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Trade-off and Pecking-order Theories

Trade-off and Pecking-order Theories
A profitable company requires less need for external financing. To satisfy financial needs, firms will often turn to debt. A profitable company usually relies on less debt. However, according to the trade-off theory, the more cash flow a profitable firm has, the more debt it will generate. As the debt capacity accumulates, it will be used to capture tax shields and leverage benefits. Within the trade-off theory, managers seek optimal capital structure. Trade-off theory translates into empirical hypothesis as it predicts a relationship between average debt ratios and asset risk, profitability, tax status, and asset type. The pecking order theory has no optimally well-defined debt ratio. Financial distress is not a concern for the pecking order theory, and tax shields are a more attractive method to use according to the model.

The pecking order theory is built on the struggles of obtaining cost efficient financing. The theory suggests that managers should use bonds because they are a lesser risk for stock price declines. Considering firms know they will need cash within the future to manage profitable projects, they accumulate the cash today, so they will not have to forcibly go to capital markets when financing is needed. Nonetheless, because of the additional cash, managers are tempted to purchase and will likely generate wasteful spending on activities.

Pecking order theory explains the variances of debt ratios, rather than the target adjustment model based on static trade-off theory. The pecking order theory can be rejected if financing flows with the target-adjustments specified. However, the trade-off theory may appear to work, which will create false positive results from time patterns of capital expenses, which creates reverting debt ratios.

Applicable Industries
Pecking order is unlikely to do well for companies investing into intangible assets. Trade-off theory works well within industries that have room for growth and expansion. Mature industries that can practically predict their future like Coca-Cola have nothing to lose by using external funds. In 2014 The Coca-Cola Company (Coke) had a long-term debt of $19,063 million and a net income of $45,998 million. The debt ratio at Coke is optimal and is maximizing its market capitalization value at their debt levels. The company has a long-term debt of less than one year’s current net earnings. Consequently, a single year earnings can pay the debt.

Intel is a company that follows the pecking order theory, particularly because of its high-risk industry. Although the company is large, considering the technology industry is forever changing at a rapid pace, the company struggles to remain relevant, which creates the industry to be high risk. Because of the large market and competition, the company has to create innovative products and quickly get them to market. This causes a problem by not allowing revenue to fund the company’s growth, and the firm has to rely on debt to satisfy the market.

In addition to the theories, capital structure is beneficial as it presents the type of financing a firms uses. The mixture of methods includes equity and debt. To determine the right type of capital structure, firms often use a combination of debt and equity in order to maximize their market value. With leverage, a firm can lower its weighted average cost of capital. However, leverage increases financial risk of firms that must service their debt regularly. Trade-off theory helps determine the most optimal debt-to-equity ratio. Pecking-order theory allows for firms to finance themselves through retained earnings. When there are no retained earnings, the firm issues debt, and as a last resort may issue equity. Debt informs investors that management is confident with servicing the debt, and equity signals that the firm may be overvalued and could trigger a stock price fall. In regards to management, pecking-order theory suggests capital structure is rooted to agency theory and suggest that financial decisions are affected by the firms’ attempt to minimize shareholder supervision. Pecking-order theory seems to focus on examining the financial behaviors of larger firms, which have a larger borrowing capacity.

Trade-off theory focuses on bankruptcy cost and debt, which states there are advantages to debt financing. Pecking-order theory focuses on financing from internal funds, and using external funds as a last resort. Trade-off theory has dominated corporate finance circles. The pecking-order theory assumes there is no capital structure. Additionally, pecking-order can easily be applied to small firms considering smaller firms borrow based on their needs rather than optimal capital structure. Increased financial leverage affects a company’s WACC. With financial leverage, the company’s WACC decreases until optimal debt ratio is achieved, after which, the WACC rises with more debt. Increasing the debt of the capital structure also increases the tax benefits considering the interest is tax deductible. The company’s market capitalization is increased when WACC is decreased considering trade-off theory assumes the company’s risk of bankruptcy.

Dividend and Non-Dividend Stock Valuation

Dividend and Non-Dividend Stock Valuation
Investors who invest in stocks often like to receive returns on their investment in the form of dividends. However, not all companies opt to offer dividends to their investors. There are three variables that affect the valuation of a dividend and non-dividend paying stocks and how stock valuation is influenced. Those variable influences include size, timing, and uncertainty of cash flows that the asset will generate for investors over its lifetime.

Company that does not pay dividends.
A company offering dividends is a potential signal to investors that the company is settling down and that its growth days are over. Dividends often depend on the size of earnings, and are key in determining the value of equity. Google Inc. is a company that actively invests in future company growth initiatives. Google does not offer dividends as the company hopes to continue its expansion into new business ventures. Taking into consideration the size of Google as a company, it is highly likely that the company will provide dividends at some point in the future. The dividend growth model can be calculated as the stock value equals next year’s dividends divided by the required rate of return difference and the constant growth assumption in dividends. A dividend growth model evaluates and considers dividends within share value and growth.

Merits and/or pitfalls of using the dividend growth model
Organizations that are likely to pay dividends in the future can benefit from using the dividend model. Investors can gain a return on their investment by purchasing stock from non-dividend paying companies and then resell those stocks for a profit. The problem with this method is that the stock is only worth what the next investor is willing to pay. If a company does not pay dividends and instead reinvest the profits into other investments, it could raise the value of the shares to be sold. The concern with using the dividend growth model is that it does not include risks. Furthermore, the model is only effective for company’s that pay dividends and is growing at a constant rate.

How variables affect the valuation of a dividend paying stock and a non-dividend paying stock.
Dividend paying stocks usually perform better than non-dividend paying stocks, considering the immediate value. Non-dividend paying stocks such as Google could use the model to predict future growth rate if Google were to ever start paying dividends. Cash dividends are generally easier to measure. Considering Google is a well-known stable company, if it were to ever begin paying stocks, the model could assume that the dividends would be constant for a time. As an investor, dividend-paying stocks are often a better investment as it can predict a return on investment. In determining equity value, both dividend and earnings-based models can be used.

The Gordon Growth Model is a good way of calculating a stock value. However, it can only used with company’s that pay a regular dividend at a constant rate. Consequently, the model is only effective for stable companies. In addition, it will only work if it the assumptions are continually proven accurate. The model also values the company based on investor payment and assumptions and does not consider anything other than the dividend when valuing the company. Investors and analyst like the model because It is an easy and simple to use method for generating assumptions. For lower dividend paying companies with high dividend growth, the Gordon growth model may not be appropriate. Regarding the dividend growth model, its shortcoming is that the model assumes the growth will be constant. However, there is no guarantee that the growth will be constant as it can be cut. A solution to this shortcoming is to move toward a two-stage or multi-stage dividend discount model (DDM). A multi-stage DDM estimates that a dividend will grow over a number of years at a certain rate.

A dividend discount model (DDM) is a way of applying net value analysis to estimate the future stock dividends and how much it will payout. The dividends calculated are then discounted back to their current value. DDMs assess the stock value based on growth rate. The projected growth rate is compared to the associated discount rate, and the current value is then determined. If the current value is more than the future market value, then that stock is undervalued, which is good for purchasing. The model is an effective tool used by many investors and analyst looking to select stocks. A disadvantage of the model is that it is not suitable for company’s that do not pay dividends. While DDM does not explicitly consider risk, it does assist in estimating the market risk premium. The DDM requires long-term growth rate data in dividends. The advantage of DDM is its simplicity of use.

Loan Evaluation

Financial Ratio Evaluations
Determining the ratio level of a company is a predictor of failure for small businesses, and obtaining data can be difficult. Financial ratios are effective for comparing different types of financial information. Short-term solvency financial ratios should be examined to determine whether a small business is an ideal business for a loan. Short-term solvency measures the company’s ability to meet its financial obligations by providing details about the company’s liquidity measures. Short-term solvency analyzes the company’s assets from cash, stress level, and ability to pay back its loan within the coming year.

Small Business Ratio
Of the short-term solvency, the current ratio is most important. A higher current ratio indicates a positive working capital, and there is a correlation between the current ratio and business size. The higher the current ratio, the more likely the company will be profitable the following year. In addition to current ratio, quick ratio could help in determining whether a business has the ability to meet its obligations. Quick ratio analyzes whether the company has assets in inventory and then deducts the valuation of those items to determine the true value of the organizations assets.

Additional Information
Additional information to obtain from the business owner before making a decision about a loan would be to check the market value and the company’s debt. Analyzing the business ratio to the ratio value of businesses within the same industry can be a predictor of business failure. Determining the debt of the company would help determine the risks level of the company. Debt has a negative effect on a company’s performance. A company with a large amount of debt would generate a high risk of insolvency and potential financial distress.

Large Business Ratio
If a larger company were to ask for a loan, instead of using short-term solvency, I would use long-term solvency considering it focuses on the capital structure and earning power. Long-term solvency is the ability to assure lenders with periodic payments of interest and repayment on the maturity of the loan. It also measures the company’s long-term ability to resolve its loans.

Earnings are better than cash flows for measuring firm value. However, small and unprofitable companies often value cash flows over earnings. As an investor, predictable earnings would be ideal considering they give a sense of how much profit will be paid versus what will be reinvested. In an attempt to avoid negative earnings, CFOs equate the idea of smooth earnings. In a 2003 study, 86.3 percent of nearly 3,200 financial executives stated that maintaining and increasing the company’s stock price helps to build credibility within the capital market as well as attract investors. In regards to meeting financial earnings target, several interviewed CFOs mentioned that they often made economic sacrifices in an attempt to deliver expected earnings. The results of the survey conclude that a majority of companies will sacrifice long-run value for short-run earnings due to market pressures.

If CEO’s have high stock options the firm is less likely to report fraudulent finances. Stock options with incentives can make moral hazard facing CEOs worse. Self-interested CEOs with opportunity to fraud, will likely harm shareholders. Executives with large stockholdings reduce the likelihood of fraud. Industry and firm characteristics are key factors that may affect fraudulent financial reporting. Industry characteristic and firm size are important organizational variations that influence white-collar crime. Principal-agent theory suggests that an increase in CEO options decreases the likelihood of fraudulent financial reporting. The presence of CEO duality and board stock options decrease the likelihood of fraudulent financial reporting. If no CEO duality and no board options are produced, fraudulent financial reporting becomes less likely. If there are board options, that likelihood increases. When a firm’s board of directors has stock options, the likelihood of fraudulent reporting decreases. The higher the CEO options, the less likely the firm is to report financial fraud.

IT Risk Mitigation

Technology has allowed hackers to create systems that bypass security measures while mining data from web sites. Organizations have almost become completely dependent on technology to run their everyday operations. In situations where security threats are possible, it is the responsibility of the decision makers to minimize damages and losses generated by security incidents. A major concern with security breaches is that many organizations do not know how to manage or countermeasure their effects. Individuals called hackers and phishers are responsible for most online thefts and fraud. These individuals use their abundance of computer knowledge to invade computer systems remotely to access, download, sell, and fraud individuals. Using, copying, and distributing intellectual software without permission, is considered pirating. Forging someone’s identity with the intent to use it for fraud is considered identity theft. Organizations should have a clear understanding of potential theft vulnerabilities, and have a plan in place to serve as a countermeasure if a breach were to ever occur. Organizations should focus on protecting the major three components of information technology (IT) systems, which includes people, information, and IT. Without the proper knowledge, hardware, and data security encryption techniques, organizations allow themselves to be vulnerable to IT security breaches.
Changes and innovative technology present many new security risks for organizations. Ethics is considered moral principles that influence behavior. Ethical individuals are viewed as having integrity, and a sense of knowing and doing what is fair and right. When handling consumer data, organizations should make an ethical decision to implement the proper security measures that can prevent hackers from accessing them. Organizations spend hundreds to millions of dollars developing and investing in security systems to protect against potential data breaches. Organizations must understand the importance of ethics, privacy, and security threats when handling information. A risk management system can be used to monitor and analyze security threats and create countermeasures. Security breaches can disable business functions, and pilfer confidential data including credit card information, social security numbers, and passwords. No matter the size of the organization, they must have an understanding of the financial cost of a potential security breach. Security breaches occur in many types of businesses including e-businesses. A security breach can create distrust, hinder reputation, and cause a loss in revenue. Risks are considered the terms in which an impact on a business process is caused by a loss of confidentiality, integrity, and availability. Organizations should be greatly aware of security concerns that threaten its information, customers, and resources.
Risk management requires identifying risk and implementing security controls. A risk analysis is used to identify risks using a business-oriented approach. Risk can be identified by constructing risk scenario’s, which are used to explore potential risk. As risks are discovered, management can prioritize the solution for the risk and resolve breaches based on the type and amount of security needed. It is recommended that organizations have a clear understanding of potential vulnerabilities, and have a plan in place to serve as a countermeasure. The primary objective of a risk analysis is to find risks and reduce their potential damage to an acceptable level. Information security should be integrated into business operations. A security breach and failure in IT could have a dramatic impact on organization success and survival.

The Role of Leadership in Shaping Organizational Culture

In this blog, I investigated how the role of leadership effects organizational health, culture, and follower perception. I further evaluated how the style of leadership can influence employee attitude and productivity. It has been found that leaders can be developed from within organizations and if leaders can learn to use their leadership powers for positive growth, it could produce a healthy organizational culture. Stress within organizations can lead to low productivity and lack of work efficiency. In addition, leaders without ethics tend to create stressful, unhealthy work environments. In order to maintain a healthy organization, businesses should select leaders that can motive followers, create positive change, and build organizational trust and commitment.

The Role of Leadership in Shaping Organizational Culture

The study of leadership spans more than 100 years and has recently begun gaining attention worldwide by researchers (McCleskey, 2014; Northouse, 2013, p. 1). The style of leadership plays a role in followers’ perceptions of an organization. The style approach can be used as a way in determining how leaders approach and manage their followers and subordinates (Northouse, 2013, p. 75). An effective leader will create an environment in which followers trust their leader to make the best decisions (Maner, & Mead, 2010). To create a healthy organization, leaders can use their leadership style and power as ways to improve stability and create productively functioning followers (Maner, & Mead, 2010).

To maintain and improve morale within organizations, leaders can place importance on communication and stress prevention programs that provide solutions to ethical dilemmas (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). Leadership is paramount in exhibiting organizational values that generate ethical orientation (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). Research has discovered that leaders can create healthy organizational cultures by discovering and supporting organizational members (Avolio, Walumbwa, & Weber, 2009; Cubero, 2007; Liden, Wayne, Liao, & Meuser, 2014).

Unlike management, leadership is centered on having the ability to cope with change (Kotter, 2001). Leaders are considered visionary individuals who influence and motivate others to ensure that proper decisions are being made (Kotter, 2001; Lopez, 2014; Vroom & Jago, 2007). Moreover, a leader has the responsibility of making sure that the organization is able to attain its goals (Vroom & Jago, 2007). In an article by Church (2014), it is stated that leaders can be developed from within organizations. Through careful selection, encouragement, and nurturing, current employees with leadership potential can be developed into future leaders (Kotter, 2001: Vroom & Jago, 2007). Every leader has their own function and characteristics and all styles of leaders can be effective in creating a healthy organizational culture (Kotter, 2001; Vroom & Jago, 2007).

Leadership Styles

In comparing leadership styles, transactional, transformational, and situational leaders can be very effective in creating a healthy organizational environment. Transformational leaders are based on social exchange, transactional is focused on economic exchange, and situational leaders are dependent upon the situation (Ismail, Mohamad, Mohamed, Rafiuddin, & Zhen, 2010; McCleskey, 2014). Transactional leaders maintain day-to-day workflow by using rewards and incentives to motivate employees to perform their best (Northouse, 2013). Transformational leaders go beyond the day-to-day and can be seen as better leaders for groups and team building. Transformational leaders motivate followers by setting goals, using incentives, and promoting personal growth (Northouse, 2013). Situational leaders can be considered rational leaders, in the sense that they are most appropriate in situations that require a unique and rational understanding (McCleskey, 2014).

Implementing proper leadership is paramount for organizational success, considering leaders have a considerable impact on members’ attitudes toward their job and performance (Ishikawa, 2012; Kovjanic, Schuh, Jonas, Quaquebeke, & Dick, 2012). While there is no one leadership style that works for every situation (Cubero, 2007), in organizational teams, transformational leaders can be considered best suited for creating positive outcomes (Hallinger, 2003). Transformational leaders focus on the status quo, needs, and desires of the organization. In addition, transformational leaders desire to fully use the potential of their followers by going beyond social exchange (Hallinger, 2003). A transformational leader understands how to encourage and intellectually stimulate individual team members’ self-concept by promoting unique thinking (Kovjanic, Schuh, Jonas, Quaquebeke, & Dick, 2012; Whittington, Coker, Goodwin, Ickes, & Murray, 2009). With nearly 80 percent of companies using some form of team-based structures, creating a healthy team environment can be helpful in organizing work performance (Magni, & Maruping, 2013). Considering transformational leaders excel in elevating member confidence (Ishikawa, 2012; Magni, & Maruping, 2013), this style of leader could be just as affective in a team setting by managing team conflicts, building relationships, and engaging members (Barnwell, Nedrick, Rudolph, Sesay, & Wellen, 2014).

Transformational, transactional, and situational leadership styles are generally centralized around building trust between leaders and followers (Northouse, 2013). In building trust, all styles of leaderships are important predictors (Ismail, Mohamad, Mohamed, Rafiuddin, & Zhen, 2010). Leadership style has been linked to employee mood, performance, attitude, and organizational commitment (Ismail, Mohamad, Mohamed, Rafiuddin, & Zhen, 2010; Strang, Kuhnert, 2009). If effective, a healthy environment will flourish and foster positive growth within the organization by producing a quality bond between leader and follower (Ismail, Mohamad, Mohamed, Rafiuddin, & Zhen, 2010).

Leadership Power

In recent years, the study of analyzing leadership power has increased, and styles of leadership have been closely linked to leadership power (Schriesheim, Podsakoff, & Hinkin, 1991). The basis of power include; reward, coercion, legitimate, expert, referent, and informational (Northouse, 2013; Raven, 1993). The definition of leadership power according to Raven (1993) is, “the possibility of inducing forces’ of a certain magnitude on another person.” Leaders are considered an influencing agent of power over their followers (Raven, 1993).

Leaders who are endowed with power can typically become corruptive (Maner, & Mead, 2010). Instead of using their power for positive member growth, they may be tempted to use their power to self-serve personal desires (Maner, & Mead, 2010). In this sense, they are using their power to dominate rather than lead (Maner, & Mead, 2010). By providing leaders with power, followers can be susceptible to exploitation by leaders who prioritize their power over the goals of the group (Maner, & Mead, 2010). In a healthy organization, a leader will use their power of influence to encourage members and promote positive change (Raven, 1993). It is the responsibility of the leader to influence and provide reasoning to followers as to why change may lead to greater productivity (Raven, 1993).

An effective leader would spend time getting to know their followers (Raven, 1993). Considering followers have many different motivational factors to be productive, by understanding followers’ needs and motivations, leaders can accomplish better results, and energize their followers with proper and affective rewards and incentives (Raven, 1993). Leaders are responsible for making certain that their followers achieve results and complete task as required (Raven, 1993). In order to produce the best possible results, leaders should exercise their leadership power, and aim at making certain that followers are confident and comfortable. This involves making certain that there is trust and respect between both leader and follower (Raven, 1993). The relationship between leaders and followers should be one in which followers trust their leaders to make the best decision (Raven, 1993. Healthy leadership provides stability and effective functioning for individuals and teams (Raven, 1993).

Organizational Stress

In creating a healthy organization, leaders should consider the stress levels of their followers. Stress in organizations can generate a lack of productivity and affect employees’ overall ability to work efficiently (Mitut, 2010). Organizational stress can be triggered by factors including communication, competition, and disruptive technology (Mitut, 2010). In addition, work overload, punishment, lack of feedback, and powerlessness can cause stress (Mitut, 2010). Organizational stress can lead to relationship imbalances between leader and follower (Mitut, 2010; Selart, & Johansen, 2011). Data conducted from a 2003 study by the European Foundation for the Improvement of Living and Working Conditions entitled “Working Conditions in the Acceding and Candidate Countries (Report),” analyzed stress as being the second largest organizational health problem.

The negative impacts of stress can generate absenteeism, decreased productivity, accidents, legal cost, medical expenses, and other financial losses for organizations (Mitut, 2010). A healthy organization requires not disturbing occupational stressors that create personal conflicts, frustrations, dissatisfaction, and low productivity (Mitut, 2010). It is the responsibility of the leader to create an efficient and stress-free environment that focuses on building the organizations performance (Mitut, 2010). To assess and prevent organizational stress, leaders should promote the implementation of stress management programs, which will help employees cope with stressful situations (Mitut, 2010). Moreover, leaders can minimize stress by communicating with followers, clearly defining roles, discussing concerns, and encouraging communication (Mitut, 2010). By implementing stress management programs, leaders could influence followers’ esteem and create a less stressful environment (Mitut, 2010).

Leadership Ethics

Organizational stress can have negative impacts in many situations, mainly those that involve punishment and lack of rewards (Selart, & Johansen, 2011). In stressful situations, there are increases in followers cutting corners, being more prone to incidents, and being deceptive (Selart, & Johansen, 2011). In addition, research and studies have connected stress to memory loss, negativity, and unethical decision-making (Selart, & Johansen, 2011).

According to research, 75 percent of employees choose not to work for employers with poor organizational ethics (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). In recent years, to avoid financial and reputation negativity, many businesses have created new positions within their organization that focus on ethical matters (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). An ethical leader is driven by morals and an ethically principle-governed mindset (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). In an organization, ethical decision-making is considered the study and evaluation of decision-making by leaders according to moral concepts and judgment (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). An unethical leader would violate accepted moral norms of behavior (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014).

Organizational ethics is still a growing business need. In order to help promote a healthy organization, organizational leaders should implement a code of ethics policy (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). As leaders, it is their responsibility to educate and inform followers of the codes of ethics (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). Within the business community, there are many leaders who consider ethics to be unimportant (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). These individuals believe that their only responsibility to the organization is to maximize profits (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014).

As the Chief Executive Officer of American Express (Margolis, Walsh, & Krehmeyer, 2006), Kenneth Chenault explains that ethics are paramount during difficult times (Wharton, 2005). Organizational crisis have the potential to damage brand equity, generate revenue loss, and tarnish a company’s reputation (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014; Maner, & Mead, 2010). It is the responsibility of the leader to determine what is done during difficult situations (Abrhiem, 2012). An ethical leader would be effective at making sure justice and equality are achieved (Abrhiem, 2012). Leaders with ethics are likely to have an impact on followers’ self-concepts and attitudes (Hartog, & Belschak, 2012).


In developing healthy organizations, organizations can implement processes, programs, and interventions that will help produce effective leadership potential (Church, 2014). Transformational, transactional, and situational leadership styles may help lead employee’s to trust their leaders, which can generate and increase productivity (Whittington, Coker, Goodwin, Ickes & Murray, 2009). If leaders have an understanding of their leadership style, they can be mindful of their actions toward their followers. In understanding leadership styles, assessments can be helpful at improving leader and follower relationships (Northouse, 2013). Being informed of leadership style can help leaders gain insight and produce solutions for challenges and certain situations (Northouse, 2013).

An effective leader should understand their leadership style, communicate with followers, and use their leadership power to influence and encourage members to create positive change (Raven, 1993). An organization’s health depends on not disturbing stressors that can generate frustrations, low motivation, personal conflict, dissatisfaction, and a drop in productivity (Mitut, 2010). The leader takes on the responsibility of reducing the effects of stress and encouraging a healthy and efficient organization that focuses on maintaining and building performance (Mitut, 2010).

To avoid risking reputation and potential financial loss, leaders should remain with a moral and ethically principle-governed mindset (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). In developing a positive leader mindset, leaders should listen to their followers’ needs, adapt to situations, create positive exchange, and build trust (Hassanzadeh, 2014). If effective, leaders will have the tools needed to promote an innovative and healthy organizational culture (Hassanzadeh, 2014).



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Consequences of Ethical Decision Making

In this blog, I evaluate organizational ethics and how they affect businesses dealing with ethical dilemmas. Within this paper, I summarize how American Express leaders failed to influence their subsidiaries with their ethical standards, and I evaluate the results of the unethical behavior. I further analyze American Express’s Chief Executive Operator and how he views the unethical situation, and I provide insight into his previous ethical actions and beliefs.


Research has found that 75% of employees do not desire to work for companies with poor organizational ethics (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). In 2003, many businesses began implementing a new position of ethics officer to satisfy work ethics and increase awareness of positive ethics in business (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). Leadership is paramount in exhibiting organizational values that generate ethical orientation (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). To avoid financial loss and risking reputation, leaders must remain moral and with an ethically principle-governed mindset (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014).

Organizational Ethics

Organizational ethics is the study and evaluation of decision-making by business leaders according to moral concepts and judgments (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). An ethical theory is a system that provides rules that guide individuals in making right or wrong and good or bad decisions (Abrhiem, 2012). Organizational ethics are determined by unethical behavior and ethical transgressions (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). An ethical theory provides a foundation for understanding what is considered to be a moral human being (Abrhiem, 2012). Unethical behavior is regarded as an act, which violates accepted moral norms of behavior (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014).

Many companies have not implemented codes of ethics within their organization. In addition, many employees in companies with codes of ethics are unaware of the policy (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). Nonetheless, it is the responsibility of the business leaders to inform and educate their employees about their policies, considering the leaders can be held accountable when ethics are not satisfied (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014).

Many business professionals believe that ethics are unimportant in the field of business (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). They further believe that the only obligation they have to their business is to maximize profits (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). By not implementing or satisfying organizational ethics, it could cost businesses financial loss, risk positive reputation, and increase external pressures (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014).

Ethical Dilemma

In a multi-part federal investigation of an American Express subsidiary in Utah, American Express was found to have violated consumer protection laws from every stage of the customer experience, from marketing to debt collecting (Markus, 2012). American Express is the country’s biggest credit card issuer by purchase volume (Johnson, 2013; Silver-Greenberg, 2012). Several American Express companies violated the protection laws provided for consumers. The order required American Express to change their business practices so that a similar situation could be avoided in the future (Markus, 2012). The illegal activities were discovered during a routine examination of an American Express subsidiary by The Federal Deposit Corporation and the Utah Department of Financial Institutions (Markus, 2012). American Express was found to have violated federal law in billing, debt collection practices, and marketing (Silver-Greenberg, 2012).

In the same year, Consumer Financial Protection Bureau enforced actions against Capital One and Discover Financial over sales tactics (Silver-Greenberg, 2012). American Express, along with Discover and Capital One failed to monitor their third-party vendors (Silver-Greenberg, 2012). The activity had occurred at American Express Centurion Bank along with American Express Travel Related Services Company, Inc. and American Express Bank, FSB (Markus, 2012). The violations included deception, unlawful late fee charges, age discrimination, failure to report consumer disputes to reporting agencies, and misleading consumers about debt collection (Markus, 2012). In 2012, American Express was required to refund $85 million to customers for illegal card practices that took place between 2002 and spring 2012 (Markus, 2012).

Though the act itself was unethical, American Express leaders fully cooperated with authorities and began their own investigation into the matter, and they eventually found and reported more fraud and violations (Markus, 2012; Silver-Greenberg, 2012). American Express agreed to end the illegal practices of their subsidiaries, fully refund approximately 250,000 consumers who were affected, implement new compliance procedures, and pay a civil monetary penalty of $27.5 million (Markus, 2012).

Kenneth Chenault

As the Chief Executive Officer of American Express since 2001 (Margolis, Walsh, & Krehmeyer, 2006), Kenneth Chenault believes that no matter how strong or ethical a company is, they are going to experience some difficulty (Wharton, 2005). He states that leadership is paramount during these difficult times (Wharton, 2005). According to Cuillla (2011), business ethics deteriorate during busy times and improve during low productivity times. Chenault believes that if leaders cannot be ethical in times of crisis, they will lose credibility and followership (Bulygo, 2013; Wharton, 2005). As a leader, ethics determine what is done in decision-making situations (Abrhiem, 2012). Ethical leaders are concerned about justice, fairness, and treating subordinates equally (Abrhiem, 2012). Leaders with an ethical identity are likely to affect the self-concepts, beliefs, and attitudes of their followers (Hartog, & Belschak, 2012).

As a leader, Chenault has demonstrated his ethical standards after the attack of 2001, in which 11 American Express employees died during the tragedy. Chenault’s first concern and order after the attack was to ensure everyone’s safety. Chenault ordered chartered planes and buses to help stranded cardholders get home, and he later donated one million dollars to families of the lost employees (Barton, 2011; Bulygo, 2013; Wharton, 2005). He believes that if leaders are not focused on moral ethics and integrity, they will not be successful (Bulygo, 2013; Wharton, 2005). Chenault explains that in order to create ethics within an organization, it begins with leadership. The best run companies are the ones that encourage employees to raise issues based on their ethics (Bulygo, 2013). Chenault further explains that social responsibility is paramount for corporate ethics visibility (Margolis, Walsh, & Krehmeyer, 2006). He states that corporate social responsibility is a set of values that American Express lives by. It helps in recognizing people who do the right things and rewards them. In addition, it influences a culture of integrity and accountability (Margolis, Walsh, & Krehmeyer, 2006).


Responding to an unethical situation of its subsidiaries, American Express acted ethically by cooperating and coming forward with valuable information that could help the investigation and the consumer fully be refunded. American Express corrected the matter by putting together plans to correct each of the violations, and strengthening its internal compliance processes. By correcting the matter and admitting to its faults, American Express may have maintained their brand reliability and business ethics standards. Had the situation not been resolved, American Express may have tarnished their brand’s reputation, trust, status, and lost customers because of their unethical tactics.

Businesses are often focused on the pursuit of self-interest and it is human nature to not ask questions about why things are going well (Cuillla, 2011). Situations such as the one with American Express place pressure on organizations and leaders to behave ethically at all times. It was the responsibility of American Express to hold their subsidiaries accountable for their lack of ethics (Hartog, & Belschak, 2012).

To resolve unethical situations in the future, ethics officers in organizations should be implemented to align practices of the workplace with ethics and beliefs of the workplace. By aligning the two, it allows people to become accountable to ethical standards (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). Additionally, ethics officers can assist employers in developing codes of ethics, and enforcing ethical codes as needed (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014). Though ethical concerns in organizations continue to create problems for society, individuals, and effect organizational culture, the extent of the effects of ethics in an organizational culture have yet to fully be explored (Chekwa, Ouhirra, Thomas, & Chukwuanu, 2014).



Abrhiem, T. H. (2012). Ethical leadership: Keeping values in business cultures. Business and Management Review, 2(7), 11–19.

Barton, A. (2011, April 4). The Quiet Lion: Kenneth Chenault. Retrieved December 1, 2014, from

Bulygo, Z. (2013, May 24). Business Lessons from American Express CEO Ken Chenault. Retrieved December 1, 2014, from

Chekwa, C., Ouhirra, L., Thomas, E., & Chukwuanu, M. (2014). An examination of the effects of leadership on business ethics: Empirical study. International Journal Of Business & Public Administration11(1), 48-65.

Cuillla, J. B. (2011). Is Business Ethics Getting Better? A Historical Perspective. Business Ethics Quarterly21(2), 335-343.

Hartog, D., & Belschak, F. (2012). Work Engagement and Machiavellianism in the Ethical Leadership Process. Journal Of Business Ethics107(1), 35-47. doi:10.1007/s10551-012-1296-4

Johnson, A. (2013, March 8). AmEx CEO got $28.5 Million in 2012. Retrieved December 1, 2014, from

Margolis, J., Walsh, J., & Krehmeyer, D. (2006, January 1). Building the business case for ethics. Retrieved December 1, 2014, from

Markus, K. (2012, October 1). CFPB Orders American Express to Pay $85 Million Refund to Consumers Harmed by Illegal Credit Card Practices Newsroom Consumer Financial Protection Bureau. Retrieved December 1, 2014, from

Silver-greenberg, J. (2012, October 1). American Express Says It Will Refund $85 Million. Retrieved December 1, 2014, from

Wharton. (2005, April 20). AmEx’s Ken Chenault Talks about Leadership, Integrity and the Credit Card Business. Retrieved December 1, 2014, from

Marketing Audit

Based on questionnaires obtained by the opinions of marketing experts, it has been determined that marketing audits are a paramount factor in business success.[1] A marketing audit can be an important tool in discovering potential risks within your business’s activities. Within the marketing industry, understanding how or why to market to a certain demographic is a key component to creating a successful marketing plan. To conduct an effective marketing audit, the method should have four major characteristics which include it being comprehensive regarding function, environment, and productivity; independent from decision-making managers; completed using a structured, systematic approach; and that it should be carried out on a periodic basis. A marketing audit can improve your marketing management and business problems by helping to assess and evaluate your business’s marketing ability, strategies, performance and effectiveness, problematic areas, and opportunities.

Having the ability to find and understand your customer, competitor, and product potential will make the process of marketing your product or service much easier. A problem often found in businesses is that they don’t develop marketing strategies or perform preemptive audits. These businesses come to realize, in the middle of their marketing efforts, that they have no real plan or a way to monitor the effects of their marketing campaigns. Having a plan of action serves to pace and organize your marketing efforts. Regular audits can help you identify business strengths, weaknesses, opportunities, and risks specific to your industry and market. Furthermore, marketing audits can be used to direct the vision of your business, the value of products offered, and the effectiveness of current, previous, and future marketing efforts and organizational efficiencies. A good marketing audit should also assist with the implementation of a marketing strategy, and help in generating brand awareness and sales.


[1] Lipnická D., Ďaďo J. (2013). Marketing Audit and Factors Influencing Its Use in Practice of Companies (From an Expert Point of View). Journal of Competitiveness, 5 (4), 26-42. doi: 10.7441/joc.2013.04.02

Decision Support Systems

A Decision Support Systems (DDS) assist in reducing time needed in manual searching of information. DSS gives the ability for results to be returned at faster than human speeds. DSS is a flexible interactive IT system designed to assist non-structured decision making problems. Advantages of DSS include, increased productivity, understanding, speed, flexibility, and reduced cost. DSSs are information systems that support decision-making processes. Objective of DSSs is to enhance the effectiveness of decision-makers. Functions that DSS assist with include data storage, retrieval, manipulation, and small calculations. A crucial point of DSS is its ability to react to changes and situations quickly. DSS can be used to assist in solving many different promising diverse alternatives to problems.
DSS is when an individual performs decision related task. The goal of DSSs is to assist the decision maker in improving their effectiveness. Enhancing the decision maker’s insights and knowledge does this. Decision-making is dependent upon knowing past, present, and likely future situations. Information systems should have the ability to forecast the future based on probability.
Often a DSS will incorporate an expert system (ES). While a DSS requires the decision maker to have knowledge and expertise about the situation, an ES only requires facts and symptoms to provide solutions to problems. In a replacement role, an ES helps with improving efficiency of decision makers. ES tools are used to mainly support and assist with problems and not replace the decision maker. ES is a system that assists with reaching conclusions based on reasoning. These types of systems are useful for diagnostic and prescriptive type problems. In a support role, an ES can be known as an expert advisory. DSS generally has three components: model management, data management, and user interface management. Model management provides information to the decision makers. Data management assists with customer and product information. User interface management helps the decision makers access the information. ES tools, if used to replace human decision makers, have been shown to be just as effective, if not better than a human. Organizations should not rely on ES tools to improve the efficiency of the decision maker. 
The marketing firm that I am researching could use DSS to analyze its customer marketing performance and create effective strategies based on that information. Considering the organization uses tracking and monitoring tools to view its customer data, it should use DSS to highlight opportunities for each unique customer. Currently, its customers each have similar goals and processes that are used to generate sales. However, with implementing DSS, it could help in developing unique plans and goals for the customers instead of one universal marketing method. 

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