Source: E-mail dt. 7 June 2012
Dr.R.Karuppasamy M.Com., MBA, M.Phil., Ph.D., PLME
Director, Management Studies, SNS College of Technology, Coimbatore
C. Arul venkadesh MBA, PGDPM (IRLL), (PhD)
Assistant Professor – Department of Management Sciences, CIET College. Coimbatore
Today finance plays a pivotal role in corporate strategy. In the interdependent and competitive world during 1990’s, the finance plays a crucial role in supporting corporate strategy and also a determining factor in the success or failure of an organization.
The Eastern Europe has lay bared with the recent events indicating its rapid changes in the world. To take real picture of these developments which occurred all of a sudden in dramatic manner, in continuation of a significant trends that have been occurring for past few decades. It is the disability to identify with the direction of these trends that makes events appear impulsive and unforeseen.
The terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment bank is to evaluate the company's financial needs and raise the appropriate type of capital that best fits those needs. Thus, the terms “corporate finance” and “corporate financier” may be associated with transactions in which capital is raised in order to create, develop, grow or acquire businesses.
The importance to finance in its support of corporate strategy is not only the knack to foretell these events but also to see the larger picture and to develop long-standing strategies that not only allow for change but take benefit of technological changes too. Corporate litheness is vital for the future triumph of an enterprise.
In last few decades, high inflation and interest rates, the deregulation of financial markets, and the uprising in communications technology that have brought forth a new state, by which the treasury function has evolved into an primary part of the strategic planning process. Due to the vivid changes in world markets which are taking place with increasing speed, financial officers need to persistently reevaluate the structure and functions of the financial organization.
In the times of yore, virtually all corporations stated as their major goal to increase earnings per share, which would decipher into higher dividends and a rising share price. But countless studies in the past decade have revealed, that earnings per share can be a ambiguous measure. Today the emphasis is on strategies that generate the maximum value for shareholders over the long term.
Alfred Rappaport says in Creating Shareholder Value, "The shareholder value approach estimates the economic value of an investment by discounting forecasted cash flows by the cost of capital. These cash flows, in turn, serve as the foundation for shareholder returns from dividends and share price appreciation”.
"Herewith we understand why management should pursue this objective as straightforward. Management is over and over again characterized as balancing the interests of a range of corporate constituencies such as employees, suppliers, debt holders, and stockholders. "Employees want competitive wages. Customers want high quality at a lower than competitive price. Suppliers and debt holders both have financial claims that must be fulfilled with cash when they fall due. Stockholders, as residual claimants of the firm, look for cash dividends and the prospect of future dividends, which is reflected in the price of the stock.
If a company does not gratify the financial claims of its constituents, it will cease to be a viable organization. Where as the employees, customers, and suppliers will merely withdraw their support. Thus going in concern will strive to enhance its cash-generating ability. The ability of a company to allocate cash to its various constituencies depends on its ability to generate cash from operating its businesses and on its ability to obtain any additional funds needed from external sources. Thus we can comprehend that the role of finance in supporting corporate strategy has become pivotal.
Managing cash requires not only accurate and meaningful financial reporting of current performance, but also analyzing and forecasting new investments by business units in a framework that will determine whether shareholder value is being created. The objective is to make better corporate decisions with reverence to the allocation of scarce corporate resources and, equally important to enable business unit heads to handle their businesses better. Hence that requires a more active role for the finance function at the corporate level and at the strategic business unit level.
In the times of yore, finance people have been viewed as "bean counters," out of the business mainstream, with little to offer beyond saying "No." But which cannot continue in long run. One of the most important tasks of a financial team is to undertake an active, positive, cooperative relationship with fellow team in marketing, operations, and all other areas of the corporation. Hence it requires some risk-taking ability, because many view financial and operations memebers as dissimilar organisms.
Financial people are often considered not to be "business people" because they are not trained as chemists or salesmen or engineers, or they have never run a plant. Operating people, on the other hand, are accused of not having a financial perspective, of being concerned with only their own businesses and not taking a corporate view. These accusations are part truth and part perception. But how can we take the other part that is true? The obvious answers are education and cross-training.
Ideally, financial team should spend a few years in an operating environment, and operating people should spend the same in a financial environment. Unfortunately, after years of restructuring and staff downsizing, the arguments often put forth are that the company is too lean, that it doesn't have the depth to transfer people back and forth, that it would run the risk that vital tasks would not get done or not be done well enough. There is no easy answer to these arguments, but let us research and relate with an example at Hercules.
In Hercules, top management instituted a major corporate reorganization. It was designed to decentralize decision-making, enhance the company's productivity, focus more visibly on markets and customers, and position the firm to meet its growth goals. Key features were to give heads of business group’s broad autonomy, adopting a teamwork operating structure and philosophy, minimizing organizational layers, and keeping decision-making at the lowest appropriate levels.
The finance group was the part of this reorganization. While there continues to be a corporate control group at Hercules, financial people have been put into each business group as controllers. The treasury function remains centralized, but the senior financial members are assigned as liaisons to each business group. The idea is to make the treasury liaison a member of the business group's team to support its strategy and help it succeed. The liaisons have developed a broad understanding of the operations of their respective business groups. Each attends the general staff and capital project meetings of the group. And thus able to provide centralized treasury support to the business group at an early stage, which has greatly reduced the conflicts.
The objective is to go beyond reducing conflicts. By achieving a cooperative and interactive relationship, it can avoid problems and speed the problem solving. An article in The Harvard Business Review, entitled "Must Finance and Strategy Clash?," addresses some of these issues. As the authors point out, "good investments come from a detailed understanding of both the market and the company's operating and competitive capabilities.
"Used sensibly, finance helps bring these into the open. Financial analysis also helps clarify a project's boundaries by addressing issues like the base case, the time horizon, and future strategic opinions, all of which are as much strategic and market based as they are financial. Finance gives them a common language and framework."
Intertwined with efforts to sustain the business groups at Hercules the corporate responsibilities of finance, are the stewards of the corporation's assets. Thus the query has raised How do we protect them? How do we support overall corporate strategy? How should we relate to the outside world? How do we organize for the years to come?
Responding to trends the "Globalization" is the word on everyone's lips these days. Certainly not every company needs to have a global strategy, although some firms may be a part of someone else's global strategy. Indeed, more and more of us are becoming part of European or Japanese global strategies. Some companies, because of their markets or products or some other factors, may face modest competition from abroad. But such companies are becoming fewer and fewer.
Business International, a research and publishing firm, notes five megatrends in the global financial environment. They are:
* The growing deregulation of financial markets.
* A world economy in flux.
* New trends in corporate organization.
* The changing dynamics of the international banking system.
* The electronics revolution.
These, of course, are not separate trends but which are directly connected. In responding to the trends, companies face two challenges. First, it is to train and organize ourselves for the new financial environment. Second, is to develop a more opportunistic, transaction-oriented posture, the net result of which will be to become more financially assertive, active, and competent than ever before.
Training begins with hiring the most talented, committed people. A team approach to problem solving and pushing responsibility down to the lowest suitable level fosters a very optimistic environment. And which need highly skilled people to do this, not a room full of clerks.
Training is a continuous process of education in light of the whole host of new financial instruments and techniques. At Hercules, they believe that through in-house programs and close relationships with the outside financial community, they keep up to date. While Hercules' operations have become more decentralized, finance continues to be centralized.
Strong arguments are made for this strategy. First, centralization reduces borrowing and foreign exchange costs. The corporation can borrow less expensively than a subsidiary, take gain of a wider range of financing techniques, and save transaction costs in foreign exchange through netting systems. Second, centralization concentrates financial expertise a scarce resource. For example, how many good foreign exchange managers are there?. Third, centralization reduces risk. A lack of expertise can lead subsidiaries or business units into borrowings or foreign exchange transactions that can greatly damage their profits. But, incase a strong case can be made for centralization, that take the next step and make the treasury function a profit center.
Finance plays a major role to protect corporate assets, provide liquidity, and avoid losses. Often, companies look to foreign exchange to provide profits. Hercules has a very good foreign exchange team as a result, managing foreign exchange position are done very well. But does that mean that should turn foreign exchange into a full-fledged profit center and go up against the round-the-clock trading operation of Chase Manhattan? Before a company undertakes profit center activities, it must make certain the proper skills exist. The process may appear easy, but there are real risks that must be understood and managed.
Hercules has used safe harbor leases to reduce taxes, foreign currency options to minimize foreign exchange exposure, and export trading companies to contribute to corporate earnings. Which have even run the real estate department at a profit? But the real job is to make the business run better, and that should not be diverted onto conflicting paths.
The financial function is more than just keeping the books. It is more than just analysis. It is more than just trying to lower borrowing costs or minimize foreign exchange losses. It is about being part of the whole picture at both the macro and micro levels of the corporation. It means getting involved at the beginning, working with business units as they formulate strategy. It means being optimistic, active, innovative, and supportive.