1 Financial Manager: Role and Responsibility by Binam Ghimire

Learning Objectives  Introduction to Financial Management  Functions and goals  Key areas of responsibility for the financial manager 2

Financial Management: Concept 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?  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 They may do it but to their own advantage or at a higher cost Shareholders have to pay the Directors and these is part of Agency Cost Because of Breakdown of Trust, Shareholders have to employ Auditors to Vouch the Stewardship Report of Directors 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 Preferred Stockholders Preferred Stockholders Managers The Firm Common Stockholders Common Stockholders Communities Creditors Governments Customers Suppliers Society Banks Environment Bondholders Employees

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 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 A Stakeholder is someone who can affect or be affected by the operations of an organization as it seeks to meet its corporate objectives

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

29 Thank You