Foundations of Management

Course assessment:

This course is a half unit course running over the Winter Term (WT).

Formative assessments:

Formative group case analysis
Each week, two student groups will provide a formative group analysis of the case, no longer than 500-words (excluding appendices and references). Further, each week two student groups will provide constructive comments on the two case analyses provided by the student groups. Over the duration of the course, therefore, each student group will provide two formative analyses of a case and two sets of constructive comments on the analyses conducted by another student group. The course leader will provide feedback on both the two case analyses and the two commentaries on the case analyses each week.

Individual formative essay:
A formative essay of up to 1,500 words (excluding appendices and references), in the WT.

Assessment:
Two individual summative essays of up to 1,500 words (excluding appendices and references), each worth 50% of the marks for the course. One of the essays is due in the WT and another in the Summer term (ST).

Marks and Grades for a Course:
Each candidate shall be given an overall result for each course as follows:
Mark Grade
0 – 29% Bad Fail
30- 49% Fail
50 – 59% Pass
60 – 69% Merit
70% and over Distinction

If you have any questions please come and see the Management Admin Office.

Reading:

For each lecture we identify a small number of ‘core’ readings which should be given a high priority. We also identify a number of additional, ‘further’, readings which enable you to go deeper into the subject. The readings are mostly given in relation to each lecture’s material. We may also suggest additional readings during the lectures which you may follow up out of interest to learn more. Readings are either available electronically through journals, as scanned copies available on Moodle or as a paper version in main library (often in the Course Collection). We shall endeavour to put some of the main library readings online during the term, particularly in cases where there is a lot of pressure on availability. We may also add readings relevant to particular lectures. We shall let you know whether they are ‘core’ or ‘further’ readings.

Lectures and seminars (case discussion session):

Each student is scheduled to attend lectures and seminars as follows:

Weeks 1-5 and 7-11: 1 two-hour lecture and 1 three-hour case discussion, weekly. Frequently, the last hour will be an optional review session immediately following a two-hour case discussion. Week 6 will be a reading week.

Revision lecture: There will be a revision lecture covering the entirety of the course in the WT.

Course outline:

The aims of this course are to provide a basic grounding in the management literatures covering disciplines relating to financial control and management science, and of the literatures on the evolving managerial, organizational and professional contexts within which these disciplines are practiced. Students will be provided with an overview of each discipline with the aim that they acquire a basic working knowledge of each. The course will cover origins and disciplinary boundaries, the foundations of these disciplines in the social sciences, core concepts, practical applications and current state of play and debate.

Accounting, management science and finance sessions: Weeks 1-8

The aims of this part of the course are two-fold. First, it provides an introduction to accounting, management science and finance. As well as facilitating use of these concepts in the workplace, it informs decisions relating to course options. At the end of the seven weeks participants in the course will have acquired knowledge of 1) the main financial techniques used in the valuation of investments and an introduction to the Capital Asset Pricing Model, 2) core issues relating to the determination of the cost of products and services and financial and non-financial performance measures, 3) the main financial accounting reports, how to analyse them and the debates relating to the values assigned within these reports and relating to disclosure, and 4) a basic introduction to value based management.

Second, this part of the course deepens participants’ understanding of accounting and financial techniques by, on occasion, considering these through the different disciplinary frames of financial economics, behavioural economics and sociological approaches to accounting, finance and financial markets. Further, by placing these techniques in a historical context, the course relates the evolution of techniques to their organizational setting.

This part of the Foundations of Management 2 course thus progresses through a series of debates relating to valuation and disclosure. Each week alternative technical methods for calculating and disclosing values are contrasted and the managerial implications discussed. This deliberative approach encourages the development by course participants of the accounting and financial aspect of their business vision and provides practical tools for its articulation.

Preliminary course reading: Prior to participating on the course, students are encouraged read the following article: Kaplan, Robert (1984) ‘The Evolution of Management Accounting’ The Accounting Review Vol. 59, No. 3: 390-418. We will over the duration of this course review Kaplan’s argument in this article.

Textbooks: This course does not draw upon a specific textbook. The core and additional readings are outlined below for each week. The textbooks outlined below are intended to provide broad overviews of the disciplines with which we will engage, for those students who wish to gain additional knowledge of each subject area. There are copies of these textbooks in the course collection section of the LSE Library. Nevertheless, you may find it useful to purchase these textbooks and second-hand copies of recent editions are available through Amazon and other outlets. The textbooks covering the different disciplines covered in this part of the course are as follows:

Finance: Berk, J. & DeMarzo, P. (2019) Corporate Finance 5th ed.

Financial accounting: Weetman, P. (2019) Financial Accounting: An Introduction 8th ed.

Financial accounting theory: Scott, W. R. & O’Brien, P. (2020) Financial Accounting Theory 8th ed.

Management accounting: Kaplan, R. & Atkinson, A. (2014) Advanced Management Accounting, 3rd ed.

Week 1: Capital Budgeting: Evaluating Investment Opportunities

By way of an introduction to this module this lecture will outline its full range of topics and will then survey the economic, behavioural and sociological theories that are useful in examining them. In turning to this week’s topic, the lecture will introduce the ubiquitous challenge of valuing the financial attractiveness of changes to a business’s productive assets, such as making investments in capital items. We will discuss the time value of money as a pervasive consideration in valuing the financial attractiveness of any allocation. Beyond that, we will consider several of the most long-standing and widely used valuation procedures, including payback period, net present value and internal rate of return. In the seminar we will practice implementing these investment decision rules.

Core Readings:

1) Franks, J., Boyles, J. & Carleton, W. (1985) Corporate Finance: Concepts and Applications, Chapter 3: “Discounted Cash Flow: Basic Tools of Financial Analysis”, p. 31 – 52 and Chapter 4: “How to Appraise a Capital Project” p. 60-77

2) Berk, J. & DeMarzo, P. (2019) Corporate Finance 5th ed. Chapter 10, ‘Capital Markets and the Pricing of Risk’ p. 354-360, 371-384 and Chapter 11, ‘Optimal Portfolio Choice and the Capital Asset Pricing Model’ p. 393-428

3) Cohen, R. 2020. The Impact Revolution: Risk-Return-Impact. Chapter 1 in Impact: Reshaping Capitalism
to Drive Real Change

4) Alchian, A. & Demsetz, H. (1972) “Production, Information Costs and Economic Organization” American
Economic Review Vol. 62 No. 5:777-

Further reading:

5) Sharpe, W. (1964) “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk” Journal of Finance, Vol. 19, No. 3: 425-442

6) Pedersen, L. Fitzgibbons, S. & Pomorski, L. (2021) “Responsible investing: The ESG-efficient frontier.” Journal of Financial Economics Vol. 142, No. 2: 572-597 (Please see this special issue on socially responsible investment, guest edited by Jeffrey Wurgler in the November 2021 edition of the Journal of Financial Economics.)

7) Zingales, L. (2000) “In Search of New Foundations” Journal of Finance Vol. 55 No. 4:1623-1653

Behavioural approaches:

8) Simon, H. (1997) “The Equilibrium of the Corporation” in Administrative Behaviour 4th ed.

9) March, J. (1987) “Ambiguity & Accounting: The Elusive Link Between Information and Decision Making” Accounting, Organizations & Society Vol. 12, No. 2:153-168

Transaction cost of economics:

10) Williamson, O. E. (2002) “Theory of the firm as Governance Structure: From Choice to Contract” Journal of Economic Perspectives Vol. 16, No 3: 171–19

Sociological approach to the analysis of financial markets:

11) Mackenzie, D. (2011) “The Credit Crisis as a Problem in the Sociology of Knowledge” American Journal of Sociology Vol. 116 No. 6:1778-1841

12) Granovetter, M. (2005) “The Impact of Social Structure on Economic Outcomes” Journal of Economic Perspectives, Vol. 19, No. 1:33-51

Seminar: Investment analysis and Lockheed Tri Star (case number 9-291-031)

Discussion Questions: Please see the questions outlined in the case document.

Week 2: Reporting to External Users of Accounts 1: The Historical Cost Accounting Convention

Weeks 2 and 3 outline contrasting approaches to financial accounting. Week 2’s lecture will introduce the primary financial statements; the balance sheet, income statement and cash flow statements. We will discuss the historical cost model of accounting and outline the economic theory justifying this accounting model. We will discuss concepts such as accrual accounting and the matching principle. Drawing on these concepts we will examine issues such as revenue recognition and the treatment of intangible assets within financial accounts. We will place these issues in the context of the debate between positive accounting theory and critical accounting theory. The seminar applies these theoretical framings through a case-based discussion of revenue recognition and the capitalizing versus expensing of research & development expenditures.

Core reading:

1) Weetman, P. (2019) Financial Accounting: An Introduction 8th ed. chapter 3: “Financial Statements from the Accounting Equation”, p. 58 – 72.

2) Scott, W. & O’Brian, P. (2020) Financial Accounting Theory 8th ed. Chapter 1: “Introduction” p. 1 and p. 22-27, Chapter 5 “The Value Relevance of Accounting Information” p. 153-156 and p. 159-163, Chapter 8 “Efficient Contracting Theory and Accounting” p. 312-325, Chapter 11 “Earnings Management” p. 463-471

3) Holmstrom, B. (1979) “Moral Hazard and Observability” Bell Journal of Economics Spring (1979:74-91).

Further reading:

4) Watts, S. & Zimmerman, J. (1979) “‘The Demand for and Supply of Accounting Theories: The Market for Excuses” The Accounting Review Vol. 54, No. 2:273-305

5) Miller, P. & Power M. (2013) “Accounting, Organizing, and Economizing: Connecting Accounting Research and Organization Theory” The Academy of Management Annals, Vol. 7 No. 1, 557-605

6) Christensen, J. & Demski, J. (2003) Accounting Theory: An Information Content Perspective, Chapter 11

Intangible assets:

7) Lev, B. (2004) ‘Sharpening the Intangibles Edge’ Harvard Business Review June p. 109-116

8) Dichev, I.D. (2008) ‘On The Balance Sheet-Based Model of Financial Reporting’, Accounting Horizons, Vol. 22 No. 4: 453-470

Case: Microsoft (case number 9-100-027)

Questions for case discussion:

1. What are the factors that likely explain the difference between Microsoft’s market value of equity and its reported book value of equity?
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2. What effect did Microsoft’s software capitalization policy have on its financial statements? Ignore any potential tax effects.

a. Assume that 60% of Microsoft’s research and development expenses were incurred after technological feasibility was established, that the average product life was two years, and that the company begins amortizing software costs at the beginning of the following year. Estimate the effect of capitalizing software costs on Microsoft’s fiscal 1997, 1998 and 1999 income statements and balance sheets.

b. Speculate as to why Microsoft chose to expense all software costs as incurred rather than capitalizing a portion of these costs.

3. What effect did Microsoft’s revenue recognition policy have on its financial statements? Ignore any potential tax effects.

a. Estimate the amount of revenue that Microsoft would have reported in each quarter from 1996 to 1999 if Microsoft had not adopted its new recognition policy in 1996.

b. Speculate as to why Microsoft decided to defer a portion of its revenues in fiscal 1996.

4. What was the overall impact of these two policies on Microsoft’s fiscal 1997, 1998 and 1999 financial statements?
5. In your opinion, did Microsoft provide its analysts with information that was intentionally overly pessimistic? Are there benefits to the company to being outwardly pessimistic about its future prospects?
6. Describe Microsoft’s overall financial reporting strategy. Why had the company adopted this strategy and why was the SEC concerned about it?

Week 3: Reporting to External Users of Accounts 2: Fair Value Accounting

This lecture introduces fair value accounting as an alternative accounting model to the historical cost accounting model introduced in week 2. We will investigate and compare the justifications provided by economic theory for fair value accounting in relation to those given for historical cost accounting. We develop the discussion of topics relating to recognition and measurement in financial accounting. This session introduces adverse selection as a type of information asymmetry. We discuss why this type of information asymmetry is best resolved by the fair value model of financial accounting. The fair value model assigns values to items within the accounting statements that reflect their market price.

Core reading:

1) Scott, W. & O’Brien, P. (2020) Financial Accounting Theory 8th ed. Chapter 6 “The Valuation Approach to Decision Usefulness”, p. 190-200,

2) Akerlof, (1970) “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism” Quarterly Journal of Economics Vol. 84, No. 3:488-500

3) Laux, C. & Leuz. C. (2010) “Did Fair-Value Accounting Contribute to the Financial Crisis?” Journal of Economic Perspectives Vol. 24, No. 1: 93–118

Further reading:

4) Barth, M. (2006) “Including estimates of the future in today’s financial statements” Accounting Horizons Vol. 20 No. 3:271-285

5) Lev, B. & Gu, F. (2016) The End of Accounting (and the path forward for investors and managers) Chapter 1 “Corporate reporting then and now: A Century of ‘Progress’” p. 1-13

6) Lev, B. & Zarowin, P. (1999) “The Boundaries of Financial Reporting and How to Extend Them” Journal of Accounting Research Vol. 37 No. 2:353-385

7) Power, M. (2010) “Fair value accounting, financial economics and the transformation of reliability” Accounting and Business Research Vol. 40 No. 3:197-210

8) Leux, C. & Verrechia, R. (2000) “The Economic Consequences of Increased Disclosure” Journal of Accounting Research Vol. 38, Supplement: Studies on Accounting Information and the Economics of the Firm p. 91-124

Case: Land Securities A and B (case numbers 9-105-014 and 9-106-020).

Questions for Case Discussion

1) How does the application of the different valuation models (cost, revaluation or fair value) affect Land Securities’ balance sheet and income statement? Can the firm assess the impact of adopting the fair value model on previous years’ key performance metrics, such as ‘profit on ordinary activities’?

2) Which model, cost or fair value, would you recommend Land Securities adopt? Why?

Week 4: Management Science

In weeks 4 and 5 we examine some of the links between issues relating to the management of the firm’s operations and the cost of a firm’s products. Management science and operations research seek to influence for the better the decisions that matter in organisations. Most frequently, management science and operations research are understood as utilizing a rational, systematic approach to problem solving that employs quantitative analysis to help managers made decisions. In so doing, management science and operations research constitute an inter-disciplinary field that draws on disciplines such as mathematics, engineering science, economics and computer science, as well as other disciplines. Following an introduction to management science and operations research, we will examine the history of management science and operations research methods in the context of inventory management. We will cover the evolution from deterministic inventory management models in the mid-twentieth century to the stochastic inventory management models adopted more recently.

Core reading:

1) Hopp, W. J. and M. L. Spearman (2008). Factory Physics. 3rd ed. Chapter 2 “Inventory Control” p. 49-57.

2) Winston, W. L. (1994) Operations Research: Applications and Algorithms: Chapter 16 Deterministic Inventory Management, p. 869-895 and Chapter 17: Probabilistic Inventory Management p. 900-939

3) Tsay, A., Gray, J., Noh, I. & Mahoney, J. (2018) “A Review of Production and Operations Management Research on Outsourcing in Supply Chains: Implications for the Theory of the Firm” Production and Operations Management Vol. 27, No. 7:1177-1220

Further Reading:

Inventory management:

4) Ravi Ravindran (2008) Operations Research and Management Science Handbook, Chapter 10: Inventory Control

5) Winston, W. L. (1994) Operations Research: Applications and Algorithms: Chapter 18: Recent Developments in Inventory Theory: Material Requirements Planning and the Just in Time Approach to Production p. 940-962

Readings with further background on management science:

6) Hillier, F. S. and G. J. Lieberman (2015). 10th ed. Introduction to Operations Research. McGraw-Hill, New York.

7) Dennis, T. L., Dennis, L. B. (1991) Management Science Chapter 1 “The Management Science Approach to Decision Making” p. 1-26

Further readings: History of operations research:

8) Ackoff, R. L. (1979). “The future of operational research is past”. Journal of the Operational Research Society 30: 93-104.

9) Kirby, M. W. (2000). “Operations Research Trajectories: the Anglo-American experience from the 1940’s to the 1990’s.” Operations Research 48: 661-670.

Further readings:

10) Ritti, R., (1968). “Work goals of scientists and engineers” Industrial Relations: A Journal of Economy and Society, Vol. 7 No. 2: 118-131.

11) Corbett, T. (1998) Throughput Accounting: TOC’s Management accounting system

Case: Three Jays Corporation (case number 9-915-531)

Week 5: Cost Determination and Cost Management

In week 5 we focus on a topic in management accounting and specifically: costing and the allocation of overheads for the purpose of determining the cost of products or services. Drawing on Kaplan’s (1984) account of the development of management accounting, we place costing techniques in their historical context. We will compare three costing methods, namely, 1) marginal costing 2) absorption costing, 3) activity based costing. We will also question whether greater accuracy in costing is always preferable and relate this to behavioural theory and target costing. In the seminar we will compare these costing methods and ultimately relate these to the operations management techniques discussed in week 4.

Core Reading:

1) Labro, E. (2006) “Analytics of Costing System Design” p. 217-242 in Bhimani, A. ed. Contemporary Issues in Management Accounting (Available as e-book through the LSE library).

2) Bhimani, A., Hongren, C., Datar, S. & Rajan, M. (2012) Management and Cost Accounting, 5th ed., Chapter 5: “Cost Allocation”.

3) Kaplan, R. & Atkinson, A. (2014) Advanced Management Accounting 3rd ed. Chapter 4: “Activity Based Cost Systems” p. 97-113

4) Harris, E (1995) Marginal Costing, p. 43-68 “Marginal costing and decision-making”

Further Reading:

5) Noreen, E. (1991) “Conditions Under Which Activity-Based Cost Systems Provide Relevant Costs” Journal of Management Accounting Research Vol. 3: 159-168

6) Datar, S. & Gupta, M. (1994) “Aggregation, Specification and Measurement Errors in Product Costing” The Accounting Review Vol. 69 No. 4:567-591

Behavioural perspective:

7) Hiromoto, T. (1988) “Another Hidden Edge – Japanese Management Accounting” Harvard Business Review (July – August)

8) Merchant, K. & Shields, M. (1993) “When and Why to Measure Costs Less Accurately to Improve Decision Making” Accounting Horizons Vol. 7 No. 2:76-81

Sustainability perspective

9) Macve, R. (1997) “Accounting for environmental cost” in Richards, D. (ed) The Industrial Green Game: Implications for Environmental Design and Management. Washington, DC: National Academy Press p. 185–199.

Cases: John Deere A and B (case numbers 9-187-107 and 9-187-108)

Questions for case discussion:

1. How did the competitive environment change for the John Deere Component Works between the 1970s and the 1980s?
2. What caused the existing cost system to fail in the 1980s? What are the symptoms of cost system failure?
3. How were the limitations of the existing cost system overcome by the Activity Based Costing (ABC) system?
4. Compare the cost of product A103 (see Exhibit 5) under the existing cost system and under the ABC approach.

Week 6: Reading week

Week 7: Financial ratios: Return on Investment and Social Return on Investment

Weeks 7 and 8 engage with topics relating to performance measurement. In week 7, the lecture begins with an overview of traditional financial ratios as performance measures and the relationship between the return on investment performance measure. We introduce Social Return on Investment as a performance measure of firms’ environmental and social performance. We discuss the merits and criticisms of these two types of performance measure.

Core Reading:

1) Weetman, P. (2019) Financial Accounting: An Introduction, 8th ed. Chapter 13 “Ratio Analysis”

2) Kaplan & Atkinson (2014) Advanced Management Accounting, Chapter 10 “Financial Measures of Performance” p. 499-506

3) Nicholls, J., Lawlor, E., Neitzert, E. and Goodspeed, T., 2009. A Guide to Social Return on Investment. London: Cabinet Office

Further Reading: Financial ratios

4) Bruns, W. (2004) Introduction to Financial Ratios and Financial Statement Analysis HBP Industry Note 9-193-029

Further Reading: Behavioural perspective on financial ratios:

5) Swieringa, R & Weick, K. (1987) ‘Management accounting and action’ Accounting, Organizations and Society Vol. 12 No. 3:293-308

Further Reading: Social Return on Investment and its critiques

6) Ebrahim, A. & Rangan, V. K. (2014) ‘A Framework for Measuring the Scale and Scope of Social Performance’ California Management Review Vol. 56 No. 3: 118-141

7) Lingane, A. & Olsen, S. 2004. Guidelines for Social Return on Investment. California Management Review Vol. 46, No. 3:116-135

8) Pathak, P. & Dattani, P. 2014. Social Return on Investment: Three Technical Challenges. Social Enterprise Journal Vol. 10 No. 2:91-104

9) Nielson, J., Lueg, R., & Van Liempd, D. (2021) “Challenges and boundaries in implementing social return on investment: An inquiry into its situational appropriateness” Nonprofit Management and Leadership Vol. 31:413–435.

Case: Financial Policy at Apple (A and B) (Case 9-214-085 and 9-214-094)

Questions for the Financial Policy at Apple case

1) From the beginning of 2000 until its peak in 2012, Apple’s stock price rose from $27.97 to $702.10, an increase of over 25 times. What specific attributes of their operational performance account for this stock performance?

2) Apple’s stock decreased by 37% from its peak in 2012 until the end of March 2013, from $702.10 to $442.66. Again, what specific attributes of their operational performance account for this stock performance?

3) Why does Apple hold so much cash? How much “excess” cash do they have? How much cash would they have after five years if they distributed all of their excess cash to shareholders in 2012? Use exhibit 10 in the case to forecast Apple’s financial status over the next five years.

Week 8: Value Based Management: The Balanced Scorecard and Economic Value Added

The lecture outlines some of the drawbacks of financial ratios such as Return on Investment, introduced last week. The first relates to non-financial performance measures, specifically focusing on the Balanced Scorecard. The second introduces residual income and Economic Value Added (EVA) as alternative performance measures to the financial ratios introduced in week 7. In examining the Balanced Scorecard and Economic Value Added we will also review Value Based Management. We will examine issues relating to the use of EVA in the remunerating managers. In the seminars we will apply these concepts in the Vyaderm Pharmaceuticals case and relate this learning to the discussion of performance measurement in week 7. Last, we will summarize the first part of the course.

Core Reading:

1) Kaplan, R. & Atkinson, A. (2014) Advanced Management Accounting, Chapter 8 “The Balanced Scorecard” ,p. 367-380 and Chapter 10 “Financial Measures of Performance” p. 507 – 523

2) Desai, M. & Ferri, F. (2006) Understanding Economic Value Added Harvard Business School note number 9-206-016.

3) Toft, J. S., & Lueg, R. 2015. Does EVA beat earnings? A literature review of the evidence since Biddle et al. (1997) Corporate Ownership & Control Vol. 12 No. 2:8-18.

Further reading:

EVA

5) Stewart, G. (1991) The Quest for Value chapter 4: ‘The EVA Financial Management System’

6) Young, D. S. & O’Byrne, S. (2000) EVA and Value Based Management: A Practical Guide to Implementation McGraw Hill

7) Merchant, K. & Van de Stede, W. (2007) Management Control Systems 2nd ed. chapter 11: ‘Combinations of Measures and other remedies to the myopia problem’

8) Balachandran, S. (2006) “How Does Residual Income Affect Investment? The Role of Prior Performance Measures” Management Science Vol. 52 No. 3:383-394

Debate on Value Based Management

9) Ittner, C. & Larcker, D. (2001) ‘Assessing empirical research in managerial accounting: A Value Based Management Perspective’ Journal of Accounting and Economics Vol. 32:349-410.

Balanced Scorecard Behavioural and Institutional perspectives:

10) Ittner, C., Larcker, D. & Meyer, M. (2003) ‘Subjectivity and the Weighting of Performance Measures: Evidence from a Balanced Scorecard’ The Accounting Review Vol. 78 No. 3:725-758

11) Meyer, M. & Gupta, V. (1993) ‘The Performance Paradox’ Research in Organizational Behaviour Vol. 16 p. 309 – 369, especially pages 325 – 353.

Balanced Scorecard: Sustainability and not-for-profit perspectives

12) Figge, Hahn, Schaltegger & Wgner (2002) “The Sustainability Balanced Scorecard- Linking Sustainability Management to Business Strategy, Business strategy & the Environment Vol. 11, p. 269-284

13) Kaplan, Robert S. (2001) “Strategic Performance Measurement and Management in Nonprofit Organizations” Nonprofit Management & Leadership Vol. 11 No. 3:353-370

Case 1: Citibank (9-198-048)

Questions for case discussion:

1) Why has Citibank introduced a Performance Scorecard?

2) Assume that you are Lisa Johnson. Complete Exhibit 1 to evaluate James’ performance. What rating would you give James?

3) How would you communicate the decision to James?

4) Would you roll-out this performance scorecard to other regions at Citibank?

Case 2: Vyaderm Pharmaceuticals (case number 9-101-019)

Questions for case discussion:

Using data from case Exhibit 8, calculate the following:

1) 2017 EVA for the North American Dermatology division

2) 2017 EVA bonus payout for a manager earning $300,000, assuming that the manager’s bonus is based 100% on the division’s EVA.

3) 2018 EVA and estimated bonus payout for the same manager, assuming that Vyaderm profits fall back to historical levels and the EVA improvement goal remains constant.

4) Based on your analysis what would you recommend to Mr. Vedrine?

Overview of weeks 9-11: Professions, corporate governance and management in a historical context:

The aims of this part of the course are to provide an outline of trends relating to the evolution of some of the professions and occupations advising corporations, trends relating to the evolution in the nature of ownership of corporations, focusing on the shifting emphasis from individual to institutional investors and salient aspects of the governance of corporations over this time. We then relate these trends to contemporary management theory of ambidexterity.

Week 9: Professions, regulation and standards setting

In week 9 we examine theories relating to the professions and to standard setting. First, we compare public interest and interest group theories of regulation. Second, professionals have been the focus of concerns and critiques relating to standards of governance. We examine theories relating to the professions, the regulation of expertise and the setting of standards in traditional and contemporary settings. How do professionals differ from other types of agents? How have the professions participated in standard setting and how has their participating evolved as professional organizations have evolved into professional service firms? We will engage with these questions as we analyse the role of the professions in standard setting.

Core reading:

1) Scott, W. & O’Brien, P. (2020) Financial Accounting Theory 8th ed. Chapter 12 “Standard Setting: Economic issues”, p.492-499 and Chapter 13 “Standard Setting: Political Issues” p. 537-542 and p. 568-569

2) Ramanna, K. (2015) “Thin Political Markets: The Soft Underbelly of Capitalism.” California Management Review 57, No. 2: 5–19

3) Barker, R. Eccles, R. & Serafeim, (2020) “The Future of ESG is … Accounting?” Harvard Business Review, December

Further reading:

Regulation theory and financial accounting:

5) Stigler, G. (1971) “The theory of economic regulation” The Bell journal of economics and management Vol. 1: 3-21.

6) Peltzman, S. (1976) “Towards a More General Theory of Regulation” Journal of Law and Economics Vol. 19, No. 2:211-240

7) Ramanna, K. (2008) “The Implications of Unverifiable Fair-Value Accounting: Evidence from the Political Economy of Goodwill Accounting” Journal of Accounting and Economics Vol. 45 No 2-3:253-281

Professions and standard setting:

8) Abbott, A. (1988) The System of Professions: An Essay on the Division of Expert Labor, “Introduction” p. 1-31 and notes on p. 327-331

9) Corbett, C. & Van Wassenhove, L. (1993) “The Natural Drift: What Happened to Operations Research? Operations Research Vol. 41, No. 4:625-640

10) Sharma, A. (1997). “Professional as Agent: Knowledge Asymmetry in Agency Exchange.” Academy of Management Review Vol. 22 No. 3:758-798

11) Parsons, T. (1939) “The Professions and Social Structure” Social Forces Vol. 17, No. 4: 457-467

Further reading: professional service firms

12) Bucher, R. & Stelling, J. (1969) “Characteristics of professional organizations” Journal of Health and Social Behavior Vol. 10, No. 1, pp. 3-15

13) Wallace, J. E. (1995). “Organizational and Professional Commitment in Professional and Nonprofessional Organizations.” Administrative Science Quarterly Vol. 40 No. 2: 228-255

14) Empson L. (2007), “Professional Service Firms” in S. Clegg (ed.), International Encyclopedia of Organization Studies, p.1311-1315

15) von Nordenflycht, A. (2010) “What Is a Professional Service Firm? Toward a Theory and Taxonomy of Knowledge-Intensive Firms” Academy of Management Review, Vol. 35, No. 1: 155-174

Case 1: The IASB at a Crossroads: The Future of Financial Reporting Standards (A and B) (9-111-084 and 9-113-089)

Questions for the IASB case

1) As an international manager or investor what benefits do you see from the adoption of IFRS across countries?

2) In your view, what are the three most substantial challenges to the growth and development of IFRS in the coming years? Why?

3) How would you propose that the IASB and its key constituents address these challenges?

4) What are the advantages and disadvantages for the IFRS Foundation Trustees of establishing the International Sustainability Standards Board (ISSB)?

Case 2: The Sustainability Accounting Standards Board (9-414-071)

Q1) What were the key challenges Rogers faced in 2011?

Q2) What did Rogers do to locate these challenges? Of all of the actions she took, which were the most important? Why?

Q3) What should Rogers do next to ensure that the SASB standards will be adopted and widely used?

Please review the following website: International Financial Reporting Standards Foundation, International Sustainability Standards Board: IFRS – International Sustainability Standards Board

Week 10: Individual and Institutional Investors in a Historical Context

This week’s session proceeds in two parts. First, the session examines the shift in the ownership of listed firms from individual to institutional investors. We begin by examining Chandler’s argument regarding the reasons for the successful ownership of business by individuals in the US, in comparison to the UK. Second, the session examines the rise of institutional investors, which increasingly replaced individuals as owners of such firms. We discuss some consequence for the governance of corporations over this time.

Core reading:

1) Chandler, A. (1990) Scale and scope: The Dynamics of Industrial Capitalism. The American Experience p. 224 – 233; and Implications of the British Experience p. 389-392

2) Herrigel, G. (2007) “A New Wave in the History of Corporate Governance” Enterprise & Society, Vol. 8, No. 3:475-488

3) Rajan, R. G. & Zingales, L. (2003) “The Great Reversals: The Politics of Financial Development in the Twentieth Century” Journal of Financial Economics Vol. 69 No. 1: 5–50

Further reading:

4) Cheffins, B. (2008) Corporate Ownership and Control: British Business Transformed, “Chapter 2: The Determinants of Ownership and Control: Current Theories, p. 26-58

5) Davis, E. P. & Steil, B. (2001) Institutional Investors

6) Hannah, L. (2007) “Pioneering Modern Corporate Governance: A View from London in 1900.” Enterprise and Society Vol. 8: No. 3: 642–86

7) Lamoreaux, N. R., Raff, D. M. G., & Temin, P. (2003) “Beyond Markets and Hierarchies: Toward a New Synthesis of American Business History” American Historical Review, Vol. 108, No. 2: 404-433

8) La Porta, R. Lopez-de-Silanes, F. Shleifer, A. & Vishny, R. (2000) “Legal Determinants of External Finance” Journal of Finance Vol. 52, No. 3:1131-1150

9) Williamson, O. E. (1988) “Corporate finance and corporate governance” Journal of Finance Vol. 43, No. 3: 567-591

Case: Pension Policy at the Boots Company Plc. (case number 9-206-105)

Questions for the Pension Policy at the Boots Company Case

1) How should Boots think about the management of its pension fund? Should the pension fund be managed as a standalone entity, or should it be managed as an integral part of the corporate balance sheet? In whose interests should the pension fund be managed?

2) Should Boots invest 100% of its pension fund assets in bonds?

3) If the pension funds of other companies adopted the same policy as Boots, what would be the consequence for standards of corporate governance in the UK?

4) Draw on the theories outlined in this week lecture to explain this change in standards of corporate governance.

Week 11: Organisational and Managemental Perspectives

This week we examine contemporary management theory relating to ambidexterity and attention in organizations. An aim is to examine how contemporary management theory might contribute to understanding changes in the organization, management and governance of firms discussed in previous weeks.

Core reading:

1) Lavie, D., Stettner, U. and Tushman, M. (2010) “Exploration and Exploitation within and across Organizations.” Academy of Management Annals Vol. 4: 109–155

2) Porac, J., Thomas, H. & Baden-Fuller, C. (2011) “Competitive Groups as Cognitive Communities: The Case of Scottish Knitwear Manufacturers Revisited” Journal of Management Studies Col. 48 No. 3:646-663

3) Ocasio, W. (1997) “Towards an Attention Based View of the Firm” Strategic Management Journal. Vol. 18, No. S1:187-206

Further reading:

4) David, P., Dharwadkar, R. & Duru, A. (2022) “Financial Reporting Choices, Governance Structures and Strategic Assets: A Transaction Cost Perspective” Academy of Management Review Vol. 47, no. 3:579-599

5) March, J. (1991) “Exploration and Exploitation in Organizational Learning.” Organization Science Vol. 2 No. 1: 71-87.

6) Ramanna, K. (2008) “The Implications of Unverifiable Fair-Value Accounting: Evidence from the Political Economy of Goodwill Accounting” Journal of Accounting and Economics Vol. 45 No 2-3:253-281

7) Gavetti, G., Levinthal, D. and Ocasio, W. (2007) “A Neo-Carnegie Perspective on Organization Theory and Strategy”. Organization Science. Vol. 18 No. 3: 523-536.

8) Simons, R. (1991) “Strategic orientation and top management attention to control systems” Strategic Management Journal Vol. 12, No. 1:49-62

9) Benner, M. J., and Tushman, M. L. (2003) “Exploitation, Exploration, and Process Management: The Productivity Dilemma Revisited.” Academy of Management Review Vol. 28, No. 2: 238–256.

10) Porac, J. Thomas, H., Wilson, F. Paton, D. & Kanfer, Al. (1995) “Rivalry and the Industry Model of Scottish Knitwear Producers” Administrative Science Quarterly Vol. 40, No. 2:203-227

11) Cuypers, I., Hennart, J., Silverman, B. Ertug, G. (2021) “Transaction Cost Theory: Past Progress, Current Challenges and Suggestions for the Future” Academy of Management Annals Vol. 15, No. 1:111-150

Case: The Politics and Economics of Accounting for Goodwill at Cisco Systems (A and B cases) (case numbers 9-109-002 and 9-109-003)

Questions for the Cisco Case

1. What is Cisco getting from its acquisition of Arrow Point? Why does Cisco’s offer price differ from both the book value and market value of Arrow Point?
2. a) Assume Cisco used the purchase method to account for the acquisition of Arrow Point. Estimate what Cisco’s balance sheet looked like after the acquisition (you will need to allocate the purchase price among net assets; be ready to defend any assumptions that you make). What are the acquisition’s income statement effects on Cisco?

b) Now assume Cisco used the pooling-of-interest method to account for the acquisition of Arrow Point. Estimate the acquisition’s balance sheet and income statement effects on Cisco.

3. Given your answers above, what is your assessment of the effectiveness of the pooling and purchase methods in reflecting the economics of the acquisition? Do you agree with Dennis Powell that the “purchase method of accounting was designed for accounting for tangible assets?”
4. Why do you think Dennis Powell switched from supporting the pooling method to proposing the purchase method with goodwill impairment testing?