Discuss about the Corporate Finance for Financial Risks of a Corporation.
Chief Financial Officer (CFO) is a corporate officer who holds the responsibility of managing the financial risks of a corporation. CFO is the financial governing body of an organisation carrying out the responsibility of managing and governing all the financial operations (Eeden, 2014). In this context, the present report aims to evaluate and examine the responsibilities of Chief Financial Officer (CFO) of NEC Australia that is a leading technology company providing a complete portfolio of ICT solutions and services to large enterprise, small business and government organisations (NEC: Annual Report 2015). The roles and responsibilities of CFO of the company and its impact on the ultimate objectives are discussed in detail in the report. The next section of the report provides an insight into the impact of efficient-market hypothesis on developing a portfolio by pension fund manager.
Tadashi Takahama is presently holding the position of CFO of NEC Australia and is therefore responsible for ensuring compliance with the company’s financial policies, corporate financial consolidation, taxation management, financial governance, credit control and treasury activities (NEC Australia Executives, 2016). The main objective of the company is to deliver innovative technology solutions to the customers through the help of its unique and diverse talent and industry partnerships (NEC: Vision & Values, 2016). The three general areas of responsibility of CFO of the company are discussed as follows:
Financial Governance: The major responsibility of CFO of the company is to control the finance operations activities by managing its cash flow position. This involves developing understanding of the sources of funds, assets availability and liabilities position, leases, statutory obligations and insurance summaries. Acquiring proper knowledge regarding the financial operational activities is very essential for the CFO for developing financial statements to communicate all the information related to finance to the key stakeholders of the company (Eeden, 2014). The CFO also holds the responsibility of developing and implementing accounting policies and procedures regarding credit collections, payment of bills and meeting other financial obligations. The CFO must acquire proper understanding of the business model in order to generate value for all its stakeholders and optimise its financial performance. This can be achieved by the CFO through proper identification of the value creating activities and segregating them from the wasteful activities. CFO also holds the responsibility of the raising capital through selection of proper equity and debt financing sources (Hope, 2013).
NEC is a technology company and therefore need proper availability of funds for financing its capital intensive technology projects. In this context, the role of CFO becomes highly important for maintaining an appropriate capital structure in the company. This includes developing execute programs for raising capital and carrying out proper financial arrangement for acquiring sufficient funds for financing the capital intensive IT projects. In addition to this, CFO carries out the function of maintaining budgets and establishing comparison of the company’s actual performance with the planned outcomes. This is essential for identifying the areas of improvement so that proper strategies can be developed for overcoming the loopholes. The proper planning and managing of financial resources is essential for NEC to achieve its ultimate objective of developing unique and innovative IT projects as per the needs and requirements of the customers. CFO through marinating capital structure must ensure that there is proper availability of the cash in the company for carrying out the development of complex IT projects that requires huge financial resources (NEC: Annual Report 2015).
Strategy Decision-making: The decision-making process in the organisation is supervised and controlled by the senior management of the company that takes all the decisions regarding carrying out the business functions. The Chief Financial Officer (CFO) holds the responsibility of conveying all the financial information to the board of directors that enables them to take effective decisions based on the financial stability of the company. Besides this, CFO also assists Chief Executive Officer (CEO) in decision-making process by providing all the information regarding the areas of improvement and the business risks. NEC Australia is involved in developing new and innovative IT solutions for its clients. As such, the company have to develop effective strategies for managing financial risks involved in developing IT projects that requires huge investment of funds. CFO assists CEO in implementing of a risk management strategy for identifying all the risks involved in developing a specific IT project and thus takes proactive steps for eliminating their chances of occurrence (NEC: Annual Report 2015). The implementation of an effective risk management strategy is essential for the company to overcome the possibilities of financial constraints. The failure of large and complex IT projects can prove to be a significant financial threat for the financial risk that can occur in the future for developing an IT project. The CFO should company and therefore CFO must properly manage the financial risk of the projects to ensure their successful completion. The CFO need to properly manage the financial risks by raising adequate capital structure, monitoring the legal risks, maintaining appropriate insurance coverage, managing the liabilities and ensuring that record keeping meets the auditors requirements (Fuhr and McDonagh, 2012).
All the decision-making process in the company must therefore be assisted and supported by CFO who carries all the knowledge regarding also support CEO in developing strategies for creating and optimising value for the stakeholders by providing them accurate and timeliness financial information. The availability of the financial information is necessary for CEO in developing economic strategies and forecasting (Hommel et al., 2011). CFO holds the responsibility of monitoring the past and present financial situation and therefore is an integral part of a company’s financial future. CFO provides suggestions to CEO on the strengths and weakness of the capital structure and regarding effective deployment of its capital for maximising stakeholder’s value. The information achieved can help in forecasting the future strategies that can be taken by the company in improving its profitability position (Hope, 2013). Thus, strategy decision-making is a prominent role to be carried out by the company’s CFO in assistance with CEO for meeting its ultimate objective of developing new and innovative IT projects.
Stewardship responsibilities: The CFO, in this context, holds the responsibility of ensuring that the company carries out its business functions in accordance with the legal and regulatory requirements. Stewardship role of the CFO includes safeguarding the business assets and developing internal control that facilitates the company in achieving its strategic objectives (Karaian, 2014). The CFO must ensure that all financial statements of the company are developed in accordance with corporate governance framework established by the Australian Securities Exchange (ASX) listing rules. The CFO must ensure accountability and transparency in all the business operations for tatting the trust of all the key stakeholders. The CFO is also liable to govern that all the finance operational activities are carried out under the framework of corporate governance standards developed and established by ASX (NEC: Annual Report 2015). The CFO must establish congruence between the financial resources available and the operational functions of the company for improving its capability to generate revenue. The strategic fit created between the financial resources and operational functions is essential for improving the productivity of the company thereby improving its sales and revenue generation. Thus, stewardship role of the company’s CFO is essential for the company so that all the operational functions are carried out smoothly in accordance with the statutory rules and requirements (Hope, 2013).
NEC Australia has good financial performance as reflected from its annual report of the year 2015 that indicates the sound management of financial resources by the company’s CFO (NEC: Annual Report 2015). The company’s CFO in future direction is thus recommended to enhance the stakeholder’s value through developing effective strategies with the CEO by communicating all the relevant financial information necessary for decision-making process. CFO should establish proper lines of communication with the analysts, creditors and internal management team to maintain accountability and integrity in financial reporting. This is necessary for obtaining trust of the stakeholders and also assisting the senior management in decision-making process.
The above statement does not hold true as efficient-market hypothesis does not have relevance in selection of portfolio with a pin as discussed. The efficient-market hypothesis states that share prices indicate all the necessary information about a particular stock and hence there is no need for diversifying the portfolio for pension fund manager. Pension fund manager is responsible for generating maximum return for the clients with selecting a portfolio that minimises risk and maximise profitability (Blake, 2006). As such, if efficient-market hypothesis is true then there does not exists a need for evaluating the stocks on the basis of their market risk as share prices itself reveals all the information significant for making decisions regarding investing in a particular stock. As per the efficient market hypothesis, if market is truly efficient then investors would be able to receive superior rates of return on their portfolio consistently. The theory does not take into account the systematic risk that affects stocks from all the industries and therefore should be evaluated before selection of a particular stock by pension fund manager. Systematic risk is the market risk that affects the stocks of all industries and therefore makes highly important for the pension fund manager to diversify the risk for obtaining maximum return by a portfolio for the clients. The pension fund manager, therefore, must ensure that the portfolio developed is able to generate maximum profitability for the clients by selection of stocks that does not have high co-relation between them. This is necessary so that financial risk associated with a particular stock does not affect the profitability of other stock and as such portfolio overall financial risk is reduced to a considerable extent (Harder, 2010).
On the basis of this discussion, pension fund manager is recommended to pension fund manager is recommended to diversify the portfolio for obtaining maximum return and minimising risk. This can be achieved by investing in those stocks or bond that have lower beta thus reducing the market risk.
Conclusion
In the context of overall discussion held in the report, it can be stated that the role of CFO is very important for NEC Australia Pty Ltd in developing new and innovative IT solution for its business clients. CFO holds the responsibility of financial governance, strategic decision-making and promoting stewardship for maximising the company’s financial performance and effectiveness. Also, the efficient-market hypothesis does not hold true for pension fund manager in selection of portfolio with a pin as the theory does not take into account the systematic risk associated with a particular stock or bond.
References
Blake, D. 2006. Pension Finance. John Wiley & Sons.
Eeden, D.V. 2014. The Role of the Chief Human Resources Officer: Perspectives, Challenges, Realities and Experiences. Knowres Publishing.
Fuhr, E.A. and McDonagh, C.W. 2012. The Risk Manager. FTI Journal.
Harder, S. 2010. The Efficient Market Hypothesis and Its Application to Stock Markets. GRIN Verlag.
Hommel, U. Et al. 2011. The Strategic CFO: Creating Value in a Dynamic Market Environment. Springer Science & Business Media.
Hope, J. 2013. Reinventing the CFO: How Financial Managers Can Transform Their Roles And Add Greater Value. Harvard Business Press.
Karaian, J. 2014. The Economist: The Chief Financial Officer: What CFOs Do, the Influence they Have, and Why it Matters. Perseus Books Group.
NEC Australia Executives. 2016. [Online]. Available at: https://au.nec.com/en_AU/about/executive-team.html [Accessed on: 26 September 2016].
NEC: Annual Report 2015. 2015. [Online]. Available at: https://www.nec.com/en/global/ir/pdf/annual/2015/ar2015-e.pdf [Accessed on: 26 September 2016].
NEC: Vision & Values. 2016. [Online]. Available at: https://au.nec.com/en_AU/about/values.html? [Accessed on: 26 September 2016].
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