The Finance Function in A Global Corporation  

Oleh:

Desai, Mihir A.

Jenis: Article from Bulletin/Magazine - ilmiah internasional
Dalam koleksi: Harvard Business Review bisa di lihat di link (http://web.b.ebscohost.com/ehost/command/detail?sid=f227f0b4-7315-44a4-a7f7-a7cd8cbad80b%40sessionmgr114&vid=12&hid=105&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=bth&jid=HBR) vol. 86 no. 7-8 (Jul. 2008), page 108-112.
Topik: finance function; global corporation

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Historically, the finance functions in large U. S. and European firms have focused on cost control, operating budgets, and internal auditing. But as corporations go global, a world of finance opens up within them, presenting new opportunities and challenges for CFOs. Rather than simply make aggregate capital - structure and dividend decisions, for example, they also have to wrestle with the capital structure and profit repatriation policies of their companies’ subsidiaries. Capital budgeting decisions and valuation must reflect not only divisional differences but also the complications introduced by currency, tax, and country risks. Incentive systems need to measure and reward managers operating in various economic and financial settings. The Globally Competent Finance Function The existence of what amounts to internal markets for capital gives global corporations a powerful mechanism for arbitrage across national financial markets. But in managing their internal markets to create a competitive advantage, finance executives must delicately balance the financial opportunities they offer with the strategic opportunities and challenges presented by operating in multiple institutional environments, each of which has it own legal regime and political risks. There is also a critical managerial component : What looks like savvy financial management can ruin individual and organizational motivation. As we’ll see in the following pages, some of the financial opportunities available to global firms are affected by institutional and managerial forces in three critical functions : financing, risk management, and capital budgeting. Financing in the Internal Capital Market Institutional differences across a company’s operations allow plenty of scope for creating value through wise financing decisions. Because interest is typically deductible, a CFO can significantly reduce a group’s overall tax bill by borrowing disproportionately in countries with high tax rates and lending the excess cash to operations in countries with lower rates. CFOs can also exploit tax differences by carefully timing and sizing the flows of profits from subsidiaries to the parent. However, tax is not the only relevant variable : Disparities in creditors’ rights around the world result in differences in borrowing costs. As a consequence, many global firms borrow in certain foreign jurisdictions or at home and then lend to their subsidiaries. Multinational firms can also exploit their internal capital markets in order to gain a competitive advantage in countries when financing for local firms becomes very expensive. When the Far East experienced a currency crisis in the 1990s, for example, and companies in the region were struggling to raise capital, a number of U. S. and European multinationals decided to increase financing to their local subsidiaries. This move allowed them to win both market share and political capital with local governments, who interpreted the increased financing as a gesture of solidarity. But the global CFO needs to be aware of the downside of getting strategic about financing in these ways. Saddling the managers of subsidiaries with debt can cloud their profit performance, affecting how they are perceived within the larger organization and thereby limiting their professional opportunities. Similar considerations should temper companies’ policies about the repatriation of profits. For U. S. companies, tax incentives dictate lumpy and irregular profit transfers to the parent. But many firms choose to maintain smooth flows of profits from subsidiaries to the parent because the requirement to disgorge cash makes it harder for managers to inflate their performance through fancy accounting. Finally, letting managers rely too much on easy financing from home saps their autonomy and spirit of enterprise, which is why many firms require subsidiaries to borrow locally, often at disadvantageous rates. Managing Risk Globally The existence of an internal capital market also broadens a firm’s risk - management options. For example, instead of managing all currency exposures through the financial market, global firms can offset natural currency exposures through their worldwide operations. Let’s say a European subsidiary purchases local components and sells a finished product to the Japanese market. Such operations create a long position in the yen or a short position in the euro. That is, those operations will become stronger if the yen appreciates and weaker if the euro appreciates. This exposure could be managed, in part, by offsetting exposures elsewhere in the group or by having the parent borrow in yen so that movements in the yen asset would be cancelled by movements in the yen liability. Given this potential for minimizing risk, it might seem perverse that many multinationals let local subsidiaries and regions manage their risks separately. General Motors is a case in point. Even though its treasury function is widely regarded as one of the strongest pools of talent within the company - and one of the best corporate treasury functions worldwide - GM’s hedging policy requires each geographic region to hedge its exposures independently, thereby vitiating the benefits of a strong, centralized treasury. Why duplicate so many hedging decisions ? Because forcing a business’s hedging decisions to correspond to its geographic footprint gives GM more - accurate measurements of the performance of the individual business unit and of the managers running it. In a related vein, companies often limit - in arbitrary and puzzling ways - their considerable expertise in managing currency exposures. Many firms require finance managers to follow “passive” policies, which they apply in a rote manner. For example, GM actively measures various exposures but then requires 50 % of them to be hedged with a prescribed ratio of futures and options. Firms adhere to these passive strategies because they limit the degree to which financial managers can undertake positions for accounting or speculative reasons. So although functioning in the global environment calls for considerable financial expertise, organizational strategy requires that expertise to be constrained so that financial incentives don’t overwhelm operating ones.

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