the role of a financial manager corporations roles and titles of financial managers principal-agent...

The Role of a Financial Manager

• Corporations

• Roles and Titles of Financial Managers

• Principal-Agent Problems

• Presentation – Dennis Spice

Corporations• Ownership by stockholders

– Closely held– Public companies

• Separation of management and ownership– Distinct legal identity– Articles of incorporation– Permanence– Limited liability for stockholders

• Board of directors– Legal liability– Directors and Officers Liability Insurance (D&O)

• Double taxation of dividends (in U.S.)

Role of The Financial Manager

Financial

ManagerFirm's

Operations

Financial

Markets

(1) Cash raised from investors

(1)

(2) Cash invested in firm

(2)

(3) Cash generated by operations

(3)

(4a) Cash reinvested in the firm

(4a)

(4b) Cash returned to investors

(4b)

Key Financial Manager Questions

• What real assets should the firm invest in?– Investment (capital budgeting) decision

• How should the cash for the investment be raised?– Financing decision

• Two issues are closely related

Financial Managers• Treasurer

– Handles cash management– Raises new capital– Maintains relationships with lenders and investors

• Controller– Prepares financial statements – Responsible for internal expenses– Handles tax issues

• Chief Financial Officer (Member of C-Suite)– Financial policy– Corporate planning– Risk management

• Financial• Enterprise wide

Principal-Agent Problems

• Principals (shareholders) want to maximize the value of the firm

• Agents (managers) may want other factors– High compensation– Job security– Perks

• Divergence in goals creates agency problems– Monitoring costs– Information asymmetries

Guest Speaker – Dennis Spice

• Chairman/CEO Institutional Advisors, Ltd.• Director of Corporate Relations University of

Illinois Fire Service Institute• Managing Partner Prairie Capital Partners• Previously:

– Founding Partner Open Prairie Ventures– Board of Directors Nims Associates, Inc.– Executive Director State Universities Retirement

System of Illinois

Next Class

• Financial Analysis– Financial statements– Measuring financial condition– Financial planning models

• Read Chapter 29 in text