Financial management and free cash flow

Using the mini case information, write a -500-word report presenting potential ethical issues that may arise from expanding into other related fields. In your discussion, proactively strategize about possible expansion by explaining opportunities to promote ethical standards within your organization.

With business, it is natural for management to have a desire for growth and expansion. Growth an expansion is what unpins many of the valuation models presented as justification to engage in acquisition activity. In addition, investors look at future growth as a critical input to their valuation methodologies. Higher growth can equate to higher multiples and justification for higher share prices.

Growth however, does have ethical considerations as it relates to managements ability to steward shareholder capital. Ethically, management may use accounting tricks and gimmicks to portray a misleading picture of growth. Enron and Sunbeam both engaged in this activity as they attempted to mislead investors. Enron for example, used off-balance sheet entities to conceal liabilities that were used extensive to finance the company’s growth in earnings per share. Sunbeam using channel stuffing techniques to show an improvement in sales that was not occurring. They were essentially ”Robbing Peter to pay Paul.” The pressure exerted by external shareholders combined with misplaced management incentives for growth can great ethical issues related to expansion.

For one management may look to expand into unrelated fields with a promise of “synergies” or “lower costs.” To justify this, management with use aggressive assumptions and estimates that appear to validate the use of shareholder capital to expand into unrelated fields. This inevitably will end with the disaster once the departing CEO has left the company and has taking his stock options with him or her. Oher ethical issues related to expansion in other fields relates to outright fraud and abuse. Here Wells Fargo is often cited for unethical expansion. When entering new markets, Wells Fargo would create fraudulent accounts and provide other products that customers never asked for. The company would then report higher revenues and profits as its culture of cross selling appeared to be working. Instead, associates were incentivized to cheat which was very unethical and unwarranted given the trusted position that Wells Fargo holds in society.