Business, the CEO Plays an Important Role

¶ … business, the CEO plays an important role in decision making. One factor that the CEO uses for their decision making processes is commonly refered to as environmental scanning. Environmental scanning is the strategy of determining the overall economic environment of a business in order to make dynamic decisions and ensure continuous growth. This is one role that can only be done by the CEO who is privy to information from all departemnts and angles of the business. There are many factors that go into proper environmental scanning.

For instance, the CEO must have pertinent network ties, both inside and outside the company. These ties keep the CEO grounded in a realistic view of the company and its current financial state. Network ties outside of the industry are especially important because those ties have an outside perspective and can assist the CEO in seeing all the extra-industry and socioeconomic trends.

In order to prove the importance of environmental scanning, the author attempted an experiment where certain keywords related to environmental scanning were detected and pulled from the annual reports of various businesses. The study found that there was a statistically signifigant positive relationship between CEO extraindustry network ties and focus of environmental scanning. In other words, the companies who were obviously and actively using environmental scanning had the highest amount of extraindustry network ties.

The article then goes on to discuss the fact that prudent CEO's use the information obtained from the environmental scanning to change and update their business to follow the growing needs and demands of their respective industry. The overall conclusions of the article are that environmental scanning allows CEO's to change their businesses keeping them dynamic and competitive in the continuously changing marketplace. Additionally, the quality of their overall analysis, rests of the types of contacts that the CEO has.

Should a CEO have only internal connections or even connections outside of the company but inside the industry, the analysis will be shallow and the results limited. When CEO's have contacts outside of the both their company and their business, the reports are much more informed and broad and allow for greater flexability, interpretation, and change. From this reading, I learned that it is vital to the success of a business to make connections outside of the company.

The primary question that this article raised in my mind was as to the credibility of those network connections within a specialized industry. The author's primary question was regarding the importance of intrabusinsess connections with regard to the growth and transformation of a business. Abebe, Michael, et al. (2010). Chief Executive Networks and Environmental Scanning Activities: An Emprical Examination. Strategic Management Review, 4(1), 30-43. The business world can be a tricky place to maneuver, especially for those in executive positions whose entire income rests on the success of their company.

In order to foster greater success, some companies such as Enron, stepped over the line and falsely reported their company's value in the annual reports. As a result, the company unexpectedly collapsed resulting in thousand's of employees losing their retirement accounts and the company going bankrupt. Those invovled in the misrepresentation were prosecuted for their actions to commit fraud. Even more, the government stepped in and enacted Sarbanes-Oxley to put stronger reings on the actions that businesses can take regarding their financial reports. This article seeks to explore two hypothesis.

First: "Does a high presence of institutional ownership foster an environment conducive to earnings management?" And second: How is prior positive organizational performance related to earnings management in an institutional heavy firm? In other words, what causes a business to choose an earnings management setup and how does it impact how the company is run overall. According to the study, when there is an institutional stockholder, the company is much more likely to engage in earnings management.

The reason is that this stockholder has a very high interest in the company and the company's overall success and simply may apply pressure to ensure that the company's figures are accurate and yet still attractive. Conversely, if the company is preforming poorly, those investors have a direct hand in suggesting means of improvement and pushing for the implementation thereof. Simply put, the greater the company's success, the greater the pressure becomes to continue that success.

This pressure could potentially lead executives into a position of misreporting or misrepresenting the company's overall numbers in the attempt to ensure their own job security. The overall purpose of this study was to prove that it is a dangerous notion to require an executive's job security be based on the overall performance of the company as this could potentially lead to unethical conduct on the part of that agent in defending his share in the overall company.

The questions raised in this article were whether performance-based pay expectations were a valuable tool for businesses or one that could potentially lead to misreporting and misrepresentation of the company's overall success thus resulting in penalties from the federal government under Sarbanes-Oxley. The answer was clearly that this method should be avoided as it does directly lead to extensive pressure on the agents to consistantly keep the company performing optimally regardless of the market. Kury, Kenneth (2010).

Institutional Ownership and Prior Positive Performance's Contribution to Earnings Management: An Agency and Impression Management Persepective. Strategic Management Review, 4(1), 44-61. Every player in a company plays some role in ownership. Particular roles within the ownership of a company can dictate how that player makes decisions and how the company is portrayed. One such area where companies are trending towards openly seeking is that of the media and politics. Prior to Sarbanes-Oxley the private sector sought to remain as free as possible.