By: Carlos Mondragón 

Wherever there are people, there will be problems with the generation of solid waste and residue; in other words, trash. Trash is natural or industrialized waste that when commingled produces unpleasant odor, generates bacteria harmful to the community, and loses its capacity for reuse or recycling. In modern society, many products are discarded when they break or no longer work because they have served their purpose. Most temporary-use products end up as solid waste. But much of the waste generated in households and industry can avoid becoming trash, because if it is correctly separated, it can be reused or recycled (in other words, it could fulfill other important functions). Furthermore, waste separation can be a significant source of revenue.

For many years, to get rid of trash we simply dumped it outside the cities. In these trash dumps, the waste was burned to reduce its volume. Over time, however, improvements were introduced, with techniques like: 1) sanitary landfills, 2) controlled incineration, 3) shutdown and cleanup of sanitary landfills, 4) preparation of compost, and 5) recycling.

In 2010, developed countries recycled between 35% and 60% of the waste they generated, while Mexico this figure barely reached 12%. In 2011, only 60% of the waste was deposited in sanitary landfills, while the remaining 40% went to trash dumps that failed to meet official standards.

Germans are leaders in trash separation, and for years now, they systematically separate glass from the rest and deposit paper and cardboard into special containers. They also have special deposits for discarding polyethylene containers, cans, organic waste and conventional trash. This is a result of a long process of making the population aware of the importance of separating waste. In consequence, German society is organized into blocks of housing that have containers for different types of trash. The cost to a community of collecting the trash depends on the volume they produce; therefore, the community that separates more waste pays less to have it collected. In 2010, Germany’s trash could be divided as follows: sanitary landfills, 20%; recycling and composting, 57%; and energy generation, 23%.

Holland is another outstanding example, because in 2010 it deposited only 3% of its trash in sanitary landfills. It separated 64% out for recycling and composting and 33% for energy generation. On average, only 27% of all the trash of Western European countries went to sanitary landfills, while 45% went for recycling and composting and 28% for energy generation. As of 2011, there were no reports in Mexico on the use of trash to generate energy.

Waste management in Mexico City

The Bordo Poniente trash tip covers 680 hectares and is located approximately 5 kilometers northwest of the Mexico City international Airport. Between 1970 and 1986 it was used as an open-air dump by the Venustiano Carranza and Gustavo A. Madero delegations, the latter of which gave it its name: GAM. The Bordo Poniente dump was divided into four phases, and as each one was filled, it was closed and prepared for cleanup (table 1). In 1985, it received more rubble from the devastating earthquakes of that year than any other dump in the city. The GAM trash tip was then turned over by the Mexico City government to the National Water Council. At the end of 2008, phases I, II and III had been reclaimed; phase IV should have been reclaimed by the end of 2009, but was delayed by two years. Each phase is successively reclaimed by containing the waste and converting the space into a zone with reduced environmental impact, managing the biogas (gas produced by the fermentation of waste) and leachates (oils and acids that filter out of compacted waste), growing grassy lawns and woodlands, and creating a treated-water lagoon.

The Mexico City government created a comprehensive recycling and energy center to separate and industrialize waste, but it is overwhelmed by the 12,000 metric tons of trash generated each day in the nation’s capital. Tremendous effort is being made to separate out organic waste and produce compost to restore the quality of the city soil.

In February 2012, another four sanitary landfills were opened in Mexico State, located in Ixtapaluca, Cuautitlán, Xonacatlán and Tecamac. Before reaching the sanitary landfills, trash is separated into organic and non-organic material at transfer stations. The organic material goes to make compost that will be used to regenerate green areas like parks and gardens. An attempt is also being made to produce biogas with the compost. Among the solid non-organic waste are materials that could be profitable, like paper, cardboard, aluminum, iron, copper, glass, rags, polyethylene containers, tires, cotton, rubber, leather, wood, ceramic, and electronic products. The non-organic material is bundled, and depending on their size and weight, the bundles are sent to various industrial centers for reuse. Tires are used for fuel in blast furnaces, because they can produce temperatures of up to 600°C without contaminating the atmosphere.

In Mexico City, these efforts have succeeded in separating out approximately 45% of the organic waste generated, equivalent to 4,800 metric tons, only 2,500 of which are used for compost.

Separated Trash is Money

The big trash generators today are households, which make up 47% of the total. They are followed by retail establishments (primarily stores and restaurants) with 29%; and finally, by services (hospitals, offices, schools and companies) with 24%. Most of the waste is organic, accounting for 43% the total. Mexico City’s sprawling Central de Abasto-where fresh produce comes in from around the nation to be distributed and sold in the city-generates 400 metric tons of organic material per day, equivalent to 20% of the total waste.

The materials most prevalent in non-organic waste are plastic (13%), cardboard and paper (11%) toilet paper, feminine napkins, and diapers (10%) and others (table 2).

Among the most valuable non-organic waste materials are copper, aluminum, cardboard and newsprint. Households, companies and schools would be surprised to learn how much money they could make a year if they were to separate out their waste and sell it in collection centers.

Until January 2012, this profitable business was taken up by the drivers of garbage trucks, as well as their assistants and informally-employed trash pickers who sift through trash at the dumps and sort out still-usable components.

It is important for Mexicans to become aware of the importance of separating trash. In addition to the economic benefits, it is better for public health and hygiene and can substantially improve the environment. The inhabitants of Mexico City can separate trash at home and at work into two or three containers, one for organic waste, another for non-organic waste and another-if they were convinced about sanitary waste-for used toilet paper and, in another bag within that container, discarded diapers and sanitary napkins. Batteries should be kept in a closed glass container, and when it is full, given to the trash collectors. If left in the open air, batteries are highly contaminating and hazardous, both for the environment and for health.

Trash can also be a source of renewable energy, because organic waste can generate biogas and digestate for generating electrical energy. Composting can significantly reduce the emission of greenhouse gases.

Table 3 shows some examples of the kind of revenues that can be obtained from separated waste. Separated waste is money; co-mingled waste is a source of contamination.?

References

Department of Urban Improvement Programs. DGSU Office of Statistics and Information, Manejo de Residuos sólidos en la Ciudad de México (2011).

Enger, Eldon and Bradley Smith (2008). Environmental Science. A Study of Interrelationships, 11a. ed., Boston, McGraw-Hill.

Alejandro Ramos, La Jornada, 13 May 2010.

Jesús García, Reforma, 23 March 2008.

Tovar, L. Raúl, M. Teresa Orta and Gerardo Saucedo (2012), Composición y generación de residuos sólidos urbanos de la ciudad de México durante 2008 – 2009., Incluye los generados en la Central de Abasto del D.F. (in publication).

Table 1. Phases at Bordo Poniente

Table 2. Breakdown of solid waste in Mexico City (2009)

Tovar, L. Raúl, M. Teresa Orta and Gerardo Saucedo (2012), Composición y generación de residuos sólidos urbanos de la ciudad de México durante 2008 – 2009., Incluye los generados en la Central de Abasto del D.F. (in publication).

Table 3. Sale of waste for metric ton

By: Guadalupe Compeán
and Imanol Belausteguigoitia

Introduction

In searching for economic growth, economics has become the articulating axis of all social life; it has annulled ethics and has stopped being a means to become an end.

Governments and companies want to grow increasing their competitiveness. They set ambitious goals, pressure all the stakeholders, specially their workers, and they compete in every way they can think off, even unfairly. In pursuit of competitiveness, they mass-replace workers with machines and they cut their wages. The basic variable is the last line in the income statements: profits.

Although it is undeniable that humanity has progressed in multiple ways of life, it is also necessary to recognize that there are situations that deeply impact it, such as poverty, scarce and badly remunerated of jobs, inequality, poor distribution of income, lack of good basic education, financial and health services, and also an accelerated environmental deterioration.

Movements of various ideologies, international organizations of all kinds, governments, churches of different religious beliefs, and a society at large debate the causes of this deterioration and possible ways to solve the problem. Moral economy could be a solution to this deterioration, since it integrates acting well with production, distribution and consumption functions.

During the Enlightment period, significant thinking surfaced on equitable, solidary and fair relationships, such as in Rousseau’s Social Contract (1762): “The government was born with the objective of finding a way of association that would defend and protect persons and their property with the common strength of them all.”

Moral and Economics

In public, several voices speak of ethics and moral, in the search of good by human beings and for the human being. Moral is defined as the “part of the philosophy that studies human conduct as worthy of an approval or disapproval trial”. It comes from the Latin word moralis, which means “use or habit”. Unfortunately, some take the word moral in a pejorative way, because of its normative nature and its restrictive and religious connotation. It is even worst with the term moralist, because there are people that relate it to closed persons or ideas, because they do not accept progress or evolution of society. Possibly, it is because they have preferred to use work ethics instead or moral, and issues that clearly belong to the world of moral have been related to ethics.

On the other hand, economics has been defined as the “science that studies the resources, the creation of wealth and production, distribution and consumption of goods and services, to meet human needs” (Anaya, 1991).

Economics is not an entity to which you only have to add ethical and moral values to make it human; it is a system that stemmed from a human philosophical conception that precedes it. It is not economics what needs moral correction; it is society, its conception, and its values that require deep rethinking.

Jon Sobrino (2007), author of an article called “Humanizar a una sociedad enferma” (Humanize a sick society), explains that the problems of society should be healed and also the structures that form it, amongst other, economics, and as a fundamental part of it, companies. He considers that it is not economics, as an independent system of society, what can be changed with an ethical or moral touch and turn it into a new system that erradicates inequality and injustice, and promotes prosperity of individuals and people. It is the society as a whole, its conception, its practice, its very life, that is sick and on which the economic structure, because it reflects and feeds prior inequalities, needs to be cured: to humanize that which has lost a moral principle that not only stems from multiple sources, but that should also be inscribed in the human being entity.

Market economy is basically focused on allocating goods and services efficiently, and it is an organization that demands private property, free initiative of the persons and the coordination through institutions and market mechanisms.

Historically, several currents of thought have opposed market economy, accusing it, amongst other things, of being individualistic. It is interesting to consider that the Catholic Church’s criticism is not against market economy, but against the set of ideas and values that have made the economic system a danger for mankind. What the catholic vision of the economic moral rejects is not the freedom of human being, as a rational creature, but its assumed autonomy of objective moral laws, the radical individualism that ignores natural sociability of human beings, the motivation based on individual benefits, in profit making as the drive to economic progress and the search of power exclusively to have more instead of being more.

Christian moral stems from the integral conception of man as a rational and free being, with rights and obligations due to its condition of creature made “in the image and likeness of God” (Genesis 1, 27), and several religions and ideologies coincide in this perspective.

As a social being, man finds fulfillment precisely from living in society. Unfortunately, there are a series of values and ideas about men and society which are not compatible with the fulfillment and wellbeing concepts of humanity.

Neither ethics nor moral should be conceived as a set of rules, precepts and prohibitions added to the acts of human beings, but rather as the result of its nature. Argandoña (1991) wrote: “ethics has nothing to say about how to obtain efficiency, but it does have many things to say about what of that efficiency and its compatibility with the supreme values and, definitively, with its contribution to men’s and society’s end”.

Market economy is a technical instrument whose application can produce excellent results in terms of efficiency, but it gets stuck on a system of ideas and values that do not respond to the truth and to the end of human beings: guarantee the dignity of persons, the attention to common good and the solidarity between men and the peoples that make it possible for societies to progress in the search for their wellbeing. Social economics which includes concepts such as “socially responsible company”, are other forms of making things more fair, human and sustainable.

Joseph Ratzinger (1985), in his essay “Economics and moral responsibility”, postulates that economics should not act in accordance with its own rules without taking into account moral considerations.  When it acts in this manner, ethics and market become irreconcilable, because the moral actions are considered contrary to market laws. Consequently, the moralizing entrepreneur should be rejected, since what is sought is efficiency more tan morality.

Ratzinger explains that, in theory, the appropriate operation of the market rules should guarantee progress and distributive justice because these are naturally good laws, regardless of morality. But this thesis is not entirely true as can be proven by the problems faced by world economy today.

According to Ratzinger, Peter Koslowski, former director of the Centre for Ethical Economy and Business, states that “economics is not only ruled by economic laws, but it is determined by men”. Market Laws only work if there is basic moral consensus that justifies them.

Enterprise, work and moral

In an individualistic society, competition excludes consideration of the common good, service to others and of course, the social justice principles. Regarding work, it is necessary to take into account the laws of justice and equality that privilege and respect human dignity. Talking in concrete terms, one should avoid bargaining the payment of salaries, the assigning work in infrahuman conditions, work days extremely long and without compensation, presentation of crafty results so as to not share profits with the workers and to not pay taxes, humiliating treatment founded on ethnic group differences, sex and socioeconomic position. Finally, there is a catalogue of countless questionable practices that are far from acting morally, and therefore they should be deemed inappropriate. Nevertheless they are accepted by a large portion of the entrepreneurial society that distances from ethical acting in looking for profitability. Entrepreneurs who consider themselves successful they have incurred in practices of this kind. The fact that society has allowed them and even rewarded them turned this characters into models whose formulas to be prosperous are echoed by a society that is sick and lacks values.

Conclusion

An economic policy that not only serves the good of a group, that not only wants the good of a specific State, but rather the common good of the human family, requires a maximum moral discipline.

Moral economy, in the first place has to consider, the parties directly affected by their acting: personnel, stockholders or owners, client and suppliers. In the second place, it should be jointly responsible and compatible with the communities where it carries out its activities. In the third place, it should take into account the entire society and collaborate with the material and ethical improvement initiatives that promote and articulate individual, common and organizational values.

As Otaduy (2004)says, “It is necessary to intensify efforts to convince the directors and the members of the Company that ethical performance is not imperative by itself, but it is also essential for their growth, development and prosperity.”

Let us try to efficiently articulate moral and ethics with economics and enterprises and let us put in the center this articulation to human beings. ?

Bibliography

Argandoña, Antonio (1991). La economía de mercado, a la luz de la doctrina social católica,(The market economy, under the light of the catholic social doctrine) IESE Business School, Universidad de Navarra. Documento de investigación,(Research document) DI No. 212, April de 1991.

Aubert, Jean-Marie (2004). Compendio de la moral católica (Summary of catholic moral). Valencia, EDICEP.

Diccionario Anaya de la Lengua (1991). Madrid, Anaya.

Otaduy, José (2004). Ética en la empresa de negocios. Dirección Estratégica (Ethics in business enterprises. Strategic Management), No. 11, year 3.

Joseph Ratzinger (1985), in his essay “Economics and moral responsibility”, postulates that economics should not act in accordance with its own rules without taking into account moral considerations. When it acts in this manner, ethics and market become irreconcilable, because the moral actions are considered contrary to market laws. Consequently, the moralizing entrepreneur should be rejected, since what is sought is efficiency more tan morality.

Rousseau, Jean-Jacques (2004). El Contrato social (The Social Contract), México, Losada.

Sobrino, Jon (2007). “Humanizar a una sociedad enferma” (Humanize a sick society) (essay), Collection: El mal hoy y el proceso de humanización (Evil today and the humanization process). Concilium 329.

*CIMA literally means peak or Summit. However in this article it is also used as an acronym to Know (conocer in Spanish), Innovate, Meassure and Act.

By: Antonio Lloret
Professor and Researcher at the Business School
ITAM

Sustainability and social responsibility efforts of companies seems to be exclusively focused on large companies, those that are listed in the stock exchange or simply those that are recognized by the population at large. However, more than 99 of every 100 companies in Mexico are medium or small, PYMES (SMEs). Although these companies only concentrate 35% of the total gross production, they hire 73% of personnel employed (INEGI 2010). PYMES play no small role in the economy, in society and in the environment; therefore, it is necessary that they generate a sense of sustainability or social responsibility that is proportionate to their size and their impact, to the extent possible.

PYMES must establish a sustainability strategy that is aligned with its competitiveness and generation of value; otherwise, the PYME’s sustainability becomes, in the best of cases, a romantic idea.

The main objective of the sustainability is to generate economic, social and environmental value in order to last. It has to do with stop seeing companies as generators of monetary value (measured in pesos and cents) and seeing them as companies capable of generating value inside and outside their economic, social and environmental environment. Porter calls this concept shared value, (Porter y Kramer 2011). Freeman et al. call it stakeholders value (Freeman et al. 2010).

The hypothesis that by adopting a sustainability or social responsibility strategy, eventually the Company will generate economic benefits (Clarkson et al. 2007; King y Lenox 2001; Orlitzky, Schimdt and Rynes 2003). The hypothesis has been partially proven abroad, although there are doubts as to whether the economic benefits only reflect the operation efficiency (Porter y van der Linde 1995). In the case of Mexico, there is no solid empiric information proving, in general terms , that the hypothesis is valid. We can say that, we are just crawling.

Some studies mention that the reputation (González-Lara 2008) or philanthropy (Weyzig 2007) trigger sustainability actions; however, in economic structural models it is mentioned that the adoption of environmental sustainability practices is the result of stringiest regulations (Blackman et al. 2007; Ruiz-Arredondo, Rivera-Planter and Muñoz-Piña 2006), training subsidized by the regulator (Dasgupta, Hettige y Wheeler 2000) or rather market incentives, such as access to international markets or the demand of goods and services of governments committed to preserve the environment (Blackman et al. 2007; Montiel and Husted 2009). The adoption of Environmental management systems does not necessarily mean that the companies are more profitable.

In the only empirical study that brings the idea of competitiveness close to sustainability in Mexico, it was found that in companies that have more than 500 employees, six of every ten companies consider that the sustainability actions they have implemented have generated economic benefits to them (Aigner and Lloret 2011).

Assuming it is true that sustainability generates more economic benefits or simply that the search for sustainability in the Company can lead to operation efficiencies, it makes it worthwhile to ask if PYMES are prone to this process and if so, where and how to begin.

The answer is found in “La CIMA”.

CIMA is an acronym of the steps a PYME and all other companies should take to adopt a sustainability strategy that generates value in the internal and external environment. CIMA is formed by specific actions the company should undertake immediately, and without incurring in costs, adopt a sustainability strategy.

The first thing that has to be done to get to CIMA is to think that the size of a company should not be a reason to adopt a sustainable strategy. Actually all companies, no matter how small they are, can achieve this..

CIMA means to generate value for the company, value shared inside and outside with its interest agents, stockholders, suppliers, clients, employees, the government and even competition

CIMA is the strategy to Know, Innovate, Measure and Act that leads to generate economic, social and environmental value. (La CIMA es la estrategia de Conocer, Innovar, Medir y Actuar que lleva a generar valor económico, social y ambiental.)

To know

• Know the consumer. What are his preferences and trends? What are his needs?
• Know competition. Where is it, who is it, what does it do, how does it produce? Knowledge is essential for competitiveness. Not allow the competition to determine the market. Buy, to the extent possible, the product of the competition, analyze it, get to know it, understand it and compare it with the products of the company: what does the company do well, what does the competition do well. Adopt the necessary measures.
• Know the company well. Know what is being produced, how it is produced and who produces what. Know the employees, the value chain, the assets, the resources. Know what resources are those that strategically give value to the company.

To know is equivalent to understand the market trends, the company’s strengths and weaknesses.

Innovate

• The knowledge of the Company, its clients and the competition should concentrate on the investigation of where the company stands and where is it going. Finding this out leads to understand what it does and to ask you if it can be done better. To do better is to redesign the products and services thinking how to generate economic, social and environmental value. Innovate is also to improve the way things are done. It is to leave behind the traditional paradigms of organization and production in order to include society and the community in the Company goals. The objective should be to improve what the company does. Also, redesign helps to curb costs. We should not believe that redesign implies to do things from scratch again. It implies to rethink the processes, to know that they are working well and what has not and what has been done to correct that. Investigate leads to innovate, to do things better. To invest in innovation does not necessarily mean to make disbursements. Innovate is to generate benefits, increase the demand, reduce the costs. To innovate does not mean to sacrifice profits. To be sustainable means to get ahead of competition in a responsible manner and this is achieved by innovating..

Measure

• It is essential to measure in order for actions to generate value. Sustainability needs measurement, monitoring and to know the impact the Company operations have; to measure the use of natural, human and financial resources. To measure needs to know how much is done today and to set specific goals for each one of the resources. One has to measure how much is spent on water, on electricity, on raw materials, and of course how many residues does the company generate. One has to measure the impact of the company outside its walls. One has to assess the company’s impact on the community, on the municipality, state and country. If the impact is negative, one has to innovate the processes to improve. It is essential to remember that to measure implies to gather and to analyze information in order to be more efficient, more profitable. The more you measure, you will surely find more areas to improve.

Adapt, Adopt, Acquire knowledge and Act

• It is convenient to adapt the operations so that what has been learnt during the investigation and innovation generates value to the company. You should not forget to measure. A vision towards the future has to be adopted and watch the company throughout time; adopt the best practices of respectable companies; to applaud, to recognize the team for doing things well, and when things are not done well, to learn from our errors. Learn from success and from failure. Learn from the customers, from competition and their clients. To act and make decisions today.

The sustainability strategy is a value generation strategy in which knowledge of trends, innovation and redesign of processes, goods or services, measurement and action allow us to reach a higher competitive level and to undertake sustainability efforts. Remember: tomorrow, when you go back to your office, go directly to CIMA.?

Bibliography

Aigner, Dennis J., y Antonio Lloret. 2011. “Sustainability and Competitiveness.” UC-MEXUS.

Blackman, Allen, Bidisha Lahiri, William Pizer, Marisol Rivera-Planter y Carlos Muñoz-Piña. 2007. “Voluntary Environmental Regulation in Developing Countries: Mexico’s Clean Industry Program.” Resources for the Future.

Clarkson, P. M., Y. Li, G.D. Richardson y F.P. Vasvari. 2007. “Does It Really Pay To Be Green: Determinants and Consequences of Proactive Environmental Strategies.” Simon Fraser University.

Dasgupta, Susmita, Hemamala Hettige y David Wheeler. 2000. “What Improves Environmental Compliance? Evidence from Mexican Industry.” Journal of Environmental Economics and Management 39: 39-66.

Freeman, R. Edward, Jeffrey S. Harrison, Andrew C. Wicks, Bidhan L. Parmar y Simone de Colle. 2010. Stakeholder Theory. The State of the Art. Cambridge, Cambridge University Press.

González-Lara, Mauricio. 2008. Responsabilidad social empresarial. México, Grupo Editorial Norma.

INEGI. 2010. “Resumen del Censo Económico 2009.” Instituto Nacional de Estadística, Geografía e Informática (National Institute of Statistics, Geography and Informatics).

King, Adrew y M.J. Lenox. 2001. “Does It Really Pay to Be Green? Accounting for Strategy Selection in the Relationship Between Environmental and Financial Performance.” Journal of Industrial Ecology 4: 105-16.

Montiel, Ivan, and Bryan W. Husted. 2009. “The Adoption of Voluntary Environmental Management Programs in Mexico: First Movers as Institutional Entrepreneurs.” Journal of Business Ethics 2009 88: 349-63.

Orlitzky, M., F.L. Schimdt y S.L. Rynes. 2003. “Corporate Social and Financial Performance: A Meta-analysis.” Organization Studies 24: 403-41.

Porter, Michael E., y Claas van der Linde. 1995. “Toward a New Conception of the Environment-Competitiveness Relationship.” Journal of Economic Perspectives 9 4: 97-118.

Porter, Michael E., y Mark R. Kramer. Enero de 2011. “Creating Shared Value.” Harvard Business Review: 1-17.

Ruiz-Arredondo, José, Marisol Rivera-Planter y Carlos Muñoz-Piña. 2006. “Incentivos económicos de las empresas a participar en acuerdos ambientales voluntarios. (Economic incentives of companies to participate in the voluntary environmental agreements)” México, Instituto Nacional de Ecología (National Ecology Institute).

Weyzig, Francis. 2007. “Corporate Social Responsibility in Mexico.” Accountancy Business and the Public Interest 6 1: 1-157.

By: Luis González

Our vision, ideas and beliefs, our images of a Company are frequently formed by elements such as installations, productive processes, machines, tools, management methods, etc. However, in companies – in all companies – there has always existed another component and it is present in all the departments, in all the activity areas. This component, that has received different names throughout history, such as workers, personnel, human resources or employees, is the human capital.

Several theoretical frameworks have been suggested to support and set the basis to manage this company component, amongst which the human capital theory, transaction costs theory, resources dependence theory, institutional theory, agency theory or behavioral theory are outstanding. However, it is the companies resource-based view (RBV) or resources and capabilities theory, the most solid and accepted framework to explain the mechanisms through which human resources and their management can generate a sustainable competitive advantage. Besides being the most accepted, it represents the convergence of strategic management and human resources management.

The appearance of RBV assumed a change in perspective in the companies’ strategic analysis. In accordance with traditional strategic thinking, the company’s sustainable competitive advantage basically depends on the adjustment between its resources and the environment’s conditions, what determines a unique and superior position in front of competitors in terms of costs, differentiation or segmentation. However, since the beginning of the 90s, it has been proven that companies in the same sector and with the same strategy may obtain different and even opposite results. The explanation of these results is not found in the characteristics of the environment, which are the same, or in the adjustment strategy, which is also the same. In order to explain these differences in results, it is necessary to change the point of view from outside to inside the company. This look inside the company discovers the elements that are in the source of these differences in the results, without questioning the need to adjust to the environment through the entrepreneurial strategy. RBV considers that companies are different and heterogeneous in the resources they have and the capabilities they develop by combining the resources, and that it is precisely in these resources and capabilities where the source of sustainable competitive advantage is found.

An organization, a company, is seen as a system or configuration integrated by some objectives and values, a set of resources and capabilities that are necessary to compete in the market, structures, and a strategy in a concrete environment. This conception is not very different from the traditional approaches. This conception comes from the importance granted to the resources and capabilities which are at the base, at the source of the mechanisms through which the company obtains and maintains a competitive advantage. The resources are the tangible as well as intangible factors, the assets owned and controlled by the organization, that participate in the production of goods and services. The capabillities are the dynamic mechanisms that allow companies to carry out activities by integrating the resources to reach a higher performance than their competitors. The joining of resources and capabilities generate organizational competences; that is, that which the organization is capable of doing better than the competition.

One of the main classifications of resources divides them into tangible and intangible resources. The tangible resources are those that have physical support like machines, facilities, tools, financial capital, etc. They can easily be identified, valued and integrated in the company’s accounting statements. Besides the tangible resources, the company also owns and controls intangible resources that do not have physical support, such as patents, brands, culture or human capital amongst others. Unlike tangible resources, the intangible resources are hard to identify, value, and incorporate in the company’s accounting records. This difficulty stems from its main characteristics, amongst which are their specificity, causal ambiguity and social complexity.

From the initial approach of RBV (Barney, 1991) the key role human capital plays in the generation of mechanisms of a sustainable competitive advantage for the company was recognized. However, and as it was recently recognized by Barney, Ketchen and Wright (2011), there has not been an attempt to delve in the knowledge of these mechanisms. This is partly due to an almost exclusive macro focus, centered at the strategic level of RBV. It is necessary to establish the micro foundation of RBV and specially, of human capital and the role it plays in creating a sustainable competitive advantage. This is one of the conclusions derived from the works published in the special issue of the magazine Journal of Management published in September, 2011 and exclusively dedicated to analyze the current and future status of RBV.

In our opinion, the necessary micro foundation of RBV and therefore, of the strategic management of human resources, goes through a new conceptualization of human capital and its articulation with strategic management (González, 2002; 2004). Reducing human capital to the stock of knowledge, capabilities, and skills contributed by the employees to the company does not allow us to know or explain the mechanisms through which value is generated. It is necessary to incorporate to the human capital concept the behavior of employees after they acquire this stock of knowledge, capabilities, and skills. What generates value is the behavior of employees, along with the company´s objectives and strategies. Therefore, in this new conceptualization, human capital is integrated by two components: stock and flow.

Besides the differentiation of these two components of human capital, it is also necessary to expand the elements that traditionally have been associated to the human capital stock. The human capital stock should be formed by all the determining factors of the employee´s behavior. That is, not only by knowledge, capabilities, and skills, that to date have been considered the exclusive elements of human capital, but also by the values, personality traits (such as place of control, self-esteem, self efficacy, resistance to change, etcetera), learning, perception and attribution, attitudes in the work place (satisfaction, commitment, and implication), psychological contract, dedication and motivation at work, just to mention some of the most relevant factors. This expansion is not merely taxonomical, it is rather that the micro foundation of human capital is supported in the articulation with RBV of the knowledge corpus and tools that one has over these elements derived from behavioral sciences. Likewise, the human capital flow component should incorporate all the knowledge background and techniques available on the behavior of employees and that allow us to explain their behavior: performance, absenteeism or turnover, their response to work teams, the processes through which they make decisions or communicate, the way they settle conflicts or the behavior that leads to leadership amongst other things.

Both components of human capital are inseparable. In order to acquire the conduct that allows the company to obtain a sustainable competitive advantage, the employees should have a series of characteristics, specific knowledge, capabilities, skills, personality traits, attitudes, motivation, etc. However, the possession of these characteristics does not generate value to the company if this is not transformed into a behavior. Lastly, we should highlight another one of the human capital characteristics directly related to the mechanisms to obtain a competitive advantage. Lastly, we should highlight another one of the human capital characteristics directly related to the mechanisms to obtain a competitive advantage. The mere possession of a human capital stock does not automatically become the behavior that is required by the Company. It is necessary to manage this human capital stock in order to obtain that behavior. Therefore, the strategic direction of human resources should allow the company to obtain the human capital stock and turn it into flow, in the behavior that will allow it to reach its objectives.

To integrate and develop this resource, strategic direction of human resources carries out a series of activities and practices so that the company acquires the human capital stock it lacks so as to turn it into behavior. Amongst these activities we find, for example, the recruiting, selection, motivation, evaluation of performance, etc. These are dynamic mechanisms of human capital integration and, therefore, capabilities of companies related to the management of human resources. However, regarding human capital, we also find another type of capabilities in companies related to human capital and not to its management; for example, the dynamic mechanisms that integrate and develop the resources that form a self-team. The nature of these capabilities is found in human capital and not in the management modes.

Figura 1. Components of human capital

Therefore, human capital is a strategic asset that can be used as a basis so that the company obtains a sustainable competitive advantage. As shown in figure 1, the two inseparable components of human capital, the static component of the stock and the dynamic one of flow, form the company’s strategic value that allows it to obtain and maintain a competitive advantage. Definitively, human capital is translated to value for the Company through the behavior of the employees, but the necessary conducts to obtain and maintain a competitive advantage do not happen without human capital that has specific characteristics.

Figura 2. Strategic management of human capital

The strategic management of human resources through configurations or high yield practice systems that constitute the human capital management capabilities, gives the Company a human capital stock and transforms it into a specific behavior. This human capital and its management form the competences that organizations related to human resources management and that, articulated with the company’s strategy, will allow it to obtain a sustainable competitive advantage. In figure 2 this conceptual scheme of human resources strategic management and its effect on human capital through the capabilities of human resources management are graphically represented. This means that the human resources management gives the company, develops and maintains a human capital stock with a set of characteristics and enables the development of a specific behavior that is susceptible of becoming a strategic asset for the company.

This new conceptualization of human capital and its integration with strategic management assumes a horizon in the development of the strategic management of human resources. It contributes elements, theoretical models and tools of intervention to know the mechanisms through which it generates value. This integration is also the future challenge that opens this new horizon.?

Bibliography

Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17, 99-120.

Barney, J. B., Ketchen, D. J. y M. Wright (2011). The Future of Resource-Based Theory: Revitalization or Decline? Journal of Management, 37, 1299-1315.

González, L. (2002). Gestión del conocimiento y gestión de recursos humanos: una convergencia necesaria. Revista de Psicología del Trabajo y de las Organizaciones, 18, 177-203.

González, L. (2004). Condiciones para una gestión estratégica de recursos humanos. Encuentros en Psicología Social, 2, 208-213.

By: Victor Hugo Luque

The European City

By size, Basel is the third-largest city in Switzerland (the two largest are Zürich and Geneva, while the capital, Bern, ranks fourth). It has an enviable geographic position in Europe, situated on the banks of the Rhine River, at the border formed by Switzerland, Germany and France. And it´s the birthplace of the best tennis player ever, Roger Federer, who holds the record for most grand slams won, with a total of 16.

When the word Basel is mentioned in the financial markets, it refers to the various banking regulation agreements made by the Basel Committee for Banking Supervision, which is been meeting in that city since late 1974. The financial institution responsible for the Basel Committee is the Bank for International Settlements, founded in 1930, which serves as the seat of international cooperation among central banks, as well as the most active proponent of the agreements reached.

Is The Basel Committee a Regulatory Authority?

The Basel Committee is not formally considered an international supervisory authority, and the agreements it reaches are not legally binding as bank regulations. It is expected, however, the regulatory authorities of each country will take the necessary measures to introduce the general guidelines and best practice recommendations from the Committee into their financial systems.

The Committee also presents a report on the agreements reached in its sessions (it meets four times a year) to central bank governors and the heads of banking supervision in each of the member countries (in Mexico, both Banco de Mexico and the National Banking and Securities Commission), with the idea that these institutions will follow up on its recommendations.

Specifically, one of the the Committee’s goal is to close the gap between different banking supervisory systems around the globe, and avoid allowing a bank to evade supervision in its country of origin or any other country where it operates. The Basel Committee is also a forum for international cooperation on various issues relating to banking regulation, in order to improve the quality of oversight and supervision throughout the world.

The exchange of information among the heads of central banks and regulatory authorities enhances the technical capacity of member countries and generates consistent guidelines for the control of banking institutions; specifically, the Committee sets standards for effective banking supervision principles, capital sufficiency requirements and agreements on international banking supervision.

According to the CNBV, Mexico’s participation in the Basel Accords has allowed it to learn from the experiences of other countries, incorporate the lessons learned from the 1994 crisis into the Committee’s recommendations, and guarantee that the new international regulatory framework takes into account the needs and interests of emerging economies with financial systems open to foreign direct investment (like Mexico).

The Basel Committee for Banking Supervision is made up of four sub-committees: The Standards Implementation Group, the Policy Development Group, the Work Group for Accounting Rules, and the Basel Consulting Group. Its 27 member countries are Argentina, Australia, Belgium, Brazil, Canada, China, England, France, Germany, Holland, Hong Kong, India, Indonesia, Italy, Japan, Luxembourg, Mexico, Saudi Arabia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Turkey, and the United States.

Basel III and Mexico

When the terms Basel I, Basel II and Basel III are heard in the deliberations of a bank’s credit committee or risk committee, they refer to the various recommendations made by the Basel Committee over the years.

In 1988, the Basel I Accords on minimum capital requirements for the banking sector were published, with a suggested implementation date of late 1992. These agreements (better known as the Basel Capital Accord) focus on the credit risk that banks confront in their activities and suggested actions to mitigate it. In particular, the Accord recommends that an international bank have a minimum regulatory capital equivalent to at least 8% of the total risk assets on its balance sheet, applicable to any banking institution.

Over the course of time, and due to the limitations identified in prior documents, the Committee came out with the Basel II Accords in 2004, including recommendations on operational risks and long-term capitalization and solvency of banking institutions, with an estimated implementation date of late 2006. In these agreements, Committee members intended to set an international standard that would serve as a reference for bank regulators, based on three pillars: minimum capital requirements, regulatory processes and market discipline.

The 2008 international financial crisis prompted the Committee to review its previous Accords. Thus, in 2009, Basel III was published, with an estimated application date of 2013. These agreements strengthen capital requirements, improve risk management, establish additional capital conservation buffers, and introduce new concepts for regulating bank liquidity and leverage.

One of the most important lessons of the recent crisis in the financial industry was that even with adequate capitalization and solvency levels, banking institutions were unable to contend with short-term liquidity problems under stressed situations. Thus, Basel III recommended improving conditions for the banking industry to be able to absorb the negative impact of unfavorable financial and economic conditions, fine-tune banks’ risk management and corporate governance, and strengthen transparency and disclosure of information published by those institutions.

What we find, however, is that some of the situations arising from the current global crisis had already been seen in Mexico during the 1994 crisis. Since then, Mexico has introduced stricter controls for banking supervision, with the intent of improving loan delinquency rates, coverage, liquidity, solvency and capitalization throughout the banking industry.

The central agreements that came out of Basel III are higher capital requirements and new liquidity rules for banks, as well as additional measures (creation of buffers, among others) to soften cyclical fluctuations in the financial system, introduce market discipline among all institutions in the industry and intensify oversight. Fortunately for the Mexican banking industry, the crises of the past, the measures taken by the regulatory authorities, and the capital sufficiency indexes that most banks maintain today, place our country in a privileged position with respect to the Basel III Accords. This means that this year Mexico could be the first country to fully apply the recommendations of the Basel Committee for Banking Supervision.

Toward the Future

The Basel III Accords comprise a series of prudential recommendations for financial systems to introduce more solid regulation by year-end 2013. The current economic situation and the incentives needed to turn that situation around create attractive scenarios for many investors who have historically found growth opportunities in crisis situations such as the one the world is currently experiencing.

In conclusion, Basel offers a series of accords that serve to strengthen bank balance sheets: short-term liquidity, long-term solvency, creation of reserves during periods favorable to the firm and adequate capitalization, among others, in addition to improved banking supervision throughout the globe. Furthermore, corporate governance and risk management should play a fundamental role in decision-making by financial institutions in coming years.

Mexico is in a privileged position to apply the recommendations of the Committee, and investors should not fail to take advantage of conditions created by specific situations affecting this country since 2008. Although economic crises are often unpredictable, financial systems can prepare themselves to deal with them through appropriate banking regulation. At the same time, investors should be prepared to take advantage of the opportunities opened by crisis. It is a call to all the visionaries and entrepreneurs of this country.?

References

http://www.bis.org/bcbs/

http://www.cnbv.gob.mx

http://www.myswitzerland.com/en/basel.html

http://www.rogerfederer.com/en/rogers/history.html

http://www.financialstabilityboard.org/

In the article “A 20 años del ABC” (“20 Years After ABC”), published in Dirección Estratégica [1] we presented the advantages and disadvantages of an activity-based costing system (ABC). The ABC system can calculate unit costs more accurately than a traditional costing system, and it also improves the processes because the activities to carry them out can be better understood. We also stated that more than 20 years after ABC was developed in its current form, studies from different countries show low adoption rates and that a large number of companies that adopted the system had already abandoned it.

Subsequently, in a second article, “Is my costing system obsolete? [2], we saw the reasons why the companies change to an ABC costing system and the symptoms of a costing system when it becomes obsolete. The obsolescent systems warn companies of potential distortions of their production unit costs calculated with a costing system based on volumes.

The most common problem is “crossed subsidies” amongst the company products. In addition to the analysis of these symptoms we mentioned that the company must examine the changes that have occurred in its manufacturing environment and its surroundings, before deciding if it is time to update or redesign the cost system. The main changes that affect the system are the following: increased automation of the productive processes, introduction of new products, changes in the marketing strategy, simplification of the productive process, increased competition and deregulation.

Some interesting questions for a company that is considering the possibility of changing to an ABC costing system are: Which is the optimum costing system for the company? What potential benefits does the adoption of and ABC system offer? Are the unit production costs more accurate if calculated with ABC? Under what conditions are the ABC systems preferable? What is the relationship between the use of ABC and the financial and operational performance of the company? This article will answer these questions.

Which is the optimum costing system for the company?

The decision to change the company’s costing system, as in all other investment projects, should include a cost-benefit analysis in which you can compare the costs of designing and operating the new system with the benefits it will provide. In addition, companies should consider the potential risk it is exposed to if it decides not to change their costing system.

In making this decision, one should consider that there is a costing system that not necessarily should measure all the costs in an extremely accurate way. Measuring every little piece of material and every second of the worker’s labor can be costly and take a long time. This investment in money and time would only be justified if there were serious consequences to providing inaccurate information.

In this regard, in 1984 Cooper [3] stated that there are two costs in the design of the entire costing system: 1) the cost of errors, and 2) the cost of measuring. The cost of errors is the result of wrong decisions made with the information provided by the costing system. Hence, the more accurate the costing system, the lower the cost of errors; with a less accurate system, the higher the cost of errors. The cost of measuring depends upon the information processing technology. The more accuracy you demand from the costing system, the higher the measuring cost; the lower demand of accuracy from the system, the lower the cost of measuring. The optimum costing system for a company shall be the one that minimizes the total cost resulting from adding the cost of errors to the cost of measuring, as can be seen in Figure 1.

It is important to highlight that the optimum costing system is not static; it is rather a target in movement. Innovation in information technologies constantly reduces the measuring cost of the costing system. Likewise, the ever growing competition increases each time more the cost of errors so much so that the company could even be driven out of the market if wrong decisions are made based on erroneous information. Therefore, the current trend is that both curves move to the right and at the same time and displace the total cost curve also to the right. A concrete example of this is the case of a regulated product whose price is set by the government, but that at a given point in time it is deregulated. With this, the competitive options of the company increase and it could happen that its costing system that worked fine until that date is no longer good because it drastically increases the cost of its errors. This moves the errors cost curves and the total cost to the right, as shown in Figure 2.

However, in the cost-benefit analysis of the decision to implement or not implement an ABC system, the Company is facing reality, namely that the costs of implementing ABC are tangible, because they include immediate investment of management time, money and commitment; and these are scarce resources. In contrast, the potential benefits its implementation promises are intangible, because they do not generate the visible reduction of inventories and of the production cycle that happens with a just in time system, (JIT), aside from the fact that it is difficult to assign the benefits of making better decisions to the implementation efforts of ABC. This is a complicated situation if the companies have not clearly defined what they expect from an information-based administration as provided by ABC and to what degree management is committed to the implementation strategy [5].

What are the potential benefits offered by adopting ABC?

For Cooper and Kaplan [8], there are various potential benefits of ABC and they can be grouped as follows: 1) strategic potential benefits, by providing more accurate unit costs of the products, which are better information to make decisions such as how to buy or produce, determine the product mix, eliminate or not a production line, analyze competition, inject resources to the most profitable line, etc., and 2) potential operational benefits, obtained from better understanding the production activities and the drivers that explain their cost and that we can summarize in lower costs, quality improvement and reductions in the production cycle time.

Lower costs. By providing detailed information on which activities add value and which do not, and on the costs of those activities and their drivers, ABC allows: a) to design products and processes that require fewer activities and, consequently fewer resources, b) increase the efficiency of the current activities and determine those that do not add value to the customers, and c) improve coordination between customers and suppliers.

Improve quality. The information of activities and drivers provided by ABC help identify the low quality activities and the persons causing those problems, apart from revealing the costs of the activities related to quality that do not add value. In addition, this information may help do an optimum distribution of resources to improvement projects.

Reduction of the cycle production time. Upon identifying the ABC activities that do not add value but increase the life of a process (review, count, move, adjust the machine before a production run, etc.), would help reduce the process time and it would also provide the necessary detailed information that is required to minimize the delays.

Are the production unit costs calculated with ABC more accurate?

Several articles document cases of successful implementation of ABC in companies. Whirlpool is one of those cases and it was studied by Beier and Mehmet [9]. The company made a pilot Project with ABC in all the production lines of its Evansville plant. As an interesting piece of information, ABC assigned to low volume Whirlpool products two or three times more indirect expenses than were assigned by the traditional costing system. The extreme example is one product to which a 64.48 dollar indirect expense was allocated with the traditional system while with ABC 25,447.11 was allocated. One of the reasons for the success of the project was the low cost incurred in its implementation, because almost all the information they needed for the system was already available in the company’s financial accounting system. In contrast, other analytical studies say that all the cost information provided by an ABC system is not necessarily more accurate than the one provided by traditional unit based systems. Data et Gupta (1994) show in a study [6] that precising the specification of the basis to distribute costs and increase the number of cost groups in the ABC systems may increase the errors of measuring the product cost. Other studies add that the desire and capability of an ABC system to produce relatively reliable costs varies with competition in the markets and technologies used by the organization, and conclude that the ABC systems are preferable only under specific conditions [4].

Under what conditions are the ABC systems preferable?

Many ABC proponents argue that the use and adoption of the system is an endogenous election in which the benefits vary depending upon the operation characteristics of the plant [4]. For example, Cooper and Kaplan show that the economic benefits of ABC increase if the company has more product lines and a wider variety of products. Other accounting circles state that the effects of ABC vary with the production process used at the plant. Reeve states that the plants with continuous processes have not adopted ABC because many of the cost drivers managed in these systems, such as the activities related to changes of products, are less important in those operations [5]. On the other hand, Krumwiede, states that it is less likely that ABC systems are implemented in production plants that use job order cost, because the uncertainty of this kind of production makes it difficult to manage such a system. For other authors, such as Kaplan and Cooper, the ABC would be more beneficial combined with advanced production practices such as JIT, total quality management and information technologies [4].

What is the relationship between the use of ABC and the financial and operational performance of the company?

For some authors, the success of ABC lies almost exclusively in the perceptual performance measures. Foster & Swenson [7] group these success measure in four categories: 1) the use of the ABC information, 2) decisions and actions taken with ABC information, 3) evaluation of the management of ABC’s total success, and 4) financial improvements perceived from the implementation of ABC. In general, in these studies we can see the scarce use of information from ABC and moderate benefits as of the starting up of the system [4]. However, few of these studies try to prove that the perceptual measures are correlated significantly with the financial and operational measure, aside from the fact that the studies have been made in small samples [4]. Aware of the limitations herein above, Ittner, Lanen and Larcker [4] made a study with a 2789 sample of companies and examined the association between the extensive use of cost-based activities and they examined the association between the extensive use of costing based on activities and the financial and operational performance of the plants. The study highlights the following conclusions: 1) on average, the extensive use of ABC is associated to higher quality levels and a higher reduction in the production cycle time; 2) the use of ABC does not maintain a direct relationship with the production costs, but it can have a significant indirect positive association with production cost reductions by improving quality and the production cycle time; and 3) the association between the net financial benefits, measured by the return on assets, and the use of ABC, varies with the operational characteristics of the plant. On average, the use of ABC does not have an association with ROA. It should be mentioned that a limitation in the Ittner, Lanen and Larcker study is to assume that ABC is equally applicable in all the plants..

As can be concluded from the previous research, the decision to implement an ABC system is not a simple one nor does it offer guaranteed results. Therefore, although some companies have been successful in establishing this system, others are still wondering if ABC is not an exercise that not only does not add value but rather distracts the organization from its activities of identifying and giving value to their clients..?

Bibliography

1. Huerta E. y Leal N., A 20 años del Costeo basado en Actividades, Dirección Estratégica, No. 17, March -May 2006.

2. Huerta E. y Leal N. ¿Está Obsoleto mi Sistema de Costos?, Dirección Estratégica, No. 18, June-August 2006.

3. Cooper, R., You need a new cost system when… Harvard Business Review, 1989, 66(1): p. 77-82.

4. Ittner, C.D., W.N. Lanen y D.F. Larcker, The Association Between Activity-Based Costing and Manufacturing Performance. Journal of Accounting Research, 2002, 40(3): 711-725

5.Reeve, James R., Projects, Models, and Systems-Where Is ABM Headed?. Journal of Cost Management (summer, 1996), 10 (2): 5-16

6. Datar, S.M. y M. Gupta., Aggregation, Specification and Measurement Errors in Product Costing. The Accounting Review (October de 1994): 567-91

7. Foster, G., y D. Swenson, Measuring the Success of Activity-Based Cost Management and Its Determinants. Journal of Management Accounting Research (autumn de 1997): 109-141

8. Cooper, R. y S. Kaplan , The Design of Cost Management Systems. Prentice Hall, chapter 5, 1991.

9. Cynthia, B. and Kocakulah Mehmet, Implementing and ABC Pilot at Whirlpool, Journal of Cost Management (March-April, 1997): 16-21.

By: Benito Revah and Genoveva Ayala

In the current globalization environment, companies are constantly exposed to financial and operation risks that should be covered to guarantee, with greater certainty, the present value of the expected flows.

Some of the functions to be performed by the Finance and Planning Committee in all Corporate Government Councils of Companies are the collaboration to identify the risks to which the corporation is subject and to evaluate the mechanisms to control them.

The internal control system is the process followed by management to comply with the following objectives: a) prepare reliable financial information b) safeguard the assets, c) increase the efficiency of the transactions, and d) comply with the laws and standards in effect.

The problems generated by the use of derivatives have to do with the difficulty of understanding their application to risk management or for speculation purposes. These problems highlight the need to develop internal control systems to regulate these transactions.

It should be remembered that a member of the Board of Directors, as an independent director, has to assess and give an opinion on the investment and financing policies proposed by top management.

There are two essential requirements to use derivatives: to have general knowledge of these instruments and their environment, and to formulate polices to manage these transactions.

General knowledge of derivatives and their environment

Derivative instruments are financial contracts that obtain their value and yield from underlying assets, such as bonds, physical commodities, interest rates or exchange rates, as well as a variety of stock indices amongst others. It is important to make sure that derivative risks are known, such as the high degree of leverage their operation implies, the volatility of the market, the risk of credit default and the lack of liquidity. Besides these technical risks, a fundamental risk is phased if the use of these products is not coherent with the organization’s policies and objectives; that is why one should understand perfectly well the hedging of operations’ or transactions’ risks through the use of derivative products, and these activities have to be aligned with the control systems.

Consultants have to understand their responsibility and thus authorize the use of derivatives after they have analyzed very thoroughly the expected risks and benefits. The contingencies generated can increase significantly if when doing these transactions with derivative financial instruments, the directors and officers of an entity do not have the knowledge or the experience on the risks implied by these transactions

Operation with derivatives policies

Non authorized speculation represents one of the higher risks in this market. Therefore, when the entity determines the objectives to contract and operate derivative financial instruments, the official documents describing the objective, the policies, and the procedures must be prepared and the persons who will make and monitor the operation of these instruments should be appointed.

The director must make decisions and should be aware of the degree of authority that he or she will delegate. Management has to have the competence needed to understand the transactions and the executives that participate in these transactions must have the technical knowledge and the operative experience.

Board members and top management need sufficient and timely information to see that the objectives and the strategies are complied with. Therefore, it is extremely important to convey promptly and accurately the positions to the control systems, and also the criteria and the risk measurements. The control activities must include procedures to identify, measure, assess and limit the risks in the use of derivatives, and also the information on the profitability of the transactions. They should preferably identify the following issues separately:

1. Benefits and losses realized in closed positions.

2. Unrealized benefits or losses in the contracts in effect.

3. Transaction costs.

4. Financing costs.

Ideally, the structure of the organization must create a control and supervision committee on the use of derivatives, that provides the necessary elements to top management so that it understands the risks of these activities, validates the results and assesses compliance with the established policies.

In conclusion, a good internal control on the use of derivatives should encompass four critical supervision areas, summarized as follows:

1. It is essential to train the directors, since they have to thoroughly understand the environment in which derivative transactions operate. An internal control system will not work if the personnel it affects ignores the nature of the risks it controls.

2. Have official documentation and clear policies on the entity’s objective in contracting derivative financial instruments,

3. Establish levels of authority that correspond to the organization’s needs, bearing in mind the experience of each employee and the functions each one has to carry out, to clearly limit their tasks performance.

4. Constantly communicate the positions, as well as the profitability levels, to determine if they are valued correctly. The format and content of this information should adapt to the company’s needs.

Operations with derivatives are and shall be every day more an essential tool to manage risk hedging in an organization. The relevance acquired by these transactions lead us to think that their importance will continue to grow with the development of new products focused on more efficiently achieving the hedging objectives. To the extent that they increase their knowledge on the management of these instruments, together with an effective control of their operation, the organization will be able to make better strategic decisions and with more certainty.?

Bibliography

American Institute of CPAS, Internal Control Issues in Derivatives Usage: An Information Tool.

Haro Pérez, J. y S. Cruz Rambaud. Control interno en operaciones con futuros y opciones. (Internal Control in operations with futures and options). Investigaciones Europeas de Dirección y Economía de la Empresa (European Research of Management and Economy of Companies).

Mosqueda Vélez, Miguel Ángel. (¿Cómo auditar instrumentos financieros derivados? (How to audit derivative financial instruments?), Instituto Mexicano de Contadores Públicos (Mexican Institute of Public Accountants, en.

Pérez Solórzano, Pedro Manuel. Los cinco componentes del control interno (The five components of internal control).

Here are ten helpful tips for filing your tax return and increasing your chances of receiving a refund.How many times have you requested a tax refund and instead received a purple-colored letter at home stating that the refund was denied? How often have you had to file your annual tax return again because of inconsistencies in the information? For these reasons and many others, it is important to take note of the following tips that will help you increase the odds of getting a refund.

Tip 1: Do not wait until the last minute

The date for filing your individual annual tax return for 2011 is approaching. It is important that if you need to file, prepare all necessary documents ahead of time so that the deadline does not take you by surprise. The deadline is April 30, 2012.

Tip 2: Find out if you are required to file an annual tax return

Not everyone is required to file an annual tax return. You are expected to file if your earnings obtained in 2011 fall into one of the following categories:

1. If you earned more than 400,000 pesos a year.

3. If you provided professional services after January 1, 2011, or ceased your activity before December 31, 2011.

4. If you earned more than 100,000 pesos in interest or if the total sum of your combined interest and salaries is greater than 400,000 pesos.

5. If you provided independent professional services, were engaged in business activities, collected rent on any type of real estate, among others.

Tip 3: How do you find out the amount of your yearly income?

Employers have the obligation to give you a withholding statement that includes the amount withheld and the time period it was withheld. In addition, individuals have the right to request such document. This document is very important – because it is not only the basis for calculating the tax, but also the documented evidence that the obligation was complied with and the amount was retained. Employers must send this information to the SAT by February 15, 2012. After that date and before the beginning of April, the document should have been given to the employee. Make sure you get this document and keep it in a safe place.

You must add up all of your income, as insignificant as it may be, because failure to report your total earnings will result in an inconsistency in the filing and the refund will be denied.

Tip 4: What expenses can be deducted?

While each contributor can deduct expenses that correspond to his or her activity, all individuals have the right to claim personal deductions. In general terms, these deductions include:

i. Medical and dental fees, and hospital expenses

ii. Funeral expenses

iii. Donations

iv. Voluntary contributions to the system of retirement savings

v. Insurance premiums for medical expenses

vi. Obligatory school transportation costs

vii. School tuition

viii. Interest on mortgage payments.

It is important to mention that invoices must correspond to the activity of the supplier who issued them. For example, if a person purchased medical insurance from a non-authorized insurance company, SAT’s automatic system will determine an inconsistency, deny the refund and signal an omission.

Tip 5:. If you paid for school tuition, what requirements must comply with?

On February 15, 2011, the government published a decree establishing a fiscal stimulus for those expenditures that arise from the payment tuition – from preschool to high school or the equivalent – provided for the taxpayer, spouse, children or taxpayer’s parents. However, this deduction has the following limits per year:

Preschool: 14,200 pesos

Primary: 12,900

Secondary: 19,900

Professional technical: 17,100

High school or equivalent: 24,500

In order that the deduction is considered valid, invoices must include the following information: student’s name and CURP; educational level; total amount of the tuition, separating other expenses (such as inscription fees, books, school supplies, uniforms, among others); and RFC code of the taxpayer who made the payment. These payments must be made electronically or by check.

Tip 6: . ¿What should you do with the digital invoices?

Since December 1, 2010, digital invoices have become more common. In the event tax authorities wish to verify the veracity of your digital invoices, they have the right to request your files as an XML extension, but not the paper invoice. If you are going to deduct digital invoices, you should have those files on hand.

Tip 7: Check to make sure all documents are filled out completely

Today SAT’s internal validation process is completely automatic. Therefore, taxpayers must check all their invoices, whether they refer to earnings or expenditures, to make sure they are correctly filled out with all the required information. The system does not recognize incomplete or incorrect RFC codes. If an invoice contains errors, taxpayers have the right to request the correction. If the errors are not corrected, the invoice will be rejected.

Tip 8: Check to see if the FIEL is active and that you have the CIECF

There are two ways to file your annual tax return: the FIEL or the CIECF. If you do not have either one, you would not be able to file by Internet. The CIECF is a password with eight alphanumeric characters that you can obtain at any SAT office. If you still do not have one, you can go without an appointment to the “express window” and request it.

On the other hand, the FIEL is valid for a limited time: if you obtained it before June 30, 2010, it is valid for two years. If you obtained it after that date, it is valid for four years. It is very important that if it has already expired, you immediately ask for an appointment at the SAT, because as the filing date approaches it will be very difficult to make an appointment. If your FIEL has not expired, you can renew it over the internet, and avoid unnecessary waiting times.

Tip 9: Check to see if your tax return is filled out correctly

Whether you hire a private service or go to one that is free, check to see that the data on your tax return is correct, including your name and address, and your CLABE number, in case you receive a refund. Any error will be registered as an inconsistency and your tax return will automatically be rejected.

Tip 10: If you do not know what to do or have any doubts, ask for help!

Both free advisers and specialized private accountants will be able to provide assistance as required by your particular case. The tax issue in Mexico is very serious and important, so obtaining all possible assistance decreases the probability of making mistakes.

If you read and follow these guidelines carefully, you are more likely to file your tax return correctly.?

By: Sandra Minaburo
Director of the Accounting Research Center
spmina@itam.mx

According to the 2010 annual report submitted by the International Accounting Standards Board (IASB), more than 120 countries require or permit companies regulated by their local stock exchanges to report their financial information on the basis of the International Financial Reporting Standards (IFRS).

This report also mentions Mexico, given that beginning 2012, companies listed on the Mexican Stock Exchange (known as the “Bolsa Mexicana de Valores” or its Spanish acronym, BMV) are now required to submit on a compulsory basis financial statements prepared in compliance with IFRS issued by the IASB. Many expect this will help ensure that Mexican companies improve the quality of the information they give to their stakeholders, and therefore allow them more easily accessible sources of external financing.

To guarantee and ensure that the process of adoption by each company is properly implemented, on May 13, 2011 the Mexican National Banking and Securities Commission (CNBV) asked the BMV-listed companies to report on their financial situation and the progress with regard to IFRS adoption no later than June 30, 2011.

These companies produced a document named “progress report on the implementation of IFRS, Company X,” which is divided into four parts: 1) Accounting and business impacts; 2) Impacts on the information systems; 3) Progress in the transition and 4) Additional considerations.

In the section on accounting and business impacts, the companies gave a general overview of their situation with regard to the adoption of IFRS and the effects they expect the mandatory exceptions will produce, as well as the decisions made so far about the voluntary exemptions permitted by IFRS 1, First-Time Adoption of International Financial Reporting Standards, modified on December 31, 2010.

In order to understand the effects of these exceptions and exemptions on Mexican companies, 96 reports were analyzed. They are published on the BMV website in the section corresponding to each of the entities subject to IFRS adoption. From the analysis, different results and approaches emerged regarding the quality of the reports and the company’s interest in making known its progress in the adoption of the rules and the expected effects.

With regard to the mandatory exceptions established in the IFRS 1, five categories can be identified in the reports: 1) No effect is expected: in this category we find the companies in which it was clearly stated that they would not expect to suffer any effect by the application of an exception; 2) An effect is expected: in this category we find the companies in which an effect by the application is expected, although it is not indicated if the effect was significant or not; 3) The effect has not yet been determined: in this category we find the companies in which it was clearly indicated that by the date of the report it would not yet be determined whether there would be an effect or not; 4) It does not apply: in this category, we find the companies in which it was clearly stated that the exception does not apply to them; 5) No information is found: this category includes the companies in which no information on the exception was provided and those in which only an explanation of what the exception consisted of was given, but with no indication of its effect or application. The results obtained are shown in Table 1, which indicates the number of companies found in each category.

These two exceptions were included in the reports because the version of IFRS1 that includes the early application of IFRS 9 was used as a base. Recently, the IASB postponed the effective date of IFRS 9 to January 1, 2015, so that they can change the figures and the decision that the companies make with regard to these two exceptions.

Table 1. Classification of companies, according to the exceptions

From Table 1, it is concluded that, on average, in 15.3% of the companies surveyed an effect is expected; in 33.7% no effect is expected and in 33.7% the exceptions established in the IFRS 1 do not correspond. It is important to note that in 11.3% of the documents, no information was found that would allow the company to be placed in one of the categories.

With respect to the exemptions of certain rules established in the IFRS, five categories can be identified upon reading the reports: 1) No effect is expected: in this category we find the companies in which it was clearly stated that they did not expect an effect by the application of an exemption; 2) The option is applied: in this category we find the companies in which it was indicated they accepted the option of the exemption, but did not indicate whether they expected to have some effect; 3) The effect has not yet been determined or the option has not been selected: in this category we find the companies in which it was clearly indicated that by the date of the report it would not yet be determined whether or not there would be an effect or whether or not they would choose the option; 4) It does not apply: in this category, we find the companies in which it was.clearly stated that the exemption does not apply to them; 5) No information is found: this category includes companies that did not provide information on the exemption or in which only an explanation of what the exemption consisted of was given, but did not indicate its effect or application. The results obtained are shown in Table 2, which indicates the number of companies found in each category.

Table 2. Classification of companies according to the exemptions

From Table 2, it is concluded that 26% of the companies are expected to have an effect or have decided to adhere to the exemption; 7% have not yet determined if they will suffer some effect or if they will accept the exemption; 45% do not have the exemption and in the remaining 23% of the documents, no information was found on the decision to accept the exemption nor about the anticipated effects.

Apart from the particular effects observed in each company or the decision each takes with regard to the exceptions or exemptions established in the IFRS, in the reading of the reports common effects were identified that Mexican companies expected, which are derived mainly from differences that still exist between the Mexican Financial Reporting Standards (“Normas de Información Financiera Mexicanas” or its Spanish acronym, NIIF) and the IFRS. These include the following:

1. Elimination of the effects of inflation from January 1, 1998, for the items of: issued capital, premium in issuance of shares, legal reserve and other reserves, intangible assets (mainly goodwill), non-current assets (when you have chosen another option that is not the previous GAAP revaluation).

2. Write-down of the deferred liability component of the statutory employee profit-sharing (“Participación de los trabajadores en las utilidades” or its Spanish acronym, PTU).

3. Reclassification of the current portion of the long term deferred taxes. .

4. Reclassification of the cumulative translation differences to retained earnings (profits).

5. Reclassification of the restricted cash, which in the case of the NIIF it is presented in “cash and cash equivalents” and under IFRS should be presented in “other current assets or other long-term assets,” as appropriate.

6. Reclassification of the costs of issuing debt of “other assets” to liability, either short or long-term, as appropriate.

7. Reclassification of certain items in “inventory” as “properties, plant and equipment.”

8. Reclassification of certain items in “property, plant and equipment” as “investment property.”

9. Reclassification of the “advance payments by purchases of property, plant and equipment,” which in the case of NIIF are presented within the rubric of “property, plant and equipment” and that, according to the IFRS, should be presented in the item “other current assets.”

10. Change in the depreciation policy by a policy by components, since the IAS 16, Property, Plant and Equipment, is not exactly equal to the newly issued NIF C-6, Property, Plant and Equipment, effective since January 1, 2011.

11. Modification of the procedure for determining the recovery value of a long-term asset to determine, in its case, a possible impairment.

12. Modification of the policy for determining the value of the sales paid in installments without interest.

13. Reclassification of the costs associated with the restructuring of financial debt, which in the case of NIIF is recognized in “advance payments” (short term) or “other assets” (long term) to “retained earnings” because under IFRS any expenditure, premium or discount associated with the issue of a liability should be recognized in net income.

14. Write-down of the “provision for employee termination ” recognized under NIIF, since in IFRS this liability is not recorded until the company does not have a clear commitment to end the employment relationship with the employee or until the company has not made an offer to the employee for a voluntary withdrawal, neither before nor after.

15. As a result of the effects mentioned above, the amount of deferred taxes will be changed.

Finally, if Mexican companies wish to compete in the globalized capital market, they must make their process of adoption more transparent and must clearly show what effects they expect from this process. In this way, the stakeholders will make decisions based on more explicit and clear information. This is a legitimate recommendation because in the analysis presented it is noted that in a large percentage of the analyzed documents information was not found or it was not possible to conclude which of the options was chosen. Some companies simply limited the explanation to what the exceptions and exemptions established in the IFRS 1 consisted of, but they did not indicate which option they chose or the effects they expected.

It is important to emphasize that in the reports submitted by ARCA, ALFA, CEMEX, CYDSASA, GCC, GISSA and LAMOSA the effects expected by the adoption of IFRS are explained in detail. In addition, the anticipated adjustments or reclassifications are clearly shown on the financial statements.

Notes:

i. The analysis shown may vary, since the final effects will not be seen until the first financial statements prepared according to IFRS are presented.

ii. The quote symbol was used as a company code name to simplify its identification on the BMV website.

Bibliography

Bolsa Mexicana de Valores (2011). Sección: Empresas emisoras. Subsección: Eventos Relevantes de cada una de las empresas emisoras. Evento Relevante: Informe de avance en la implementación de IFRS, en http://www.bmv.com.mx, consultado en diciembre de 2011.

IFRS Foundation (2011). Annual Report 2010, en http://www.ifrs.org/NR/rdonlyres/EB99AF27-22F7-45AF-A033-75A36CDC3549/0/IFRSANNUALREPORT_ALL_12July.pdf, consultado en diciembre de 2011.

IFRS Foundation (2011). International Financial Reporting Standards (IFRS), Londres, IFRS Foundation.