Diversification - Corporate Governance and Firm Value in Small Markets

Question: Discuss about the Case Study for Diversification, Corporate Governance and Firm Value in Small Markets. Answer: Introduction The purpose of the following piece of project is to give a thorough explanation of the general responsibilities undertaken by the Chief Financial officer of a company. The responsibilities are generally accomplished with the view of maximizing the profit generating capacity of the firms. The various ways in which a CFO serves the company has been listed below and discussed briefly. The impact of the roles of the CFO of the company has also been discussed by the researcher. The main aim of the researcher is to find the ways in which the responsibilities undertaken by the CFO of a particular company can affect the ultimate objective of the same. Here, the ultimate objective of the company has been taken to be profit maximization, gaining more customers and improving the brand image. In order to apprehend the following piece of research, the researcher has selected an Australian Retail company named Woolworths Ltd to display the impact of the duties followed by the CFO of the Woolworths Ltd on the organizational objectives of the same. 1: General Responsibilities of a CFO in Woolworths Ltd The major responsibility of the Chief Financial Officer of a company is to assist the financial workings of the company they are appointed in. In addition to this, the CFO also requires to determine the areas of strength as well as weakness of the company so as to give the appropriate suggestion regarding the growth of the company. As said by Alà ¢Ã¢â€š ¬Ã‚ Maskati et al. (2015), it falls under the major duties of a CFO to ensure that the financial reports proposed by the company are fully authentic by all means. In the words of McNulty et al. (2013), the recent retail market situation in Australia is facing serious competition from the rival firms owing to the emergence of a number of firms engaged in similar form of business. Among the top retail companies operating in Australia currently, Woolworths Ltd is one of the major firms that has a number of stores functioning across the major cities of the country. The following company operates mainly in the food industry sector and offers grocery products to the consumers for the purpose of sale. The company also claims to provide 100% fresh raw food products in the country. In this context, it falls under the duties of a CFO of the Woolworths Ltd to manage and allocate the resources in a manner that would produce the best possible results in favor of the company. The responsibilities of a CFO of the Woolworths Ltd may be categorized into the following heads as follows: As a Controller of the Woolworths Ltd: In the words of Ou et al. (2014), it is the prime responsibility of the CFO of the Woolworths Ltd to look after the reports and the financial presentation of the annual reports of the company. on account of this presentation of the annual reports a lot of major decision regarding the future work proceedings of the company is taken making it absolutely mandatory for the CFO to check the authenticity of the reports. Here, the investors of the Woolworths Ltd such as the employees, shareholders, dividend holders etc depend on the published annual reports of the company to take decision regarding the amount of investment to be done in the company. Besides, it is also essential that the company publishes the annual financial reports on time for the ease of the investors in taking major investment decisions. Here, the CFO of Woolworths is liable to ensure the authenticity of the allocation as well as documentation of the annual reports of the company. As optioned by Block (2008), the CFO also requires performing the responsibilities as that of a cash manager and looking after the disbursement of cash, payables and receivables of various accounts including the reconciliation statements of banks and the payroll functions. In the words of Brealey et al. (2003), the framing of the financial strategies and the implementation of the same in the accounting process of the Woolworths Ltd is among the major responsibilities of the CFO of the company. In addition to that, the CFO also requires reviewing and approving the invoices of the company that are payable in addition to the account receivables of the company. As observed by Deloof (2003), it is the duty of the CFO of Woolworths Ltd to prepare the income tax structure by coordinating with the auditors as well as the external tax accountants in order to make sure that the tax structure prepared is favorable for the well-being of the company. Besides, the CFO of Woolworths also requires keeping a check on the arrangement of the annual reports of the company so that it may be clearly accessed for examining purpose. It is one of the major responsibilities to be fulfilled by the CFO of Woolworths that is reviewing the annual reports of the company along with the financial contracts and agreements, financial policies including the negotiations done on credit and the agreements made with the vendors. According to Garcia-Teruel and Martinez-Solano (2007), the organization and preparation of the financial data helps the CFO of the company to construct the financial strategies of the company to be implemented in the long run. Here, the coordination of the financial plans and the various business operations undertaken by the company is looked after by the CFO of Woolworths Ltd. Further, the CFO also provides the required assistance to the executives in the framing of the policy decisions of the company. In context of this Fao.org (2014), stated that the CFO requires to expertise in delivering the essential opinions as well as perspectives for the financial affairs of the Woolworths Ltd. It is one of the essential duties of the CFO to be undertaken i.e. is to fulfill the reporting duties towards the maintenance of the financial statements along with the budgets of the Woolworths Ltd. As a forecaster of the Economic Strategies of the Woolworths Ltd: As a forecaster for the company the CFO analysis the areas of expertise of the company and finds out the ways of channelizing profits out of it. According to Sarkar and Sudipto (2011), the CFO also needs to identify the areas in which the company lacks behind and suggest the appropriate remedial measures for it. The CFO of Woolworths conducts the allocation of the financial resources of the company and makes the future predictions about the profits risk and growth possibility of the company. In order to identify the possibility of risk in the future, according to Uyar (2009), the CFO of the Woolworths LTD requires linking the data of the company with the workings of the same to find out the possibilities of growth and expansion. As stated by Vintila and Nicoleta (2005), the CFO is responsible to regulate the ongoing performance of the company and to keep a check on the fact that the workings of the company is meeting the organizational needs of the same. The CFO of the Woolworths Ltd engages in the formulation of the financial as well as the internal control systems of the company. The management sector of the Woolworths Ltd is also given the subsequent assistance in the formation of the growth strategies of the company. The checking of the company annual reports and the submission of the same on the prescribed time is the responsibility of the CFO. As a treasurer of the Woolworths Ltd: In the words of OHanlon et al. (2007), it is one of the prime responsibilities of the CFO of a company to work towards the improvement of the financial position and enhancing the financial condition of the same. The CFO also requires deciding upon the basic mix of the debt, equity along with the internal finances of the company with the purpose of deriving the best possible results. As opinioned by Kaya and Halil (2011), along with the other functions, the CFO of a company also requires to take the necessary steps essential to eradicate the problems associated with the capital structure of the Woolworths Ltd. The coordination in between the budget of the Woolworths Ltd and investing activities of the same is looked after by the CFO of the company. Along with the other duties, as stated by Lazaridis (2004), the CFO also decides the rate of charging depreciation on the capital assets of the company. In addition to the above the CFO provides with the required advice concerning the purchase as well as lease along with the disposal of the companys assets. Besides, the CFO of the Woolworths Ltd provides the accounting staffs with the necessary guidelines regarding the framing of the budget policies of the company. Besides, the above stated responsibility as a treasurer, the CFO of Woolworths Ltd also requires keeping a check on the performance of the employees of the company particularly of the financial staffs and taking the necessary actions with regard to the promotion and the dismissal of the staffs appointed. Effect of CFO on the objectives of the Woolworths Ltd The development and growth of the Woolworths Ltd in the fglobal market is shaped and integrated by the CFO of the company. The CFO performs the combined functions of a controller, treasurer as well as of a financial analyst and forecaster. As stated by Harford et al. (2012), the workings of the CFO as a controller help the company in the determination of the growth possibilities of the same and the extent to which the workings are fulfilling the objectives of the company. Further, the CFO also takes the necessary steps that may generate the maximum revenue in the areas in which the company thrives via analyzing the annual reports. As a treasurer of the company the CFO assists the management in reducing the cost of production along with the other expenses incurred by the company by allocating the resources of the business in an efficient way. The analysis of the market structure in which the firm is operating is done by the CFO of the company that may help in determining the occurrences of risks in the business so that the necessary steps may be taken in this regard. However, according to Essen et al. (2013), besides undertaking the major responsibilities of the workings of the company, the prime responsibility of a CFO involves preparing the company financially to deal with the rising competition in the market and expand the business of the Woolworths Ltd. 2: As stated by Yao et al. (2013), in accordance with the theory of the Efficient Market Hypothesis or EMH it becomes quite impossible to beat down the market as the efficiency of the stock market compels the current prices of stock to integrate and display all the required relevant information. In the words of the theory, the stock are always traded in the stock market at the fair value. Therefore, the investors find it impossible to sell the stocks at a higher or inflated price and purchase the stocks at an undervalued rate. In this context, the theory states that through the way of the market timings it becomes quite impossible to surpass the stock market or the selection of stocks by the market experts. As per the words of Della Croce (2012), the best possible way to beat the market is making the investments at a highest risk in order to earn the maximum higher returns. The impact of the theory of EMH has also been witnessed upon the portfolio and pension fund managers etc. However, the theory is also believed to have raised a subsequent amount of controversy. The managers of the pension fund department are in support of this theory stating that is irrelevant to search out for the undervalued stocks or to look out for trends through the process of technical as well as fundamental analysis. However, a few of the investors have been successful in defeating the market on a continuous basis for the past few years. According to Gao (2013), the pension fund managers tend to lay more emphasis on the submissive strategies of investment with a lower cost portfolio. The EMH theory concentrates mainly on the investment strategy along with the total market index and portfolio diversification to form a benchmark for the performance. As per the view of the pension fund managers, it is not possible to determine the future performance of any particular company by studying or analyzing the past performance of the same. Hence, it may be said that the pension fund managers try to implement the strategy of passive investment strategy for their clients in order to play safe. In the words of Vitali et al. (2016), the strategy of passive investment involves the purchase, sale and holding of the stocks for a long period of time in order to earn good returns. It is the belief of the pension fund managers that the long time period will automatically depart the inefficiencies of the short term period. However, it must be noted that the market need not be in an efficient state at all times. The pension fund often aims at avoiding the small cap stocks. Such an incidence mainly takes place due to the additional requirements associated with such kind of stocks. Besides, the pension fund managers often tend to sell out the stocks that are not meeting the objectives of the investment strategy nonetheless the level of performance of the stocks currently. Here, the prime focus of the pension fund managers is to accomplish the pension objectives of the clients. The strategy of the managers is to generate a fixed rate of income post the retirement of the stated client. Conclusion The following research has been done with the purpose of determining the major responsibilities that are undertaken by the CFO of the Woolworths Ltd and the ways in which it assists in meeting the organizational goals of the company. On the completion of the research work, subsequent details regarding the duties of the CFO imply that the growth of the company is directly linked with the efficiency of the working of the CFO of the same. As a controller, treasurer and analyst of the company, the CFO assists the day to day workings of the company particularly in the finance sector so that the company may be able to derive the maximum amount of benefit and revenue. Hence, it may be concluded that the responsibilities undertaken the CFO plays a major role towards the attainment of the organizational objectives of the company. Apart from the above, the researcher has also focused on analyzing the strategy of the pension fund managers. In this context, the researcher has concluded that such managers tend to lay more emphasis on the passive investment strategy. The reason for adopting this strategy is that the major objective of the pension fund managers is to channelize a fixed flow of earnings for their clients. The researcher has given a detailed description regarding the same. Reference List: Alà ¢Ã¢â€š ¬Ã‚ Maskati, N., Bate, A.J. and Bhabra, G.S., 2015. 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