1. Chapter 1 The world of financial management
LEARNING OUTCOMES
You should be able to:
Identify and discuss possible objectives for a business and explain the advantages of the shareholder wealth maximisation objective
Discuss the role of the finance function within a business
Describe the agency problem and explain how it may be managed
Explain how risk, ethical considerations and the needs of other stakeholders influence the pursuit of shareholder wealth maximisation

2. Operations management
The role of managers
Strategic management
Risk management
Operations management

3. The task of the finance function
Investment project appraisal
Financial planning
Financing and capital market operations
Financial control

4. Primary objective
To achieve wealth maximisation the needs of other stakeholders must be considered
Not the same as profit maximisation
The primary objective of a business is shareholder wealth maximisation:
High ethical standards may be needed to maximise shareholder wealth

5. Shareholder wealth maximisation
Shareholders:
Have a residual claim and bear the risk
Are incentivised to increase their residual claim through entrepreneurial activity
Are the effective owners
However, pursuit of this objective:
May undermine the status of other stakeholders
May encourage excessive cost cutting
May encourage unethical behaviour

6. Profit maximisation problems
Profit is influenced by accounting policy choices
Different measures of profit are available
May encourage short-term thinking

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

8. Relationship between risk and return

9. Principles underpinning a framework of rules
Disclosure
Accountability
Fairness
Source: P. Atrill and E. McLaney, Financial Accounting for Decision Makers, 6th edn, Financial Times Prentice Hall, 2010, p. 392.

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

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
Appointments to the board should be the subject of rigorous, formal and transparent procedures
The board should receive timely information

12. The UK Corporate Governance Code (Continued)
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
All directors should submit themselves to re-election at regular intervals

13. The UK Corporate Governance Code (Continued)
Formal and transparent arrangements for financial reporting and internal control should be in place
The board should define the company’s risk appetite and tolerance and maintain a sound risk management system
The board should formally and rigorously examine its own performance each year
Boards should use the annual general meeting to communicate with investors

14. Ownership of UK listed shares, end of 2008
Private non-financial companies
Insurance companies 5 20 15 40 %
Other financial institutions
Pension funds
Individuals
Unit trusts
Investment trusts
Public sector
Banks
Charities 10 25 35 30
Rest of the world
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.

15. The main forms of shareholder activism
Exercising voting rights
Meeting with directors
Direct intervention in business affairs

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
Be willing to act collectively with other investors where appropriate
Establish clear guidelines on when and how activities will escalate in order to protect and enhance shareholder value
Report periodically on their stewardship and voting activities
Have a clear policy on voting and disclosure of voting activity