28 Jan 2010

Sample Essay: In Hard Times,Companies Should Concentrate On Their Own Profits Not Charity. Discuss

This paper is a discussion on the reasons why companies focus more on charity than profitability during hard times.  In order to carry out the discussion regarding the above mentioned statement, various relevant issues of business and management like Ethics and corporate social responsibility, business strategy, importance of finance, aspects of organizational behaviour have been focused upon in order to arrive upon a decent judgment.

One fundamental question for which answers are not clear and which is the basis of this entire dissertation is “why do people indulge in charity?”

The above question for which an answer is being sought is actually pretty critical and also a highly debated question.  Our society considers people who indulge in charity with great respect as it is believed that people do charity due to the great concern they have upon the society.  However, there is one more school of thought that, many people do charity for the sake of tax deductions.

Despite these contrasting perceptions of people indulging in charity, it is true that people who do charity activities are a real boon to today’s society.  It would be good that if more and more people across the globe come forward to donate their vastly accumulated affluence.  They should also ensure that their charity is distributed equally to people who are really in need and thereby ensuring their survival in the society.

People have a variety of needs.  Irrespective of one’s status, age, and achievements, one would still have some unfulfilled needs.  In order to satisfy their unfulfilled needs more effectively, people have learned to organize themselves into groups.  The process of organizing facilitates an organization in its specialization efforts (Frederiksen, 1982).  It helps the employees to develop specialized skills and enhances the productivity and efficient functioning of the organization.  The organizational system consists of social, technical and economic elements which coordinate human and managerial resources to achieve various organizational objectives.

Despite the fact that good human relations are a significant organizational objective even today, it is no longer the predominant approach in guiding management of employees within organization.  It is bow evident that many factors have to be considered in order to ensure high levels of employee satisfaction and productivity (Falletta, 2005).  In order to achieve higher employee satisfaction and productivity, organizations today are adopting the human resources approach, which treats the organizational goals and employee needs as being mutual and compatible, and which can be pursued in unison.

Decision-making describes the process by which a course of action is selected as the way to deal with a specific problem.  People at all levels in an organization are constantly making decisions and solving problems.  For managers, the decision-making and problem-solving tasks are particularly important aspects of their jobs. (Drucker, 1974) which employee should be assigned a particular task?  How profits should be invested?  Whether the problem is large or small, it is usually the manager who has to confront it and decide what action to take.

Managers make decisions dealing with both problems and opportunities.  For instance, making decisions about how to cut costs by five percent reflects a problem.  The manager also has to make decisions when there is an opportunity that can be exploited.  If the firm has surplus funds, the manager has to decide whether the extra funds should be used to increase shareholder dividends, reinvested in current operations, or to expand into new markets.

The quality of managers’ decisions is the yardstick of their effectiveness and value to the organization.  Managers are usually evaluated and rewarded on the basis of the importance and results of their decisions.(Drucker, 1998).  this indicates that managers must necessarily develop decision-making skills.

The success of an organization depends greatly on the decisions that managers make.  The Rational model which is believed to be one of the major types of models regarding how managers make decisions is discussed below.

The rational model of managerial decision-making has its roots in the economic theory of the firm.  When theories about the economic behaviour of business firms were being developed, there was a general tendency among economists to assume that whatever decisions managers made would always be in the best economic interests of their firms.  There was a tremendous support for this assumption from many thinkers of management.  The rational model of decision-making believes that managers engage in a decision-making process which is totally rational.  They not only have all the relevant information needed to take decisions but also are aware of all the possible outcomes and consequence of the decision so taken by them.

Ethics refer to the rules and standards governing a person’s conduct.  Ethics has only recently become an important area of study.  It has been found that ethical behaviour is influenced not only by individual or group behaviour but also by factors in the cultural, organizational and external environment.  Factors in the cultural environment include family, friends, neighbours, education, religion and media.  Ethical codes, role models, policies and practices, and reward and punishment systems comprise the organizational influences.  The external factors include developments taking place in the political, legal, economic and international arena.  All these factors work together in determining the ethical behaviour of individuals and groups in organizations (Research (ICMR), 2003).

There is a great deal of controversy regarding the nature of ethical behaviour.  Even though some persons may consider their behaviour ethical, their peers in the organization and people from other places of the world i.e. their counterparts may disagree.  An employee may consider the use of office stationery like pens, envelops etc. for personal use as unethical, whereas his colleagues may feel that since these things are not very costly, using them for personal reasons is not wrong.  The meaning of ethical behaviour differs from individual to individual and from group to group.  A research study in which business executives and business faculty members were asked to give their opinion on the unauthorized copying of microcomputer software revealed that while executives considered this behaviour unethical, faculty members did not.

It is hence proved that ‘Ethics’ is important for any organization and also its members.

Synopsis on Ethics

Ethics, in philosophy, is the study and evaluation of human conduct in the light of moral principles. Moral principles may be viewed either as the standard of conduct that individuals have constructed for themselves or as the body of obligations and duties that a particular society requires of its members ((ICMR), 2003).

Professional Ethics concerns one’s conduct of behaviour and practice when carrying out professional work. Such work may include consulting, researching, teaching and writing (Research (ICMR), 2003). The institutionalization of Codes of Conduct and Codes of Practice is common with many professional bodies for their members to observe.

Any code may be considered to be a formalization of experience into a set of rules. A code is adopted by a community because its members accept the adherence to these rules, including the restrictions that apply.

Good ethics and good business

Why should a company consider ethics in directing its behaviour – on top of law, self-interest, and convention?  The worst conceivable result of high moral standard would be competitive or other tangible detriment because the special efforts and costs a company attaches to ethical consideration result in net disadvantages for it.  There are a number of indications that the short-term profit from ethical conduct does not exactly burst into the limelight or even show clearly measurable financial disadvantage (Palanikumar, 2007).  It would be dishonest to exclude these effects in an option in action on corporate ethics.

On the other hand there are many empirical examples in which unethical corporate behaviour caused a great social outcry and intervention from the authorities, and presented no favourable options even in the short-term. A second conceivable possibility is that financial disadvantages due to investments over and above those required by law for instance in environmental, social, or safety areas or withdrawing from sale for ethical reasons could be compensated and balanced out by non-financial advantages like the company’s reputation (Keerti, 2007).

A third possibility is that ethical dealing might be worthwhile from both the financial and non-financial points of view.  These are most probable, at least in the mid- and long-term, for the following reasons.

Reduction in the cost of friction with social environment

First and foremost, ethical conduct brings reductions in the cost of friction with the social environment (for private individuals and institutions.)  For corporations, social friction costs arise when behaviour which is legal but seen as illegitimate or unethical leads to calls for boycotts from other organizations (Answers.Com, 2007).

On the other hand, there is growing evidence that a company’s “image” can become a competitive advantage because a “positive coefficient” arises.  This can become a decisive market advantage where a corporation offers products and services that are comparable in quality and usefulness with those of other companies.

Money in the form of deposits offers the least risk, of all financial instruments.  But its value is most eroded by inflation.  That is why one always prefers to store the funds in financial instruments like stocks, bonds, debentures, etc.  The compromise one makes in such investments is that (1) the risk involved is more, and (2) the degree of liquidity, i.e. conversion of the claims into money is less.  The financial markets provide the investor with the opportunity to liquidate the investments ((ICMR), 2003).

Keynes coined a new term “liquidity preference” by which his theory of interest is commonly known. Liquidity preference is the desire to hold cash.  The money in cash and the rate of interest which is demanded in exchange for it is a “measure of the degree of our disquietude (ICFAI Center for Management Research (ICMR), 2005).”  The rate of interest, in Keynes’ words, is the “premium which has to be offered to induce people to hold the wealth in some form other than hoarded money.”  The higher the liquidity preference, the higher will be the rate of interest that will have to be paid to the holders of cash to induce them to part with their liquid assets.  The lower the liquidity preference the lower will be the rate of interest that will be paid to the cash-holders.

Employees’ motivation

The fact that corporate behaviour which is at least frictionless but wherever possible goes beyond marginal ethics also motivates serious investors to purchase shares, and that the direct neighbours look to the company with pleasure and pride reinforces employees’ positive identification.

In the business setting, ‘social-responsibility’ is often employed as a synonym for a business’s or business person’s ethical obligations.  This is unfortunate because this loose, generic use of the phrase can often obscure or prejudice the issue of what a business’s or business person’s ethical obligations truly are.  To see why, one must appreciate that the phrase is also used to contrast a business’s or business person’s “social” responsibilities with its or his or her ordinary ones (Drucker, 2000 Rev ed).  A business’s or business person’s ordinary responsibilities are to manage the business and expend business resources so as to accomplish the specific purposes for which the business was organized.  However, there were many recent examples of companies which lack ethics in business. AIG and Lehman are a few of them which became recently popular.

A recent current affair that raised eyebrows and also created a panic situation to the millions of investors’ world over, in the global financial market is the financial crisis in some of the world famous financial institutions namely Lehman brothers’, American International Group (AIG), Fannie Mae and Freddie Mac (Amateur Economists, 2008).  Out of these financial institutions, Lehman brothers went bankrupt and Fannie Mae & Freddie Mac were seized.  The only fortunate institution among the ones listed above was AIG which was lucky enough to be bailed out by the U.S. Federal Reserve.

All these recent happenings can be related to what is known as “The Big Bank Theory” of finance and economics (PinoyMoney.com, 2008).  According to this theory, no government across the globe will allow any big financial institution or a bank to collapse so easily.  This is because the after effect or the consequences of such collapses would definitely be great and at time will be out of control to handle despite how big the economy in which the collapse occurred. This exactly is the basic reason as to why AIG was bailed out by the U.S. Federal Reserve.  The reasons substantiated by the U.S. Federal Reserve as to why it took this step of bailing out AIG was it felt that the collapse of such a big financial institution would definitely add to the woes of the financial markets and economy which is currently delicate.  The Fed also stated that the collapse of AIG would also result in higher cost of borrowings, reduction in the household wealth and also weaken the current performance of the economy.  It was also true that the collapse of AIG would not only effect the U.S. economy alone as felt by the Fed but would also have a drastic and negative impact on the global financial markets.

Subprime mortgage crises have become an ongoing economic problem in various parts of the globe.  The basic reasons behind these crises may be described as contracted liquidity in the banking systems across the globe and also in the credit markets.  Risky lending, excess of corporate and individual debt levels, risky practices of borrowing also can be added to the list of reasons for subprime crisis to occur.

Once the reasons as to why subprime crises occur is known, the next question that arises is as to what are the ways to avoid or decrease these crises from occurring.  One best solution would be modification of loan lending (ICFAI Center for Management Research (ICMR), 2003) (ICFAI University Press, 2003).  Lending is a crucial activity for a bank as it enables the bank to generate income.  But to sustain income generation, prudent decisions need to be taken both prior to and after sanctioning the credit.  These decisions are generally related to issues like the size, security and repayment of credit to be extended during a financial year, the industries to focus on, the geographical spread, the type of credit to offer, the type of proposals to finance, the disbursal mechanism, the collateral value, the method of pricing, the repayment schedule, the monitoring process, etc.  Credit is the mainstay for any financial institution particularly banks and financial institutions.  Almost 60% of the assets side o a bank’s balance sheet is credit.  The bank’s or the management of the various financial institutions’ across the globe should thus, ensure that lending decisions fall in line to sub – serve the bank’s overall objectives of growth and stability (ICFAI Center for Management Research (ICMR), 2005).

Apart from the above, pumping more money into the market and also reducing the amount of bank reserves would also serve as a solution to weaken the crises if not avoiding them to occur.

One another similar example that can be quoted in this situation is the Northern Rock Crisis.  Northern Rock is Britain’s fifth largest mortgage bank, and the Bank of England deemed it necessary for Britain’s economic stability to come to its rescue by offering the mortgage bank an open ended line of credit for the duration of the current liquidity crisis, which is set to continue well into 2008. The amount of the funding has not been specified but is estimated at more than £4 billion (Walayat, 2007).  It has specialised in mortgage lending based on the availability of cheap credit. The credit crunch that followed the collapse of the US sub-prime mortgage market meant that Northern Rock was unable to raise loans. The Bank of England stepped in to provide loans when depositors scrambled to withdraw their money in the first run on a British bank since over end and Gurney in 1866. Even Wall Street shuddered at the spectacle. The threat of contagion was felt internationally, and the Bank of England was forced to act (Talbot, 2007).

Northern Rock was facing difficulty raising money on the wholesale money markets.  It was experiencing difficulty funding its day-to-day requirements and had therefore sought a short-term line of credit from the Bank of England (BoE) in order to improve its liquidity. It is quite normal for the BoE to act as a ‘lender of last resort’ for banks struggling to raise funds (D’Arcy, 2007).  Northern Rock has a credit squeeze and is a bit short of cash, so it has therefore agreed a form of temporary overdraft (costing a mere 1% over base rate, or 6.75% a year) from the Bank of England.  This created a situation that had not been seen in Britain since the 1860s. On Sept. 14, 2007, as soon as the bank’s management announced that it had turned to the Bank of England for temporary assistance, long lines of clients appeared in front of Northern Rock offices trying to withdraw their deposits. The bank’s Web site collapsed under the huge wave of clients attempting to transfer money from Northern Rock accounts to other banks.

The bank’s crisis is linked to the global credit crunch which has been caused by the problems in the American sub-prime mortgage market. Northern Rock has been hit as other banks – the main source of its cash – are unwilling to lend in the current unsteady climate. However, the Bank of England, and the Chancellor, has stepped in to rescue the bank with extra funds, which they say is enough to save Northern Rock.  The U.K. government is facing growing criticism for its decision to temporarily nationalize Northern Rock. Taking the total volume of loans and guarantees provided by the Bank of England in combination with the value of mortgages on the troubled bank’s books, the state’s involvement in Northern Rock reached £ 100 billion (Košťál, 2008).

The crisis began when the management of Northern Rock and the government were approached by U.K. bank Lloyds TSB with a proposal to purchase Northern Rock for £ 2 per share if the government provided a credit of £ 10 billion to cover the risks associated with the takeover of the threatened bank.

Northern Rock’s problems have been caused by the crisis in the credit markets over the past few weeks, which has seen banks become increasingly wary about lending to each other.  The credit crunch began because a number of mortgage lenders in the US had been lending too much and too freely to consumers with poor credit ratings. As interest rates increased in the US; many of these borrowers were unable to keep up payments on their loans. Unfortunately, this was not just a problem for the banks that lent them the money.  Many lenders packaged up their books of so-called “sub-prime” mortgage debt and sold it to other institutions around the world in the form of high-yielding bonds. When the borrowers stopped paying their mortgages, the bonds were no longer worth as much as the institutions who had bought them thought. This caused a crisis of confidence in debt markets around the world – amplified by the fact that it was not clear exactly how exposed various companies were to the sub-prime crisis (The Independent, 2007).

After these series of incidents, Northern Rock shares slide further, with the stock opening 31% lower after tumbling by a similar amount in the immediate wake of the crisis. Meanwhile, savers continue to queue at Northern Rock branches across the UK. Darling intervenes, pledging that the government will guarantee all deposits lodged with Northern Rock (Association, 2008).

Despite reassurances that the money of its customers’ is safe, worrying pictures of customers the length and breadth of the country queuing up at Northern Rock branches dominated the news.  Northern Rock put on extra staff to deal with the surge of customers arriving at branches and some stayed open later to deal with them, with transfers of up to £140,000 taking place.

Systematic failure of duty is believed to be the main reasons for the crisis of Northern Rock bank.  Northern Rock has fared badly because without a large savings base to use as collateral on loans, it must seek support for loans on the debt markets. Until last year Northern Rock was considered as a stock market darling for its ability to tap into new markets, particularly among borrowers with few assets.  Northern Rock stands accused of “reckless” lending after it emerged.  The business practices of Northern Bank were also responsible for the crisis to occur.

The meaning of ethical behavior differs from individual to individual and from group to group.  A research study in which business executives and business faculty members were asked to give their opinion on the unauthorized copying of microcomputer software revealed that while executives considered this behavior unethical, faculty members did not.  ‘Ethics’ is important in the study of organizational behavior since it affects the way employees are treated and has a great impact on their performance and well-being ((ICMR), 2003).

In an organization which professes and practices high business ethics is likely to drive the entire organizational culture.  The human resource value will be driven by such ethics and when recruiters interview people seeking a cultural fit they mentally check of people who have high ethics in their business practices.  Only such people are recruited.  Obviously business ethics would have a high place during the induction of people into the organization.  Thus, pushing people to practice high business ethics similarly the culture that is going to be built within the organization will be of higher standards and will be more exacting in nature.

Any unethical business practice indulged in will be looked down upon seriously and would have a very high negative impact on individuals probably even including forced exits.  A forced exit when properly communicated across the organization would send a strong message within the organization cajoling people to stick to high ethical values, wherein punishments go beyond forced exits to the extent of legal actions – the message that is communicated both formally and informally would be a strong deterrent not to indulge in unethical business practices.

For instance, in the case of the much famed WorldCom debacle, indulging in unethical practices led to the total devastation of the company and its folding up.  This whole thing, in extremely rare cases, wherein there is a conscious effort on part of the management to hoodwink the stakeholders, the management would seemingly be following high ethical values while practicing undetected immoral business values.  Thus, creating an emotional conflict over a period of time will definitely give way to corruption of corporate culture.

The globalization of trade and commerce has produced spectacular new imperatives for organizations to take action against fraud and inducement. Academics and governments became familiar that fraud shunts assets into fruitless sectors, retards the growth of buyer markets, and excessively troubles the deprived. Companies often put into practice anti-corruption programs with the principal objective of plummeting susceptibility to fines and illegal sanctions.

As organizations become more and more global in nature, they are looking for out ways to safeguard their values and integrity-specifically, to fight dishonesty and bribery-while competing effectively in a broad range of cultures and business environments (Aamodt, 2001). “A burst of activity on the part of governments and international bodies created a comprehensive architecture of legal and regulatory standards governing corruption and bribery. Corporate anti-corruption and bribery programs vary by individual company, country of origin, and industry(BNET, 2003).”

As most of the companies today are doing business in a global economy, there would be situations that are to be faced by the managers and situations which really need certain decisions that are to be taken by them.  The decisions may be ones which have – in small or not-so-small ways – significant consequences for the present or future welfare of persons.  That is to say that situation of ethical choices would be faced.

Every significant profession and every institution that thinks anything of itself has its “something ethics” to proclaim – environmental ethics, media ethics, research ethics, and even corporate ethics are the consequence.  The latter has recently, along with environmental ethics, gained most in significance.  There are now a great number of national and international books, seminars, symposia, ethics networks, and journals exclusively devoted to business ethics.  There can be no doubt that not only “ethics” is “in” – business ethics is too.

The reason behind this is, if there had been a fundamental shift in social value systems and has the “worth” of ethical argument increase as a result?  That would be an explanation, for when traditional ways of life and institutions are not longer taken for granted, philosophical ethics, guided by the idea of sensible human life, seeks generally valid arguments about good and just behaviour in a methodical way.  There is no need to point out that we are living in a time of great social change.  If social change were to move in the direction of higher morals then all social groups and institutions – including business enterprises – would be faced with new legitimating demands.  Economic performance alone is no longer enough to give businesses legitimacy.  Non-economic demands, e.g., the sustainable fulfilment of social and environmental responsibility in industrialized and developing countries, have been increasing their significance for legitimating for many years.

Philosophical reflection is without doubt a fulfilling and intellectually challenging matter – also for those that bear responsibility in companies.  But if one wishes to do more than just get traditional moral philosophical knowledge over to people or preach romantic idealism, then ethics, including corporate ethics, must come down from its lofty realm of “ideas” and “values” and establish itself in day-to-day reality.  Acting responsibly would then not mean swearing allegiance to higher notions of approvable behaviour, but would emerge from a very worldly setting in which a company’s or individual’s activity has to be justified in the light of different values in pluralistic societies.

Acting responsibly always and primarily means acting intelligently, i.e. carefully weighing up the benefits and harm that one’s own actions can bring.  All moral activity occurs on the basis of a balance between the realization of interests and the avoidance of physical, social, or even state sanctions – not to mention those in any afterlife.  In the business environment characterized by cut-throat competition, organizations set insurmountable targets for employees who under pressure break rules and even resort to unfair practices to achieve the targets.

Business Cycles

History shows that the economies do not grow in a uniform pattern.  There may be several years of economic growth followed by a recession and in some cases even a prolonged depression.  This may be accompanied by falling national output, declining profits and real incomes and rising unemployment.    In course of time, the economy recovers and if the recovery is very strong it may lead to a boom.  During the boom period the economy will experience prosperity which means a long period of high demand, more employment opportunities and improving standards of living.  Prosperity may also lead to inflationary conditions marked by rising prices and speculation.  This would be followed by another slump in the economy.  All market economies are characterized by movements in national output, inflation, interest rates and employment.  These movements could be either upward or downward.

A business cycle may be defined as a swing in total national output, income and employment.  It usually lasts for two to ten years and is characterized by expansion and contraction in many sectors.  A business cycle has mainly two phases:  recession and expansion.  Peaks and troughs are the tuning points of the cycles.  Recession takes place when there is a downturn in the economy.

Economic growth is dependent on mobilizing savings and directing them into productive channels.  In this process, money supply can only play a limited role.  However, the role establishes an important connection between money supply, output and price level (ICFAI Center for Management Research (ICMR), 2003).  These relationships cannot be ignored even if the primary concern of the government is mobilization of real factors that ultimately lead to economic growth.

The demand for money in the society is very high.  Due to such a high demand, the reasons for people’s charity is never thought of or clearly known to many.  Demand in economics means effective demand, which can be defined as a desire backed by willingness and ability to pay for a particular product.  Thus, in order for a demand to be effective, three important factors namely the desire to buy, willingness to buy and ability to buy are the important factors (ICFAI Center for Management Research (ICMR), 2003).

The law of demand says that ceteris paribus when the price of a product is high, quantity demanded is low, and vice versa.  In other words, other factors remaining the same, the demand for a product is inversely related to the price.  When the relationship between demand and price is illustrated in a graphical form it is called the demand curve.  The demand curve slopes downward from left to right, because the price of a product goes up the quantity demanded decreases.  The demand curve is drawn with the assumption that only the price changes while other factors remain same.  Besides such a demand for money in order to carry out various transactions, some people demand it for hoarding or holding wealth in liquid form. It can conveniently be used according to variations in the market conditions (Pinkmonkey.com).

Demand for money means demand to hold money on hand.  Money in one’s hands earns no income.  If converted into goods or other financial assets one can derive either additional utility or income.  The supply money means the amount of money held by the people in the country.  In other words, the supply of money is the amount of money held by and used by the people for transactions, for making payments and for settlement of debt.  It does not include the amount of money with the Government in its exchequer and the amount of money held by the financial institutions such as banks.

The Supply Side theory, also known as Reganomics, was initiated during the Regan administration. During the 1970’s, the state and local governments increased sales and excise taxes. These taxes were passed from business to business and finally to the customer, resulting in higher prices. Along with raised taxes for the middle and lower classes, this effect was compounded because there was little incentive to work if even more was going to be taxed. People were also reluctant to put money into savings accounts or stocks because the interest dividends were highly taxed. There was also too much protection of business by the government which was inefficient and this also ran up costs, and one thing the Supply Side theory was quite good at was reinforcing inflation (Cyberessays.com).

Observations

Do companies actually increase their contribution to the bit of charity or does it just seem that?  If companies actually do increase bit of contribution to charity, is it because the human beings at the leadership level are just behaving like human beings?  Applying Freudian principles to this exhibited charity behaviour of leaders in the organization, a question that can be categorically asked that “are the leaders feeling guilty of having made large profits when the biding were good and are thus exhibiting remorse and hence doing more charity?”

On examining the collections made by a couple of charitable organizations does not actually reflect an increase in charity, to the contrary it actually indicates that bad times have actually fallen upon these organizations, but a word of caution needs to be added to this observation that most of these organizations which were touched upon to examine the fund inflow positions were depending on individual donors or rather than corporate donors.  So, we are actually examining individual behaviour and not corporate behaviour.  On examining some of the organizations, which are recipients of corporate charity shows that the Corporates were trying their level best to maintain the charity levels and in a few cases some new organizations had actually come forward to donate.

Short run trade-off exists between liquidity and profitability.  Other things remaining constant, the more liquid a bank the lower its return on equity and return on assets (The Banker, 2004).  Both asset and liability liquidity contribute to this relationship.

Facts about liquidity of a bank:

The more liquid a bank, the less profitable the bank

Liquid assets earn less than illiquid assets.

The shorter the maturity, the lower the yield.

The highest yielding loans are loans with the highest default or interest rate risk and are therefore the least liquid.

Asset liquidity is influenced by the composition and maturity of funds i.e. the ease with which a bank can convert assets to cash with a minimum loss (Comptroller of the Currency Administrator of National Banks, 2001).  Large holdings of cash assets evidently decrease profits because of the opportunity loss of interest income.

Now the question is – if the charity levels were being held constant, why does it seem like more in tough times?   The answer could possibly be because of one of the following three reasons.

1. Perceptions

2. Lens effect

3. An actual percentage increase

Perceptions – During bad times, when companies do their regular bit of charity, it gets noticed as if more than normal charity is being doled out.  Here a critical element of plays a role actually pointing to avarice that the dollar of charity can actually be re-deployed to save a favourite colleague’s job or can be possibly given to self as that missed or reduced increment which leads to the next point.

Lens Effect – During bad times, the work load on individuals tends to be much lesser than in regular times, which means every bit of activity in an organization tends to get noticed and becomes more often than not topics of water cooler conversation.

An actual percentage increase – Assuming that an organization has 100 units of total productive work and 5 units of charity work during normal times and while in difficult times the charity work might be actually reduced to 4 units and the actual work would have come to say 50 units, comparing the percentage of charity to productive work shows an actual jump of 3%.  In normal times, it would have been 5% and in difficult times it is 8% which translates to actual jump in percentage of charity.

The last observation that is relevant is that charity/ corporate social responsibility are being actively used by organizations world over to create a bonding and more often than not to set a culture of “giving” within the organization.  Usually, the human resources professional tend to grab the slack during times of economic difficulty to create a strong sense of bonding within the organization and encourage informal organizational networks.  The spin-offs of strong bonding and stronger informal networks are very much evident when there are higher demands of productivity leading to high stress levels across the organizations.

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Filed under: Sample essays — Tags: , , , — admin @ 4:50 am

10 Aug 2009

Sample Essay: Analysis of Engineering Inspection and Insurance Company

A Case Study on the Organizational Structure and Strategy of Engineering Inspection & Insurance Company (EIIC)

EIIC is a property insurance company or more precisely an equipment breakdown insurance company.  It inspects and insures industrial equipment such as compressed air tanks and steam turbines from accidents and physical damages.  One of the main features of EIIC as an insurance company is the inspection process or phase undertaken by its engineers before the writing and completion of the insurance policy.  Inspecting the property considered a candidate for insurance provides vital information to EIIC in its company decision to insure or not and consequently in the development of insurance contract.  EIIC claims to hold the competitive edge of responding to customer’s demands on time.  In cases of accidents or breakdown to insured industrial equipment, EIIC boasts of addressing the problem-rendering the equipment functional through restoration, repair or replacement- within desired and reasonable time period. The real customers of EIIC are the insureds being the prime recipients of the benefits and service the company has to offer and not the independent agents which- in function and role- are merely one of the company’s distribution channels.

Much of EIIC’s operations are concentrated on the Pacific Northwest which maintain, as of 1991, over 20 branches. Aside from its main business function as provider of property insurance to industrial equipment, EIIIC also lends its service in its inspection capacity to fellow boiler insurance companies who lack adequate inspection tools and methods.

The company profits are derived primarily from the earned premium and the investment income minus the incurred loss and the underwriting expenses.

EIIC’s Key Managerial Operations and Strategic Problems

In the early part of 1991, EIIC reports a premium income of $65 M dollar a year. This is a clear demonstration of the initial success of the company in terms of profit generation and market competitiveness. However, in mid-1991, problems start to sprout within the organization and this growing unease internally is reflected in the decreasing sales growth and profitability.  One of the signs of company dysfunction at EIIC is the increasing employee turnover rate particularly among the crop of engineers (with a turnover rate of 17% in 1990) and underwriters. The possible causes for this include the rising sentiment of being undervalued especially among the underwriters who feel deprived of relevant decision-making power, low to average compensation package (inspectors merely receive a monthly salary of $2,250 amounting to a meager $27,000 income per annum), inadequate perceived career advancement among the underwriters and the acquisition of other jobs aside from the ones they hold at EIIC (a.k.a. moonlighting)-as soon as employees experience the slightest dissatisfaction within the company they can immediately leave since they have other jobs to fall back on.  Aside from the increasing turnover rate among the workforce, EIIC notices growing disputes and conflicts between branch managers and the chief inspectors.  This stems mainly from the current ineffective organizational structure.  Chief inspectors instead of the bank managers make the decision of whether to insure certain risks or not.  Furthermore, bank managers do not get to monitor and supervise their inspection staff; only the chief directors are tasked to oversee inspection activities.  This kind of organizational set-up becomes a source of internal strife and misunderstandings since in cases when chief inspectors fail in their assigned duties as head of their branches, branch managers are held accountable for unmet goals, losses, and unfulfilled responsibilities. Also, branch managers sometimes disagree with chief inspectors on the basis and manner of accepting risks accusing the latter of tending to go by the book. Another burgeoning problem is the late delivery of insurance policies. EIIC sets the completion time for insurance policy within 14 days on the average.  However, in reality, this company goal is applicable for small policies only. For larger policies it takes normally 43 days-the MFG time-to finish (26 days to complete First Inspection Order, 10 days for the approval of supervisory director, 5 days for the underwriting process and 2 days to accomplish all the other miscellaneous tasks).   Last, EIIC encounters problems with the planning and coordination of activities among the inspectors/engineers.  The issues that EIIC are struggling to confront are not only internal; it also faces challenges from the external environment. There is now a rising trend in the insurance industry to consolidate policies which upon adoption requires faster completion time for the insurance policies.

EIIC’s Business Strategy

EIIC relies on its engineering inspection activities as basis for its insurance policies.   It ensures that the services offered by the engineering department are thorough, well-supervised and efficient.   To ensure the superiority of its inspection, EIIC has developed an elaborate evaluation scheme, creating several levels of office or position in the engineering department to check and validate inspection reports.  Field inspectors do not directly submit inspection findings to the chief inspector instead they approach the supervisory inspectors first.  Also in the effort to provide customers and the company an above average inspection, EIIC employs experienced, highly trained ‘practical’ engineers and licensed boiler machinery inspectors.

In gaining new customers, EIIC employs special agents in each branch tasked to deal with independent agents who in turn have direct communication with the clients or the insureds.

EIIC closely manages and directs the overall business undertakings from the top or the head/home office.

Short term and Long-term solutions

In order to prevent profits from spiraling downward, EIIC needs to speed up the writing and submission of insurance policies.  This implies shortening the time allotted for each stage in the process-from inspection to underwriting.  Although the competitive edge of EIIC lies on its inspection service, it can cut down on the number of inspections conducted especially on the smaller policies, preferring to concentrate instead on the larger ones. In other words, inspectors need not inspect every property or industry equipment only those that really needs or demands inspection. Inspectors, by implication, should be given enough free rein to decide which to inspect and not to inspect without excessive control and intervention from the home office.

Another short-term solution to speeding up the formulation and completion of insurance policies is to flatten out the hierarchy removing unnecessary levels in the organizational structure. If not, just reduce the evaluative functions of certain positions.  For instance, instead of requiring the field inspectors to report to the supervisory inspectors, they can submit inspection findings to the chief inspector directly.  There is also the drastic measure of taking down the position of supervisory inspector.  This downsizing action paves the way for faster decision making.

Aside from quicker completion of insurance policies, EIIC can increase profitability back to competitive level by simultaneously increasing the accounts through the influx of more customers.  The tradition of EIIC is to hire independent agents in attracting new clients-this manner of gaining more contracts can be augmented through direct sales.  EIIC can employ salespeople to sell its product directly to potential customers without the delaying action of agents.

For longer staying benefits and long-lasting success, EIIC needs to create a culture of people empowerment.  This is the more permanent solution to the high turnover rate among the employees.  It is about time that EIIC changes its focus from its competitive edge (i.e. inspection service) to its invaluable asset-the people. In order to foster a culture that is centered on the human factor of production, there is a need to overhaul the current management values. EIIC needs to adopt the following assumptions: (a) people have worth and that (b.) they are capable of making independent, smart, reasonable decisions.  Underwriters at EIIC, for instance, must be allowed to make choices and decisions on their own without unnecessary regulations from the head office.  Part of empowerment is decentralization-letting the staff from the lower ranks take on more meaningful and relevant responsibilities and duties.  Higher compensation packages should also be extended not only to the engineers but to the rest of the employees from the five functional areas (agency, engineering, underwriting, finance and legal).

Another long-term solution is the restructuring of the organizational design. Removal of certain positions is needed, making the organizational structure cleaner and more efficient. There is also a need to redefine functions and relationships between managerial levels.  The branch managers at EIIC, for instance, should be allowed to participate in the inspection activities of the engineering department instead of the chief inspector solely shouldering the responsibility.  Furthermore, the chief inspector need not report to Roger Cutler, the Vice President for Engineering only the branch manager should communicate with the home office being the branch representative to avoid duplicity.  Also, in changing the organizational structure, the top officials of EIIC need to regulate less, loosening its grasp over the components of the business. It should encourage dialogue, better coordination and planning between and among the functional areas. Also, reporting relationships should be lessened to save time and effort.

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