Chapter 1 Flashcards
What is strategy?
Strategic planning - concerned with long term direction of business (which products should sell in which markets) and how business will achieve objectives
What is financial strategy?
Having decided overall direction and objectives, this is more detailed and aims to support financial decisions over short term
Financing: how to fund existing ops of the co and new projects)
Investment: which new project to invest in
Dividend: how much profit to pay back to ordinary shareholders and when
Risk management: how to manage risks relating to financing, FOREX etc
What is the list of stakeholders?
Shareholders (price maximisation, dividend maximisation, earnings growth)
Lenders (certainty of payment, security of cap and further loans)
Directors (maximise remuneration, security of tenure, career dep)
Employees (maximise remuneration, career dep, training)
Customers (VFM, high quality, reliable service)
Suppliers (certainty of payment, further business)
Gov (creation of employment and payment of taxes)
Community (environmental improvements, creation of wealth)
What is the agency theory and agency problem?
Theory: says directors will always put shareholders objectives first. It is not to say all other stakeholder objectives are ignored, as if the remaining stakeholders are unhappy, then it will be difficult to maximise shareholder wealth
Agency problem: situation where directors may be tempted to act in their own best interests instead of the shareholders.
How to address: use a mixture of appropriate managerial reward schemes, corp governance and audits… cost of these arrangements known as agency costs.
What four ethical considerations do directors and management face when making financial decisions?
- dealing with customers
- fair treatment of employees
- use of suppliers who make use of child labour
- protection of the environment
Define sustainability and sustainable development
Sustainability: meeting needs of current generations without compromising the needs of future generations
Sustainable development: recognises the interdependence between business, society and the environment. Initiatives by governments, business and organisations to promote sustainable development include: taxes and subsidies, voluntary codes, stakeholder engagement.
What are the two fundamental aspects to sustainability?
Impacts: consider how decisions or actions of an organisation either positively or negatively affect ESG issues. (Human rights, waste, water usage) this is useful for broader stakeholders. An organisations impacts can be financially material due to reputational impact
Dependencies: how current and future ESG issues affect orgs ability to create and maintain value. Eg: workplace diversity and consumer expectations. Info is generally more useful for investors who want to assess how well a company is managing exposure to long term ESG risks
What is double materiality?
- Incorporated in the Corporate Sustainability Reporting Directive
- means companies must not only report on how sustainability issues might create financial risks (financial materiality), but also on the company’s own impacts on people and the environment (impact materiality)
What is the aim of the IFRS Sustainability Disclosure Standards?
What do the task force on climate related financial disclosure focus their recommendations on?
- To provide high quality, transparent and comparable information which covers a range of ESG topics.
- forward looking financial disclosure. Governance, strategy, risk management and metrics abd targets.
What should a sustainability report generally include?
Environmental factors
Social factors
Governance factors
Policies, practice and performance
Targets for each ESG factor
What are ESG performance indicators?
E: pollutants and effluents release, % of waste recycled.
S: employee turnover, no of accidents, supply chain sustainability
G: diversity of board, bribery and corruption training, board member expertise
What are the challenges of measuring, reporting and evaluating ESG data?
Lack of comparability: companies can choose which ESG metrics they want to report which results in a lack of comparability between competitors
Insufficient measurable outcomes: data is often non financial and therefore will be difficult to measure
Lack of assurance: data is not subject to companies normal assurance and control processes
Greenwashing: companies may provide public with misleading or false info about the environmental impact of their products
