advanced social system which

significantly affects the conditions of business and management in the European area. All these facts are a

starting point and incentive for comparing the current and expected trend in the building industry of these

countries in terms of human resource management.

The required data were obtained on the basis of phone interviews with representatives of the questioned

building companies. The questionnaire survey took place at the start of 2013. The relevant data were provided

by a total of 202 companies from the Czech Republic, 105 companies from Hungary, 100 companies from

Poland, 102 companies from the Slovak Republic, and 99 companies from the Federal Republic of Germany.

The contact data were obtained from public information sources available on the internet. The questionnaire

contained a total of 10 questions with a choice of answers aimed at the total concept of human resource

management and basic human resource activities associated with planning, acquisition, selection, appraisal,

remuneration, and training of employees. The results of the survey were drawn up and assessed by the

Microsoft Excel calculator determining the relative frequency and explanation of answers. The relative

frequency of the answers was expressed by pie and block graphs.

Concept of Human Resource Management

Human resource management is an important part of the management of each building company, because

it makes it possible to recruit, use, and develop able and motivated employees to perform the agreed work,

achieve the required performance, and implement strategic objectives. Individual human resource activities,

such as planning, recruitment, selection, appraisal, remuneration, and training of employees, serve the building

company whose successful handling decides about the function and management of the building company.

Human resource management makes it possible to influence the abilities, motivation, and performance of

individual employees and therefore the performance of the entire building company. However, the successful

fulfillment of this relationship demands the optimal concept of human resource management which makes it

possible for the building company to systematically and effectively provide individual human resource

activities in accordance with strategic objectives and in terms of determining external and internal conditions of

business and management of the building company.

Hence, one of the questions in the questionnaire survey found out what overall concept of human resource

management was implemented by building companies, whether they were striving for stability or flexibility, or

whether they implement a combined approach to human resource management. The results of the questionnaire

survey showed that most questioned building companies strive for stability, which means a low rate of

fluctuation and maintaining key employees, which requires a strategic approach to human resource

management (see Table 1). Individual human resource activities must be ensured systematically in accordance

with human resource strategy and based on human resource plans, especially in selection, appraisal,

remuneration, and training of employees.


1063

Table 1

Overall Approach to Human Resource Management Country Stability (%) Flexibility (%) Combination (%)

Czech Republic 55 11 34

Hungary 53 37 10

Poland 65 12 23

Slovakia 55 15 30

Germany 74 5 21

Note. Source: Own elaborations.

The results of the questionnaire survey showed that a strategic approach to human resource management,

which means the approach implemented in accordance with the human resource strategy and based on human

resource plans, is not that widespread in the building industry (see Table 2). Most building companies do not

have drawn-up human resource strategy and human resource plans. On the contrary, most building companies

draw up human resource records. The approach of most building companies to human resource management is

more non-conceptual and random, aimed mostly at satisfying the momentary needs of the workforce and

meeting administrative obligations that arise from legislation.

Table 2

Strategic Approach to Human Resource Management Country Human resource strategy (%) Human resource plans (%) Human resource records (%)


Hungary 52 34 59

Poland 52 53 48

Slovakia 29 32 64

Germany 30 34 33


Successful human resource management requires a tool for exploring and assessing the expedience and

efficiency of the implementation of individual human resource activities, their impact on the performance of

individual employees, and the entire building company. Such a tool is the systematic assessment of the

efficiency of human resource management applying the principles and methods of human resource controlling

or human resource audit. The results of the questionnaire survey showed that despite the evident attempt of

most building companies, there is a lack of the necessary know-how for expedient and effective measurement

of the efficiency of human resource management which significantly affects the performance of every building

company (see Table 3).

Table 3

Evaluation of the Efficiency of Human Resource Management Country Evaluation of efficiency (%) Human resource controlling (%) Human resource audit (%)


Hungary 53 43 23

Poland 69 45 40

Slovakia 53 54 27

Germany 54 66 30



1064

Every building company that wants to achieve a business success must learn to suppress its weaknesses

(e.g., obsolete technology), overcome threats (e.g., stronger competition), assess its strengths (e.g., qualified

employees), and exploit the opportunities (e.g., a new contract). It is important for every building company to

strive for expedient diversification of building activities and develop its adaptability and ability to handle

diverse construction works. This is where human resource management comes in provided it is implemented

expediently and effectively to safeguard the stable function of the building company and quality satisfaction of

the various needs of the interested parties, especially employees and customers. Such a concept of human

resource management provides every building company with the ability to optimally assess the invested funds,

exploit disposable resources, and achieve the expected results.

Basic Human Resource Activities

Among the basic human resource activities that relate to effective recruitment, use, and development of

employees of a building company are: recruitment and selection of employees, appraisal of employees, and

remuneration and training of employees (see Table 4).

The initial problem of recruiting and selecting employees is the identification of potential sources of

employees within and outside the company. The results of the questionnaire survey showed that building

companies use internal and external sources of employees. Internal sources of employees are mostly used by

building companies in Germany (an average of 82%), then in Hungary (an average of 73%), Slovakia

(an average of 61%), Czech Republic (an average of 55%), and Poland (an average of 52%). Most building

companies recruit employees on the basis of an analysis of tasks, conditions, and requirements of jobs of

employees and select employees in terms of their actual abilities to perform the required work.

Appraisal of employees geared towards exploration and assessment of the abilities, motivations, results,

and behaviors of employees represents an effective tool for the management and leadership of employees, as

well as an important source of information for further human resources decision-making in remuneration,

training, or development of employees. Most building companies confirmed that they conduct regular appraisal

interviews with employees in order to define the fundamental working and development objectives of

employees. It is important to make use of the formal and informal appraisals of employees as a managerial tool

for the management and leadership of employees towards performing the agreed work and achieving the

required results.

Table 4

Basic Human Resource Activities

Activity Czech Republic (%)

Hungary (%) Poland (%) Slovakia (%) Germany (%)

Employee recruitment based on job analysis 60 82 60 65 56

Employee selection in terms of ability 87 84 81 90 68 Creating individual adaptation plans for new employees

32

46

16

28

17

Conducting regular appraisal interviews with employees

66

75

71

66

70

Employee compensation based on employee appraisal results

91

78

83

97

55

Conducting employee satisfaction polls 48 45 16 45 37

Drawing up a motivation programme for employees 53 50 61 53 23



1065

Employee compensation in most building companies is used to evaluate the achieved results or as a

stimulus for performing the required work. Various compensation tools especially wage for performed work,

wage bonuses for extraordinary working conditions, or employee benefits based on the employee contract serve

to meet the purpose of remunerating employees. Most building companies confirmed that they compensate

employees based on employee appraisal results. This corresponds to the concept of modern performance

remuneration to link work performance and the related employee compensation to achieving individual and

collective objectives.

Employee training allows the shaping of the working abilities of employees, support of personal

development, and the work promotion of employees in a company. In most building companies, employee

training is associated with the need to learn new knowledge and skills as a consequence of changes in job

requirements. Less common is employee training geared towards long-term professional development of

employees. Most building companies do not create individual employee development plans or new individual

employee adaptation plans.

The result confirmed that the questioned building companies do not implement the idea of a strategic and

systemic approach to basic human resource activities. The problem is that every building company employs

people of various professions who perform various construction works in diverse working conditions.

Moreover, building companies usually base their successes on specialized professions, professional experience,

quality work, and good customer references which bring them the required building contracts. Under such

circumstances, it is more or less necessary that every building company implement a strategic and systemic

approach to human resource management and provide individual human resource activities in accordance with

the human resource strategy and based on human resource plans.

The basis of any efforts for expedient change in management of any building company must be efforts for

effective change in human resource management, or the philosophy, strategy, and system of employee

management, because it is the employees who by their approach individually and collectively decide the

method of implementing the required activities and achieving the expected objectives of the building company.

Conclusions

The exploration, assessment, and comparison of the concept and procedures of human resource

management in the questioned building companies operating in the Czech Republic (202 companies), Hungary

(105 companies), Poland (100 companies), Slovak Republic (102 companies), and the Federal Republic of

Germany (99 companies) show that among the questioned building companies in individual countries, there is

no major difference in the general concept and in the partial procedures of human resource management. The

implemented concept and procedures in the questioned building companies show marked merits and surprising

shortcomings.

The current approach of building companies to human resource management is more non-conceptual and

random, geared mostly towards satisfying the momentary needs of the workforce and meeting administrative

obligations. Despite the fact that building companies base their successes on specialized professions, quality

work, and good customer references, most do not implement a strategic and systematic approach to human

resource management and do not provide basic human resource activities in accordance with the human

resource strategy and based on human resource plans. Most building companies also lack the required

know-how for expedient and effective measurement of the efficiency of human resource management which


1066

significantly affects the performance of every building company. Currently, it was shown that it is difficult to

prove a direct connection between the efficiency of human resource management and the success rate of

building companies. This relationship is determined by a number of other political, economic, legal, social,

cultural, technical, demographic, and natural effects which do not relate to the efficiency of human resource

management or to the performance of employees of building companies.

In the context of current and expected economic development, it is important for every building company

to strive for expedient diversification of building activities and develop its adaptability and ability to manage

diverse construction works. It is human resource management that serves this purpose provided it is enforced

expediently and effectively to safeguard the stable function of the building company and quality satisfaction of

the various needs of the interested parties, especially the employees and customers. Such a concept of human

resource management provides every building company with the ability to optimally evaluate the invested

funds, exploit the disposable resources, and achieve the expected results.

References Armstrong, M. (2007). Řízení lidských zdrojů. Nejnovější trendy a postupy (Human resources management. Latest trends and

practices) (10th ed.). Praha: Grada Publishing. Brandenburg, S. G., Haas, C. T., & Byrom, K. (2006). Strategic management of human resources in construction. Journal of

Management in Engineering, 22(2), 89-96. CEEC Research. (2013a). Kvartální analýza českého stavebnictví Q4/2013 (Quarterly analysis of the Czech building industry

Q4/2013). Retrieved from http://www.ceec.eu/research/ CEEC Research. (2013b). Kvalitativní studie maďarského stavebnictví 2013 (Qualitative study of the Hungarian building industry

2013). Retrieved from http://www.ceec.eu/research/ CEEC Research. (2013c). Kvalitativní studie polského stavebnictví 2013 (Qualitative study of the Polish building industry 2013).

Retrieved from http://www.ceec.eu/research/ CEEC Research. (2013d). Kvartální analýza slovenského stavebnictví Q4/2013 (Quarterly analysis of the Slovak building industry

Q4/2013). Retrieved from http://www.ceec.eu/research/ Gerhart, B., & Milkovich, G. (1990). Organizational differences in managerial compensation and financial performance. Academy

of Management Journal, 33(4), 663-691. Huselid, M. A. (1995). The impact of human resource management practices on turnover, productivity, and corporate financial

performance. Academy of Management Journal, 38(3), 635-672. Koubek, J. (2007). Řízení lidských zdrojů. Základy moderní personalistiky (Human resources management. Fundamentals of

modern human resource management) (4th ed.). Praha: Management Press. Maloney, W. F. (1997). Strategic planning for human resource management in construction. Journal of Management in

Engineering, 13(3), 49-56. Marchington, M., & Wilkinson, A. (2005). Human resource management at work: People management and development

(3rd ed.). London: CIPD. Rizov, M., & Croucher, R. (2009). Human resource management and performance in European firms. Cambridge Journal of

Economics, 33(2), 253-272.