C1 Objectives CFS

Strategy

Long-term direction

Which products to sell

How to achieve objectives

Overall business strategy

Financial Strategy

Financial aspects of strategic planning process

More detailed supporting financial decisions over medium to short term to contribute towards strategy

Advises board

Financing

How to fund existing operations and new projects

Invesment

Deciding which projects to invest in and choosing between investments

Dividend

Determining sustainable policy when it comes to paying out dividends to shareholders

Risk management

Determining a sustainable policy when it comes to paying out dividends to shareholders

Risk management

How to manage risks relating to investments, financing and foreign exchange

Inter-related finance decisions

Financing, investment, dividend decisions all affect each other by increasing/decreasing resources

e.g. if company increase dividends then less retained earnings, may increase need for external finance or reduce amount of capital investment projects invested in

Stakeholders objectives

Share price maximisation

Dividend maximisation

Earnings growth

Maintenance of control

Lenders objectives

Certainty of payment

Security of capital

Further loans

Directors/Senior managers objectives

Maximise remuneration

Security of tenure

Maximisation of power and influence

Emloyees objectives

Maximise remuneration

Security of tenure

Career development

Training

Customers objectives

VFM

High quality

Reliable services

Innovation

Suppliers objectives

Certainty of payment

Further business

Government

Creation of employment

Payment of taxes

Meet regulations

Community

Environmental improvements

Creation of wealth

Possible conflict betweens stakeholder objectives

Maximising dividend for shareholders may conflict with maximising directions/employees remuneration

Satisficing

Make decisions which allow partial satisfaction of stakeholder objectives and do not maximis shareholder wealth

Aim is to increase value for shareholders rather than maximising wealth

Agency theory

Directors will always put shareholders’ objectives first

Although not to say that directions will ignore all other stakeholders’ objectives as if remaing stakeholders are unhappy then it is difficult to maximise shareholder wealth

Agency problem

Directors may be tempted to act in their own best interests rather than the shareholders

Addressing agency problem

Managerial reward schemes (share option schemes)

Corporate governance

Audits

Cost of these arrangements are ‘agency costs’

Takeovers conflict

Shareholders gain from takeovers

Managers lose (jobs) from takeoversTi

Time horizon conflicts

Shareholders view long term performance

Managers are judged on short term achievementsR

Risk conflicts

Shareholders appraise risks looking at wide range of shares

Managers career prospects and short term financial remuneration depende on success of their individual firm

Debt conflicts

Managers are more likely to be cautious over risk than shareholders, they might wish to adopt lower levels of debt than would be optimal for shareholders

Ethical considerations

Dealing with customers

Fair treatment of employees

Use of suppliers who may make use of child / slave labour or employ people to work in dangerous conditions

Protection of the environment

Allegations of unethical behaviour can cause tremendous brand damage and large adverse impact on value of company

Sustainability

Meeting the needs of current generations without comprimising the needs of future generationsSus

Sustainable development

Recognises interdependence between business, society and the environment

Initiatives by governments, business and organisations to promote sustainable development include:

Taxes and subsidies

voluntary codes

Stakeholder engagement

Impacts

How actions of organisations affect environmental, societal and governance issues

Human rights, waste, water usage

Can be financially material due to reputational impacts such as reduced consumer demand

Information on impacts is useful for consumers, employers

Dependencies

How current and future ESG issues can affect the organisation’s ability to create and maintain value

Workplace diversity and consumer expectations

Information on dependencies useful for investors to assess how well a company is managing its exposure to ESg risks

Double materiality

Impact materiality as well as financial materiality

Considering impacts on people and enviroment

Environmental

Quality and functioning of natural environment and natural systems

Greenhouse gas emissions, waste management (impacts)

Water shortages, sever weather events (dependencies)

fines, loss of reputation due to poor environmental behaviour

Social

Rights, wellbeing and interestes of people and communities

e.g. labour standards in supply chain, workplace health and safety

Governance

Issues relating to way in which a company is directed and controlled such as stakeholder interaction and business ethics

Business strategy

IFRS Sustainability Disclosure Standards

To provide high quality, transparent and comparable information which covers a range of ESG topics about which investors want information

Investors increasingly want to see ESG reporting

Task force on Climate-related Financial Disclosure (TCFD)

Forward looking financial disclosures

Asking organisations to identify climate related risks and opportunities to consider the financial implications and assess resilience of the business strategy to future climate outcomes

TCFD Core Elements

Governance

Strategy

Risk management

Metrics and targets

Environmental Factors

Environmental complain mechanisms

Climate related disclosures

Social factors

Employment practices

Product responsibility

Governance factors

Procedures to manage economic, environmental and social performance

Policies, practice and performance

Actual performance versus targets for the ESG factors identified

Targets

For each ESG factor

Environment performance indicators

Pollutants and effluents released

Percentage of waste recycled

Social performance indicators

Employee turnover

Number of reportable incidents

Supply chain sustainability

Governance performance indicators

Diversity of the board

Bribery and corruptions training for employees

Board member expertise

Lack of comparability

Companies can choose own ESG metrics

Insufficient measurable outcomes

Data if often non-financial therefore difficult to measure

Lack of assurance

ESG data is not subject to normal assurance and control processes

Greenwashing

Companies may provide the public with misleading or false information about the environmental impact of their products and operations

ESG ratings

ESG rating agencies use ESG metrics to grade a companies ESG performance

Good rating can help to secure finance at lower cost