FM Anthony Sir

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1.1 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.

The Role of FinancialThe Role of FinancialManagementManagement







Why should I care about Why should I care about

Financial Management ? Financial Management ?

� Pr epar e for the workplace of tomorr ow.

� Br oadening expectations of financialknowledge and skills.

� Use and under stand financial ter minology

and concepts in team communication.

� Developing cr oss-functional capabilities.

� Cr itical thinking.




T he Role of T he Role of

Financial Management Financial Management

� What is Financial Management?

� The Goal of the Fir m

� Cor por ate Gover nance

� Or ganization of the FinancialManagement Function




What is Financial What is Financial

Management? Management?

Concer ns the acquisition,

financing, and

management of assets

with some overall goal overall goal inmind.




Investment DecisionsInvestment Decisions

� What is the optimal fir m size?

� What specific assets should be

acquir ed?� What assets (if any) should be

r educed or eliminated?

Most impor tant of the thr eeMost impor tant of the thr ee

decisions.decisions.




Asset Management Asset Management

DecisionsDecisions� How do we manage existing assets

efficiently ?

� Financial Manager has var ying degr ees

of oper ating r esponsibility over assets.

� Gr eater emphasis on curr ent assetmanagement than fixed asset

management.




What is the Goal What is the Goal

of the Firm? of the Firm?

Maximization of Maximization of

Shareholder Wealth! Shareholder Wealth!

Value creation occurs whenwe maximize the share price

for current shareholders.




C orporate Social C orporate Social

Responsibility DiscussionResponsibility Discussion

C lass DiscussionC lass Discussion: What role should What role should

C SR and/or sustainability have onC SR and/or sustainability have on

living the ³goal of the firm´? living the ³goal of the firm´?

C orporate Social Responsibility ( C SR): A business

outlook that acknowledges a firm¶s responsibilities to

its stakeholders and the natural environment.

Sustainability : Meeting the needs of the present without

compromising the ability of future generations to meet

their own needs.




What Goals doWhat Goals do

some Firms have? some Firms have? � ³ C reating superior shareholder value is our top priority.´

Associated Banc-Corp 2006 Annual Report.

� ³ T he desire to increase shareholder value is what drives

our actions.´ Phillips 2006 Annual Report.

� ³FedEx¶s main responsibility is to create shareholder value.´ FedEx Corporation, SEC Form Def 14A for the periodending 9/25/2006.

� ³« the Board of Directors plays a central role in theC ompany¶s corporate governance system; it has the power (and the duty) to direct C ompany business, pursuing and fulfilling its primary and ultimate objective of creating shareholder value.´ Pirelli & C. S.p.A. Milan Annual Report2006.




Shortcomings of Shortcomings of

Alternative Perspectives


� Could incr ease curr ent pr ofits while

har ming fi

r m (e.g., defe

r maintenance,issue common stock to buy T-bills, etc.).

� Ignor es changes in the r isk level of the

fir m.

Profit MaximizationProfit Maximization

� Maximizing a fir m¶s ear nings after taxes.

ProblemsProblems




Shortcomings of Shortcomings of



� Does not specify timing or dur ation of

expected r etur ns.

� Ignor es changes in the r isk level of the fir m.

� Calls for a zer o payout dividend policy.

Earnings per Share MaximizationEarnings per Share Maximization

� Maximizing ear nings after taxes divided

by shar es outstanding.

ProblemsProblems




Strengths of Shareholder Strengths of Shareholder

Wealth MaximizationWealth Maximization� Takes account of : curr ent and futur e

pr ofits and EPS; the timing, dur ation,

and r isk of pr ofits and EPS; dividend

policy; and all other r elevant factor s.

� Thus, share price ser ves as abar ometer for business per for mance.




T he Modern

C orporation

T he Modern

C orporation

Ther e exists a SEPARATION

between owner s and manager s.

Moder n Cor por ation

Shar eholder s Management




Role of Management Role of Management

� An agent agent is an individual

author ized by another per son,called the pr incipal, to act inthe latter ¶s behalf.

Management acts as an agent agent

for the owner s (shar eholder s)

of the fir m.




A

gency T

heory A

gency T

heory

�� Agency T heory Agency T heory is a br anch of

economics r elating to thebehavior of pr incipals and their agents.

� Jensen and Meckling developed

a theor y of the fir m based onagency theory agency theory .




Agency T heory Agency T heory

� Incentives include, stock optionsstock options,,per quisitesper quisites,, and bonusesbonuses.

� Pr incipals must pr ovide incentivesincentives

so that management acts in thepr incipals¶ best inter ests and then

monitor monitor r esults.




C orporateC orporate

Social Social Responsibility Responsibility � Wealth maximization does not

pr eclude the fir m f r om being sociallysocially

r esponsibler esponsible at the cor por ate level.

� Assume we view the fir m as pr oducing

both pr ivate and social goods.

� Then shareholder wealth maximizationshareholder wealth maximization

r emains the appr opr iate goal in

gover ning the fir m.




C orporate GovernanceC orporate Governance

� C orporate governance: represents the

system by which corporations are

managed and controlled .

� Includes shar eholder s, boar d of

dir ector s, and senior management.

� Then shareholder wealth maximizationshareholder wealth maximization

r emains the appr opr iate goal in

gover ning the fir m.




Board of DirectorsBoard of Directors

� Typical r esponsibilities:

� Set company-wide policy;

�A

dvise the CEO and other

senior

executives;� Hir e, fir e, and set the compensation of the CEO;

� Review and appr ove str ategy, significantinvestments, and acquisitions; and

� Over see ope

r ating plans, capital budgets, andfinancial r epor ts to common shar eholder s.

� CEO/Chair man r oles commonly same per sonin US, but separ ate in Br itain (US moving inthis dir ection).




SarbanesSarbanes- -Oxley Act of 2002 Oxley Act of 2002

� Sarbanes-Oxley Act of 2002 (SOX): addressescorporate governance, auditing and accounting, executivecompensation, and enhanced and timely disclosure of

corporate information.� Imposes new penalties for violations of securities

laws.

� Established the Public Company Accounting

Oversight Board (PCAOB) to adopt auditing, qualitycontrol, ethics, disclosure standards for publiccompanies and their auditors, and policing authority.

� Generally increasing the standards for corporategovernance.




Organization of the Financial Organization of the Financial

Management FunctionManagement Function

Boar d of Dir ector s

Pr esident

(Chief Executive Officer )

Executive Vice

Pr esident

(Oper ations)

Executive Vice

Pr esident

(Marketing)

Executive Vice

Pr esident

(Finance - CFO)




Vice President ( T reasurer)

�Capital Investment�Cash Management

�Commer cial/investment

banking r elationships

�Cr edit Management

�Dividend Disbur sement

�FinancialAnalysis/Planning� Investor Relations

�Mer ger s and Acquisitions

�Pension Management

� Insur ance/Risk Management

�TaxA

nalysis/P

lanning

Organization of the Financial Organization of the Financial

Management FunctionManagement FunctionEVP of Finance

C ontroller

� CostA

ccounting� Cost Management

� Data Pr ocessing

� Gener al Ledger

� Gover nment Repor ting

� Inter nal Contr ol

�Pr epar ing Financial Statements�Pr epar ing Budgets

�Pr epar ing For ecasts

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