The Role of the Finance Manager
Role of the finance manager in maximizing shareholder value
In many ways the finance manager must become the strategic partner of the chief executive officer. The finance manager is responsible, most certainly, of the purse-strings, but also for the future of the corporation. The financial manager must also demonstrate leadership in cost-effective uses of the corporation’s financial resources by utilizing effective financial management practices; in this way, the finance manager, more than others, is responsible for maximizing the shareholder value. The financial manager must also ensure resources are protected from waste, and, especially under the new auspices of the Sarbanes-Oxley Act, protect those resources from fraud and misuse (Gitman, 1987).
The finance manager must assess what style of growth will best suit the corporation
Stakeholders’ view of maximization of wealth
A firm buys equity in the form of debt and credit from investors (Booth, 1998), and in return the investor expects a higher return on the capital invested in the form of dividends. From the stockholder’s perspective, the key to the success of a corporation is represented in the corporation’s ability to not only meet debt and other liabilities, but also in the corporation’s ability to meet the needs of the shareholder in terms of dividends, maximization of wealth and common stock price (Booth, 1998). The shareholders bear the majority of the burden in terms of liability, as they are the final stakeholder to be compensated. Those who have carried the largest risk, therefore, desire to be rewarded with the largest slice of the corporate pie. If investors do not receive what they perceive as their due, they will either vote present management out of office (through electing a new board of directors) or they will simply take their investment somewhere else, to a corporation that will provide the return they are looking for. This will, in turn, likely dissuade other investors from stepping forward with their capital.
However, the employee is not necessarily so keen on the majority of retained earnings flowing out to the pockets of the investors, unless the employees have a significant stake in the common stock prices through stock incentive programs or understand that the presence of investors keeps the cash flowing at all. Employees often like to see the retained earnings flow back into the company, and into their hands, in the form of better, newer equipment, training programs and employee incentive programs. The finance manager must sufficiently balance these competing needs in order to keep those employed in the company satisfied as well as maintain adequate returns to the investors. This is especially key in times when it is an “employees’ market” and good workers are harder to come by.
In general it can be argued that the welfare of the firm is not harmed by maximizing wealth, and neither is the welfare of the other stakeholders in the business (Booth, 1998). However, the manager should keep a keen eye for instances when wealth maximization is occurring at the expense of the general health of the corporation and the safety and welfare of the employees.
What is shareholder value?
It might be easy, at this point, to assume that shareholder value justifies many of the corporate misdeeds we see present in our modern business world. However, things such as environmental damage, sweatshops, and union-busting can all have a massive impact on the bottom line, which in turn impacts shareholder value. Bad publicity can turn an investor off to a company as surely as poor returns can. It will be a wise financial manager who does not simply keep an eye for the capital costs of projects and expenditures, but is also savvy to the political and social climate within which the corporation operates. For example, consumers proved themselves willing to pay more for shade-grown coffees championed by Starbucks Corporation, so much that it is now the industry standard. This willingness helped fuel the massive boom of the gourmet coffee industry, which pushed Starbucks into position as the world’s foremost coffee retailer. Starbucks has also championed the cause of the plantation coffee worker by only doing business with plantations that provide a living wage and plantations that meet their standards for good environmental stewardship. As recently as 2002, Starbucks found itself responding to consumer demands via shareholder demands over labeling of genetically engineered foods. All this reflects in Starbuck’s bottom line, and, although it was most costly at the outset, it proved to be a risk worth taking for all the stakeholders. Shareholder value, therefore, is not necessarily measured in simple capital, but also in intangible measures such as good will and brand recognition.
Summary and conclusion
The role of the financial manager is more than simply the person who, as the accountant of years ago, tallied the assets and liabilities of a corporation. The finance manager is part financial wizard, and part strategic planner, as well as someone keenly aware of industry trends and standards. The financial manager must understand all aspects of the business so they are able to adequately advise and support the chief executive officer in decision-making and ensuring company growth and profitability into the future.
References
Booth, L. (1998). What drives shareholder value. Paper presented at the Federated Press “Creating Shareholder Value” conference. Retrieved from http://www.mgmt.utoronto.ca/~booth/value.pdf February 18, 2006.
Gitman, L.J. (1992) Foundations of Managerial Finance, 3rd Edition Harper Collins, New York, New York.
Ross, S.A., Westerfield, R.W., Jaffe, J. (2005).Corporate Finance. McGraw-Hill/Irwin. New York, New York. Online ed.
http://www.bls.gov/oco/ocos010.htm Retrieved February 19, 2006.
http://www.organicconsumers.org/starbucks/proxy022602.cfm Retrieved February 19, 2006.
http://www.conservation.org/xp/news/press_releases/2000/081100.xml Retrieved February 19, 2006.
