1: The Scope of Corporate FinanceDavid Nickel, Controller
for Intel Communications
Group, Intel Corp. (former)
‘Finance’s primary role
is to try to drive the
right business decisions
to increase shareholder
value.’
See the entire interview on
the CourseMate website.COURSEMATE
SMART VIdEOFurthermore, by accepting their position as residual claimants, shareholders agree to bear more
risk than do other stakeholders. If companies did not operate with the goal of maximising shareholder
wealth in mind, then shareholders would have little incentive to accept the risks necessary for a business
to thrive. To understand this point, consider how a company would operate if it were run solely in
the interests of its creditors. Given that creditors receive only a fixed return, would such a company
be inclined to make risky investments, no matter how profitable? Only shareholders have the proper
incentives to make risky, value-increasing investments.Focus on Stakeholders?
Although the primary goal of managers should be to maximise shareholder wealth, many companies
have broadened their focus to include the interests of other stakeholders, such as customers, employees,
suppliers, creditors, tax authorities and the communities where companies operate. A company with a
stakeholder focus consciously avoids actions that would harm stakeholders by transferring their wealth
to shareholders. The goal is not so much to maximise others’ interests as it is to preserve those interests.
Considering other constituents’ interests is part of the company’s social responsibility, and keeping other
affected groups happy provides long-term benefits to shareholders. Such relationships minimise employee
turnover, conflicts and litigation. In most cases, taking care of stakeholders translates into maximising
shareholder wealth. But conflict between these two objectives sometimes arises. When it does, the
company should ultimately be run to benefit shareholders while preserving stakeholder interests. For
example, it is important to put customers first; but obviously, making customers happy enough to do
repeat business is also part of maximising shareholder value.
Interestingly, even though Australian and New Zealand companies are generally expected to act in
a socially responsible way, they are rarely required by law to do so. The situation is different in many
Western European countries, where companies are expected to contribute to social welfare almost as
much as they are expected to create private wealth.1-4b HOW CAN AGENCY COSTS BE CONTROLLEd IN
CORPORATE FINANCE?We have argued that financial managers should pursue the goal of maximising shareholder wealth. Thus,
managers act as agents of the owners who have hired them and given them decision-making authority. In
practice, managers also care about their personal wealth, job security, lifestyle, prestige and perquisites
(such as golf club memberships, personal chauffeurs and posh offices). Such concerns cause managers
to pursue objectives other than maximising shareholder wealth. Shareholders recognise the potential
for managers’ self-interested behaviour, and they use a variety of tools to limit this behaviour. Similarly,
conflicts can arise between shareholders and bondholders, especially regarding the risks that the company
takes when it makes new investments. The term ‘agency costs’ refers to costs that arise as a result of these
conflicts between various corporate stakeholders.Types of Agency Costs
The conflict of interest between owners and managers gives rise to agency problems. Shareholders can
attempt to overcome these agency problems by various means, including:■ relying on market forces to exert managerial discipline
■ incurring the monitoring and bonding costs necessary to ensure that executive compensation
packages fairly align the interests of managers and shareholders.LO1.4
Source: Cengage Learningagency problems
The conflict of interest
between the goals of a
company’s owners and its
managers