Role of the Financial Manager

Role of the Financial Manager Paper

Introduction

Shareholders own companies and are therefore entitled to a return on their investments when the companies are performing well. It becomes the financial managers’ role to ensure that shareholders are receiving a maximum return on their investment. This project will concentrate on defining the different roles and objectives of financial managers in their attempt to maximize shareholder value. Furthermore, the viewpoint of stockholders will also be compared to those of financial managers with regards to maximization of shareholder value.

Maximizing Shareholder Value

In today’s competitive global environment, financial managers are continually faced with the ability to engage in activities bringing value to the firm and the shareholders. In order to achieve their goals successfully, financial managers need to set strategies to influence the direction and success of the company. Such strategies include internal company performance goals. For instance, financial managers need to be information providers to top management for strategy development and implementation. Furthermore, they also need to be narrow strategic partners by engaging in narrowly defined financial areas (Twomey, 2005). As strategy implementers, the role of financial managers also includes maximizing shareholder value. Many businesses that previously thought of shareholders as little more than another source of funds are now starting to place shareholder interests at the core of their strategies, and are reconfiguring capital structures to do so (Currie,1998). There are various ways to create and increase value from the firm’s capital budgeting, financing, and net working-capital activities. For instance, financial managers can buy assets which generate more cash than they cost or they can sell bonds and stocks and other financial instruments which all produce more money than they cost (Ross et al., 2005). Additionally, the role of financial managers also includes closely examining the cash flows of the company. Cash flows are a crucial aspect of any firm, as they are generally considered to be the best way to measure a company’s financial health. Increased cash flow means that more funds would be available to the firm to pay dividends, service or reduce debt, and invest in new assets (Wall Street Words, 2003). Even though a company’s sales are positive, a slow down in cash flow would be a bad indicator to shareholders. Therefore, financial managers need to determine ways to ensure positive cash flow that will help pay dividends, hence keep shareholders satisfied.

When attempting to maintain a healthy balance between the firm’s and the shareholder’s needs, financial managers also need to conform to ethical standards by ensuring that all their financial transaction and statements are correct. The Sarbanes-Oxley Act was established after many fraudulent accounting events that happened, such as Enron and WorldCom. The objective of this act helps keep CEO’s and CFO’s aligned with the generally accepted accounting practices and ethical procedures as they would personally be held responsible for any fraudulent practices with heavy fines and possibly jail time. Furthermore, personal integrity and fear of the Securities and Exchange Commission (SEC) and jail sentences serves as a generally reliable preventative (The Kiplinger Washington Editors, Inc., 1994).

On the other hand, a shareholder’s viewpoint is similar to a financial manager in many respects. Shareholders’ most important objective is return on their investment. This return is calculated by both dividends and appreciation in share value over time. When shareholders elect directors as their representatives, the directors' objective should be the highest possible return for those they represent. Therefore, directors have a fiduciary obligation to the shareholders (Kaplan et al., 1997). This fiduciary obligation is shared between all executives and financial managers. With this in mind, even though shareholders and financial managers share a common goal of increasing value, conflicts of interest with both parties’ intentions could ultimately arise. Some individuals with large shareholdings may try to influence company policies. However, from the outside, without an accepted official position, little can be accomplished in spite of considerable effort if management is not persuaded (Kouskoula, 1998). From a shareholder’s viewpoint, not having any influence on companies may lead to conflicts of interest. For instance, shareholders could fear that some managers may seek to use the shareholder’s money for their own personal gains. When faced with such principal-agent problems, it becomes the role of senior management