Yr 2 Computing Financial

Management
Topic 1:
Nature and Scope of Financial
Management:
Financial Environment

Continuous Assessment (40%):

Class test Week 6 (15%) and Week 10 (25%)
Any student who is unable to sit the assessment (for example through illness or
representing the college at a sporting event) should complete the assessment
deferral form to request a deferral of their assessment and submit the
completed form to the lecturer.

Topic 1: NATURE AND SCOPE OF FINANCIAL MANAGEMENT

Topic 2: FINANCIAL STATEMENTS
Topic 3: BUDGETING
Topic 4: CAPITAL EXPENDITURE AND INVESTMENT
Topic 5: ACQUISITION OF SOFTWARE, HARDWARE AND SERVICES

Reading:

Ch:1, Financial Management An Irish

Text (2nd or 3rd Ed), Power,T., Walsh,S. and
OMeara, P. Gill & MacMillan, 2009

An overview of finance

Appreciate the objectives of financial management.

Understand the role of the financial manager.

Financial Objectives and Relationship with corporate

strategy

Stakeholders and impact on corporate strategy

Measuring the achievement of corporate objectives

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Financial Management - links to

other related disciplines

Financial Accounting
-

Provides externally used information

Historic picture of past events

Management Accounting
- Provides internally used information
- Used to aid management to record, plan and
control activities and help the decision making
process
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Company Financial Management and the nature and scope of financial

objectives for commercial organisations.
Forms of business organisation.
Ethics; Corporate social responsibility towards shareholders and society

Cost of capital is determined by the appetite of

the investor for the firms capital

The investor will choose as a location for his

funds an investment which provides an
adequate return

An adequate return is the sum of the return from

a risk free investment plus a risk premium

Calculating cost of capital

The notion of the cost of capital: the cost

of servicing both debt and equity capital.
It is relevant for any quoted company or
company with substantial external
investors, helping to assess whether the
company as a whole is growing as a
valuable asset or whether, in common
parlance, shareholder value is being
destroyed.

Calculating cost of capital

The weighted average cost of capital

(weighted between debt and equity) is the
key number and
the two elements are calculated separately
The cost of debt is the rate of return that
debt holders require in order to hold debt.

10

Corporate Bonds
Anglian Water
National Grid

3.637%
3.942%

The most well known (but far from foolproof)

mechanism for calculating the cost of equity is
the confusingly titled capital asset pricing model
(CAPM).
CAPM extends the principle that the cost of equity
can be assessed from analysing the levels of
return expected by the investor when buying a
share (equity).

The variations in return between shares reflect

the risk.
12

The greater the risk attached to that share, the

In the CAPM calculation this risk has two

components:
(i) equity risk as against a risk-free security,
familiarly known as the equity risk premium;
and
(ii) the particular risk attaching to one
companys equity as against the equity market
as a whole (or some predefined subset like
industrials or chemicals).

13

As a piece of shorthand this element is know as

beta.

Beta
Beta measures the relative volatility of a
particular share price as against the market
as a
whole, which is deemed to have a beta of
1.0.
A relatively risky share, which will display
greater volatility, will have a beta in excess
of 1.0, a less risky investment will show
less than 1.0.
14

Volatility

Stock Market volatility refers to the amount of uncertainty or risk about the size
of changes in the value of the Stock Market - See on next slide for historic
volatility.

Although the Stock Market Risk premium is c.6%, in some years the actual
return was more and others it was less.

It is very important for an investor to understand the volatile nature of the

market when making an investment. If you dont it will be difficult for you to
establish the risk associated with your investment.

The volatility of the stock market index is estimated at 20% i.e. the market can
rise or fall by 20% in any one year

Stock Market Volatility S&P 500

Summarising these concepts as a simple

equation:
Cost of equity = return on risk-free security
+
(Beta x equity risk premium).

17

Return on risk-free security.

A risk-free security doesnt exist, but the
nearest thing to such a security is deemed
to be a benchmark UK gilt of about 10
years maturity

18

THE UK 10 Year gilt was averaging 4.5% till the onset of

the crisis and since then at 3%? due to
QE

19

Equity risk premium.

The calculations are based on historic stock
market data.
Figures around 5.5% to 6% p.a., have been
used by various regulators in their dealings
with the utilities.

20

Beta
As an example, if a share has a beta of 1.5,
when the market has a 12% annual return
then the share will have returned 18%.
The Walt Disney Company
Beta:0.96
Apple Inc
Beta:1.26
21

Equity premium
The Walt Disney Company
Cost of equity = 4.5% + 0.96 x 6%
= 4.5% + 5.76%
=10.26%
Apple Inc
Cost of equity = 4.5% + 1.26 x
6%
= 4.5% + 7.56%
=12.06%
22

Why is the cost of Apples equity more

expensive than that of Walt Disney
Risk is defined as the probability that the actual
return may be different from the expected
return.
Hence stocks having higher variance carry
higher risk.
Interestingly, variance doesn't differentiate
between dispersion above the mean and
dispersion below the mean.
There is nothing called good deviation or bad
deviation.
23

Variance as a measure of risk can be associated with the markets general attitude
towards uncertainty.
Higher fluctuation makes prediction of stock prices more difficult, increasing
uncertainty and hence, risk.
The annualized standard deviation in the share price of Google , Groupon , and
Amazon for different time periods are given below.
First, daily standard deviation based on daily prices is calculated.
Daily standard deviation is annualized by multiplying it with the square root of
The total number of trading days in a year..

24

One Year

Two years

Five Years

GOOGL

23.61%

21.78%

24.51%

GRPN

58.89%

70.49%

NA

AMZN

33.05%

29.80%

32.74%

While Google is least risky across all time

periods, Groupon is riskiest among the
three. From the table it can also be seen
that standard deviation of a stock varies
depending on the time period chosen.

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While variance measures the deviation of

returns from the mean, beta measures the
co-movement of a security in relation to the
market, which generally is an index like S&P
500.
A stock which moves in tandem with the
market has beta of 1. A stock which has
more variance than the market average has
beta greater than one, conversely, a stock
which has lesser variance than the market
has beta lower than one.
26

S&P 500

Stock A

Stock B

1500

120

120

1650 (10%
increase)

138 (15%
increase)

126 (5% increase)

1485 (10%
decline)

120 (13 %
decline)

116 (8% decline)

In the above example Stock A has beta greater than one while Stock B has beta lower than one.
Stocks having beta of one are riskier than the market while stocks having beta of less than one
carry lesser risk the market.
It is also possible to have negative beta if the returns on the stock and the market are negatively
correlated.
So, does a stock having higher variance also has higher beta?
Not necessarily.
A stock will have higher beta only if it adds extra risk to the market portfolio.
Put simply, variance is comparison to self while beta is in comparison with the markets.
Hence, a stock having high variance may have lower beta.
27

Mathematically beta is covariance of the stock with the market divided by variance of the market.

Why is capital needed?

Capital is needed to deal with the unexpected?

28

Tell that to Mr. Badger!

BP oil spill

31

BP oil spill

32

BP oil spill

33

34

What happened to the property

Developers in 2008
A small number survived
A large number went bankrupt

35

A large number went

bankrupt
Suddenly there were no buyers for new
properties
36

The developers were unable to repay

A small number survived

These Developers had spare cash to
make repayments till the house price fall
started to reverse
37

Many bought up the assets of the

Financial management function

What is Financial management?

The

management of the finances of an

organisation in order to achieve the objectives
of the organisation
Usual financial assumption is that main
objective of the company is to maximise
shareholder wealth

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What is finance?

Finance is about managing money.

How much cash do you need to finance a business

Assessing the firms long-term investment projects.

the most fundamental principle in finance net present value

(NPV).

This will involve an assessment of the future timing and risk of

future cash flow generated by these investments.

Where this cash will come from - the capital structure

decision.

Managing the day-to-day working capital.

Overriding consideration - maximising owners wealth.

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Financial Management
Financial planning

making sure funds are available

Financial control

objectives being met and assets being used efficiently

Financial management decisions

Financing, taking more credit, profit retention, issuing

shares
Dividends decision
Investing to maximise profit

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Financial planning
Need to plan to ensure adequate funding
available at the right time to meet the needs
of the organisation for short, medium and long
term capital
Medium / long term funding for - fixed assets
purchases
Will investment in fixed assets achieve
organisations objectives

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Financial Control
Are the various activities meeting the
entities objectives
Are assets being used efficiently
Actual performance vs actual vs budget

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Role of the Financial Managerdecision maker

A financial managers tasks can be divided into 3 areas:

Financing decisions...management of working capital

requirements.. where will the cash come from (short term / long
term)
Dividend decisionshow much (if any) dividends to pay to
shareholdershow much to keep back
Investment decisions...project A or project B??

Key point: appreciate the interrelationship of these 3 decision areas

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The financial manager

Who is the financial manager in reality?
Finance Director
(strategic decision making)
Corporate Treasurer
(day-to-day cash management)

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Aims and Objectives

The fundamental aim of the financial manager is

the optimal allocation of the resources available to
them.
The most common objective assumed for a
financial manager is the maximisation of
shareholder wealth. HOW??
Sometimes, shareholder is replaced by
stakeholder
Financial managers do need a firm understanding
of both management accounting and financial
accounting

Stakeholders and the Enterprise

Figure 11.1

Like shareholders, customers, suppliers, employees, and local

communities, etc have a stake in, and are affected by, the firms
success or failure

Stakeholders

Are individuals /groups affected by the activities of

the firm
Internal

Employees, pensioners, managers

Connected

Shareholders, debt holders, customers, bankers, suppliers,

competitors

External

Govnt, local/ national communities, prof / reg bodies

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Stakeholders
What are the objectives of the
stakeholders
Students to list objectives for the following

Ordinary

shareholders

Creditors
Long

term creditors
Employees
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government
management

50

Stakeholders
Stakeholder objectives
Ordinary shareholders want to maximise their wealth
Suppliers want to be paid full amount at due date to continue
trading relationship
Banks want to receive interest and minimise default risk
Employees want to maximise rewards and ensure
employment continuity
Managers want to maximise their own rewards
Government wants sustained economic growth and high
levels of employment

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Shell's Corrib gas project has been delayed for years by strong resistance in County
Mayo.
Now claims are emerging of corporate sweeteners, including a consignment of
alcohol for police after a clash with protesters
The struggle has become an epic clash between the Goliath that is Shell, backed by
the Irish police, and a group assembled around the umbrella protest group
Shell to Sea, whose founder, retired primary schoolteacher Maura Harrington, says
that, "thanks in no small measure to the Shell to Sea campaign, the project is 10
years behind schedule and its budget has trebled".
The campaign to win the residents' goodwill has sometimes displayed dashes
of Whisky Galore-style farce shower facilities for the local football team and
suchlike
A tiny oil services company, OSSL, claims that it was charged with "greasing the
palms" of interested parties on County Mayo's coastline.
The company insists that the services it carried out for Shell even ran to providing the
police force with alcohol soon after a major clash with protesters along with other

Company Financial Management and the nature and scope of financial

objectives for commercial organisations.
Forms of business organisation.
Ethics; Corporate social responsibility towards shareholders and society

Business Entities
1.SOLE TRADER
Sole proprietorship is the most prevalent form of
business organisation in Ireland and around the world
This is a business formed and owned by one
individual
The private monies of the sole trader can be grabbed
to pay the debts of the firm

2. PARTNERSHIP
Two to twenty persons carry on a business
with the view of making a profit.
It can easily be formed and is relatively
inexpensive once more than one person
acts in business it is a partnership.
The liability of the partners is unlimited.

Partnership

General partnership is where each

partner contributes an agreed amount.

Limited partnership is where some of the

partners are liable for all the debts of the
firm and other partners are liable only for
their financial contribution to the firm.

3. Corporations (Companies)

Business organised as a separate legal entity

owned by stockholders
Limited

liability for the business

Private

funds off limits

Ownership
Unlimited

easily transferred

life for the business

Corporation / Company
The

formation of a limited liability company

takes the following form:

The

articles of association: the rules

governing the internal workings of the
organisation

Memorandum

of association: the document

governing the relationship between the company
and others.

Corporation / Company

Why incorporate?
Limited

liability
Raising finance
Number of shareholders widening ownership
Ease of expansion
Owning assets
Tax advantages

Types of companies
Unlimited

company
Private Limited Company
Public Limited Company (PLC)
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Corporation / Company

Costs of incorporation
Formation

costs
Compliance costs

Preparation of financial accounts

Annual return
Audit

Directors

responsibilities

Preparation of accounts and annual return

Proper governance of company

More

difficult to get funds out dividends

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Possible corporate objectives

Shareholder wealth maximisation

Maximisation of profit
Maximisation of sales
Increase market share
Cash flow maximisation
Customer satisfaction
Quality of firms products
Survival
Social responsibility
Industrial relations
Which one should we follow?What is the relationship with
financial objectives?
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Financial objectives
The assumed primary financial objective is to
maximise shareholder wealth
Maximising shareholder wealth is to maximise
the value of the company..maximise share
price...value a share..
How do we value a share

Balance

sheet valuation
Break up basis
Market value
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Financial objectives

Financial targets could include targets for

Earnings

growth

EPS
Dividend

per share
Profit retention
Operating profit

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Unilvers Strategic and

Financial Objectives

Grow annual revenues by 5-6% annually

Increase operating profit margins from 11%

to 16% within 5 years

Trim companys 1200 food, household, and

personal care products down to 400 core
brands

Focus sales and marketing efforts on those

brands with potential to become respected,
market-leading global brands

Streamline companys supply chain

Heinzs Financial and

Strategic Objectives

Achieve earnings per share in the range

of $2.15-$2.25
Increase operating cash flow by 45% to $750 million
Reduce net debt by $1.3 billion and further strengthen
the company balance sheet Continue to introduce new
and improved food products
Remove the clutter in the company product offerings by
reducing the number of SKUs
Increase spending on trade promotion and advertising
by $200 million to strengthen the recognition and
market shares of the companys core brands
Divest non-core underperforming product lines

Non Financial targets

Employee welfare
Management welfare ( agency problem?)
Provision of a service ( say Eircom / Bord Gais)
Fulfilment of responsibility towards
customers..fair
Fulfilment of responsibility towards suppliers
Welfare of societypollution

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Shareholder wealth maximisation

Shareholders want dividends and capital
gains - return on their investment
Capital gains reflect future dividends
Current and future dividends depend on
future cash flows:

their

magnitude or size
their timing
their associated risk.
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Shareholder wealth maximisation

Shareholders will want managers to manage the company in

such a way that will maximise shareholders wealth.
The wealth of shareholders is the number of shares they hold
multiplied by the market price of the share. how do we
value a company

Balance sheet valuation

Market valuation
Break up basis

Share ownership is increasing because of the proliferation of

pension funds, life insurance companies and unit-linked funds.
Pension fund and mutual fund managers are seeking out
companies that are adopting shareholder value added
financial systems.
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Returns to shareholders
Reminder:
Capital

gains: from increases in market

value
Dividends: cash paid to shareholders

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What maximises share price

The value of a share depends on the ability of a company to

generate cash flows both now and in the future.
Cash is king.
Shareholder value is maximised by generating cash flow
and not necessarily maximising profits. ..long term view
The timing of cash flows is also important in enhancing
shareholder value.
Investors will pay more for shares that are less risky.
Therefore, generate as much cash flow as possible.
Get this cash in as soon as possible.
Do all of this while minimising risk.

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Davy View
Against a tough trading and FX backdrop, Kerry has demonstrated good growth in its
key metrics KIF volume growth of 4.2% and a c.50bps expansion in group trading
margin.
Indeed, KIF performance looks to have accelerated in Q2. Like-for-like trading profit
growth (excluding FX) was 7.1%, while on a reported basis it grew by 3% (Davy:
+5.6%). Adjusted EPS rose by 5.8%.
Kerry reiterated full year EPS growth guidance of 6-10%; as anticipated, the growth is
more second half-weighted.
Our own EPS forecast (+8.1%) remains unchanged, although at first glance we may
make some modest mix adjustments lower Foods profit (where restructuring remains
on-going) and higher central costs, offset by a small KIF upgrade and lower interest.

Market Expectations

Happy Investors

What doesnt maximises share price

Shareholders appoint directors who in turn appoint

managers.
Managers act as agents for owners.
Managers are assumed to make decisions that enhance
shareholder value.
Sometimes, however, managers make decisions that suit
themselves at the expense of shareholders.
Agency theory deals with the conflict of interest between
managers and their shareholders, and between
shareholders and creditors.
The possibility of conflict between the parties is referred to
as the agency problem.
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False Dawn!

Financial markets: Introduction

Financial markets and institutions are the
firms financial environment
Stock and bond markets
Mutual and pension funds

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Flow of Funds & Financial Intermediation

The primary function of the financial system is to facilitate the allocation of scarce funds
from those who wish to save to those who wish to invest.
This transfer or flow of funds leads to a more efficient allocation of scarce financial
resources and results in greater economic productivity and resulting higher living
standards.
The financial system facilitates the channelling of funds from those who wish to delay
consumption today savers or lenders, to those who wish to bring future consumption
or investment forward to today investors or borrowers.

The flow of savings to

corporations

The money that corporations invest in real

assets comes mainly from savings by investors
The savings can pass through financial markets,
financial intermediaries or both.
Cash retained and reinvested in the firms
operations is cash saved and invested on behalf
of firms stockholders

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The financial system performs this matching of financial resources, with funds
flowing from lenders to borrowers, via two main routes:

Some terms..
The stock markets

A financial market is a market where securities are

issued and traded.
Traded security is a financial asset (shares of stock).
The stock market is the most important financial market
for corporations.
Primary market is a market for the sale of new
securities by corporation.- IPO and Seasoned
Secondary Market - Purchase and sales of existing securities
are known as secondary transactions and they take place in the
secondary market

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Stock exchange

Most trading in shares of large corporations takes

place on stock exchanges such as NYSE LSE & ISE
Trades in each stock are handled by a specialist, who
act as an auctioneer
the specialist ensures that stocks are traded at best
prices (sell high, buy cheap)
NYSE, LSE & ISE are the examples of an auction
markets
www.ise.ie

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Over the Counter (OTC)

The OTC market is not a centralised

exchange like NYSE, but a network of
security dealers who use an electronic
system known as NASDAQ to quote
prices at which they will buy and sell
shares.

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NASDAQ

Nasdaq

Created in 1971, the Nasdaq was the world's first electronic stock market.
The Nasdaq is a computerized system that facilitates trading and provides
price quotations on some 5,000 of the more actively traded over-thecounter stocks.

The term "Nasdaq" used to be capitalized "NASDAQ" as an acronym for

National Association of Securities Dealers Automated Quotation. In recent
times, the acronym was dropped, and Nasdaq is now used as a proper
noun.

The Nasdaq is traditionally home to many high-tech stocks. The big ones
include Microsoft, Intel, Dell and Cisco.

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STOCK MARKET INDEX

A stock market index is a listing of stock and a statistic

reflecting the composite value of its components. The
stocks selected bear some commonality such as trading
on the same

Stock Market
belonging to the same industry
having similar market capitalisations size!

Many indices compiled by news or financial services firms are used

to benchmark the performance of portfolios such as mutual
funds

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84

Other financial markets

Fixed-income market is a market for debt securities

Capital market is a market for long-term financing
Money market is a market for short-term financing
(less than 1 year)
Foreign-exchange markets (OTC through a network of
the largest international banks)
Commodities markets
Derivatives markets

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Financial intermediary
An organisation that rises money from
investors and provides financing for
individuals, corporations, or other
organisations
A mutual fund is a professionally-managed
form of collective investments in a portfolio of
securities-diversification and professional
management

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Pension fund
Investment plan set up by an employer to
provide for employees' retirement.
Designed for long-run investment.
They provide professional management
and diversification
Tax advantage

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Functions of financial markets

and intermediaries
Channel savings to real investment
Transporting cash across time.
Liquidity (ability to turn an investment into
cash when needed).
Reducing risk.

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88

Diversification

Financial markets and intermediaries allow

investors and businesses to reduce and
reallocate risk
Strategy designed to reduce risk by spreading
the portfolio across many investments.
Portfolio diversification works because prices of
different stocks do not move exactly together.
Diversification works best when the returns are
negatively correlated.

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Company Financial Management and the nature and scope of financial

objectives for commercial organisations.
Forms of business organisation.
Ethics; Corporate social responsibility towards shareholders and society

George Cadbury (19 September 1839 24 October 1922) was the third son of
John Cadbury, a Quaker who founded Cadbury's cocoa and chocolate company.
He worked at the school for adults on Sundays for no pay.
Together with his brother Richard he took over the family business in 1861.
In 1878 they acquired 14 acres (57,000 m) of land in open country, four miles (6 km)
south of Birmingham, where they opened a new factory in 1879.
In the early 20th century, he and John Wilhelm Rowntree established a Quaker study
centre and it remains the only such centre in Europe today, offering short educational
courses on spiritual and social matters to Quakers and others.
He also created a hospital in Normandy called "l'hopital de Normandy".
The Cadbury brothers were concerned with the quality of life of their employees and
provided an alternative to grimy city life.

As more land was acquired and the brothers moved the factory to a new country
location, they decided to build a factory town (designed by architect
William Alexander Harvey), which was not exclusive to the employees of the factory.
This village became known as Bournville after the nearby river and French word for
"town".
The houses were never privately owned, and their value stayed low and affordable.
Bournville was a marked change from the poor living conditions of the urban
environment. Here, families had houses with yards, gardens, and fresh air.
To the present, the town offers affordable housing.
The brothers cared for their employees; they both believed in the social rights of the
workers and hence they installed canteens and sport grounds.
Nineteen years after brother Richard died, George opened a works committee for each
gender which discussed proposals for improving the firm.
He also pressed ahead with other ideas, like an annuity, a deposit account and
education facilities for every employee

Business Ethics
Socially

responsible investing, also known as

sustainable investing or ethical investing, describes
an investment strategy which seeks to maximize both
financial return and social good
In general, socially responsible investors favour
corporate best practices that promote environmental
stewardship, consumer protection, human rights, and
diversity.
Some (but not all) avoid businesses involved in
alcohol, tobacco, gambling, the military.

Being ethical is one of the obligations that

companies owe society so business ethics is
part of corporate social responsibility
Ethics is more important nowadays as
business becomes more intrusive e.g. smart
phones, internet privacy etc.

An unethical situation involves actions

which are harming others
Ivory Coast use slave children to grow and
harvest cocoa beans
Mars, Nestle and Kraft Foods use these

It is the policy of the CIE Group to maintain its high reputation for ethical behaviour and
fair dealing in the conduct of its business.
In many cases decisions as to what is ethical or fair are clear cut and will be obvious to
any reasonable person.
In some situations, however, there may be circumstances where an element of doubt or
ambiguity arises.
To help in those circumstances and to protect and guide individual employees of the CIE
Group, it is necessary to have a written Code of Business Ethics.
It is not possible to provide for every situation in the Code of Business Ethics. If there is
doubt about the probity of any particular situation, ones superior must be consulted
about that situation by the individual concerned.
Where a conflict of interest situation could arise for an employee, he/she must desist
from dealing with the contract or situation giving rise to the conflict or potential conflict of
interest, and may not attempt in any way to influence decisions on the matter.

The Code of Business Ethics applies to all employees of the Group.

Those who are engaged in the purchasing of goods or services, the placement of
contracts or the approval of payments to or by the CIE Group must have particular
regard to the terms of the Code
Management and employees are not allowed to be involved in outside
employment/business interests in conflict or in potential conflict with the businesses of
the CIE Group.
Therefore it is important that all employees of the CIE Group disclose in writing to the
Company/Group Secretary, through their superiors, details of any conflict of interest
which might affect their impartiality in carrying out their duties as soon as they become
apparent, including:
any interest, shareholding or possible conflict of interest an employee has with any firm
or organisation from which the CIE Group purchases supplies, works or services, or
through whom the CIE Group proposes to sell property or services
any outside employment or business interests in conflict or potentially in conflict with
CIEs business

Guidelines regarding Gifts or Hospitality

It is customary for many suppliers to offer gifts, hospitality or entertainment to named
employees with whom they have contact as a result of business dealings.
However employees should, subject to the procedures outlined below, avoid the giving or
receiving of corporate gifts, hospitality, preferential treatment or benefits which might
affect or appear to affect the ability of the donor or the recipient to make an independent
judgment on business transactions.
Gifts
Employees may accept gifts from suppliers to or contractors who have worked for the
CIE Group, provided:
the gift is unsolicited,
the gift is one of very small intrinsic value (e.g. diary, calendar, bottle of wine/spirits etc.),
the value of such gifts accepted in a year from any one source does not exceed 130
and
gifts with a value exceeding 70 are disclosed to that employees immediate superior.

Gifts
Employees may accept gifts from suppliers to or contractors who have worked for the
CIE Group, provided:
In all other cases, the gift should be returned to the sender, with a note advising that
acceptance would be contrary to Group policy.
Details of returned gifts must be notified at once to the recipients superior.
Sponsorship requested on behalf of a club or society within the CIE Group from
suppliers or contractors to CIE must not exceed 1,200 per subsidiary company in any
year from such supplier or contractor unless the approval in writing of the Finance
Manager/Group Chief Financial Officer is obtained.

Hospitality
Modest hospitality (including sporting events and golf outings) may be accepted,
provided:
the frequency and scale of hospitality is not more than CIE might be expected to give in
return,
the number of CIE staff availing of the hospitality is kept to a minimum and
invitations do not include the provision of travel or overnight accommodation and availing
of the hospitality does not identify the CIE Group in a public way with any particular
supplier or contractor.
Details of hospitality offered in this context that has been turned down must be notified at
once to the recipients supervisor.

07/06/2013

Penneys says it will this week complete the registration of almost 4,000 former
employees of the Rana Plaza complex which collapsed in Bangladesh last month.
More than 1,100 workers died in the tragedy - the worst industrial accident in the
country's history.
Penneys parent company Primark says the registration process will see the payment
of short-term financial aid, the equivalent of three months' wages, to all the Rana
Plaza employees.
According to the company, the vast majority of these employees made clothes for
retail brands other than Primark.
Earlier this week, Penneys announced that it is now surveying the structural safety of
factories in Bangladesh that make clothes for them.

Ethical issues in Businesses

Ethical issues challenge the function of business and financial management.

Civil rights of employees and consumers

Environmental pollution concerns

Workplace health and safety issues

Ethical responsibilities of management towards shareholders

Fair employment opportunities

Product safety

Ethical advertising standards

Bribery and corruption

Insider dealing

Ethical business behaviour can have long-term profitability gains.

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Ethics at work
a) Dealing with suppliers
Cadbury Schweppes deals with tens of thousands of suppliers around the world and
aims to work closely with them to ensure they receive fair treatment.
In the case of cocoa farmers for example, Cadbury Schweppes is a member of a
global coalition, which is comprised of industry, governments, non-government
organisations and special interest groups created to improve working practices on
cocoa farms.
The coalition has funded independent surveys into cocoa farming in West Africa
that have contributed to the development of programmes to help local
communities.
In 2003, the coalition also established a foundation, the International Cocoa
Initiative - Working Towards Responsible Standards for Cocoa Growing, which
aims to support field projects and will act as a clearinghouse for best practices to
ensure that cocoa is grown responsibly.

a)
Dealing
with suppliers
Ethics
at work
Another practice is Fair Trade.
Under this scheme cocoa is paid for at a fixed minimum price with a premium going to
the farmer co-operatives in exchange for using the Fair Trade logo and accreditation.
Presently, a modest amount of cocoa goes to the Fair Trade market.
This scheme works best when farms have access to communications and warehousing
facilities.
Many farms, however, are family owned operations in remote areas and access to a Fair
Trade co-operative group may be difficult so the coalition is working to ensure these
farms can benefit from the work that it does.
It is Cadbury Schweppes aim to help all cocoa farmers improve their standard of living
by helping them develop sustainable crops of quality beans.
In Ghana, for example, where Cadbury Schweppes buys most of its cocoa, the company
supports farming communities through programmes on sustainable tree crop
management and building wells for drinking water.

Developing and implementing a strategic approach to ethics

A Vodafone case study
Ethical companies do the right thing and concern themselves with the long term.
This may damage financial performance in the short term.
Ethics guide decisions.
When Vodafone first included moderators into young people's chat rooms to create a
safe environment for chat, the number of users dropped significantly.
This led to reduced revenues for the company. However, the company believed that this
was the right thing to do.

Company bosses have access to

company funds and they should at
all times use these funds for the
benefit of the companys owners

print edition 15.05.2011

AIDAN Heavey's supercharged oil company Tullow faced down a shareholder
revolt last week, as almost 40 per cent of its backers voted against changing
the terms of an executive bonus scheme.
Investor revolts at Irish companies are exceedingly rare as institutional
shareholders typically back management when it comes to a vote. However a
number of 'City' institutions have started to take a hard line on bonus schemes
based on total shareholder returns.
Tullow had sought shareholder approval to increase the amount of shares it
could give out to its executives under the bonus scheme -- but also sought to
raise the performance bar. Almost 37 per cent of shareholders voted against
this plan. The shareholder revolt was beaten off just one day before Mr Heavey
and his team were conditionally awarded 15.4m in shares.
Tullow's latest annual report shows that Mr Heavey and three of his top
executives shared a 12.9m pay day last year between shares vesting and
conditional awards under the bonus scheme. This was on top of their salaries,
benefits and pensions.

This wrongdoing arises because of

AGENCY ISSUES
Agency Issues arise where we give
a third party access to our money
It can apply to any organisation

The information asymmetry that exists between shareholders and

the Chief Executive Officer is generally considered to be a classic
example of a principal agent problem.
The agent (the manager) is supposed to be working on behalf of
the principal (the shareholders), who does not observe the actions
of the agent.
Information asymmetry facilitates company bosses behaving in a
morally hazardous way.
Agency costs mainly arise due to the divergence of control,
separation of ownership and control and the different objectives
(rather than shareholder maximization) of the managers.
Also, when a firm has debt, conflicts of interest arise between
stockholders and bondholders.

An agency cost is any benefit a manager receives from

a company which they should not get.

Examples: golf in the afternoon, fancy offices and the

use of luxurious company cars where smaller, less
expensive cars would do, and the use of company
helicopters and perhaps jets.

Managers deciding not to embark on projects that are

risky, even though such projects may be potentially
lucrative if they pay off.

Expenditures incurred by shareholders designed to

investigate and control managerial actions.

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So what is Corporate Governance?

It is a system of structuring, operating and controlling a
company with a view to achieve long term strategic goals
to satisfy shareholders, creditors, employees, customers
and suppliers, and complying with the legal and regulatory
requirements, apart from meeting environmental and local
community needs.

Board of Directors
Provide controls & oversight corporate governance

Executive
Management
Know what
is going on
Have access to
company bank
accounts

Shareholders
Dont know what
is going on
Dont have access
to company bank
accounts

Summary: Crucial concepts in finance

Future cash flows determine values Cash is King

Value of money depends on when it is received.
Role of finance is not necessarily to maximise profits.
Risk v Return

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