Industrial Conflict

In Britain, the number of working days lost through strikes in 1994 was

the lowest since records began in 1891, As the Study Points have shown,

there has been a similar trend throughout the west. It has been caused

in part by economic insecurity, flexible working, a shortage of full-time

jobs and, in Britain, new laws which make it more difficult to strike.

Strikes are the workers’ most powerful, and final, weapon. A firm suf-

fers great losses because it cannot produce any goods or services. How-

ever, the workers also lose, as they receive only I a few pounds a week

in strike pay from their union. To lessen the effects on their members,

unions sometimes call a short strike lasting only a few days.

In addition to strikes, workers can also; take other industrial action.

The three main kinds are:

 Non-co-operation. The workers may boycott, or refuse to have any-

thing, to do with, a new working practice of which they do not approve.

For example, a new method of keeping records may have been intro-

duced without prior talks with the unions. The workers may refuse to

operate the new system.

 Working to rule. There are official rules in workplaces about the

conditions and terms of employment. For example, they may specify

all the parts that should be checked before a machine is used or all the

protective clothing that should be worn for a particular job. In practice,

some of these rules are often ignored in the interests of greater speed

and efficiency. However, when there is a work to rule, or go slow, all the

rules will be strictly observed. As a result, the jobs take I much longer and

productivity falls. Shop stewards may take every single complaint and

grievance to management, which he or she would previously have settled

on the spot. As a result, management time is wasted.

 Overtime ban. Workers may refuse to work beyond the normal hours.

Firms that rely heavily on overtime working to keep to their produc-

tion schedules will be affected. The workers are also affected as they lose

valuable overtime pay.

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Employers can also take industrial action against the work force.

Some of their main actions are:

 Closer work supervision. Managers can supervise, or examine, em-

ployees’ work more closely and point out the faults.

 Pay freeze. Employers can say that costs have to be cut and, there-

fore, wages and/or salaries will have to be frozen at their present level for

a period of six months or a year.

 Derecognize union. Employers can refuse to talk to a union unless

over 50 per cent of employees are members.

 Lock-outs. Employers lock the work place gates or doors to prevent

employees entering and stop paying them wages. A lock-out also harms

employers as they have to go on paying their overheads and may lose

orders and damage the image of the firm.

Factory or office closure. The employers’ final weapon is to close a

factory or an office with a long record of conflict. However, the employ-

ers may then face a large redundancy bill.

Many disputes are settled peacefully by management and unions. If

they cannot settle the dispute themselves, they may call in the Advisory,

Conciliation and Arbitration Service (ACAS). This independent body

was set up during the great industrial disputes of the 1970s. Some of its

main functions are:

 To settle disputes between unions and employers by conciliation.

 To refer unsettled disputes to arbitration with the agreement of all

the parties involved.

 To advise both sides of industry on ways of improving industrial

relations.

CAS has an excellent record in settling disputes. In recent years, it

has not had to deal with so many industrial conflicts, owing to the great

decline in both collective bargaining and trade union actions. The num-

ber of individual conciliation cases, however, has increased greatly from

about 50,000 in 1986 to over 90,000 in 1995. About half of them con-

cerned allegations of unfair dismissal.

About 70 per cent of the cases were withdrawn or settled through

ACAS conciliation.

Text 5

Employees’ Rights

Employers cannot treat their employees in any way they like. There

are dozens of laws protecting employees` rights. If employers break these

laws they can be taken before an industrial tribunal, which can award the

employee thousands of pounds’ compensation.

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Some of the things an employer must do are:

 Provide employees with a written statement of employment within

two months of starting work, unless they will be employed for less than

a month. The statement should include:

– the employer’s name

– the employee’s name

– the date employment began

– the amount of pay and the intervals between payments

– hours of work

– holiday entitlement

– sick-leave arrangements

– pension arrangements

– length of notice for ending employment

– job title or brief description

– if not a permanent job, the period for which employment expected

to last

– the place of work

– details of disciplinary and grievance procedures

Provide an itemized pay statement showing gross and net pay, statu-

tory deductions for income tax and national insurance, and any pension

contributions and voluntary deductions.

Give men and women equal pay if they are doing the same work or

work of equal value. Give Statutory Sick Pay (SSP) to an employee who

has been off sick for four or more days in a row for up to 28 weeks.

Give guarantee payments of up to Ј14.10 a day to employees who are laid

off through shortage of work, for up to five days in a three-month period.

Give women 14 weeks’ unpaid maternity leave regardless of length

of employment or hours of work. Give women who have worked for the

business for two years Statutory Maternity Pay (SMP) of 90 per cent

of their weekly earnings for the first six weeks and, at the time of writ-

ing, Ј52.50 a week for the remaining 12 weeks. These payments must be

made even if the woman is not returning to her job. Provide a written

statement of reasons for dismissal. Employees are entitled to receive at

least one week’s notice (or pay instead) after one month’s employment

and a maximum of 12 weeks’ pay for 12 years of employment or more.

Give redundancy pay to employees with at least two years’ service. This

ranges, according to age, from half a week’s to one and a half weeks’ pay

for each year of employment, up to a maximum of 20 years. Observe

the Health and Safety Regulations of 1993, based on a European Union

(EU) law, which makes it compulsory for employers to treat health and

safety as seriously as any other aspect of their business by assessing risk

and taking suitable action. The regulations include most of the provi-

sions of the Health and Safety Act of 1974.

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 Give part-time workers the same employment rights as full-time

workers.

 Treat disabled workers no less favourably than other workers under

the Disability Discrimination Act of 1995. This applies only to business-

es employing 20 people or more.

An employer must not:

 Discriminate against employees because of their race (see Unit 74).

 Make deductions from pay, except in a few cases allowed by law or

by a contract of employment or when an employee has given written con

sent, e.g. for trade union subscriptions or National Savings.

 Stop an employee from joining a trade union or dismiss an em-

ployee for belonging to a union.

 Stop an employee taking time off for public duties, e.g. as a magis-

trate or as a member of a local council.

 Employ children under 13 years of age, except in some family busi-

nesses.

 Dismiss a woman because she is pregnant.

 Dismiss an employee for refusing to work on Sundays.

 Dismiss an employee unfairly.

The main reasons for which an employer can dismiss an employee are:

 misconduct

 inability to do the job

 redundancy, if the employee’s labour is no longer needed.

If the dismissal was for misconduct, the employee must know that

he or she was committing an offence, and a warning has to be given so

that the employee has a chance to put a case, or to put right his or her

behaviour. If it was for inability to do the job, it must be shown that ad-

equate training and supervision were provided and that a more suitable

job was offered instead. If it was for redundancy, the employer needs to

show that he or she gave as much notice as possible and that the method

of selection was fair.

Unit 6

WOMEN IN BUSINESS

Text 1

Sex Discrimination in Japan

The management techniques of Japanese business firms are admired

around the world – yet more than 70 percent of these companies refuse

to accept applications from female college graduates. According Japan’s

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labor ministry, less than 20 percent of the nation’s businesses offer men

and women equal opportunities on the job. Overall, women hold only

6.2 percent of all executive positions in Japanese companies.

Japan’s 22 million working women represent 40 percent of the I

country’s paid labor force; however, women account for only 6.4 per-

cent of the nation’s scientists, 2.4 percent of its engineers, and 9 percent

of its lawyers. Women’s wages average only about half as much as men’s,

in good part because most women are restricted to traditionally female

(and lesser-paying) occupations such as teaching and clerical work.

Akiko, a 23-year-old office worker at a trading company, is fairly typical

of Japanese women in the work force. Like most female college gradu-

ates, she serves as an assistant to the men in her office, bringing them tea

and handling their errands.

These work patterns must be viewed in the context of a culture that

regards women’s place – especially married women’s place – as being

in the home. In a 2000 survey of Japanese women 20 to 59 years old,

only 17 percent felt that the desirable lifestyle for women was to work

indefinitely. Most respondents (55 percent) favored “withdrawing into

home life” and reentering the labor force at some later time (ideally on

a part-time basis).

Despite the continuing importance of traditional gender-role so-

cialization, Japan has been influenced by the international movement

for women’s rights. In 2001, after seven years of public debate, Japan’s

parliament—at the time, about 97 percent male— passed an Equal Em-

ployment Bill which would encourage employers to end sex discrimina-

tion in hiring, assignment, and promotion policies. One key target of

the new law was severe restrictions on overtime and late-night work by

women; these restrictions have prevented many women from entering

or advancing in their chosen occupations. However, Japanese feminist

groups remain dissatisfied because the Equal Employment Bill merely

requires employers to ‘endeavor’ to achieve sexual equality and lacks

strong sanctions to prevent continued discrimination against women.

Text 2

Sexual Harassment

Sexual harassment – the demand that someone respond to or tole-

rate unwanted sexual advances from a person who has power over the

victim – made headlines in 1991 during the Senate hearings on Presi-

dent George Bush’s appointment of Clarence Thomas to the Supreme

Court. In the course of the hearings, Anita Hill, a law professor, accused

Judge Thomas of having sexually harassed her when she worked on his

305

start. He had persistently asked her for dates, she said, and made of-

fensive sexual comments when she refused. Thomas denied the accusa-

tions and was eventually confirmed as a Supreme Court justice. We will

probably never know for sure who was telling the truth. But what scan-

dalized many women was the fact that the Senate Judiciary Commit-

tee evaluating Judge Thomas’s appointment initially ignored the charge

of sexual harassment. The public learned of Professor Hill’s accusation

only because it was leaked to the press; the all-male Senate committee

apparently saw the issue as insignificant.

Several themes illustrating the key sociological concepts came to-

gether in the Hill–Thomas episode. First of all, the social structure of

the Senate was (and is) extremely unbalanced in gender terms: Of 100

senators in 1991, only two were women. Second, in part because of this

social structure, women lacked the power to insist that issues important

to them be taken seriously. This is part of a broader cultural pattern in

which male harassment of women is not treated as a major problem.

Indeed, women are reluctant to report instances of harassment; existing

patterns of functional integration fail to offer procedures for responding

to women’s complaints. In addition, functional links between school and

workplace, and between one workplace and another, discourage women

from speaking out when to do so would mean losing a valuable work rec-

ommendation. When faced with reports of harassment, it is functional

for men in positions of power to ignore comparatively powerless women.

One result of the Thomas hearings was to make many women resolve to

take political action to make sure that their voices were heard, that more

women were elected to Congress, and that men would take seriously the

hardship that sexual harassment causes women.

Sexual harassment is a particular problem in workplaces and in re-

lationships of unequal power. It takes place because men (harassers are

usually, though not always, men) abuse their power, and because our

culture denies that this is serious—suggesting in effect that “boys will be

boys.” Sexual harassment can be limited to sexual jokes in a classroom

or on the job that make women feel uncomfortable. It is more serious

when a woman’s professor or boss or co-worker makes a sexual advance,

especially when the woman has clearly indicated that such attentions are

unwelcome. It is extremely serious when a woman’s refusal of a sexual

advance results in punitive treatment or denial of a promotion. This is

also illegal, although male-dominated judges and grievance committees

have been slow to enforce the law.

Sexual harassment causes difficulties not just when women who reject

sexual advances are penalized, but whenever women work in an atmo-

sphere where they fear they must either tolerate harassment or lose their

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jobs. Harassment illustrates the fears – small and large – that women

in our society are forced to live with because of the unequal power re-

lationship between men and women. The Hill–Thomas case suggests

that women’s fear of speaking out is realistic, given the gender inequality

built into the social structure.

Sexual harassment is not as extreme a crime as rape, but the underly-

ing problems are similar. Both are products of a culture that encourages

male sexual aggressiveness, and both have been dismissed by the “powers

that be” because of the comparative powerlessness of women. It is still dif-

ficult, for example, to get date rape (forced sexual intercourse with a per-

son the victim went out with voluntarily) taken seriously as a crime. Men,

who have the power through the legal system to define what constitutes

rape, typically consider this sort of assault trivial or even blame the victim

for having provoked it. In one famous case of date rape, the boxer Mike

Tyson was convicted of raping a contestant in the Miss Black America

beauty pageant. In an echo of the Hill–Thomas case, thousands of Afri-

can-American church women were startled to hear the head of their reli-

gious denomination say that Tyson should be given a light sentence or set

free – and some other ministers backed him up. As the women noted,

all the ministers were male. Even though women were a majority of the

church members, the men dominated the leadership of the church.

Text 3

Combining Career and Family

In describing their future family life, however, both sexes tend to follow

traditional gender roles. When asked whose job comes first, most say the

husband’s does. Both sexes are unanimous in declaring that primary care

of children is the wife’s job. Although young women hope their husband

will share household chores equally, most young men express only willing-

ness to ‘help’ – a word that implies, not taking their share of the responsi-

bility, but assisting with tasks that are really the wife’s responsibility.

Although both sexes anticipate having careers, males and females

hold different attitudes toward work. Male students see their future in

terms of a steady line of work and achievement. Most have clear ideas

about where they want to go and how to get there. They expect to work

for the rest of their lives and to be the main providers for their fami-

lies, even if their wife works. By comparison, women seem tentative and

vague about their career goals. They want to work, but see their career

plans as depending on the needs of their husband and children. They

expect their careers to be interrupted or even halted at various times.

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In short, neither sex anticipates a symmetrical marriage in which

husband and wife assume equal responsibility for supporting the family

and raising the children. If compromises need to be made, both sexes

assume that the wife will sacrifice her career for the family (and the hus-

band his family life for his career). Given the fact that women usually

earn less than men and that the workplace is not structured to accom-

modate family commitments, these expectations may be realistic.

The American workplace is not designed for people who want to make

equal commitments to their family and their job. The law does not guar-

antee American women maternity leave, and very few companies offer

men paternity leave though one of the first bills that President Bill Clinton

signed into law required large companies to offer their workers unpaid

leave for births, adoptions, and family emergencies. Although more than

half the mothers of small children work, few employers provide any form

of child-care assistance (such as on-site day care or allowances for baby-

sitters). The federal government’s support for day care has been minimal.

Because caring for children is still seen as women’s work, the burden of

trying to balance work and parenthood falls on women. Our culture still ex-

pects men to be part-time parents, just filling in for Mom now and then.

There are alternatives. In Sweden, where nine out of ten women ages

twenty-five to thirty-four work, the government provides public day care

for all children. Parents of either sex who choose to stay home with a

newborn or newly adopted baby are guaranteed eighteen months’ leave,

receive social security payments corresponding to their current salary,

and must be given their old jobs back when their leave ends. The govern-

ment also requires employers to allow parents time off to care for a sick

child and the option of part-time work while children are preschoolers.

Either parent may take advantage of these programs, or mothers and fa-

thers may take turns. Of all the industrial nations, only the United States

and South Africa do not provide new parents with some form of support.

But the structure of the workplace does not tell the full story; cultural

forces also come into play. Even in Sweden, few men take advantage of

paternity leave, and those who do often are ridiculed by their co-work-

ers. As a result, most women today hold two full-time jobs, one at the

workplace and one at home.

The sociologist Arlie Hochschild characterizes the state of gender

relations in America today as a ‘stalled revolution.’ The work force has

changed, women have changed, but most workplaces and many men

have not changed in response.

The most visible sign of the stalled revolution is the phenomenon that

has come to be known as women’s “second shift.” Growing numbers of

women work an eight-hour shift at their jobs and then put in another full

shift at home, cooking, cleaning, and caring for children. From her own

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research and other time-use studies, Hochschild calculates that work-

ing women do fifteen more hours of work a week than their husbands

do. This adds up to an extra month of twenty-four-hour days each year.

Even when husbands are willing to put in as much time on child care

and housework, women feel more responsible for the functioning of the

family and the home. Women are the ones who keep track of doctor

appointments, arrange for children’s visits with friends, and call from

work to check on the baby-sitter. Women do more of the daily jobs, like

cooking and cleaning up, that lock them into fixed routines. Men take

care of the car, the yard, and household repairs – nonroutine chores that

are less frequent and often can be done whenever time permits. Most of

the time men spend working at home is devoted to the children, not the

laundry. Moreover, men are more likely to do ‘fun’ things with the child-

ren (such as trips to the zoo), while women more often perform such

routine child-care tasks as feeding and bathing. Just as there is a wage

gap in the workplace, so there is a ‘leisure gap’ at home. Husbands sleep

longer and have more time to watch TV or pursue hobbies. Wives talk

about sleep ‘the way a hungry person talks about food’

Hochschild suggests that women give in to their husbands on the

“second-shift” issue because they are locked into marriage in a way that

men are not. For one thing, women earn less than men and so have more

of an economic need for marriage. For another, marriage is less stable

than it used to be, and divorce is more economically damaging to women

than to men. To make matters worse, many divorced mothers receive little

emotional or other support from traditionally minded friends and relatives.

Hochschild sees the ‘stalled revolution’ as the result of colliding so-

cial forces. On the one hand, new economic opportunities and needs

have drawn women into the work force, which puts pressure on men to

share the second shift. On the other hand, the wage gap between men

and women and the high rate of divorce lead women to hold on to their

marriages—and men to hold out on sharing housework. Hochschild sug-

gests that many modern women feel doubly oppressed by men, not only

on the first shift (where the boss is male, privileged, and better paid than

they are) but also on the second shift (where husbands opt out).

Text 4

Pay Equity

What can be done to close the gap between the earnings of women and

men? In the 1980s, pay equity—also known as comparable worth – has

emerged as a controversial solution in the effort to alleviate the second-

class status of women within the paid labor force of the United States.

309

Pay equity calls for equal pay for different types of work judged to be

comparable through measurement of such factors as employee knowled-

ge, skills, effort, responsibility, and working conditions. Pay equity goes

beyond the idea of “equal pay for equal work” by encouraging equal pay

for different (but comparable) work.

Theoretically, this doctrine sounds straightforward, but it is not so

simple to effect. How exactly does one compare jobs in order to deter-

mine standards of equtable pay? Should a zookeeper be paid more than

a child care worker? Does our society pay zookeepers more because we

value caretaking for animals more than caretaking for children? Or do

zookeepers earn more than child care workers because the former tend

to be male while the latter are generally female?

Women’s work is undervalued and underpaid in American society.

From a conflict perspective, women earn low wages because they labor

within a tradition that treats them as temporary and supplementary wor-

kers, devalues women’s work, and views low wages as sufficient for female

workers. Efforts to address the issue of wage discrimination have resulted

in legislation and increased public awareness, yet women’s salaries remain

far lower than those of men. The federal Equal Pay Act of 1963, which

mandates equal pay for equal work, applies to a relatively small proportion

of female workers: those who perform the same job under the same roof as

male coworkers. Although these women’s wages have increased as a result

of the Equal Pay Act, most female workers remain segregated in a few

occupations in which there are no male workers doing the same jobs with

whom these underpaid women might compare themselves.

In some instances, pay inequity is difficult to defend. For example, in

Arlington County, Virginia, entry-level gardeners working for the county

must have a high school diploma and one year’s experience before be-

ing hired. They earn $13,927 per year to start. By contrast, the posi-

tion of entry-level Library Assistant I requires two years of college or

two years of library experience, yet the pay is only $12,598 per year. Of

the entry-level librarians, 93.4 percent are female, while 87.5 percent of

the gardeners are male. Such data are cited by advocates of comparable

worth, who insist that we need a more equitable way of evaluating jobs to

determine their value.

Although sex discrimination is one obvious explanation for the lack

of pay equity, other explanations are possible. Employers commonly cite

the influence of labor market supply and demand on wages in various

occupations. ‘You can’t measure productivity of jobs or the intrinsic

worth of a job,’ argues Owen Johnson of Continental Bank. ‘Women are

disproportionately found in relatively few jobs in our society, and there

is an oversupply of women in certain occupations. This oversupply typi-

cally results in low wages.’ Johnson’s comment appears questionable,

310

however, in view of a labor-market phenomenon evident in the nursing

profession. Thousands of nurses are leaving the field because of low pay;

yet, in response to this shortage, wages have not been increased. Instead,

a general reduction in nursing services has followed, and some institu-

tions have hired nurses from outside the United States who will accept

lower wages.

Thus far, the courts have generally been reluctant to address the is-

sue of pay equity. However, in late 1983, federal district court judge Jack

Tanner held that the state of Washington had violated the 1964 Civil

Rights Act through inequitable treatment of its female employees and

ordered the state to pay $838 million in raises and retroactive compensa-

tion to these women. This ruling was overturned in 1985, as an appeals

court determined that an employer can follow prevailing market wages

in setting salaries—even if these wages underpay women. In 1986, the

state decided to avoid further appeals by settling the case for $482 mil-

lion in damages. As part of the settlement, the worth of different jobs will

now be measured in terms of skill, training, education, responsibility,

and other factors.

In 1985, the U.S. Commission on Civil Rights took up the issue of

comparable worth. By a vote of 5-2, the commissioners held that ‘com-

parable worth, as a theory of discrimination, or as a remedy for discrimi-

nation, is profoundly and irretrievably flawed.’ The chairman, Clarence

M. Pendleton, Jr., inflamed the controversy by stating that comparable

worth was the ‘looniest idea since Looney Tunes.’ Nevertheless, the ma-

jority of the Civil Rights Commission acknowledged that sex-based wage

discrimination is a serious matter. As a remedy, they called for strict en-

forcement of the Equal Pay Act of 1963 and federal civil rights acts to

prohibit employment discrimination against women.

Many public employers, including the states of New York and New

Jersey, have developed voluntary plans to put pay equity policies into

effect. In a key development in 1985, the city of Los Angeles embraced

the idea of equal pay for city jobs ‘of comparable worth,’ a decision that

Mayor Tom Bradley called a ‘historic step.’ The city accepted a union

contract that gave 10 to 15 percent raises to 3900 clerks and librarians—

most of them women—to bring their salaries to the level of those of

maintenance workers, gardeners, and other city workers in male-domi-

nated classifications. Mayor Bradley commented that, through the city’s

action, ‘we will send a message to all cities across this country’

The issue of pay equity is just beginning to gain pub attention. In a

2003 national survey, only one-fourth of respondents stated that they

had heard a ‘fair amount’ or a ‘great deal’ about pay equity or compa-

rable worth. Most Americans believe that women and men should be

311

paid equally for jobs of comparable worth. At the same time, two-thirds

of respondents in the survey agreed that it is too difficult—and therefore

unfair—to compare and evaluate jobs that are quite different (such as

secretary and electrician) to see if they deserve similar compensation. In

any event, the American people will surely be hearing much more about

this controversial concept. According to a survey released by the National

Committee on Pay Equity, more than 1500 local governments and school

districts in 24 states have taken steps to address the issue of pay equity.

Text 5

Equality for Women – Sweden Shows How

It is easy to pay lip service to the idea of equality for women but in

practice this is often difficult to achieve. People’s attitudes do not change

overnight, and it takes time, as well as education and example, to remove

prejudice. In many countries women still have great difficulty entering

such professions as medicine and law, while the idea of woman truck-

driver or race-horse jockey would be unthinkable.

In Sweden, however, equality of the sexes has been carried far. One

reason for this is that there has been a shortage of labor in the country.

Unemployment has been low, the population has remained static, so

new jobs have had to be filled by women. Nowadays women comprise

about 40 per cent of the working population – a high percentage com-

pared with other countries. A second reason is that positive measures, in

the form of government action, education and propaganda, have been

used to bring about greater equality for women.

Campaigners for women’s rights argued convincingly that there were

two labour markets in Sweden, one for men and one for women. They

stressed that women were mainly gathered in the office, carrying and

service sectors of the economy.

Those sympathetic to women’s rights considered that the problem

was to persuade more women to work and, more specifically, to get

women to undertake traditionally masculine jobs.

The first significant step in Sweden was taken when women priests

were accepted in the official Lutheran church. Some years later another

step was taken. The principle of equal pay was recognized in a binding

agreement between trade unions and employers.

Then separate taxation for a husband and wife was allowed. This cre-

ated an incentive for women to go out to work. A scheme of ‘parents’ in-

surance was brought in. During the first seven months after the birth of a

child, either parent could stay away from work, and still collect about 90

per cent of normal pay. The idea was to encourage husbands to take part

312

of this time off. They would then develop closer contact with their chil-

dren, so it was thought, and take a more active role in child care later on.

Another related benefit was that parents of young children could take off

ten days each year to look after them if they were sick.

The most far-reaching measures were directed at tempting, even

pushing, women into traditionally masculine jobs. The purpose of this

is not only to produce more female lumberjacks, for example, but also

more male textile workers; also, employers who provide in-service train-

ing for workers in jobs normally held by the opposite sex get a subsidy

towards the cost of their wages. Local employment offices throughout

the country have taken on extra staff specializing in the problems of

women’s employment. Part of their brief is to ‘prevail upon employers

and job seekers to take an unconventional attitude’ about appropriate

work for their sex.

One programme in particular has attracted international interest.

A pilot scheme was introduced, in six of Sweden’s twenty-four coun-

tries, to persuade women to take on ‘masculine’ jobs. Areas were chosen

where there was a shortage of labour and many unemployed women. In-

vitations were sent out to all women in these areas, and those interested

in working were invited to attend an information day at chosen compa-

nies. They were thus given an opportunity to study the manufacturing

processes of the local industries. Next, they registered for a four-week

course consisting of practical orientation in a certain type of work. At

the end of this period many stayed on and were hired by the company.

This experimental programme proved highly successful. It was ex-

tended to other counties. It produced women painters, electricians’ ap-

prentices, lathe operators, even foundry workers.

Other measures are in the pipeline. It has been suggested that widows’

pensions should be abolished. Alimony payments have been reduced, on

the principle that a woman ought to go out and support herself rather

than depend on her former husband.

Of course, some problems have arisen. When a wife works a morning

shift and her husband an afternoon shift, then they may only really see

each other at weekends. Also, many husbands are still reluctant to do

their share of household chores even though their wives have full-time

jobs. Life can be tough in Sweden for the working woman.

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PART I

Unit 1

MANAGEMENT

Text 1

Douglas McGregor – Theory X & Theory Y

In 1960 Douglas McGregor defined contrasting assumptions about

the nature of humans in the work place. These assumptions are the basis

of Theory X and Theory Y.

Theory X. Theory X basically holds the belief that people do not like

work and that some kind of direct pressure and control must be exerted

to get them to work effectively. These people require a rigidly managed

environment, usually requiring threats of disciplinary action as a prima-

ry source of motivation. It is also held that employees will only respond

to monetary rewards as an incentive to perform above the level of that

which is expected. From a management point of view, autocratic (The-

ory X) managers like to retain most of their authority. They make deci-

sions on their own and inform the workers, assuming that they will carry

out the instructions. Autocratic managers are often called “authorita-

tive” for this reason; they act as “authorities”. This type of managers is

highly task oriented, placing a great deal of concern towards getting the

job done, with little concern about workers’ attitudes towards manager’s

decision. This show that autocratic managers lose ground in the work

place, making way for leaders who share more authority and decision

making with other members of the group.

Theory Y. A more popular view of the relationship found in the work

place between managers and workers, is explained in the concepts of

Theory Y. This theory assumes that people are creative and eager to

work. Workers tend to desire more responsibility than Theory X workers,

and have strong desires to participate in the decision making process.

Theory Y workers are comfortable in a working environment which al-

lows creativity and the opportunity to become personally involved in or-

ganizational planning. Theory Y workers are emphasizes to be far more

prevalent in the work place than are Theory X workers. For instance, it

is pointed out that ingenuity, creativity and imagination are increasingly

present throughout the ranks of the working population These people

not only accept responsibility, but actively seek increased authority.

William Ouchi – Theory Z. Another theory which has emerged, and

deals with the way in which workers are perceived by managers, as well

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as how managers are perceived by workers, is William Ouchi’s Theory Z.

Often referred to as the “Japanese” management style, Theory Z of-

fers the notion of a hybrid management style which is a combination of

a strict American management style (Theory A) and a strict Japanese

management style (Theory J). This theory speaks of an organizational

culture which mirrors the Japanese culture in which workers are more

participative, and capable of performing many and varied tasks. Theory

Z emphasizes thing such as job rotation, broadening of skills, general-

ization versus specialization, and the need for continuous training of

workers.

Much like McGregor’s theories, Ouchi’s Theory Z makes certain as-

sumptions about workers. Some of the assumptions about workers under

this theory include the notion that workers tend to want to build co-op-

erative and intimate working relationships with those they work for and

with, as well as the people that work for them. Also Theory Z workers

have a high need to be supported by the company, and highly value a

working environment in which such things as family, cultures add tradi-

tions, and social institutions are regarded as equally important as the

work itself. Finally, Theory Z workers, it is assumed, can be trusted to do

their jobs to their utmost ability, so long as management can be trusted

to support them and look out for their wellbeing.

Text 2

Managing Conflict

Conflict is an inevitable by-product of interpersonal dealings. This

is particularly true of work groups because they generally are expedi-

ently assembled collections of individuals with differing backgrounds,

perceptions, attitudes and values. Conflict, as defined by an expert in the

field, “refers to all kinds of opposition or antagonistic interaction. It is

based on scarcity of power, resources or social position, and differing

value structures”. But one should be careful not to assume that all con-

flict is bad. Conflict has two faces, one functional (or constructive) and

the other dysfunctional (or destructive). “Constructive conflict is both

valuable and necessary. Without conflict, there would be few new chal-

lenges; there would be no stimulation to think through ideas; organiza-

tions would be only apathetic and stagnant”.

Conflict triggers. A conflict trigger is a circumstance that increases the

chances of intergroup or interpersonal conflict. It can stimulate either

functional or dysfunctional conflict. As long as a conflict trigger ap-

pears to stimulate constructive conflict, it can be allowed to continue.

But as soon as the symptoms of destructive conflict become apparent,

315

steps should be taken to remove or correct the offending conflict trigger.

Major conflict triggers include: ambiguous overlapping jurisdictions; com-

petition for scarce resources; communication breakdowns; time pressure;

unreasonable standards, rules. Policies, or procedures; personality clashes;

status differentials; unrealized expectations.

Resolving conflict. Even the best managers sometimes find themselves

in the middle of dysfunctional conflict, whether it is due to inattention or

to circumstances beyond their control. In these situations, one or more

of the following conflict resolution techniques may be appropriate.

Problem solving. When conflicting parties take the time to identify

and correct the source of their conflict, they are engaging in problem

solving. This approach is based on the assumption that causes must be

rooted out and attacked if anything is really to change. The major short-

coming of the problem-solving approach is that it takes time, but the

investment of extra time can pay off handsomely when the problem is

corrected instead of ignored.

Superordinate goals. “Superordinate goals are highly valued, unat-

tainable by any one group (or individual) alone, and commonly sought”.

When a manager relies on superordinate goals to resolve dysfunctional

conflict, he or she brings the conflicting parties together and, in effect

says, “Look, we’re all in this together. Let’s forget our differences so we

can get the job done”. Although this technique often works in the short

run, the underlying problem totally crops up later to cause friction once

again.

Compromise. This technique generally appeals to those living in

a democracy. Proponents of this approach claim that everybody wins

because it is based on negotiation, or give, or take. But everyone loses

something in a compromise. Something must be given up if anything is

to be gained. Like problem solving, compromise takes time that man-

agement may or may not be able to afford. But, unlike problem solving,

the problem is worked around rather than solved.

Forcing. Sometimes, especially when time is important, management

must simply step into a conflict and order the conflicting parties to han-

dle the situation in a certain manner. Reliance on formal authority and

power of superior position are at the heart of forcing. Forcing does not

resolve the personal conflict and, in fact, may serve to compound it by

hurting feelings and/or fostering resentment and mistrust.

Smoothing. A manager who relies on smoothing, says to the conflict-

ing parties something like “Settle down. Don’t rock the boat. Things

will work out themselves”. This approach may tone down conflict in the

short run, but it doesn’t solve the underlying problem. As with the each

other conflict resolution techniques, smoothing has its place. It can be

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useful when management is attempting to hold things together until a

critical project is completed or when there is no time for problem solving

or compromise and forcing is deemed inappropriate.

Text 3

Selecting Employees

Selection is the process of collecting systematic information about

applicants and using that information to decide which applicant to hire.

The major purpose of various devices of selection – application form,

interviews, testing, and reference checking – is to gather information

about the applicants’ job related skills. A very important principle of the

questions should reflect the activities of the job to be filled.

The application. Traditional application forms ask information about

educational and work history, avocational interests, and honors. How-

ever, such forms have limitations. In the majority of cases, they have

limited space, so the applicant can supply only basic information such as

the manes of schools attended, major, dated of attendance, and previous

job titles and dates of employment. A second limitation is that a large

percentage of respondents falsify the information that they report. Such

falsification is easy because often all that is requested is brief information

such as job title and major.

One device that has been used successfully is a training and experience

form, which presents a small number, for example five, of the important

tasks of the job. The form asks applicants to indicate whether they have

ever performed or been trained in each of the activities. If they answer

yes, they are then asked to describe briefly how to perform the activity.

The interview. The interview is, perhaps, the most often used selec-

tion device. The purpose of the interview is to allow at least one mem-

ber of the organization to interact with each applicant and assess that

applicant’s job-related KSAs (key selection areas). Two aspects of the

interview format are especially important. First, the interview should be

structured, meaning that the interviewer asks the same set of job-related

questions of each candidate. This ensures that the interviewer gathers

full information from each applicant, and it makes comparisons among

applicants easier because they all are evaluated on the same character-

istics. The second aspect of the format is the nature of the questions.

Questions about job-related behaviors have proven to be quite useful.

The idea behind them is that gathering information about behaviors that

are performed on the job is useful in making selection decision. The in-

terviewer must evaluate the accuracy and completeness of the response.

317

Tests. Many organizations use tests during the selection process to

identify those applicants who have the specific KSAs needed for the

available position. Human resource managers can use many kinds of

tests. The most common are the following:

Ability tests are paper-and-pencil quizzes, usually multiple choice,

that measure an applicant’s knowledge of specific work content or cog-

nitive ability.

Performance or work-sample tests verify an applicant’s ability to per-

form actual job behaviors identified from a job analysis. Perhaps the old-

est example is a typing test.

Assessment center tests are programs that typically simulate manageri-

al tasks. One of the most often used simulations is the In-Basket, which

simulates 20 to 30 office memos, complete with an organizational chart

and relevant company policy statement.

Integrity tests measure an applicant’s attitudes and opinions about

dysfunctional behaviors such as theft, sabotage, physical abuse, and sub-

stance abuse. Companies usually use paper-and-pencil, multiple choice

tests that ask about the applicant’s thoughts and reactions to a number

of illegal or unethical situations.

Personality inventories measure the thoughts, feeling and behavior

that define an individual and determine that person’s pattern of interac-

tion with the environment. Two general types of personality tests have

been used in selection. One is a multiple-choice questionnaire. The

second type of personality tests is the projective test, which asks an ap-

plicant to write a story about ambiguous pictures or to finish partially

completed sentences.

Physical examinations test individuals for placement in manually and

physically demanding jobs.

Reference checks. A company considering hiring a particular appli-

cant often contacts previous employers or others who know him or her

well to verify the information previously obtained. Reference checks can

be handled in three ways. The first, and most often used, is through tele-

phone conversations, in which previous supervisors of the applicant are

contacted. Other ways include in-person visits and mail inquiries. The

organization may also obtain reference information from investigative

agencies, credit bureaus, and public documents.

318

Unit 2

MARKETING

Text 1

Why Segment Markets?

Henry Ford made history with his decision to mass produce the

Model T Ford ad a very low price for the mass market. His famous quip,

“The can have any color it wants, as long as it’s black!” clearly illus-

trated his marketing philosophy. A wise choice at the time, but for long.

Other manufacturers, notably General Motors, began producing cars in

a variety of price levels, styles, brands and colors, believing that the auto

market was becoming bigger and more affluent – a segmented market.

They were right. GM built a market lead over Ford that it has never re-

linquished.

Today, most firms pursue a market segmentation strategy. In fact, it is

probably safe to say that market segmentation is one of the most visible

features of the affluent society. As people increase their wealth and lei-

sure time, they become able to enjoy a much greater variety of life-styles,

and the many different products and services that go with them.

In short, market segmentation is popular because it often plays off in

higher sales and profits. By designing specific products for different cus-

tomer groups, the firm can more closely match the needs of its different

target customers. This offers the firm some protection from competitors

who are not as closely matched to these segments’ needs. Market seg-

mentation bring other related benefits, too. It keeps the firm tuned more

closely to the market and alert to new opportunities. And it encourages

higher management efficiency in using the firms resources.

Logically, the concept of a market segment can be extended to the

needs of individual customers or firms. In fact, the term “custom-made”

refers to just this idea – creating a product or service to the specifica-

tion of a particular customer. Since customized products and services

are more costly to produce than standardized products, the total market

that can afford to be individually served is very small. Even segmenting

to larger groups can be extremely expensive.

Firms also must guard against creating too many different products or

excessive or frivolous product features beyond those desired by enough

customers.

Whether markets are uniform or segmented, they usually are too large

for a single organization to serve effectively with its limited resources.

Therefore firms select certain target markets from the segments it has

319

identified. Marketing mix strategies are then developed to match these

target market needs and also the objectives and resources of the firm.

Text 2

Organising For Nondomestic Marketing

Two dimensions of organizing are important to the international

marketing manager. The first concerns the way the firm is organized for

entry into its nondomestic markets and the second deals with how the

firm is organized internally to achieve its marketing objectives. In do-

mestic marketing the entry question does not exist and one is immedi-

ately concerned with the structuring of the marketing activities within

the firm’s organizational chart.

Entry alternatives. Basically, firms may enter an overseas market with

varying degrees of decision-making control over their total operations,

including their marketing efforts. The firm that enters an overseas mar-

ket by establishing a wholly owned subsidiary or by having over 50% eq-

uity obviously has the greater degree of decision-making control.

When a firm is exporting to a market, it potentially has no say on how

its product or service is to be marketed, although in practice it can dis-

continue exporting through an uncooperative middleman. Similarly, by

licensing the production of its product, the firm has only those decision-

making controls that are established in the original agreement. These

generally relate to quality control and the territory covered. In either in-

stance (exporting or licensing), the international marketing manager has

limited control over the marketing techniques used in overseas market.

Many firms have tended to prefer entry through the use of wholly

owned subsidiaries. This entry method provides a maximum operational

control and the greatest protection to a firm’s technology and the quality

of product sold under its brand name. However, it also entails the great-

est risk.

In more recent years, the trend has been toward entry through a joint

venture agreement. Among the joint venture’s advantages is the fact that

it permits sharing the risk while still obtaining a measure of control and

participating in the profits in the market. Further, since a joint venture

agreement if often made with an existing firm in the overseas market, the

joint venture may have the additional benefits of reducing competition

and gaining local market expertise and contacts. An even more recent

development is the establishment of country-company partnerships.

An even more compelling factor favoring a joint venture is the foreign

investment regulations that now exist in a number of countries. The

market in which the firm wishes to enter may simply require the estab-

320

lishment of a joint venture and dictate the percentage of equity that the

outside investor may hold. This directly affects the decision-making

control of the international marketing manager because his ability to

conduct marketing planning becomes restricted.

Text 3

Channels of Distribution

A channel of distribution is the combination of middlemen that a

company uses to move its products to ultimate purchasers. The two ma-

jor types of middlemen that can be used are wholesalers and retailers.

Wholesalers purchase goods and resell them to retailers, other

wholesalers, industrial users, institutes, commercial firms and govern-

ment agencies. Wholesalers do not sell directly to ultimate consumers,

but retailers do. There are three major types of wholesalers. Merchant

wholesalers take title to the products they purchase and often offer a

wide range of services. Merchandise agents and brokers bring buyers and

sellers together; they do not take title to merchandise. Manufacturers

establish sales branches and sales offices in order to perform the whole-

saling function themselves.

Middlemen make a number of contributions to the economy. They

reduce distribution costs by minimizing the number of transactions re-

quired. They perform all the marketing functions. Because they are spe-

cialists, they efficiently perform these marketing functions. Their opera-

tions result in increased value because time and place utility are created.

They bring buyers and sellers together and act as information sources.

Middlemen can be especially valuable for companies that are going into

new markets, small firms, companies that are

Bringing out new products, and companies that do not have suffi-

cient financial resources.

Firms that market consumer goods tend to use middlemen exten-

sively. In all, approximately 95% of all consumer products flow through

wholesalers and retailers. Industrial goods, however, tend to go directly

to purchasers and not through middlemen. Around 80% of all industrial

goods are marketed directly.

There are four major types of retailing establishment in the United

States. By far the most dominant of these are stores. Automatic vend-

ing, direct selling, and mail order are much less important than stores.

Within the store category, chain operations (operations that have two or

more establishments under one ownership) tend to dominate.

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Unit 3

ADVERTISING

Text 1

Advertising All Over The World

In the world of advertising, selling products is the most important

goal. As the companies are becoming more global, they are looking for

new ways to sell their products all over the world. It is true that because of

global communication, the world is becoming more smaller today. But

it is also true that the problems of global advertising – problems of lan-

guage and culture – have become larger than ever before. For example,

Braniff Airlines wanted to advertise its fine leather seats. But when its

advertisement was translated from English into Spanish, it told people

that they could fly naked! Another example of wrong translation is when

Chevrolet tried to market the Chevy Nova in Latin America. In English,

the word “nova” refers to a star. But in Spanish, it means “doesn’t go”.

Would you buy a car with this name?

To avoid these problems with translation, most advertising firms are

now beginning to write completely new ads. In writing new ads, global

advertisers must consider different styles of communication in different

countries. In some cultures, the meaning of an advertisement is usually

found in the exact words that are used to describe the product and to

explain why it is better than the competition. It is true in such countries

as the United States, Britain and Germany. But in other countries, such

as Japan’s, the message depends more on situations and feelings than

it does on words. For this reason, the goal of many TV commercials in

Japan will be to create a positive mood or feeling about the product.

Global advertisers must also consider differences in laws and cus-

toms. For instance, certain countries will not allow TV commercials on

Sunday, and others will not allow TV commercials for children’s prod-

ucts on any day of the week. In some parts of the world, it is forbidden to

show dogs on television or certain types of clothing, such as jeans. The

global advertiser who does not understand such laws and customs will

soon have problems.

Finally, there is a question of what to advertise. People around the

world have different customs as well as different likes and dislikes. So the

best advertisement in the world means nothing if the product is not right

for the market. Even though some markets around the world are quite

similar, companies such as McDonald’s have found that it is very impor-

tant to sell different products in different parts of the world.

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All of these products must be sold with the right kind of message. It

has never been an easy job for global advertisers to create this message.

But no matter how difficult this job may be, it is very important for global

advertisers to do it well. In today’s competitive world, most new products

quickly fail. Knowing how to advertise in the global market can help

companies win the competition for success.

Text 2

Advertising Agencies

Most advertising or promotion can be divided into three parts. One is

the agency that plans and prepares the campaign. Another is the adverti-

ser who pays the bills and whose name usually appears in the advertise-

ment. And finally there are the media that carry the message to the public.

The function of the modern advertising agency, to help a company

to market and advertise its goods and services efficiently, is fundamen-

tally different from the function of the original advertising agents who

were agents for the newspapers and magazines rather than the advertis-

ers. The original agents acted as media brokers selling advertising space

to anyone they could persuade to advertise and receiving commissions

from the publications for the space they sold. Agencies began to employ

copywriters, to think up and write effective advertising copy. Then, as it

became more important to make advertisements stand out from the edi-

torial and from an increasing number of other advertisements, graphic

artists were employed. Finally, production staff were employed to order

the printing services, ensure the best possible reproduction of advertising

literature, arrange for TV and radio adverts to be produced.

Nowadays an advertising agency is an independent organization of

creative people and businesspeople who specialize in developing and

preparing advertising plans, advertisements, and other promotional

tools. The agency also arranges or contracts for the purchase of advertis-

ing space and time in the various media. It does all this on behalf of dif-

ferent advertisers, or sellers – its clients – in an effort to find customers

for their goods and services.

This definition offers some good clues as to why so many advertisers

hire advertising agencies. The definition points out that agencies are in-

dependent: the are not owned by the advertiser, the media, or the suppli-

ers. This independence allows the agency to bring an outside, objective

viewpoint to the advertiser’s business. Good agencies possess the savvy,

skill, and competence to serve the needs of a variety of clients because

of their daily exposure to a broad spectrum of marketing situations and

problems.

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Text 3

Criticisms Of Advertising

Advertising is widely criticized not only for the role in selling prod-

ucts but also for its influence on our society. Some critics charge that

at its worst advertising is downright untruthful, and, at best, it presents

only positive information about products. Others complain that adver-

tising psychologically manipulates people to buy things they can’t af-

ford. There are many discussion questions on the topic.

Does advertising debase our language? The defenders of traditional

English usage don’t like advertising. They feel advertising copy is too

breezy, too informal, too casual, and therefore improper. Advertising,

the believe, has destroyed the dignity of the language. The fact is that

advertising must speak to people, must be understandable and readable.

Some critics don’t acknowledge that ads are designed for specific audi-

ences and therefore should reflect different language usage. Advertising

research shows that people respond better to a conversational tone than

to a more formal tone.

Does advertising make us too materialistic? Some critics claim adver-

tising adversely affects our value system by suggesting that the means to a

happier life is the acquisition of more material things instead of spiritual

or intellectual enlightenment. Advertising, they say, encourages people

to buy more things than they need – all with the promise of greater sta-

tus, greater social acceptance. But These critics fail to realize that they

often tend to force their own values on others. Some people prefer a

simple life, others enjoy the material pleasures of a modern, techno-

logical society. Proponents of advertising also point out that, through its

support of the media, advertising has brought literature, opera, drama to

millions who otherwise might never have experienced them.

Does advertising manipulate us into buying thing we don’t need? An oft-

heard criticism is that advertising forces people to buy thing they don’t

need by playing on their emotions. Some critics believe advertising’s

persuasive techniques are so powerful that consumers are helpless to de-

fend themselves. Some specialists point out that the persuasive power

of advertising has been exaggerated. Advertising powerful ideas doesn’t

guarantee a sale if people aren’t interested.

Is advertising excessive? One of the most common complaints about

advertising is simply that there is too much of it. Experts say the average

American is exposed to over 500 commercial messages a day. We are con-

stantly bombarded at hone with ads on radio and television, in newspa-

pers, and through the mail. Advertisements also reach us in our cars and

in elevators, parking lots, hotel lobbies, movie theatres, and subways.

324

Is advertising offensive or in bad taste? Many people find advertising

offensive to their religious convictions, morality, or political perspec-

tives. Others find advertising techniques that emphasize violence or body

functions in bad taste. Taste is highly subjective. What is good for some is

bad taste to others. And tastes change. What is considered offensive to-

day may not be offensive in the future. Often the products themselves are

not offensive, but the way they are advertised may be open to criticism.

Is advertising deceptive? Perhaps the greatest criticism of advertising

is that it attempts to deceive the public. Critics define deceptiveness not

only as false and misleading but also as any false impression conveyed,

whether intentional or unintentional. Consumers must have confidence

in advertising if it is to be effective.

Unit 4

BANKING

Text 1

The Business of Banking

When asked why he had robbed a bank, Willie Sutton, a 19th-century

American outlaw, replied: ‘Because that’s where the money is’. His rea-

soning is hard to fault: since modern banking emerged in 12th-century

Genoa, banks and money have gone hand in hand.

Banks are still pre-eminent in the financial system, although other

financial intermediaries are growing in importance. First, they are vi-

tal to economic activity, because they reallocate money, or credit, from

savers, who have a temporary surplus of it, to borrowers, who can make

better use of it.

Second, banks are at the heart of the clearing system. By collaborat-

ing to clear payments, they help individuals and firms fulfil transactions.

Payments can take the form of money orders, cheques or regular trans-

fers, such as standing orders and direct-debit mandates.

Banks take in money as deposits, on which they sometimes pay inter-

est, and then lend it to borrowers, who use it to finance investment or

consumption. They also borrow money in other ways, generally from

other banks in what is called the interbank market. They make profits

on the difference, called the margin or the spread, between interest paid

and received. As this spread has been driven down by better information

and the increasing sophistication of capital markets, banks have tried to

boost their profits with fee businesses, such as selling mutual funds. Such

income now accounts for 40 % of bank profits in America.

325

Deposits are banks’ liabilities. They come in two forms: current ac-

counts (in America, checking accounts), on which cheques can be drawn

and on which funds are payable immediately on demand; and deposit

or savings accounts. Some deposit accounts have notice periods before

money can be withdrawn: these are known as time deposits or notice

accounts. The interest rate paid on such accounts is generally higher

than on demand deposits, from which money can be immediately with-

drawn.

Banks’ assets also range between short-term credit, such as overdrafts

or credit lines, which can be called in by the bank at little notice, and

longer-term loans, for example to buy a house, or capital equipment,

which may be repaid over tens of years. Most of a bank’s liabilities have

a shorter maturity than its assets.

There is, therefore, a mismatch between the two. This leads to prob-

lems if depositors become so worried about the quality of a bank’s lend-

ing book that they demand their savings back. Although some overdrafts

or credit lines can easily be called in, longer-term loans are much less

liquid. This ‘maturity transformation’ can cause a bank to fail.

A more common danger is credit risk: the possibility that borrowers

will be unable to repay their loans. This risk tends to mount in periods

of prosperity, when banks relax their lending criteria, only to become

apparent when recession strikes. In the late 1980s, for example, Japa-

nese banks, seduced by the country’s apparent economic invincibility,

lent masses of money to high-risk firms, many of which later went bust.

Some banks followed them into bankruptcy; the rest are still hobbled.

A third threat to banks is interest-rate risk. This is the possibility that a

bank will pay more interest on deposits than it is able to charge for loans.

It exists because interest on loans is often set at a fixed rate, whereas

rates on deposits are generally variable. This disparity destroyed much of

America’s savings-and-loan (thrifts) industry. When interest rates rose

sharply in 1979 the S&LS found themselves paying depositors more than

they were earning on their loans. The government eventually had to bail

out or close much of the industry.

One way around this is to lend at variable or floating rates, so as to

match floating-rate deposits. However, borrowers often prefer fixed-rate

debt, as it makes their own interest payments predictable. More recently,

banks and borrowers have been able to ‘swap’ fixed-rate assets for floa-

ting ones in the interest-rate swap market.

Another way in which regulators have tried to keep banks’ heads

above water is to force them to match a proportion of their risky assets

(i. e., loans) with capital, in the form of equity or retained earnings. In

1988 bank regulators from the richest countries agreed that the capital of

326

internationally active banks should, with a few variations, amount to at

least 8 % of the value of their risky assets. This agreement, called the Basle

Accord, is being revised, largely because the original makes only crude

distinctions between loans’ different levels of risk.

It is not just the failure of individual banks that gives regulators sleep-

less nights. The collapse of one bank can spread trouble throughout the

financial system as depositors from other, healthy, banks suddenly fear

for their money. Regulators step in because they want to prevent a col-

lapse of the entire system. Governments try to minimise the risk of such

failure in several ways. One is to impose harsher regulation on banks than

on other sorts of companies; often, the regulator is the central bank. An-

other tack is to try to prevent runs on banks in the first place. Following

the collapse of a third of all American banks in 1930-33, the government

set up an insurance scheme under which it guaranteed to repay deposi-

tors, up to a certain limit, in the event of bank failure.

Following America’s lead, other countries have also introduced de-

posit-guarantee schemes. Even where they have not, depositors often

assume that there is an implicit guarantee, because the government will

step in rather than risk a collapse of the whole system. In this decade,

the Japanese government went to the extreme of guaranteeing all lenders

(not just depositors) to the country’s biggest banks until the end of the

century.

Some argue that these guarantees make bank failures more likely,

because they encourage depositors to be indifferent to the riskness of

banks’ lending. Moreover, as banks get bigger, they are also likely to con-

clude that they are ‘too big to fail’, which is an incentive to take more

risk. Both are a form of moral hazard.

To combat moral hazard, regulators try to be ambiguous about how

big is too big, and to restrict the amount of insurance they provide. In re-

cent years, none of these measures has prevented ill-advised lending by

banks around the world. Failures include the excessive loans of Ameri-

can banks to Latin America in the 1980s; and banking crises in Japan,

Scandinavia and East Asia.

In many countries, governments have responded to emergencies

by nationalizing the worst banks, often pledging to inject capital, take

on their dud loans, and re-privatize them. This is fine in theory, but in

practice it often distorts the market for the remaining privately owned

banks by keeping too many banks in business and by allowing national-

ized banks with the benefit of a government guarantee to borrow more

cheaply.

327

Text 2

Types of Bank

Commercial or retail banks are businesses that trade in money. They

receive and hold deposits, pay money according to customers’ instruc-

tions, lend money, offer investment advice, exchange foreign currencies,

and so on. They make a profit from the differences (known as a spread or

a margin) between the interest rates they pay to lenders or depositors and

those they charge to borrowers. Banks also creates credit, because the

money they lend, from their deposits, is generally spent (either on goods

or services, to settle debts), and in this way transferred to another bank

account – often by way a bank transfer or a cheque (check) rather than

the use of notes or coins – from where it can be lent to another borrower,

and so on. When lending money, bankers have to find a balance between

yield and risk, and between liquidity and different maturities.

Merchant banks in Britain raise funds for industry on the various fi-

nancial markets, finance international trade, issue and underwrite se-

curities, deal with takeovers and mergers, and issue government bonds.

They also generally offer stockbroking and portfolio management ser-

vices to rich corporate and individual clients. Investment banks in the

USA are similar, but they can only act as intermediaries offering advisory

services, and do not offer loans themselves. Investment banks make their

profits from the fees and commissions they charge for their services.

In the USA, the Glass-Steagall Act of 1934 enforced a strict separa-

tion between commercial banks and investment banks or stockbroking

firms. Yet the distinction between commercial and investment banking

has become less с ear in recent years. Deregulation in the USA and Brit-

ain is leading to the creation of ‘financial supermarkets’: conglomerates

combining the services previously offered by banks, stockbrokers, insur-

ance companies, and so on. In some European countries (notably Ger-

many, Austria and Switzerland) there have always been universal banks

combining deposit and loan banking with share and bond dealing and

investment services.

A country’s minimum interest rate is usually fixed by the central

bank. This is the discount rate, at which the central bank makes secured

loans to commercial banks. BANKS lend to blue chip borrowers (very safe

large companies) at the base rate or the prime rate; all other borrowers

pay more, depending on their credit standing (or credit rating, or credit-

worthiness): the lender’s estimation of their present and future solvenсу.

Borrowers can usually get a lower interest rate if the loan is secured or

guaranteed by some kind of asset, known as collateral.

328

In most financial centers, there are also branches of lots of foreign

banks, largely doing Eurocurrency business. A Eurocurrency is any cur-

rency held outside its country of origin. The first significant Eurocur-

rency market was for US dollars in Europe, but the name is now used

for foreign currencies held anywhere in the world (e.g. yen in the US,

DM in Japan). Since the US$ is the world’s most important trading

currency – and because the U.S. has for many years had a huge trade

deficit – there is a market of many billions of Eurodollars, including

the oil-exporting countries’ ‘petrodollars’, Although a central bank can

determine the minimum lending rate for its national currency it has no

control over foreign currencies. Furthermore, banks are not obliged to

deposit any of their Eurocurrency assets at 0% interest with the central

bank, which means that they can usually offer better rates to borrowers

and depositors than in the home country.

Text 3

Banker to the U.S. Government

In addition to acting as banker to banks, the reserve banks fulfill a

second major function: banker to the federal government. Like business

firms, or even households, the U.S. government requires certain bank-

ing services. Receipts come in and payments continually go out, mostly

in checks, and the two are rarely synchronized perfectly. At times, re-

ceipts exceed payments, and the surplus must be invested. More often,

payments must be made before receipts come in, or payments exceed

expected receipts, and the shortages must be financed for short or long

periods. The Federal Reserve assists either directly or indirectly with

these and similar needs of the U.S. government and with some needs of

federal agencies.

As banker to the federal government, the 12 Federal Reserve banks

and their branches handle the Treasury’s ‘checking account,’ that is, they

handle the Treasury’s tax receipts and expenditures. The most straight-

forward way to handle this account would be for the U.S. Treasury to

deposit in the Federal Reserve banks all tax checks from the public and

to have the Treasury pay all the expenditures of the U.S. government

with Federal Reserve checks, that is, checks drawn against the U.S.

Treasury’s account with the Federal Reserve banks.

Actually, only the second part of this proposition is what really hap-

pens: All payments by the U.S. government are made with Federal Re-

serve checks (paper or electronic). The funds for these checks, however,

are in commercial banks and other depository institutions, where they

stay until needed to support the checks drawn against the Federal Re-

329

serve account. At that time the funds are transferred from these deposi-

tory institutions to the reserve bank against which the check is drawn.

In other words, all government funds are deposited with private insti-

tutions, which benefit from this arrangement, and not with the federal

government’s federal bank.

Some might conclude that this beneficial arrangement for banks is

the result of lobbying by the powerful banking industry. Actually, there

is no sinister motive; this symbiotic relationship between the public and

private sectors actually improves the conduct of monetary policy because

it gives the Fed better control over nonborrowed reserves. As a matter

of fact, until recently, tax receipts were deposited with reserve banks,

and the Treasury’s expenditures were made by drawing checks on those

accounts at the reserve banks. This procedure, however, caused prob-

lems for the Fed. Treasury deposits with the Fed are one of the ‘other

liabilities’ in the Fed’s balance sheet and, hence, are a technical fac-

tor affecting reserves. Like currency, these deposits are a competing use

of reserves, or a factor absorbing reserve funds. As a result, increases in

Treasury deposits drain reserves from the banking system, reserves that

could otherwise be used to support deposits.

Text 4

Discounting, Rediscounting and Discount Window Loans

The interest rate Federal Reserve banks charge on loans to banks in

their district is called the discount rate. The facility, or division, through

which these loans are provided is called the discount window, and the

loans are called discount window loans. The least mysterious of these

terms is the window, referring to the actual window where at one time

Fed tellers made loans to banks. But why the term discount? What is dis-

counted? Today, nothing is discounted; discount loans are merely loans

of reserve funds to banks in need of reserves.

The Federal Reserve Act of 1913, which created the Federal Reserve

System, provided for the Fed to make loans to banks. Actually, the act

provided for ‘rediscounting commercial paper.’ All of these terms have

their origins in the early history of central bank practices, especially in

Europe and Japan, on which the Fed’s practices were patterned.

To understand discounting and rediscounting, let us imagine our-

selves back at the early years of the Fed’s life. (This also permits us to use

the present rather than the past tense.) Imagine a retailer in Raincity,

Washington, who places an order with a manufacturer in New York for

100 umbrellas to be delivered in three months, in time for the coming

rainy season. He signs and gives to the manufacturer an IOU, or ‘bill

330

of exchange,’ of $1,000, which promises payment of that amount at the

time of delivery. The New York manufacturer, however, wants to be paid

at once. He takes the bill to his bank, NY Bank, which ‘discounts’ the

paper. That is, NY Bank pays the manufacturer the present value of the

three-month $1,000 bill, which, of course, is less than $1.000; hence,

the term discounting. The two parties agree that in calculating the present

value NY Bank uses the current three-month interest rate. The bank now

has in its portfolio the bill signed by the Raincity retailer. In effect, NY Bank

has made a three-month loan to the retailer at the market interest rate.

Next, suppose that on the same day NY Bank realizes that it needs

more liquidity and decides to sell this IOU by endorsing it to another

bank, Streetbank. The buying bank discounts it, that is, pays the present

value of the $1,000 face value. Of course, if Streetbank uses the same

interest rate in the calculation, the selling price would be exactly what

NY Bank paid the manufacturer. NY Bank can also sell the paper at the

discount window of its banker, the New York Fed. In this case, the New

York Fed ‘rediscounts’ the paper. If the discount window officer uses

today’s three-month market interest rate to calculate the paper’s present

value, NY Bank will be paid the same price that it would have received

from Streetbank. The Fed would merely provide NY Bank liquidity. This

service would be especially valuable to banks in areas with limited access

to financial markets.

If the discount window officer calculates the present value using a

discount rate lower than the market interest rate, the price that NY Bank

receives will be higher. In this case, the Fed’s service to the bank is more

than merely providing liquidity. It is a source of profit for the bank. The

difference between the price the bank paid to acquire the IOU and the

price it receives at the discount window is a result of the difference be-

tween the interest rate on the paper and the discount rate the Fed used.

In effect, NY Bank borrows from the Fed at a lower rate (the discount

rate) than the rate it charges the retailer.

Central banks, including the Fed, learned early on that by changing

the discount rate, they could affect the profitability of borrowing from

the Fed and thus affect the amount of credit in the economy. Until the

1930s, discount rate policy was the principal, if not the only, instrument

of monetary policy.

In modern times, the Fed does not make loans to banks by redis-

counting paper in their possession. The Fed simply makes outright loans,

called advances. Perhaps to underscore the history of discounting or to

keep up appearances, the Fed normally requires borrowing banks to post

supporting collateral paper, even though ‘borrowers in good financial

condition who seek short-term adjustment credit may be permitted to

hold their own collateral appropriately earmarked.’

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Text 5

A Brief History of the Federal Reserve

The authority to create and regulate money rests with Congress,

which is empowered, according to Article 1, Section 8, Clause 5, of the

U.S. Constitution, “to coin money [and to] regulate the value thereof.”

By enacting the Federal Reserve Act in 1913, Congress, in turn, cre-

ated the Federal Reserve System and authorized it to create money and

regulate its value. In designing the Federal Reserve System, Congress

benefited from the experience of other countries central banks.

By the time the Federal Reserve was founded in 1913, the phrase

‘regulate the value’ had acquired an interpretation broader than mere

regulation of the purchasing power of money. The Federal Reserve Act

came in the aftermath of several financial panics, which were accompa-

nied by the failure of many banks and nonfinancial businesses and by the

disruption of commerce and general economic activity. In response, the

act was specifically designed to provide the country with enough liquid-

ity, to provide facilities for discounting commercial credit, and to im-

prove the supervision of the banking system. Thus, from the beginning,

the Federal Reserve Act mandated the functions of the Fed: (1) to pro-

vide enough money and credit to facilitate economic activity and (2) to

supervise banks. In other words, safeguarding the health of the economy

and the health of the financial system itself were the dual ultimate goals

of the Federal Reserve.

By working toward these goals, the Fed hoped to prevent bankrupt-

cies of financial and nonfinancial businesses and disruptions in eco-

nomic activity. It failed, however, to avert the Great Depression of the

1930s, when thousands of banks and even more nonfinancial businesses

failed. The level of economic activity became so weak that it could sup-

port only a shockingly small proportion of the labor force. Unemploy-

ment soared.

In the aftermath of the Great Depression, the Banking Acts of 1933

and 1935 amended the form and functions of the Federal Reserve. In

addition to giving the Fed power to regulate rates on savings and time

deposits, the 1933 act established the Federal Open Market Commit-

tee (FOMC), the third component of the Federal Reserve System. The

1935 act restructured both the Board and the FOMC by removing the

secretary of the Treasury and the comptroller of the currency from these

two bodies, thereby making the Fed more independent. The next major

amendment came with the Depository Institutions Deregulation and

Monetary Control Act of 1980 (DID&MCA). As Chapter 5 points out,

this act deregulated deposit rates and subjected all depository institu-

tions to reserve requirements.

332

These three acts—the Banking Act of 1933, the Banking Act of 1935,

and DID&MCA of 1980 – were concerned with the Fed’s role as a

regulator both of the banking industry and of economic activity. Two

additional acts focused primarily on the Fed’s role as a regulator of eco-

nomic activity. The Full Employment Act of 1946 directed the govern-

ment to promote ‘maximum employment, production, and purchasing

power.’ The term government was interpreted to include the Federal

Reserve. The goals of monetary policy were further refined by the 1978

Full Employment and Balanced Growth Act, commonly called the

Humphrey-Hawkins Act in honor of its prime sponsors, the late senator

Hubert Humphrey and Congressman Augustus Hawkins. The preced-

ing years had been characterized by high and rising inflation rates. The

Humphrey-Hawkins Act instructs the Fed to pay attention to the rate of

unemployment and the rate of growth of real GDP but also to the rate

of inflation. It also requires the Fed to report semiannually to Congress

about its outlook on economic activity and inflation and to relate this

outlook for the economy to that set down by the administration in the

annual Economic Report of the President. Additionally, the Humphrey-

Hawkins Act requires the Fed to set and report on targets for money

growth. The requirements of the Humphrey–Hawkins Act reflected not

only the public’s awareness and concern about inflation but also the as-

cendancy of monetarism, a school of thought whose basic tenet is that

inflation is caused by excessive growth of monetary aggregates.

To date, none of the laws mandates a rigid set of practices to which

the Fed must adhere regardless of economic conditions. The practices

that the Fed has pursued in striving to achieve its twin goals of safeguard-

ing the health of the economy and the health of the financial system have

changed over time, as the Fed has adapted to the economic and political

realities of the day.

Unit 5

ACCOUNTING

Text 1

Deloitte, Touche, Tohmatsu

The name of this world-known auditing company− Deloitte, Tou-

che, Tohmatsu− owes its existence to its founders who, from the very

start of their careers, realized the importance of world-wide practice.

The history of the company can be traced through their names: Deloitte,

Touche, Tohmatsu.

333

Deloitte. William Welch Deloitte was one of the fathers of accoun-

tancy. He came from a rich French family who had to leave France dur-

ing the Revolution. He began learning business at the age of 15 working

as an assistant to the Official Assignee at the Bankruptcy Court in the

City of London. At that time accountancy profession grew from its early

days in the business of sorting out the affairs of bankrupts. At the age

of 25 Deloitte opened his own office opposite the Bankruptcy Court in

London. He was the first independent auditor in Britain. He made his

name with the industry of the day – the railways. In 1849 he discovered

frauds on the Great North Railway and invented a system of accounts

to protect investors from mismanagement of their funds. His reputation

as a professional accountant was rather high. Some years later he be-

came president of the newly created Institute of Chartered Accountants

in Britain. In 1893 he opened offices in the United States and began to

audit different businesses.

Touche. George Touche came from Scotland, and when he qualified

as an accountant in Edinburgh, there was no e at the end of his name.

It was Touch and was pronounced in the same way as the Scottish loch.

But since it was often mispronounced he decided to change it later. In

1883 he graduated from Edinburgh University and set off to the south

to seek his fortune. Investment trust business was experiencing a boom,

and that gave him a chance for making a career in this field. He took

up saving businesses from financial disasters which were very frequent

in those days because investment trust business was quite new. George

Touche had a lot of clients and had to work very hard. Soon he earned

a very good reputation for a true flair for his business and honesty. In 1899

he started his own business ‘George A. Touche and Co’. In 1900, he and

John Niven set up the firm of Touche, Niven and Co in New York. Many

large companies of both in the US and Britain became his clients. His

company enjoyed high reputation and popularity among businessmen.

Tohmatsu. The Japanese company of Tohmatsu owes its origin to

Admiral Nobuzo Tohmatsu. He started his career as a naval attache at

the London Embassy. At that time he was also an instructor at the Na-

val Academy. Many of his students were talented people taking interest

in economics. Tohmatsu took an interest for accounting. He qualified

as a certified public accountant at the age of 57. After that he became

president of the Japanese Institute of CPAs. At that time Japanese gov-

ernment wanted to establish national audit firms. Tohmatsu, together

with one of his students decided to respond to the challenge. So in 1968,

Tohmatsu and Co was incorporated. From the very beginning this com-

pany was internationally focused. It was not surprising, that it merged

with another globally focused company Deloitte & Touche.

334

Today Deloitte Touche Tohmatsu is one of the largest auditing com-

panies of the world. It provides their clients with efficient consultative

services wherever they are.

Text 2

AICPA Code of Professional Conduct

51 Preamble

1. Membership in the American Institute of Certified Public Ac-

countants is voluntary. By accepting membership, a certified public ac-

countant assumes an obligation of self-discipline above and beyond the

requirements of laws and regulations.

2. These Principles of the Code of Professional Conduct of the Amer-

ican Institute of Certified Public Accountants express the profession’s

recognition of its responsibilities to the public, to clients, and to col-

leagues. They guide members in the performance of their professional

responsibilities and express the basic tenets of ethical and professional

conduct. The Principles call for an unswerving commitment to honor-

able behavior, even at the sacrifice of personal advantage.

Section 54 – Article III: Integrity

To maintain and broaden public confidence, members should per-

form all professional responsibilities with the highest sense of integrity.

1. Integrity is an element of character fundamental to professional

recognition. It is the quality from which the public trust derives and the

benchmark against which a member must ultimately test all decisions.

2. Integrity requires a member to be, among other things, honest and

candid within the constraints of client confidentiality. Service and the

public trust should not be subordinated to personal gain and advantage.

Integrity can accommodate the inadvertent error and the honest dif-

ference of opinion; it cannot accommodate deceit or subordination of

principle.

3. Integrity is measured in terms of what is right and just. In the ab-

sence of specific rules, standards, or guidance, or in the face of con-

flicting opinions, a member should test decisions and deeds by asking:

“Am I doing what a person of integrity would do? Have I retained my

integrity?” Integrity requires a member to observe both the form and the

spirit of technical and ethical standards; circumvention of those stan-

dards constitutes subordination of judgment.

4. Integrity also requires a member to observe the principles of objec-

tivity and independence and of due care.

Section 56 – Article V: Due Care

A member should observe the profession’s technical and ethical

standards, strive continually to improve competence and the quality

335

of services, and discharge professional responsibility to the best of the

member’s ability.

1. The quest for excellence is the essence of due care. Due care re-

quires a member to discharge professional responsibilities with compe-

tence and diligence. It imposes the obligation to perform professional

services to the best of a member’s ability with concern for the best inter-

est of those for whom the services are performed and consistent with the

profession’s responsibility to the public.

2. Competence is derived from a synthesis of education and experi-

ence. It begins with a mastery of the common body of knowledge re-

quired for designation as a certified public accountant. The maintenance

of competence requires a commitment to learning and professional

improvement that must continue throughout a member’s professional

life. It is a member’s individual responsibility. In all engagements and

in all responsibilities, each member should undertake to achieve a level

of competence that will assure that the quality of the member’s services

meets the high level of professionalism required by these Principles.

4. Members should be diligent in discharging responsibilities to cli-

ents, employers, and the public. Diligence imposes the responsibility to

render services promptly and carefully, to be thorough, and to observe

applicable technical and ethical standards.

Section 55 – Article IV: Objectivity and Independence

A member should maintain objectivity and be free of conflicts of in-

terest in discharging professional responsibilities. A member in public

practice should be independent in fact and appearance when providing

auditing and other attestation services.

1. Objectivity is a state of mind, a quality that lends value to a mem-

ber’s services. It is a distinguishing feature of the profession. The prin-

ciple of objectivity imposes the obligation to be impartial, intellectually

honest, and free of conflicts of interest. Independence precludes rela-

tionships that may appear to impair a member’s objectivity in rendering

attestation services.

2. Members often serve multiple interests in many different capacities

and must demonstrate their objectivity in varying circumstances. Mem-

bers in public practice render attest, tax, and management advisory ser-

vices. Other members prepare financial statements in the employment

of others, perform internal auditing services, and serve in financial and

management capacities in industry, education, and government. They

also educate and train those who aspire to admission into the profession.

Regardless of service or capacity, members should protect the integrity

of their work, maintain objectivity, and avoid any subordination of their

judgment.

336

3. For a member in public practice, the maintenance of objectivity

and independence requires a continuing assessment of client relation-

ships and public responsibility. Such a member who provides auditing

and other attestation services should be independent in fact and appear-

ance. In providing all other services, a member should maintain objec-

tivity and avoid conflicts of interest.

4. Although members not in public practice cannot maintain the ap-

pearance of independence, they nevertheless have the responsibility to

maintain objectivity in rendering professional services. Members em-

ployed by others to prepare financial statements or to perform auditing,

tax, or consulting services are charged with the same responsibility for

objectivity as members in public practice and must be scrupulous in their

application of Generally Accepted Accounting Principles and candid in

all their dealings with members in public practice.

Unit 6

FINANCE

Text 1

Bull and Bear Markets

Simply put, bull markets are movements in the stock market in which

prices are rising and the consensus is that prices will continue moving

upward. During this time, economic production is strong, jobs are plen-

tiful and inflation is low. Bear markets are the opposite – stock prices are

falling, and the view is that they will continue falling. The economy will

slow down, coupled with a rise in unemployment and inflation. In either

scenario, people invest as though the trend will continue. Investors who

think and act as though the market will continue to rise are bullish, while

those who think it will keep falling are bearish.

What causes bull and bear markets? They are partly a result of the

supply and demand for securities. Investor psychology, government in-

volvement in the economy and changes in economic activity also drive

the market up or down. These forces combine to make investors bid

higher or lower prices for stocks. To qualify as a bull or bear market, a

market must have been moving in its current direction (by about 20% of

its value) for a sustained period. Small, short-term movements lasting

days do not qualify; they may only indicate corrections or short-lived

movements. Bull and bear markets signify long movements of significant

proportion. The best-known bear market in the U.S. was, of course, the

337

Great Depression. The Dow Jones Industrial Average lost roughly 90

percent of its value during the first three years of this period.

Investors turn to theories and complex calculations to try to figure

out in advance when the market will scream upward or tumble down-

ward. In reality, however, no perfect indicator has been found. In their

attempts to predict the market, economists use technical analysis. Tech-

nical analysis is the use of market data to analyze individual stocks and

the market as a whole. It is based on the ideas that supply and demand

determine stock prices and that prices, in turn, also reflect the moods

of investors. One tool commonly used in technical analysis is the ad-

vance-decline line, which measures the difference between the number

of stocks advancing in price and the number declining in price. Each

day a net advance is determined by subtracting total declines from total

advances. This total, when taken over time, comprises the advance-de-

cline line, which analysts use to forecast market trends. Generally, the

A/D line moves up or down with the Dow. However, economists have

noted that when the line declines while the Dow is moving upward, it

indicates that the market is probably going to change direction and de-

cline as well.

A key to successful investing during a bull market is to take advantage

of the rising prices. For most, this means buying securities early, watch-

ing them rise in value and then selling them when they reach a high.

However, as simple as it sounds, this practice involves timing the market.

Since no one knows exactly when the market will begin its climb or reach

its peak, virtually no one can time the market perfectly. Investors often

attempt to buy securities as they demonstrate a strong and steady rise

and sell them as the market begins a strong move downward. Portfolios

with larger percentages of stocks can work well when the market is mov-

ing upward. Investors who believe in watching the market will buy and

sell accordingly to change their portfolios. Speculators and risk-takers

can fare relatively well in bull markets. They believe they can make prof-

its from rising prices, so they buy stocks, options, futures and currencies

they believe will gain value. Growth is what most bull investors seek.

Text 2

Functions performed by the Financial System and the Financial

Markets

The great importance of the financial system in our daily lives can

be illustrated by reviewing its different functions. There are seven basic

functions of the financial system in a modern economy.

338

Savings Function. As we noted earlier, the system of financial mar-

kets and institutions provides a conduit for the public’s savings. Bonds,

stocks, deposits, and other financial claims sold in the money and capi-

tal markets provide a profitable, relatively low-risk outlet for the public’s

savings. Those savings flow through the financial markets into invest-

ment so that more goods and services can be produced in the future,

increasing society’s standard of living. When savings flows decline, how-

ever, the growth of investment and living standards begin to fall.

Wealth Function. For those businesses and individuals choosing to

save, the financial instruments sold in the money and capital markets

provide an excellent way to store wealth (i.e., to preserve value) until

funds are needed for spending in future periods. While we might choose

to store our wealth in “things” (e.g., automobiles and clothes), such

items are subject to depreciation and often carry great risk of loss. How-

ever, bonds, stocks, and other financial instruments do not wear out over

time and usually generate income; and, normally, the risk of loss is much

less than for other forms of stored wealth.

Liquidity Function. For wealth that is stored in financial instruments,

the financial marketplace provides a means of converting those instru-

ments into ready cash with little risk of loss. Thus, the financial system

provides liquidity for savers holding financial instruments but in need

of money. In modern societies money consists mainly of deposits held

in banks and is the only financial instrument possessing perfect liquid-

ity. Money can be spent as it is without the necessity of converting it

into some other form. However, money generally earns the lowest rate

of return of all assets traded in the financial system, and its purchasing

power is seriously eroded by inflation. That is why savers generally mini-

mize their holdings of money and hold other financial instruments until

spendable funds really are needed.

Credit Function.In addition to facilitating the flow of savings into in-

vestment and providing liquidity for stored wealth, the financial markets

furnish credit to finance consumption and investment spending. Credit

consists of a loan of funds in return for a promise of future payment.

Consumers frequently need credit to purchase a home, buy groceries,

repair the family automobile, and retire outstanding debt. Businesses

draw upon their lines of credit to stock their shelves, construct buildings,

meet payrolls, and grant dividends to their stockholders. State, local,

and federal governments frequently borrow to construct buildings and

other public facilities and cover daily cash expenses until tax revenues

flow in.

Payments Function. The financial system also provides a mechanism

for making payments for goods and services. Certain financial assets,

mainly checking accounts and negotiable order of withdrawal (NOW)

339

accounts, serve as a medium of exchange in the making of payments.

Plastic credit cards issued by many banks, credit unions, and retail stores

give the customer instant access to short-term credit but also are widely

accepted as a convenient means of payment. Plastic cards and electronic

means of payment, including computer terminals in homes, offices, and

stores, are likely to displace checks and other pieces of paper as the prin-

cipal means of payment in the years ahead.

Risk Function. The financial markets offer businesses, consumers,

and governments protection against life, health, property, and income

risks. This is accomplished first of all by the sale of life and property-ca-

sualty insurance policies. Policies marketed by life insurance companies

indemnify a family against possible loss of income following the death

of a loved one. Property-casualty insurers protect their policyholders

against an incredibly wide array of personal and property risks ranging

from ill health, crime, and storm damage to negligence on the high-

ways. In addition to making possible the selling of insurance policies, the

money and capital markets have been used increasingly by businesses

and consumers to “self-insure” against risk. This simply means building

up one’s holdings of securities, deposits, and so forth, as a precaution

against future loss.

Policy Function. Finally, in recent decades the financial markets have

been the principal channel through which government has carried out

its policy of attempting to stabilize the economy and avoid excessive in-

flation.

Text 3

Fidelity Bonds, Surety Bonds, and Criminal Insurance

Two important types of insurance available to companies are called

fidelity bonds and surety bonds. While many people think only of natural

perils in connection with insurance, other unplanned losses can be in-

sured. One such type of loss is due to theft and other criminal behaviors

of employees.

Employees who are placed in positions of trust—especially positions

that require handling money, such as cashiers, accountants, bartenders,

and loan collectors—can embezzle or steal large sums of money from

the company. Fidelity bonds protect employers against losses caused by

dishonest and fraudulent acts of employees.

A second type of unplanned loss occurs when a company is unable

to meet the performance terms of a contract. For example, a customer

who asks a contractor to build a new warehouse may lose money if the

warehouse is not completed by some specified date. In this case, the cus-

340

tomer may ask the contractor to purchase a surety bond, a bond that

provides monetary compensation if the bonded party fails to meet the

performance terms of a contract. If the contractor fails to meet the com-

pletion deadline, the surety bond will compensate the customer for the

face amount of the policy. Without the surety bond, the contractor might

be obligated to compensate the customer directly.

A related type of insurance protects the company against the criminal

acts of others. This is especially important in the case of burglary, rob-

bery, and theft. Each of these perils requires a separate policy, because

the risks differ and require different premiums. Burglary insurance cov-

ers losses when the company’s property is taken by forced entry. If a “cat

burglar” breaks into the premises at night and steals expensive display

items, burglary insurance will cover the loss. Robbery insurance covers

losses when the company’s property is taken by force or threat of force,

such as frequently happens during a holdup of a bank or convenience

store. Theft insurance, which is general coverage, applies to all losses

due to any act of stealing, including burglary and robbery. Note that em-

ployee theft may be covered by either fidelity bonds or theft insurance.

A very important group of insurance policies covers losses due to

sickness, injuries, or deaths of employees. Partners may purchase life

insurance policies that cover them for the unexpected death of one part-

ner. In this section, however, we focus on insurance that provides ben-

efits to employees and their survivors. This type of insurance, called em-

ployee benefit insurance, is for the benefit of employees and is intended

to protect them rather than the company in the event of fortuitous loss.

Employee benefit insurance includes health insurance, life insurance,

and annuities.

Health Insurance. The rising costs of health care have caused great

concern for many Americans and their elected officials, including the

Clinton administration. Although medical research has led to cures and

treatments for many serious illnesses, the costs of treatments may be

excessive. In addition to the direct cost of treatment, employees may

lose wages and other benefits while they are sick. Health insurance is

designed to cover losses suffered by employees due to illness or injury.

These policies typically have a deductible amount which the employee

pays when the loss occurs.

It is common for employers to provide group health insurance cover-

age for employees, in which employees pay part of the premium and the

employer pays the other part. Health policies typically cover hospital,

surgical, and other common expenses. Major medical expenses, such as

those for cancer treatment, are often covered by specific clauses in the

policy. Many policies require coinsurance for some medical expenses,

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meaning the insured employee must pay a certain percentage of eligible

medical expenses, such as 20 percent. In addition, certain costly, experi-

mental medical treatments, such as bone marrow transplants, may be

excluded.

Life insurance provides for payment of a stipulated sum to a desig-

nated beneficiary upon death of the insured. Life insurance is one of

the most important investments wage earners can make for their depen-

dents. As long as the primary wage earner is alive, the well-being of his or

her family is reasonably safe. If the primary wage earner dies, however,

the family survivors may be hard pressed to find financial support. Life

insurance, especially for the primary wage earner, is one of the basic

means by which survivors can be assured of a reasonably comfortable

lifestyle.

Social insurance programs are provided by government agencies and

regulations. Generally, these programs are financed entirely by manda-

tory contributions from employers and / or employees rather than by

general (tax) revenues. The contributions are set aside for the social in-

surance

Text 4

Mergers and Acquisitions

There is no more dramatic or controversial activity in corporate fi-

nance than the acquisition of one firm by another or the merger of two

firms. The acquisition of one firm by another is, of course, an investment

made under uncertainty. The basic principle of valuation applies: A firm

should be acquired if it generates a positive net present value (NPV) to

the shareholders of the acquiring firm.

There are three basic legal procedures that one firm can use to ac-

quire another firm: (1) merger or consolidation, (2) acquisition of stock,

and (3) acquisition of assets.

A merger refers to the absorption of one firm by another. The acquir-

ing firm retains its name and its identity, and it acquires all of the assets

and liabilities of the acquired firm. After a merger, the acquired firm

ceases to exist as a separate business entity. A consolidation is the same as

a merger except that an entirely new firm is created. In a consolidation,

both the acquiring firm and the acquired firm terminate their previous

legal existence and become part of the new firm. In a consolidation, the

distinction between the acquiring and the acquired firm is not impor-

tant. However, the rules for mergers and consolidations are basically the

same. Acquisitions by merger and consolidation result in combinations

of the assets and liabilities of acquired and acquiring firms.

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There are some advantages and some disadvantages to using a merger

to acquire a firm:

1. A merger is legally straightforward and does not cost as much as

other forms of acquisition. It avoids the necessity of transferring title of

each individual asset of the acquired firm to the acquiring firm.

2. A merger must be approved by a vote of the stockholders of each

firm. Typically, two thirds of the shares are required for approval. In

addition, shareholders of the acquired firm have appraisal rights. This

means that they can demand that their shares be purchased at a fair value

by the acquiring firm. Often the acquiring firm and the dissenting share-

holders of the acquired firm cannot agree on a fair value, which results

in expensive legal proceedings.

The second way to acquire another firm is to purchase the firm’s voting

stock in exchange for cash, shares of stock, or other securities. This may

start as a private offer from the management of one firm to another. At

some point the offer is taken directly to the selling firm’s stockholders.

This can be accomplished by use of a tender offer. A tender offer is a public

offer to buy shares of a target firm. It is made by one firm directly to the

shareholders of another firm. The offer is communicated to the target

firm’s shareholders by public announcements such as newspaper adver-

tisement. Sometimes a general mailing is used in a tender offer. How-

ever, a general mailing is very difficult because it requires the names and

addresses of the stockholder record, which are not usually available.

One firm can acquire another firm by buying all of its assets. A formal

vote of the shareholders of the selling firm is required. This approach to

acquisition will avoid the potential problem of having minority share-

holders, which can occur in an acquisition of stock. Acquisition of assets

involves transferring title to assets. The legal process of transferring as-

sets can be costly.

Financial analysts have typically classified acquisitions into three

types:

1. Horizontal Acquisition. This is an acquisition of a firm in the same

industry as the acquiring firm. The firms compete with each other in

their product market.

2. Vertical Acquisition. A vertical acquisition involves firms at different

steps of the production process. The acquisition by an airline company

of a travel agency would be a vertical acquisition.

3. Conglomerate Acquisition. The acquiring firm and the acquired

firm are not related to each other. The acquisition of a food-products firm

by a computer firm would be considered a conglomerate acquisition.

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Unit 7

BUSINESS LAW

Text 1

Dispute resolving

Almost all the day-to-day activities of a business create potential for

a civil dispute: a supplier may fail to deliver goods under a contract; a

customer may refuse to pay a bill; one of the business’s products may in-

jure a consumer; an employee may be injured in a manufacturing plant;

a marketing plan may involve restraint of trade. Although good business

managers attempt to minimize the potential for dispute through careful

planning, even the best-run businesses cannot avoid them.

Litigation. A business that becomes engaged in a legal dispute may

resort to litigation, contesting the claim in court, to resolve it. Because

litigation has become increasingly time-consuming and costly, however,

it often is not the best method for resolving a business dispute. The for-

mal procedures of litigation can require a business and its employees to

devote valuable time to collecting and reviewing evidence, meeting with

attorneys, and attending court hearings. Further costs are incurred to re-

tain attorneys who must draft documents, attend court hearings, review

evidence and legal precedent, interview witnesses, and otherwise plan for

trial. Litigation rarely resolves a dispute quickly. Complex business issues

may further protract proceedings because the judge or jury is not familiar

with economic, scientific, or other specialized information. Even after

trial, the case may be prolonged by appeal. Litigation also often cre-

ates hostility between the parties, a result that is especially detrimental

if the parties must maintain a business relationship such as a long-term

contract or employer-employee relationship. Moreover, because court

proceedings and documents generally are open to the public, a litigated

case may produce adverse publicity for a business or the opportunity for

its competitors to obtain valuable information. In addition, a successful

plaintiff does not have the benefit of the damage award until the case is

resolved and the judgment collected. Finally, even a strong case can be

lost, and uncertainty regarding the outcome of a case often adversely af-

fects both parties’ ability to plan operations.

Because of the expense, delay, and uncertainty of litigation, most

civil disputes involving businesses are resolved using alternative dispute

resolution (ADR), processes. ADR encompasses a variety of procedures

including time-tested techniques such as negotiation, mediation, and

arbitration, as well as recent innovations such as minitrials and private

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trials. Although ADR is available to resolve any legal controversy, many

ADR techniques are particularly suitable for resolving business disputes.

Almost all ADR techniques emphasize quick resolution of disputes

using informal procedures and allow the parties to avoid crowded court

dockets and the protracted appellate process. The appropriate method

for resolving a specific dispute depends on a number of factors including

the nature of the dispute and the relationship of the parties.

Negotiation. The vast majority of business disputes are resolved

through negotiation, a process by which two parties with differing de-

mands reach an agreement generally through compromise and conces-

sion. Whether negotiation is informal (for instance, one or more tele-

phone conversations between two business people), or formally struc-

tured (such as a meeting or meetings scheduled solely to resolve the dis-

pute), the negotiation process generally follows a similar format. After

defining their positions and communicating them to one another, the

parties usually engage in a period of discussion, oral or in writing, in

which they analyze the strengths and weaknesses of the other. Finally,

one or both of the parties propose solutions usually requiring conces-

sions by each. If the parties can mutually agree on appropriate conces-

sions, the dispute will be resolved. Without agreement, the parties even-

tually become deadlocked, and resort to more formal dispute resolution

techniques.

Negotiation is the simplest and most efficient method of dispute

resolution, provided the parties truly desire to resolve their differences.

Although effective negotiating skills and strategies can be learned in

business schools and other programs, negotiating parties also should be

knowledgeable about the legal principles underlying their dispute. Many

businesses, therefore, either consult with their attorneys throughout the

negotiation process or refer the matter to their attorneys who then nego-

tiate the dispute on behalf of their clients.

Mediation. If disputing parties reach a deadlock, they may seek the

assistance of a third party to resolve the controversy. Mediation is a rela-

tively informal process in which a neutral third party, the mediator, helps

resolve a dispute. A mediator generally has no power to impose a resolu-

tion. In many respects, therefore, mediation can be considered as struc-

tured negotiation in which the mediator facilitates the process. Although

mediators use different techniques and strategies, the mediator usually

initiates the process by meeting with the disputing parties, either indi-

vidually or jointly, to explain the mediation process and to gather infor-

mation about the parties and their dispute. The mediator then attempts

to define the issues, establish an agenda for mediation, and preserve an

atmosphere conducive to communication. Through meetings with the

345

parties, the mediator assists them in generating options for settlement

and assessing the options. Finally, the mediator helps the parties reach

concessions and compromises that will lead to a final settlement. If a

resolution is reached, the mediator may help reduce the agreement to

writing and work with the parties to implement the agreement.

A good mediator knows strategies and techniques to facilitate com-

munication, minimize distrust and help develop alternatives when the

parties are unable to achieve these goals without guidance. If the media-

tor also has expertise in the subject area of the dispute, the mediation

process can expedite a fair resolution. The primary disadvantage of me-

diation is the mediator’s lack of power to impose a binding resolution.

Arbitration. Like mediation, arbitration uses a neutral third party to

resolve a dispute. Unlike the mediator, however, an arbitrator generally

is empowered to impose a binding decision that resolves the dispute and

that may be enforced by a court if the parties fail to comply. Unlike the

court, which is a branch of government, the arbitrator derives its power

to impose a binding decision from an express contract, the arbitration

agreement, between the parties. Most frequently, parties to a contract

include a provision requiring any disputes arising under the contract to

be resolved through arbitration. Alternatively, parties may enter into an

arbitration agreement, sometimes called an Ad Hoc agreement, after a

dispute arises. Many arbitration agreements provide for a panel of three

arbitrators, who reach a decision by majority vote.

The arbitration contract may establish all of the rules for the arbitra-

tion process, including selection of the arbitrator, designation of the site

for the arbitration, procedures for presentation of evidence, and dead-

lines for hearings and the decision.

Text 2

Protecting the Product Idea

In the past few decades, our society has added information and in-

novation to the formula for producing wealth. Now, knowledge is con-

sidered every bit as much a factor in making money as labour, capital,

land, plant, and equipment. Moreover, ideas are important “assets” of a

company. Consequently, the law affords ideas protection.

Any tangible medium of expression, such as writings, sound record-

ings, motion pictures, sculptures, notated choreographic works are copy-

rightable. Copyrights protect the creators of literary, dramatic, musical,

artistic, and other intellectual works. Copyright law covers reproduction

by photocopying, video tape, and magnetic storage.

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To obtain Copyright protection, the word copyright (or its abbrevia-

tion) or the symbol must be on copies along with the author’s name and

the year of copyright.

The Copyright Office will issue a copyright to the creator or to whom-

ever the creator has granted the right to reproduce the work. (A book, for

example, may be copyrighted by the author or the publisher.) Copyrights

issued after 1977 are valid for the lifetime of the creator plus 50 years.

Copyrights issued prior to 1977 are good for 75 years.

Technically, copyright protection exists from the moment you create

the material. When you distribute a work, place on the copies a notice

that includes the term “copyright” or an abbreviation, the name of the

author or creator, and the year of publication or production – for ex-

ample, “Copyright 1986 Jane Doe.”

Choosing a new name for a product is no easy task since there are

about 1 million brand names in the US alone. Marketing impact is not

the only consideration in the naming of a product. The scheme of laws

surrounding product names and symbols must be consulted before se-

lecting a new name.

A trademark is any word, name, symbol, or device used to distinguish

the product of one manufacturer from those made by others. A service

mark is the same thing for services. McDonald’s golden arches are one

of the most visible of modern trademarks. Brand names can also be reg-

istered as trademarks. Examples are Exxon, Polaroid, and Chevrolet. If

properly registered and renewed every 20 years, a trademark generally

belongs to its owner forever. Among the exceptions are popular brand

names that have become generic terms, meaning that they describe a

whole class of products. A brand-name trademark can become a generic

term if the trademark has been allowed to expire, if it has been incor-

rectly used by its owner. Trademarks and service marks comprise most of

the marks protected under state and federal law.

A collective mark is a trademark or service mark used by members

of a collective group, such as a union or trade association, to identify

that its goods or services are produced by members of the group. Many

realtors, for example, display a symbol reading “MLS” indicating that

they are members of Multiple Listing Service, a real estate cooperative.

A certification mark is a mark that attests to a specified quality, material,

or origin from a certain region. The symbol “UL,” for example, certi-

fies that a product is in compliance with the standards of Underwriters’

Laboratories, Inc.

A patent protects the invention or discovery of a new and useful pro-

cess, an article of manufacture, a machine, a chemical substance, or

an improvement on any of these. Issued by the Patent Office, a patent

347

grants the owner the right to exclude others from making, using, or selling

the invention for 17 years. After that time, the patent becomes available

for common use. On the one hand, patent law guarantees the origina-

tor the right to use the discovery exclusively for a relatively long period

of time, thus encouraging people to devise new machines, gadgets, and

processes. On the other hand, it also ensures that rights to the new item

will be released eventually. Other enterprises may be able to make use of

it more creatively than its originator. Not all inventions are patentable.

The Patent Act empowers the federal government to grant three general

types of patents: utility patents, design patents, and plant patents.

One of the best variant of protecting product ideas is the law of trade

secrets.

As the term indicates, the subject of a trade secret must be secret—

not generally known to the public or to other competitors in the trade

or business. It may or may not be patentable. Novelty, as used in pat-

ent law, is not required. Unlike patents, which confer a right to exclude

all others from using the invention, trade secrets are protected against

unauthorized use only if the secret is obtained through a breach of a

confidential relationship or other improper means. Thus, an employer

who confides the secret to key employees under an express or implied

restriction against disclosure or use would be protected if the employees

subsequently used the secret for personal use or disclosed it to a compet-

itor. In addition, the holder of a trade secret is protected against knowl-

edge gained by improper means such as physical force, burglary, theft,

wiretapping, or other forms of industrial espionage. The trade secret

holder, accordingly, is not protected against discovery of the secret by

honest means, independent invention, or reverse engineering (analyzing

the product embodying the secret to determine how it was developed

or manufactured). Thus, tort liability is imposed not for using a trade

secret, but rather for employing improper means to procure it. A patent

provides in some ways more, and in other ways less, protection than a

trade secret. For example, trade secrets may last indefinitely and are not

limited to patentable inventions. In contrast, patent law protects inven-

tions that are not secret even against persons who independently and

honestly discover the patented product or process.

Text 3