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Essentials of Financial Management 4th Edition by Brigham, F., involvement, making them popular with small
Houston, F., Hsu, J., Kong, Y & Bany-Ariffin, AN. (2019). Pg. 5 - business owners and contractors
24  A partnership is a form of business organization
formed by two or more parties to manage and
FINANCE WITHIN THE ORGANIZATION operate a business and share its profits. There are
In an organization, a structure is very important so as to several types of partnership arrangements. In
provide a skeleton to understand how functions relate to particular, in a partnership business, all partners
each other. We will be zooming in on the function of finance share liabilities and profits equally, while in others,
in a corporation and how it connects to and with other partners have limited liability
functions in the firm.  A corporation is a business entity that is owned by its
shareholder(s), who elect a board of directors to
            A typical corporation would at least contain the
oversee the organization’s activities. The corporation
following organizational chart:
is liable for the actions and finances of the business –
the shareholders are not. Corporations can be for-
profit, as businesses are, or not-for-profit, as
charitable organizations typically are. 

PROPRIETORSHIPS AND PARTNERSHIPS

Advantages over a Corporation

 Ease of formation
 Subject to few regulations
 No corporate income taxes
The Board of Directors (BOD)– is the top governing body of
the organization. The board's key purpose is to ensure the Disadvantages over a Corporation
company's prosperity by collectively directing the company's
affairs while meeting the appropriate interests of its  Difficult to raise capital
shareholders and relevant stakeholders. They are elected  Unlimited liability
from the shareholders and the board is normally headed by  Limited life
the chairperson who is the highest-ranking official.
CORPORATION
Chief Executive Officer (CEO) - A chief executive officer (CEO)
is the highest-ranking executive in a company, whose primary Advantages over proprietorship and partnerships
responsibilities include making major corporate decisions,
managing the overall operations and resources of a company,  Unlimited life
acting as the main point of communication between the  Easy transfer of ownership
board of directors (the board) and corporate operations and  Limited liability
being the public face of the company. A CEO is elected by the  Ease of raising capital
board and its shareholders. However, in most cases, the CEO
of the company is also the chairperson of the board.
Disadvantages over proprietorship and partnerships
Chief Operating Officer (COO) – Directly under the CEO, the
 Double taxation
COO is often designated as the President of the company. The
 Cost of setup and report filing
COO directs the operations of the firm, which include
marketing, manufacturing, sales, and other operating THE OVERALL FINANCIAL GOAL: Creating Value for Investors
departments.
            The corporation is owned by the shareholders who
Chief Financial Officer (CFO) – Generally a Senior Vice contribute resources and get shares of stocks in exchange.
President, the CFO is normally the third highest-ranking Their claim over the corporation, therefore, is the stocks that
official of the corporation. The Chief Financial Officer (CFO) of they own. It follows that creating value for the investor
a company has primary responsibility for the planning, means maximining the value of their share, their stock.
implementation, managing, and running of all the finance Earning profit is just one of the goals but the main focus is to
activities of a company, including business planning, satisfy the investors by increasing the value of their claim
budgeting, forecasting, and negotiations. over the corporation.
For a corporation that is publicly listed, meaning its stocks are
            The measure of “value” should be understood in
traded in a stock exchange, both the CEO and CFO must
different contexts. Talking about the value of a share of stock,
certify the veracity of the reports submitted to stakeholders,
two terms must be kept in mind: the Intrinsic Value and the
such as the financial statements, and other annual reports.
Market Value.
FORMS OF BUSINESS ORGANIZATIONS
Market value is simply a measure of how much the market
values the company, or how much it would cost to buy it. This
 A sole proprietorship is an unincorporated business can be directly observed in the stock market, particularly
with only one owner who pays personal income tax when a company is publicly traded. Intrinsic value on the
on profits earned. Sole proprietorships are easy to other hand is an estimate of the actual value of a company,
establish and dismantle, due to a lack of government separate from how the market values it. Intrinsic value
cannot be directly observable. Calculations are needed to be
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able to estimate it. Is it be possible that the market value is BALANCING SHAREHOLDER INTERESTS AND SOCIETY
different from the stock’s intrinsic value? DEFINITELY YES!!! INTERESTS

 The primary financial goal of management is

shareholder wealth maximization, which
translates to maximizing stock price.
- The value of any asset is the present value of the
cash flow stream to owners.
- Most significant decisions are evaluated in terms of
their financial consequences.
- Stock prices change over time as conditions change
and as investors obtain new information about a
company’s prospects.

 Managers recognize that being socially

The market price of the stock represents the market’s
responsible is not inconsistent with maximizing
perception of the company. Intrinsic value is the theoretical
shareholder value.
“true” value of the company. When the market price is equal
to the stock’s intrinsic value, it is called an equilibrium. When
WHY ETHICS MATTER
the stock price is less than the intrinsic value, the stock is said
to be underpriced and thus, a regular investor would want to
buy a share. A stock on the other hand is overpriced when its
market price is higher than its intrinsic value, thus an investor
should sell it to realize a profit.

  Ethics can be defined as a set of moral principles or rules of

conduct that provide guidance for our behavior when it
affects others. Widely acknowledged fundamental ethical
principles include honesty, fairness, diligence, and care and
respect for others. Ethical conduct follows those principles
and balances self-interest with both the direct and the
indirect consequences of that behavior for other people.

             Not only does unethical behavior by individuals have

serious personal consequences—ranging from job loss and
reputational damage to fines and even jail—but unethical
STOCKHOLDER-MANAGER CONFLICTS conduct from market participants, investment professionals,
and those who service investors can damage investor trust
 Managers are naturally inclined to act in their own and thereby impair the sustainability of the global capital
best interests (which are not always the same as the markets as a whole. Unfortunately, there seems to be an
interest of stockholders). unending parade of stories bringing to light accounting frauds
 But the following factors affect managerial behavior: and manipulations, Ponzi schemes, insider-trading scandals,
- Managerial compensation packages and other misdeeds. Not surprisingly, this has led to erosion
- Direct intervention by shareholders in public confidence in investment professionals. Empirical
- The threat of firing evidence from numerous surveys documents the low
- The threat of takeover standing in the eyes of the investing public of banks and
financial services firms—the very institutions that are
 STOCKHOLDER-DEBTHOLDER CONFLICTS entrusted with the economic well-being and retirement
security of society.
 Stockholders are more likely to prefer riskier projects
because they receive more of the upside if the            Governments and regulators have historically tried to
project succeeds. By contrast, bondholders receive combat misconduct in the industry through regulatory
fixed payments and are more interested in limiting reform, with various levels of success. Global capital markets
risk. are highly regulated to protect investors and other market
 Bondholders are particularly concerned about the participants. However, compliance with regulation alone is
use of additional debt. insufficient to fully earn investor trust. Individuals and firms
- Bondholders attempt to protect themselves by must develop a “culture of integrity” that permeates all levels
including covenants in bond agreements that limit of operations and promotes the ethical principles of
the use of additional debt and constrain managers’ stewardship of investor assets and working in the best
actions. interests of clients, above and beyond strict compliance with
the law. A strong ethical culture that helps honest, ethical
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people engage in ethical behavior will foster the trust of

investors, lead to robust global capital markets, and
ultimately benefit society. That is why ethics matters.

             Society ultimately benefits from efficient markets

where capital can freely flow to the most productive or
innovative destination. Well-functioning capital markets
efficiently match those needing capital with those seeking to
invest their assets in revenue-generating ventures. In order
for capital markets to be efficient, investors must be able to
trust that the markets are fair and transparent and offer them
the opportunity to be rewarded for the risk they choose to
take. Laws, regulations, and enforcement play a vital role but
are insufficient alone to guarantee fair and transparent
markets. The markets depend on an ethical foundation to
guide participants’ judgment and behavior.

THE RELATIONSHIP BETWEEN ETHICS AND REGULATIONS

             Some equate ethical behavior with legal behavior: If

you are following the law, you must be acting appropriately.
Ethical principles, like laws and regulations, prescribe
appropriate constraints on our natural tendency to pursue
self-interest that could harm the interests of others. Laws and
regulations often attempt to guide people toward ethical
behavior, but they do not cover all unethical behavior. Ethical
behavior is often distinguished from legal conduct by
describing legal behavior as what is required and ethical
behavior as conduct that is morally correct. Ethical principles
go beyond that which is legally sufficient and encompass
what is the right thing to do.

          Given many regulators’ lack of sufficient resources to

enforce well-conceived rules and regulations, relying on a
regulatory framework to lead the charge in establishing
ethical behavior has its challenges. Therefore, reliance on
compliance with laws and regulations alone is insufficient to
ensure the ethical behavior of investment professionals or to
create a truly ethical culture in the industry.

          The recent past has shown us that some individuals will

succeed at circumventing the regulatory rules for their
personal gain. Only the application of strong ethical
principles, at both the individual level and the firm level, will
limit abuses. Knowing the rules or regulations to apply in a
particular situation, although important, may not be sufficient
to ensure ethical conduct. Individuals must be able both to
recognize areas that are prone to ethical pitfalls and to
identify and process those circumstances and influences that
can impair ethical judgment.