Transcript Financial Theory - Banks and Markets

Financial Manager: Role and
Responsibility
by Binam Ghimire
1
Learning Objectives
 Introduction to Financial Management
 Functions and goals
 Key areas of responsibility for the financial manager
2
Financial Management:
Concept
Board of Directors
President
(Chief Executive Officer, CEO)
Vice-president:
Marketing
Vice-president: Finance
(Chief Financial Officer,
CFO)
Treasurer
Credit
Manager
Inventory
Manager
Director of Capital
Budgeting
Vice-president: Manufacturing
Controller
Cost
Accounting
Manager
Financial
Accounting
Manager
Tax
Department
Manager
3
Chief Financial Officer/ Financial
Manager
 Vice President Finance (CFO – USA, Finance Director:
UK and Europe)
 Prime responsibilities:
Financial Planning
Financial Controlling
Financial Analysing the financial performance
4
Treasurer
 Person concerned with managing cash, credit and
capital structure
 Prime responsibilities:
Managing cash and marketable securities
Managing firms pension fund
Managing risks by way of insurance portfolio,
derivative securities etc.
Planning firm’s capital structure
Managing credit activities
Managing foreign exchange
Investor relation.
5
Controller
 Mainly Accounting activities
 Prime responsibilities:
Cost and management accounting
Financial accounting
Auditing and taxation
Budgeting, planning and control
Reporting and interpreting
Evaluating and consulting
Protecting the assets.
6
Functions of Financial Management
 Executive and Routine
Executive Functions
 Long-term Investment Decision
 Financing Decision
 Dividend Decision
 Working Capital Decision
Routine Functions
 Supervision of receipts and payments
 Record keeping of financial performance
 Reporting to the management
 Supervision of fixed and current assets
Financial Manager: Relationship with
other functional areas
 With Marketing Management
 Production Management
 Human Resource Management
Goals of Financial Management
 Profit Maximisation vs. Wealth Maximisation
Accounting concept
Zero dividend
Ambiguity
Time value of benefits
Quality of benefits
Modern business environment
Who are the shareholders?
Conflict of interest among stakeholders of a firm
Financial Manager: Wealth
Maximisation
 How?
FCF1
FCF2
FCF
Value = (1 + WACC)1 + (1 + WACC)2 + . . . +

(1 + WACC)
 FCF: Free cash flows: Funds available for distributions to
shareholders
Agency Problem: Responsibility for the
financial manager
 Agency Theory
Michael C. Jensen and William H. Meckling
propounded this theory in 1976
 Principal and Agent
 Management and Shareholders, Creditors and
shareholders
Agency Problem: Responsibility for the
financial manager
 Manager owns less than 100% of the company
 Agency Problem
 Agency Cost (Monitoring, Structuring and opportunity
costs)
Agency Cost
Owners of Corporations
cannot manage them
Personally
They have to employ
Directors to Manage their
Businesses on their Behalf
These Directors May not
carry out the
management to the
standard expected of
them
Because of Breakdown of
Trust, Shareholders have
to employ Auditors to
Vouch the Stewardship
Report of Directors
Shareholders have to pay
the Directors and these is
part of Agency Cost
They may do it but to
their own advantage or at
a higher cost
All theses add up and the
management of the Agent
Principal Relationship with
its attendant cost to the
Principals is the Agency
Cost
Agency Problem: How to reduce?
 Managerial compensation plan (e.g. performance stock)
 Direct Intervention by shareholders
 Threat of firing
 Threat of takeover (e.g. hostile takeover, M&A)
Set of Contracts Model of the Firm
 The firm has contracts with a large number of
stakeholders.
 These contracts may be explicit or implicit.
 Contracts may also be contingent on particular future
outcomes.
 The model recognizes that conflicts of interest may exist
between the various stakeholders.
Set of Contracts Model of the Firm
Bondholders
Banks
Customers
Employees
Governments
Environment
The
Firm
Common
Stockholders
Preferred
Stockholders
Communities
Society
Creditors
Suppliers
Managers
Business Ethics
 Ethics
Moral rules
Ethics differ from one to another
 Business Ethics
Attitude and conduct towards stakeholders
Stakeholder Theory
Who are
these
Stakeholder? Stakeholders
identification Models
To what Extent Should
Companies take them into
consideration? Stakeholders
Mapping
A Stakeholder is someone
who can affect or be affected
by the operations of an
organization as it seeks to
meet its corporate objectives
What if what is good for one
stakeholder is Bad for
Another? Satisficing
What if What is good for
stakeholders is viewed as
unethical? Moral Frameworks
and Guidelines
Social Responsibility
 Charity principles
 Stewardship principles
Corporate Social Responsibility
 Milton Friedman's argument
There is one and only one responsibility of business: to
use its resources and energy in activities designed to
increase its profit so long as it stays within the rule
of game and engages in open and free
competition, without deception and fraud.
Corporate Social Responsibility
 Keith Davis
An iron law of responsibility which states that in the
long-term those who do not use power in a manner that
society considers responsible will tend to lose it.
Corporate Social Responsibility
 Gray, Owen and Adams (1996) described society as a
series of social contracts between members of society
and society itself.
Corporate Social Responsibility
 Gray, Owen and Adams (1996)
1.Pristine Capitalist, 2.Expedient, 3.Social contract,
4.Social Ecologists, 5.Socialists, 6.Radiacal Feminists,
7.Deep Ecologists
Corporate Social Responsibility
 Different approaches
Social Obstruction
Social Obligation
Social Response
Social Contribution
The Case Study
 Corporate Ethics.
27
Exercise: Classroom Discussion
 What are the Key areas of responsibility for the financial
manager
 Sarbanes-Oxley Act (2002), USA
 Classroom Exercise: Question in Word File
 Homework: Word File
28
Thank You
29