Importance of Financial Management:
Keeps the business stable.
Helps avoid money shortages.
Helps in growth and expansion.
Builds trust with investors and banks.
Simple Example:
Imagine you give your friend money to run your shop.
Instead of working hard, your friend:
Spends money on personal things
Does not share profits
Hides the real income
This is the agency problem – when the person managing your money doesn’t
act in your interest.
Main Functions of Corporate Finance:
1. Investment Decisions (Capital Budgeting)
Where should the company invest money?
Example: Build a new factory or buy new equipment?
2. Financing Decisions
How to get money?
Example: Take a bank loan, issue shares, or borrow from investors?
3. Dividend Decisions
How much profit should be given to shareholders as dividends?
How much should be kept in the business?
Importance of Corporate Finance:
Helps a business grow and compete.
Maintains financial stability.
Builds investor trust.
Ensures the company uses money efficiently.
What is Corporate Governance?
Corporate governance means the system of rules, processes, and practices
that guide how a company is controlled and managed.
It ensures that a company is run in a fair, honest, and responsible way –
especially for the benefit of shareholders, employees, customers, and
society.
Main Objectives of Corporate Governance:
Protect the interest of shareholders
Ensure transparency in operations
Prevent fraud and corruption
Improve company performance
Build trust with investors and the public
What is the Agency Problem?
The agency problem happens when the people who manage a company
(agents) do not act in the best interest of the owners (principals).
Principal = Owners or shareholders (people who invest money)
Agent = Managers or directors (people who run the c
The problem is: agents may act for their own benefit, not for the owners’
benefit.
Why Does the Agency Problem Happen?
[Link] Goals
Owners want higher profits.
Managers may want high salary, power, or less work.
[Link] of Monitoring
Owners may not know what managers are doing daily.
[Link]-interest
Managers may make decisions that benefit themselves (like increasing
their bonus) instead of the company.
First, What is the Agency Problem?
The agency problem happens when the managers (agents) of a company do
not act in the best interest of the owners (shareholders).
Managers may:
Waste company money
Make decisions for personal gain
Hide information
Focus on short-term benefits instead of long-term growth
How Corporate Governance Solves the Agency Problem:
Corporate governance puts rules, systems, and checks in place to stop
managers from misusing power.
Ways Corporate Governance Helps:
[Link] Board of Directors
A board monitors the CEO and top managers to ensure they act in the
company’s best interest.
[Link] Accountability
Managers must explain their actions and performance regularly.
