Why preparation is key to ensuring your team can respond in a crisis

It was a Saturday night Angelo Camillo will never forget. He was the manager on duty at the Intercontinental Hotel in London when smoke began to fill the building at every corner. It was a busy night, the rooms were packed and there was a wedding reception in the ballroom.

Fortunately for Camillo and his team, a plan had been developed for moments just like this.

“Although panic started, I and other members of the management team managed to deal with the situation because we had a plan and we were well-trained in this kind of crisis,” says Camillo, associate professor of management with the School of Business at Woodbury University.

Guests were evacuated and accounted for, a spokesperson was designated to communicate with the fire department and everything was logged for insurance claim purposes.
“The most important thing we learned was to raise awareness and to be even better trained for the next crisis,” Camillo says.

The flow of information by way of communication from those in charge to the people in the center of a crisis is essential to your ability to get through it effectively.

Smart Business spoke with Camillo about what you can do to get prepared for a crisis in your organization.

How can you ensure your business is ready for anything that might happen?

You have a risk assessment plan before you develop a crisis plan. There is no company without risk. If you take a hotel, from the moment a guest walks into the hotel, you are vulnerable until the guest leaves. Anything can happen and it’s impossible to prepare for every scenario, whether it’s a hotel or a business. Most crises happen unexpectedly and they may never end exactly as you expect.

In addition, things change constantly so something that wasn’t an issue in the past may now be a potential hazard that you need to address.

So what can you do? Start by implementing regular training and retraining programs that are as comprehensive as you can make them. Perform scenarios of possible crises that could occur and train people in the steps that would need to be taken to get through it. Meet afterward to review the session and talk about what was learned and what you still need to work on.

If a real problem does occur, use what happened as a training tool to accomplish the same goals.
Before you can communicate appropriately in a crisis, you need your team to be clear about the roles they’ll need to perform. So these steps are a must in any crisis communication plan.

How do you determine communication roles in a crisis?

Your HR department deals with a number of training sessions on things such as sexual harassment, communication between departments and solving problems. So that would be a good place to start to build your communications team.

Define a team that is able to communicate and has the skills to do it. Make sure they have the skills to lead others and can work well in crisis mode. One of the biggest problems in a crisis is that people panic. Panic can be managed more easily when your leaders speak with confidence and demonstrate that they have control of the situation.

Quoting an excerpt from research I have conducted and published, communication can be interpreted as ‘the skill to communicate activities and messages to stimulate an anticipated reaction in a specific situation.’ Specifically, competent management needs to master the art of interaction and apply it efficiently with the people and the environment, and at the same time, fulfill its own communication goals using this capability.

What is the biggest mistake you can make in dealing with a crisis?

Thinking it will never happen to you. There have been enough incidents of credit card hackers and security breaches that no organization is immune from being the victim of an attack or of an unexpected situation. You need to develop and implement communication policies and procedures and have continuous training in place for all stakeholders. ●

Insights Executive Education is brought to you by Woodbury University

An academic take on the gains made by women in the corporate world

Men and women bring unique skills and talents to the table when it comes to leadership.

The business sector would be wise to recognize the different approaches they take. That can be a challenge, however, in a world where mere words about what men and women do or don’t do well can have unintended consequences.

“It’s a sensitive topic,” says H. Eric Schockman, Ph.D., chair and associate professor for the Center for Leadership at Woodbury University. “But it’s not a competition of who is right and who is wrong. It’s the recognition — a practical reality for those who run corporations and the channels of power — that we need to understand and let the individual strengths of the sexes run on their own encouragement and build those up.”

Schockman is also president and founder of the Global Hunger Foundation, dedicated to helping women in the developing world break the chains of poverty by funding projects designed to provide sustainable development and organic farming.

He is keenly aware of, and has done vast research, on the plight of women to measure up and climb the ladder in today’s business world.

Smart Business spoke with Schockman about his findings and the value of allowing both men and women to be themselves in the workplace.

What strides have women made in terms of corporate leadership influence?
It’s important to explore leadership differences between men and women. The debate has great implications for the bottom line, for public leadership and for the future of how we as a society and a world really prosper.

You’ve seen this growth of women in all industries and in all parts of the workforce. They are beginning to find their own ethos of leadership.

You now have a woman running General Motors. That’s unbelievable. If what’s good for General Motors is good for the U.S., what does that tell you about the power of women in the corporate suite?

The whole notion of how we see the gender maturation of both sexes is an important part of starting this evolution of thinking from the 20th century to the 21st century.

What does academic research show when it comes to women in leadership positions?
Women negotiate the world very differently when you talk about economics and how they sense closing the gaps in equity that threaten family and social order.

Research from the World Bank shows that women direct up to 90 percent of their income back into community infrastructure and improvement while men invest 30 to 40 percent of their income.

Women have a different proclivity to be change agents and accelerate decision-making power when dealing with positive developmental outcomes.

Women have been able to think differently, lead differently and have a better sense of thinking how you operate from outside closed networks, which means adapting and creating your own roles.

How can an organization of men and women move forward as one team?

The critical transformation for a CEO is to do this in a more non-threatening way.

Rather than focusing specifically on what we know in the research and the science behind the research, talk more holistically about transformational leadership and how both sexes can use it to get a further training modality to uplift employees so they can do a better job.

They buy into the team. They understand their role in productivity. They can think before we even think. We’re talking about how to find successful leadership that inspires, that has positive role modeling and is concerned about followers and employees.

What does the future hold for women in leadership?

The noted leadership scholar Dr. Bernard Bass predicts that by 2034, the majority of high-level leaders will be women, and men will have to realize their old ways of “command and control” will not be the most effective way to lead.

The idea that people could be managed scientifically was a revolution in the 1900s. In 2014, it’s a different group of people that want to help the scientific management process move forward. Including women in that team of leadership shows it’s a better way to meet your bottom line. ●

Insights Executive Education is brought to you by Woodbury University

Why you should be superficial in the way you build your e-commerce site

Security and substance are two words that need to define the look and feel of your e-commerce website. If the site isn’t safe and focuses more on glitz than functionality, you’ll have a hard time building a successful business on the Web.

“If you don’t have a compelling argument (a value proposition) in the design of your website convincing a person as to why he or she should be your customer, you are going to fail,” says Laura Ingraham, Ph.D., CPA, a professor in the department of accounting and finance for the College of Business at San José State University. “The design has to translate in the customer’s mind as to why they should buy from you.”

Design does not necessarily mean flash videos and high-tech bells and whistles that may instantly catch the eye, but clutter your message.

“You want to focus on your product,” Ingraham says.

Smart Business spoke with Ingraham about key strategies to help your e-commerce business stand out from the competition.

What are the biggest mistake companies make in the e-commerce sector?

A lot of companies jump right into the fray and just throw up a website. They’re going to have an e-commerce site and they don’t pay a lot of attention to design. Web design is critical. If someone comes to your site and they aren’t sure of what you are trying to sell or they have a moment of hesitation about doing business with you, it won’t work. They will go to the next site.

More and more, there are few reasons to shop anywhere else than the large discount sites like Amazon. You either have to beat the discounter’s prices or the user experience. So if you can’t beat them on price, it’s all about the user experience. To do that, you can’t just take your brick and mortar business and plaster it on an e-commerce site. You have to provide a compelling reason for someone to choose to do business with you. That starts with design.

Where can an e-commerce business find an edge?

Security is so crucial to anything on the Internet today. You should be upgrading constantly and have your experts out there looking at the latest security options available and what is necessary for what you are doing.

Beyond that, you need to be innovative, flexible and adaptive. Think about what’s happening with your website and how people are interacting with it. What are consumers looking for and what is happening in the market of your industry?

You need to have your supply chain down pat and think about your return policy. People get frustrated with return policies, so you have to make it easy for the consumer. If they have to pay for returns or find their own box to bundle up the product to send it back, that’s all a big hassle. They are not going to want to shop with you.

The user experience needs to make it easy to navigate through each step of the interaction with your business. Give people a place to voice feedback, both positive and negative, so you can continue to adapt and improve the way these processes are handled.

How is hiring for e-commerce different than for a typical business?

The people skills are still critically important. There are times as a customer when I’m very frustrated with what has gone on. I need to be able to vent that frustration and have the individual who is representing the company be able to respond in a way that is helpful. If they can bring humor to the situation, that is great. But that is a difficult thing to do and it takes a unique kind of individual to be able to do it. Your ability to find those people who can will go a long way toward how your business is perceived.

How does an e-commerce business integrate new technology?

You need to stay competitive and build a trusting relationship with your IT people. Hire individuals who you can put your trust and faith in and let them do what they need to do.

Let the team monitor the existing infrastructure and technological developments on the horizon so you can maintain your competitive advantage. Otherwise, somebody else is going to take it.

Why relationship building is more important than ever in advertising

Advertising in the 21st century is an interactive experience, and any business that fails to buy into this new reality does so at its own risk.

“Traditionally, the company or brand would deliver a message or create a campaign that focused on one-way communication. This is what we stand for, this is what we offer. Buy this product or service,” says Danielle Way-Ramirez, Ph.D., coordinator and assistant professor of marketing at Woodbury University. “Today, consumers need to feel that a strategy or a product is actually being sold to them.”

Advertising has come a long way from the days of radio, newspaper and the Big Three television networks. Today, there are seemingly limitless ways to deliver a message to potential consumers. The challenge is reaching the consumers who are interested in what you’re selling.

Smart Business spoke with Way-Ramirez about the evolution of advertising and the best way to reach your target audience.

What goes into building a strong brand?

Brands are strong and successful because they engage consumers. The brand’s mission always supersedes what the company is selling at that moment. Many companies like to change their mission or the direction of their message based on what they are selling at that moment. But when you don’t have that foundation of what you’re all about, it makes it very difficult to build brand awareness.

Look at companies that have built strong brands and understand their platform. How do they want to be viewed by the consumer? It’s likely that there is a consistent message or theme that comes through with anything that the company is selling. That’s the brand, and a strong brand builds consumer loyalty.

You may see a commercial for a company that sells phones or tablets that has nothing to do with the phone or tablet. The company is at a point where it is not necessarily selling a product anymore. It is selling the feeling that the product gives its consumers. There is a personality attached to that brand and what it stands for.

How can a company forge that deep connection with consumers?

It’s important for companies to remember that despite all the different ways there are to communicate, you’re still communicating with people. We spend time doing market research on consumers, but we should be doing research with consumers. It allows for the consumer to build a relationship with your brand and make them feel important, wanted and appreciated.

Talk to consumers about their interests, rather than the interests of your brand. So often, brands talk about and promote the message that they feel consumers want to hear. You need to really listen to what consumers are talking about and dig into understanding their desires and interests. Let the consumer lead the conversation and make sure you understand that one size, or one strategy, does not fit all. When you do the research first and you do it with the consumer, you’ll be much more tuned in to what they are looking for.

What is the value of brand awareness?

The impact of increasing awareness of your brand is not always parallel with the volume of consumption of your brand. Just because there is more awareness does not mean more dollars for your business or that more people are purchasing from your company.

A few years ago, Tommy Hilfiger said the audience that was purchasing his items was not the audience he had in mind when he started his brand. It’s a mistake many people make. They try to target a specific group, but that’s not necessarily the group that is most interested in what they are selling. So having a target audience is good, but you always need to keep your eyes and ears open to know who else is interested in you. Listen and participate in those conversations whether online or in the more traditional sense. Go to where the consumers are and don’t wait for them to come to you.

If you have a younger consumer market that largely uses online platforms, that’s where you need to be. If you have a market that does better with face-to-face communication, then that’s what needs to happen.

Insights Executive Education is brought to you by Woodbury University

Why it makes good business sense for schools to earn their accreditation

A recent report by Bloomberg Businessweek found that the number of smaller business schools accredited by the Association to Advance Collegiate Schools of Business (AACSB) — many of them based outside the U.S. — has skyrocketed in recent years. The article noted that online education and changing demographics may put some business schools out of business in the years to come, particularly those schools without strong reputations.

Smart Business spoke with Andre van Niekerk, Ph.D., dean of Woodbury University’s School of Business, about accreditation and the state of business schools in 2014.

What is required to create and sustain effective academic programs in business? 

First and foremost, it’s essential to achieve and maintain high standards. With less than 500 undergraduate and graduate students in our School of Business, it’s a legitimate question how an institution like ours can compete against business schools with student bodies that number in the thousands and endowments many multiples of that of our entire university.

Woodbury recently completed a seven-year quest to achieve AACSB accreditation, a status conferred on fewer than 5 percent of business schools worldwide. The accreditation process proved to be an education in its own right. While it’s still quite fresh, it’s already evident how the experience can transform the way a school thinks about its future and about professional education in general.

How has it made a difference, and how do you see it playing out in the future?

Accountability is as vital in business as it is in education, which is why the accreditation process is such a strategic step for any professional school. Our school’s mission is to cultivate the distinctive talents of each student to prepare future leaders of business who communicate effectively, act ethically and think globally.

The model of values-based and ethically driven business education is predicated on building lifelong relationships and networks that will aid students’ future success and provide them with the tools to be effective and valued members of society. The accreditation process can play a significant role in helping schools understand how to apply their mission to today’s global business environment.

Robert Reid, a former dean of James Madison University’s College of Business — and now chief accreditation officer at a nonprofit — recently told Businessweek that the growth in AACSB-accredited schools is ‘a reasonable proxy’ for interest in management education.

What does accreditation mean to the business community?

It means that businesses can count on that school to deliver consistent quality across the board. Accreditation mandates standards that touch virtually everyone and everything at the school — students, faculty, curriculum, alumni. At Woodbury, the accreditation process dovetails nicely with quality improvement measures that are now part of our school’s DNA, a direct result of President Luis Calingo’s experience in quality management.

Since 1997, Calingo has served as a member of the Board of Examiners of the Malcolm Baldrige National Quality Award, the country’s highest award for quality and performance excellence. Although the accreditation process began several years before his arrival at Woodbury, the systems his administration has put in place allow the school to maintain these high standards.

How receptive are companies to business school graduates, especially MBAs?  

Businesses want to work with students whose standards are as high as their own or higher — that’s a big reason why we wanted to raise the bar.

The student experience — small class sizes, one-on-one mentoring, opportunities for coursework in a variety of disciplines — is what sets our School of Business apart, and why graduates from this kind of environment remain so attractive to employers.

For both graduates and undergrads, accreditation immediately finds its way onto resumes and CVs, increasing both the value of the school’s business degree and the appeal it has to companies.

 

Insights Executive Education is brought to you by Woodbury University

Why the ability to sell your idea is a key component to achieving success

Passion can be contagious, but it’s not always that simple when it comes to taking the idea in your head and transforming it into a strong business model. You have to do more than get others excited about the company you want to build. You need outsiders to believe that they can become a valuable part of helping you make your dream a reality.

“Truly great entrepreneurs communicate their vision so well that they are able to persuade others, including employees, investors and customers, to join them,” says Anuradha Basu, Ph.D., director for the Silicon Valley Center for Entrepreneurship at San José State University.

“That’s really important because in today’s world, particularly for millennials who like to feel they are doing something valuable, it’s not all about the money. They want to feel like they are contributing to and doing something for a project that is going to help change the world.”

Smart Business spoke with Basu about what makes entrepreneurs tick and why that knowledge is helpful even if you’re not on a path to start your own business.

Can you learn to become an entrepreneur?

Few people were born with the gift to build a business. There are a lot more people who have some kind of interest or talent for entrepreneurship, and have other skills that need to be developed.

Entrepreneurship can be time- consuming, requiring a lot of hours and hard work. If you want to succeed, you have to be willing to put in that time. But if it’s something that you really enjoy doing, that’s typically not a problem. If you are passionate about your idea and you believe in it, you are willing to put in that effort to make it work. Even if you fail, it can be a huge learning experience.

How do entrepreneurs overcome the financial challenges of starting a business?

Try not to focus on the money that you need. When someone invests in an idea or a business, they are also investing in the entrepreneur. They are seeking reassurance that you have the fortitude to overcome the inevitable challenges that will come about as you build your business.

Often, an entrepreneur’s first idea will not work. If an investor does not believe that you have a solid backup plan in place to deal with this scenario, why would they invest their own valuable dollars in your proposal?

Focus on making connections with people who would have an interest in what you want to do. Build relationships, get people engaged in what you want to do, demonstrate that you have the ability to execute your plan, and secure customer validation.

Do what you can to reduce the uncertainty with potential investors and get them thinking about the opportunity. Once you’ve done that effectively, the money will come.

How has the mindset of young professionals changed?

We did a project last year looking at what it is that attracts students to companies. Students were shown three different job descriptions and asked which of those they would choose. They chose the job that involved getting more responsibility and sounded more challenging. The company’s reputation didn’t matter as much to them. Today’s young professionals don’t mind joining a startup if they feel they are going to have a more interesting ride.

Why is learning about entrepreneurship valuable for non-entrepreneurs?

Not everyone who takes a course about entrepreneurship has to become a company founder.

It’s a skill that teaches you how to deal with uncertainty and think outside the box to solve problems. If aspects of a project or goal are unclear, how do you find a way to make decisions? It’s a mindset that can be helpful at multiple levels in an organization.

Entrepreneurship is not just about finance, marketing or legal issues. It’s about team-building and leading people across all those functions. You have to see how everything connects to find innovative solutions to problems. That makes you a better employee and entrepreneur.

 

Insights Executive Education is brought to you by San José State University

Why today’s workforce needs liberal arts educated critical thinkers

Critical thinking is a major component of business for innovation, product services, manufacturing processes, business models and more, which all create value for customers.

As a matter of fact, in a survey conducted by the Association of American Colleges and Universities, nearly all employer respondents said a demonstrated capacity for thinking critically is more important than the undergraduate preparation of a job candidate, says Luis Ma. R. Calingo, Ph.D., president of Woodbury University.

Other skills valued over the degree type are being able to communicate clearly and solve complex problems.

Smart Business spoke with Calingo about the importance of critical thinking in business today, and how a liberal arts education can help develop those skills.

 

Are there areas where critical thinking may fall short in corporate America?

The most important contribution of critical thinking is innovation in the workplace. It’s a prerequisite.

The second would be improving processes and systems by having people working in cross-functional teams to find better ways to accomplish tasks. For instance, at Woodbury University, we created a cross-functional team to look at the entire student experience. After identifying five distinct processes, we looked for opportunities to streamline those processes. Creating that type of opportunity requires a lot of creative and critical thinking.

 

How does a liberal arts education help nurture critical thinking skills?

The main function of a liberal arts or humanities education is to prepare students to be citizens of a democratic society. Without people with a liberal arts background, the world is filled with narrow and technically trained workers, not complete citizens who think for themselves.

According to the Bureau of Labor Statistics, baby boomers who were born between 1957 and 1964 held an average of 11.3 jobs from age 18 to 46. That suggests to universities and colleges that we are educating students for jobs and careers that do not yet exist. Those jobs and careers will use technologies and solutions that have not yet been invented to solve problems that society has not yet recognized. Students need skills that can be used for many things, rather than one discipline.

 

What’s your response to: “The only thing a liberal arts degree is good for is working at McDonald’s”?

A book by University of Chicago professor Martha Nussbaum, “Not for Profit: Why Democracy Needs the Humanities,” lays out a good argument for why humanities are central to our society. You need people who criticize tradition and authority, as well as understand the significance of another person’s sufferings and achievements, to have a functioning democratic society.

Liberal arts teaches different aspects of human existence. For instance, philosophy is probably one of the best ways to learn critical thinking skills that help you reason out your choices. And if you study philosophy, where do you eventually go? Maybe you become a lawyer.

As another example, if you study and participate in the creative arts like music and dance, it fosters certain skills like empathy that allow you to imagine the challenges other people face — people unlike ourselves.

Even countries that have traditionally linked higher education to national economic gain, only training people for specific professions, like Singapore and China, are starting to recognize the importance of having more creativity and critical thinking skills in their populations.

 

News, social media, entertainment, politics, etc., are becoming narrower. How does this factor into the argument that the workforce needs broad skills like the ability to think critically, communicate and solve problems?

With today’s information overload, people are looking for summaries and others to interpret data for them. In fact, some executives buy services that summarize books for people who do not have time to read. It’s like an executive version of CliffsNotes.

Information overload and using summary data is happening throughout society — including with business leaders. This trend just highlights the importance of being able to think critically for yourself.

 

How to encourage employee wellness and increase workplace contentment

Satinder Dhiman, Ph.D., Ed.D., associate dean, School of Business; chair and director, MBA Program; professor of management, Woodbury University

Satinder Dhiman, Ph.D., Ed.D., associate dean, School of Business; chair and director, MBA Program; professor of management, Woodbury University

Workplace contentment, fulfillment or wellness may be intangible, but it will affect the growth and success of your business. When it’s present, there are obvious, unmistakable signs, says Satinder Dhiman, Ph.D., Ed.D., associate dean of the School of Business, chair and director of the MBA Program and professor of management at Woodbury University.

“When you go into an organization, you can almost smell it,” he says. “Being highly fulfilled takes a conscious decision; it’s not something that just comes about.”

Businesses have less absenteeism, turnover and stress leave when employees have a sense of belonging, enhanced contribution, and more engagement and trust.

Smart Business spoke with Dhiman about how to encourage highly fulfilled employees.

Why do executives need to be concerned with workplace contentment?

A recent Gallup survey found that 47 percent of employees feel disengaged, and when that’s the case it will affect the bottom line. People just going through the motions are more likely to be absent and leave the company. There also are about, depending on the survey, 17 to 20 percent of employees who are positively disengaged.

Organizations are not just numbers, and you don’t want to pursue profits in an unbridled manner. Remember that businesses are about people.

What are the characteristics of highly fulfilled employees?

These employees have a sense of ownership and commitment. They focus on what is right, are generally more appreciative and concentrate on making things work. They are aware of their contribution to the organization and know how it adds to the bigger picture.

This then leads to high emotional intelligence. They are in better control of their own feelings, so they are better equipped to deal with the feelings of others. And better interaction leads to greater trust, which is the glue holding things together.

Research shows corporate communication failure happens not because the message was wrong, but because it was interpreted wrong. There was distrust of the messenger.

How can management increase workplace contentment?

A great employer will inspire employees through actions, not just words or slogans. To achieve this, approach employees in a holistic manner, appreciating all skills and abilities. There’s a joke that at his retirement party, an employee said, “For 40 years you paid me for my hands; you could have had my brain for free.” Also, strive to create a culture of appreciation. Instead of catching people doing something wrong, catch people doing something right.

Fulfillment engages the body, mind and spirit. So, take a genuine interest in employees’ well-being and what is happening with their emotional makeup. You want to help employees attain their dreams — send a few staff members to a local conference, provide tuition reimbursement or be flexible on hours to allow them to go to class.

If employers support employee education, many fear employees will gain skills and leave. However, in addition to being more productive while working for you, think of the economy as a whole. You hire people who have been trained elsewhere. Your employees gain skills and go elsewhere. There is no real gain or loss.
Of course, bonuses and pay raises don’t hurt in terms of building trust and appreciation.

Why is personal fulfillment so important?

Workplace fulfillment is more likely when employers and employees are fulfilled in their own lives. It trickles down.
Attaining personal wellness comes from self-knowledge or understanding your purpose in life, as well as selfless service. Once those two pillars are in place, certain mental habits or gifts contribute and help create a sense of self-fulfillment. They are:

  • Pure motivation.
  • Gratitude.
  • Generosity.
  • Taking a vow of harmlessness.
  • Acceptance.
  • Mindfulness.

By focusing on each of these habits, you can create personal fulfillment. And, by sharing it with your employees, achieve organizational well-being.

Satinder Dhiman, Ph.D., Ed.D., is an associate dean in the School of Business; chair and director, MBA Program; and professor of management at Woodbury University. Reach him at (818) 252-5138 or [email protected]

Book: More on this subject can be found in Satinder Dhiman’s new book, “Seven Habits of Highly Fulfilled People: Journey from Success to Significance.” Find it on Amazon.com.

Insights Executive Education is brought to you by Woodbury University

Changes to lease accounting are coming. Are you ready?

Gerald Weinstein, Ph.D., CPA, Professor and chair, Department of Accountancy, John Carroll University John and Mary Jo Boler School of Business

Gerald Weinstein, Ph.D., CPA, Professor and chair, Department of Accountancy, John Carroll University John and Mary Jo Boler School of Business

Any business that leases anything for an extended period of time — generally, more than one year — will be impacted by a proposed new accounting standard.

“This may appear arcane to some, but the new rules will have a major impact on the reported financial position of many companies. It has been estimated that this may add hundreds of billions of dollars to the existing liabilities on businesses’ balance sheets nationwide,” says Gerald Weinstein, Ph.D., CPA, a professor and chair of the Department of Accountancy at the John Carroll University John and Mary Jo Boler School of Business.

“Therefore, it is likely that your firm’s financial statements will be affected. At a minimum, expect to see changes in the ways in which leases are being conceived of for recognition and measurement purposes,” says Weinstein.

Smart Business spoke with Weinstein about what the proposed accounting standard would do and how businesses can prepare for the change.

What do you need to know?

Under existing Generally Accepted Accounting Principles (GAAP), leases that are in essence purchases of all of the inherent value of a leased asset are capitalized. Capitalization requires both that the leased asset and related liability for future lease payments be recorded onto the balance sheet. GAAP dictates use of four indicators, any one of which is considered evidence of a so-called capital lease.

Leases that do not meet at least one of the four criteria are operating leases, and are not capitalized. Operating leases are accounted for by expensing the lease payments as they accrue. An example is leasing an office inside an office building owned by another entity.

An operating lease is generally favored by businesses, as it makes the accounting simple in that it avoids recording the liability and depreciating the underlying asset. Further, not booking a liability can improve a company’s debt related ratios. Users, however, would prefer to know about all liabilities the entity has and hence want these liabilities booked. These cross-purposes are being resolved in the proposed standard by essentially requiring all leases to be capitalized.

What will the new standard change?

What defines a lease as a capital lease is changing under an exposure draft (ED) issued jointly by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on May 16, 2013, and the four indicators noted above will no longer apply. Everyone will be affected if this becomes a final standard in 2014.

All leases, with one exception, would be recognized with a lease liability for the present value of the payments, which must be made over the lease term. As lease payments are made, the effective interest method is to be used to accrete the liability. An asset would be reported and written off to expense over time.

The ED defines the manner of write-off. It depends on the type of asset of which two are defined. A Type A asset is personal property whereas Type B is generally real property. Type A assets are amortized on a straight-line basis unless another method better represents the pattern of use. For Type B leases, the amortization would be the difference between the annual straight-line expense and the interest incurred on the liability.

The most notable change in terms of the direct financial impact is that what has previously been accounted for as an operating lease will now be treated as if it were an owned asset, even if title to the asset will never transfer to the lessee. An office suite leased inside an office building would be accounted for as a balance sheet asset and subject to annual amortization.

What is the exception?

Lessees can elect a policy wherein leases with a maximum possible lease term including options to renew of 12 months or less, are accounted for using a method like that currently available for an operating lease.

How is a leased office akin to an asset purchase?

Leases are being redefined as a contract that conveys the right to use an asset for a period of time in exchange for consideration. The contract must depend on the use of an identified asset and convey the right to control its use. The use of the asset can be either explicit or implicit, such as the lease of a floor of a building. ‘Right to control use’ is slightly different from existing GAAP, which calls it the ‘right to use’ an asset. 

Why should you care about recording such a lease as an asset?

Companies should be concerned because booking the asset also means booking the liability. For most businesses, this will have a negative impact on solvency ratios, including debt to assets and debt to equity. This change in the standards could cause your bank loans that have covenants requiring certain solvency ratios to go into technical default.

What can you do to be ready?

Companies should determine which leases they have that will now need to be capitalized, prepare pro forma financials, and determine the impact your solvency ratios. If the new accounting rules cause your debt ratios to deteriorate, consider contacting your lending institution to see if you can re-negotiate the covenants.

While the final standard may undergo some tweaking, changes to lease accounting have been in the works since 2005 and professional accountants expect the standard to be finalized in its current form. The comment deadline on the ED is Sept. 13, 2013.

Gerald Weinstein, Ph.D., CPA, is a professor and chair of the Department of Accountancy at the John Carroll University John and Mary Jo Boler School of Business. Reach him at (216) 397-4609 or [email protected]

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Common misconceptions that could derail would-be entrepreneurs

Mark Hauserman, director of The Muldoon Center for Entrepreneurship

Mark Hauserman, director of The Muldoon Center for Entrepreneurship

Without question, entrepreneurship is the hottest thing going today. Rarely will you pick up a paper or magazine that does not either feature a fabulously successful entrepreneur or talk about some of the literally hundreds of programs or courses being offered to help you become that entrepreneur.

But, what is it really? In part the interest is a reaction to today’s younger generation – 75 percent of high school seniors do not want to work for a large organization. This is a reaction to the re-engineering of American business that has taken place during the past 20 years. These young people have seen the impact on their immediate families and they want to do something that will afford them more control of their lives.

Educational institutions, ever mindful of changing demographics, have jumped on the band wagon. The Internet revolution and the many successful IPOs of Web-based entrepreneurial firms have heightened the visibility of entrepreneurship. There is an increasing interest in entrepreneurship among the general population, but particularly among younger adults. As a result, colleges with formal Entrepreneurship centers have grown from a handful in 1990 to more than 200 today.

Smart Business spoke with Mark Hauserman, director of The Muldoon Center for Entrepreneurship, about common myths about entrepreneurship and what traits are common in successful entrepreneurs.

Are entrepreneurs necessarily young men and women?

You may be surprised to learn that a recent Kauffman Foundation research study revealed that the average age of the founders of technology companies in the U.S. is a surprisingly high 39 — with twice as many over age 50 as under age 25. With the average life span increasing and more ‘necessity entrepreneurs,’ those who start businesses because of the scarcity of job availability at existing companies, being created every day, this number will probably increase.

When you gain experience, you probably know a lot about a lot of things. If youth is the answer, why are so many venture capitalists over 50? And most of the better ones are over 60. Don’t short change your experience. Investors get a lot more comfortable if they know you have been around the block a couple of times.

How is entrepreneurship learned?

The best start for an entrepreneur is to gain experience. This often means working for a company that may not have the biggest buildings on the block, but has an entrepreneurial attitude and will challenge you to spread your wings and continually take on new tasks.

While all jobs consist of ‘things you must do,’ the better businesses are also continually looking for better ways to serve their customers and markets. Every business owner responds to ideas that will make the company more money. You may not think you are an important cog, but the owner will sit up and take notice when you offer better solutions to the existing business strategy.

Don’t be afraid to make mistakes. I have heard Edward Crawford, Chairman of Park Ohio and self-made entrepreneur, say that the common denominator in entrepreneurship is failure. Not every idea you have will be a winner, but people will respect you if you get up after being knocked down and get back in the game.

The younger entrepreneurs get it. A healthy 44 percent of young entrepreneurs feel that business failure is perceived as a learning opportunity.

How will you know when you have arrived?

In most cases, there was no ‘grand plan.’ The entrepreneur just started working and as they solved more and more problems, work became fun. The classic sign of an entrepreneur is they cannot let it go. Unlike the idea in the popular culture that they are looking for the big score, they love what they do.

I played golf with a guy a couple of years ago who had just been offered $8 million in cash for his company. I am afraid I jinxed the deal when I asked him what he was going to do in a month after a long vacation and a shopping spree; no answer and ultimately no deal. He was only 42 at the time, so he will eventually sell, but it was way early and he was having too much fun.

Mark Hauserman is director of The Muldoon Center for Entrepreneurship. Reach him at (216) 397-4572 or [email protected]

To learn more about the Muldoon Center and our programs, visit: www.jcu.edu/Muldoon.

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