Transcript Slide 1

Slide 1.1
Chapter 1
The world of financial management
LEARNING OUTCOMES
You should be able to:
Discuss the role of the finance function
within a business
Identify and discuss possible objectives for a business
and explain the advantages of the shareholder wealth
maximisation objective
Explain how risk, ethical considerations and the
needs of other stakeholders influence the pursuit of
shareholder wealth maximisation
Describe the agency problem and explain how it
may be managed
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.2
The role of managers
Strategic
management
Operations
management
Risk
management
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.3
The task of the finance function
Financial
planning
Investment
project
appraisal
Finance
function
Financing
and capital
market
operations
Financial
control
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.4
Primary objective
The primary objective of a business
is shareholder wealth maximisation:
Not the same as profit maximisation
To achieve wealth maximisation the
needs of other stakeholders must
be considered
High ethical standards may be needed
to maximise shareholder wealth
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.5
Shareholder wealth maximisation
Shareholders:
However, pursuit of this
objective:
Are the effective owners
May encourage
excessive cost cutting
Have a residual claim and
bear the risk
May undermine the status
of other stakeholders
Are incentivised to
increase their residual
claim through
entrepreneurial activity
May encourage
unethical behaviour
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.6
Profit maximisation problems
Profit is influenced by
accounting policy choices
Different measures of profit
are available
May encourage
short-term thinking
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.7
Stakeholder approach – problems
Does not offer clear-cut objectives
Increases problems of accountability
Raises difficult questions concerning
who the stakeholders are and how
they should be treated
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.8
Return
Relationship between risk and return
Risk
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.9
Principles underpinning a framework of rules
Disclosure
Framework
of rules
Fairness
Accountability
Source: P. Atrill and E. McLaney, Financial Accounting for Decision Makers, 6th edn, Financial Times
Prentice Hall, 2010, p. 392.
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.10
The UK Corporate Governance Code
Aims to ensure that:
Powers and responsibilities of
directors are clearly delineated
Appropriate checks and
balances are in place
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.11
The UK Corporate Governance Code (Continued)
Every listed company should have a board of directors
There should be a clear division of responsibilities
between the chairman and the chief executive officer
There should be a balance of skills, experience,
independence and knowledge
The board should receive timely information
Appointments to the board should be the subject of
rigorous, formal and transparent procedures
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.12
The UK Corporate Governance Code (Continued)
All directors should submit themselves to re-election at
regular intervals
Remuneration levels should be sufficient to attract, retain
and motivate directors of the appropriate quality
There should be formal and transparent procedures for
developing policy on directors’ remuneration
The board should present a balanced and understandable
assessment of the company’s position and prospects
The board should try to ensure that a satisfactory
dialogue with shareholders occurs
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.13
The UK Corporate Governance Code (Continued)
Boards should use the annual general meeting to
communicate with investors
The board should define the company’s risk appetite and
tolerance and maintain a sound risk management system
Formal and transparent arrangements for financial
reporting and internal control should be in place
The board should formally and rigorously examine its
own performance each year
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.14
Ownership of UK listed shares, end of 2008
40
%
35
30
25
20
15
10
Banks
Public sector
Private
non-financial
companies
Charities
Other financial
institutions
Investment
trusts
Unit trusts
Individuals
Pension funds
Insurance
companies
Rest of the
world
5
Source: Financial Statistics, Share Ownership Survey 2008, Office for National Statistics, p. 1. Copyright © 2010 Crown
Copyright. Crown copyright material is reproduced with the permission of the Controller of HMSO.
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.15
The main forms of shareholder activism
Exercising
voting
rights
Shareholder
activism
Meeting
with
directors
Direct
intervention in
business affairs
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012
Slide 1.16
UK Stewardship Code
Financial institutions should:
Publicly disclose how they discharge their stewardship
responsibilities
Have a robust policy on managing conflicts of interest in
relation to stewardship which is publicly disclosed
Monitor their investee companies
Establish clear guidelines on when and how activities will
escalate in order to protect and enhance shareholder value
Be willing to act collectively with other investors
where appropriate
Have a clear policy on voting and disclosure of voting activity
Report periodically on their stewardship and voting activities
Peter Atrill, Financial Management for Decision Makers, 6th Edition, © Pearson Education Limited 2012