1. The Roles of the Finance Function in Organisations Flashcards
How does the finance function ENABLE how organisations create and preserve value?
Planning
Forecasting
Resource allocation
How does the finance function SHAPE how organisations create and preserve value?
Performance management
Control
How does the finance function NARRATE how organisations create and preserve value?
Financial reporting
The roles of the finance function are constantly changing. What is driving this change?
Continuous changes in technology driven by the 4th industrial revolution
What are the two main types of organisation called?
Profit seeking and not-for-profit
What is the primary objective of a profit seeking organisation?
Maximisation of the wealth of their owners
What is the primary objective of a not-for-profit organisation?
Maximise benefit to beneficiaries
What is the definition of value?
Value is the achievement of the specified objective, most economically and at the required standard of quality and reliability
What are the five ethical principles in CIMA’s Code of Ethics?
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
What is meant by integrity?
Being straightforward, honest and truthful
What is meant by objectivity?
Not allowing bias, conflict of interest, or the influence of others to override your professional judgement
What is meant by professional competence and due care?
Ongoing commitment to maintain your level of knowledge and skill. Work should be completed carefully, thoroughly and diligently in accordance with relevant standards
What is meant by confidentiality?
Do not disclose information without permission
What is meant by professional behaviour?
Comply with relevant laws and regulations
What are examples of ethical behaviour from a company?
Pay fair wages
Provide good working conditions
Pay suppliers on time
Source supplies carefully
Use renewable sources
Be open and honest with customers
How does ethical behaviour maximise shareholder wealth?
Higher sales from customers
Attract and retain best staff
Increased business collaboration
Reduces risk
Avoid reputational damage
What is an ethics officer?
Monitor the application of ethical policies and is available to discuss ethical dilemmas with staff
Define stakeholder
A group or individual who has an interest in what the organisation does, or an expectation of the organisation
What are the three types of stakeholder (and brief definition)?
Internal - Intimately connected to the organisation. E.g. staff, directors
Connected - Invest in or have dealings with. E.g Shareholders, customers
External - Can influence or be influenced. E.g Govt, trade unions
What tool can be used to prioritise stakeholders?
Mendelow’s power-interest matrix
Draw Mendelow’s power-interest matrix
See page 13 of text book.
What is meant by corporate social responsibility?
The idea that a company should be sensitive to the needs and wants of all the stakeholders rather than just the shareholders
What do traditionalists argue about CSR?
They argue that a company should operate solely to make money for shareholders and that it is not a company’s role to worry about social responsibilities
What is the modern view of CSR?
The modern view is that by aligning a company’s core values with the values of society the company can improve its reputation and ensure a long-term future.
How can corporate social responsibility benefit a company?
Differentiation (E.g. no animal testing)
High calibre staff (Attract and retain)
Strengthen brand (Honest approach)
Lower costs (E.g less packaging used)
New market opportunities
Why is corporate governance needed?
Due to the separation of ownership and control (agency problem)
What is the definition of corporate governance?
The set of processes and policies by which a company is directed, administered and controlled. It includes the appropriate role of the board of directors and the auditors of the company
What are the symptoms of poor corporate governance?
- Domination of the board by one person or group
- No involvement by the board (no regular meetings)
- Inadequate control function (no internal audit)
- Lack of supervision of employees
- Lack of scrutiny by auditors
- Lack of contact with shareholders
- Focus on short-term profitability
- Misleading financial statements
What are the rules regarding which companies must comply with the UK Corporate Governance Code?
All companies listed on the london stock exchange must comply with the code and produce a statement confirming their compliance.
Smaller companies (not in FTSE 350) can take a more flexible approach
UK Corporate Governance Code - What should the board use the AGM for?
The board should use the annual general meeting to construct a dialogue with shareholders
What does the UK Corporate Governance Code say about the board?
- Board must be effective
- Annual report should identify the holders, number of meetings and attendance,
- Emphasises the importance of positive relationships
What does the UK Corporate Governance Code say about the roles of Chairman and CEO?
Should be held by separate people to avoid any one individual having too much power
Chairman should be independent on appointment
What are the rules regarding non-executive directors?
- Should be as independent as possible.
- Not been an employee in last 5 years
- Not had a material interest in the company for the last 3 years
- Not participate in the company’s pension scheme, share options, performance related pay
- Not have close family ties with directors or senior employees
- Not serve as a NED for more than 9 years with same company
- Not hold cross directorship
- At least half the board should be NED’s. Smaller company must have at least 2.
- One NED should be appointed “senior independent director”. Shareholders can contact to raise matters outside executive channels
What are the rules regarding the nomination committee?
*Appointments to the board are made via the nominations committee
* Over 50% of nonminations committee should comprise NED’s
* Appointments should be based on merit and suitability for role
* Responsible for effective succession planning
What are the rules regarding the remuneration committee?
- No director should be involved in setting their own pay
*Remuneration committee is made up of NED’s - Chairman can be a member but cannot chair the committee
- Chair must have been a committee member for at least 12 months
- Remuneration should be sufficient to attract, retain and motivate quality directors but not more than necessary
- Significant proportion should be performance related
- Should be clear reporting on remuneration
What are the rules regarding the audit committee?
- Audit committee consists of independent NED’s
- Board should review the effectiveness of risk management and internal controls at least annually and report to shareholders
- Acts as interface between the board and internal/external auditors
- Review the work and effectiveness of internal audit
- Monitor external auditors independence and objectivity
- Short-list external audit firms when a change is needed
- First point of contact for auditors
