Week 6 - Portfolio - Qualitative Factors Affecting Capital Budgeting - 100% PDF

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University of the People BUS 5110 Managerial Accounting Assignment for the year 2019/2020. The grades received are in the titles....

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Qualitative Factors Affecting Capital Budgeting While there are many qualitative factors that may cause a company to implement capital projects/purchases that do not necessarily the best return on investment. The three that are discussed below are: 

community reception

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employee morale

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environment impact

Community Reception Profit making businesses have a delicate relationship with their local communities. The community may supply the bulk of the workers, so retrenchment can cause community pushback, an issue if the community is also a significant consumer of goods and services. Companies moving into new communities may cause disruption of the local economy with local businesses forced closed (Miczek, 2016). Where the company is known for paying low wages for both low-skill and high-skill jobs, resentment can brew (Goodman, 2019; Miczek, 2016). Infrastructure and environmental questions can also be critical for local communities (Mercer, 2103). The impact of local community and wider societal protest over corporate investment has become greater with protest movements such as Occupy, leading to calls for laws in Australia outlawing the use of boycott (Taylor, 2019). Employee Morale Many capital projects are linked to efficiencies, which in turn are often linked to automation leading to the loss of jobs. This can have a flow on effect to those employees remaining who may feel anxiety about the stability of their own employment, leading to illness

2 or to them seeking employment elsewhere. The link between employee morale and productivity has been widely studied and direct relationships have been shown again and again (Osho et al., 2006; Seppälä & Cameron, 2015; Straka, 1993) Environment Impact Choosing to move into environmentally sustainable production systems, products or accommodation has been seen as a significant burden, but as societal pressure grows, there is a need to balance profit and environment (Clarke et al., 1994; Martin & Dent, 2019) This may mean having to work with public relations to explain increases in price, manage competitors undercutting prices, or seeing clients walk away due to failure to meet their ethical standards. Pressure on mining and related companies in Australia has come under intense pressure over the last few years with companies choosing not to begin oil drilling the Great Australian Bight, despite having government approval, and power generation companies choosing to no longer invest in coal fired generation, despite having government support to do so(AAP, 2020; Carabott, 2018; Mercer, 2020). Overlap There are also overlaps between these three factors. For example, the installation of large solar and wind generated power systems in the mid north of South Australia have been plagued by all three. Wind powered turbine generator systems are often seen as detrimental to the local ecology while being beneficial to wider society, have been seen as the catalyst for closing of other power generating plants resulting in the loss of jobs, and due to both of these and the visual and auditory impact claimed by local residents have been fought by local communities. In contrast, farmers hosting these farms have seen the benefit of the projects as a revenue stabiliser during poor production years.

3 Decision making It is difficult to tell whether the decisions made in the above-mentioned cases are really a matter of business choosing to put ‘people before profits’ or whether it is a response to poor public relations. Did the qualitative factor win, or is there a bigger economic return to be made by investing in certain actions? Certainly Martin and Dent show that it is no longer the noneconomic decision to follow a ‘green’ path, and Daniel F. Larcker points out that US law, compared to European law, is written so that companies must focus on the primacy of the shareholder (Andrews, 2019; Martin & Dent, 2019). If this is true, there must be a profit somewhere for qualitative factors to have sway in capital budgeting.

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References AAP. (2020). Private investors won’t touch new Coalition-backed coal plant, Labor says. The Guardian. https://www.theguardian.com/australia-news/2020/feb/08/private-investors-wonttouch-new-coalition-backed-coal-plant-labor-says Andrews, E. L. (2019). People Before Profits: A New American Credo? Standford Graduate School of Business. https://www.gsb.stanford.edu/insights/people-profits-new-american-credo Carabott, M. (2018). Energy Australia says ‘No’ to any new investments in coal generation. Leading Edge Energy. https://www.leadingedgeenergy.com.au/news/coal-investments-energy-australia/ Clarke, R. A., Stavins, R. N., Greeno, J. L., Bavaria, J. L., Cairncross, F., Esty, D. C., Smart, B., Piet, J., Wells, R. P., Gray, R., Fischer, K., & Schot, J. (1994). The Challenge of Going Green. Harvard Business Review. https://hbr.org/1994/07/the-challenge-of-going-green Goodman, J. D. (2019, February 14). Amazon Pulls Out of Planned New York City Headquarters. The New York Times. https://www.nytimes.com/2019/02/14/nyregion/amazon-hq2-queens.html Martin, C., & Dent, M. (2019). Corporate America Has Found a Way to Turn a Profit Off Being Green. Bloomberg. https://www.bloomberg.com/news/articles/2019-09-20/corporate-america-issaving-the-world-by-saving-money Mercer, P. (2020). Great Australian Bight: Equinor abandons controversial oil drilling plans. BBC News. https://www.bbc.com/news/world-australia-51623764 Mercer, P. (2103). McDonald’s faces backlash in Tecoma, Australia. BBC News. https://www.bbc.com/news/business-24364204

5 Osho, G. S., Ashe, C., & Wickramatunge, J. (2006). Correlation of Morale , Productivity and Profit in Organizations Correlation of Morale , Productivity and Profit in Organizations. National Social Science Journal, 26(1), 108–115. Seppälä, E., & Cameron, K. (2015). Proof That Positive Work Cultures Are More Productive. Harvard Business Review. https://hbr.org/2015/12/proof-that-positive-work-cultures-are-more-productive Miczek, J. E. (2016). Small towns devastated after Wal-Mart Stores Inc decimates mom-and-pop shops, then packs up and leaves: “They ruined our lives.” Financial Post. https://business.financialpost.com/news/retail-marketing/small-towns-devastated-after-wal-martstores-inc-decimates-mom-and-pop-shops-then-packs-up-and-leaves-they-ruined-our-lives Straka, J. W. (1993). Is Poor Worker Morale Costly to Firms? ILR Review, 46(2), 381–394. https://doi.org/10.1177/001979399304600211 Taylor, A. (2019). Australia’s prime minister pledges to outlaw climate boycotts, arguing they threaten the economy. The Washington Post. https://www.washingtonpost.com/world/2019/11/01/australias-prime-minister-pledges-outlawclimate-boycotts-arguing-they-threaten-economy/...