Corporate Governance, Risk Management, and Strategy
The finance of companies is a critical topic that affects almost all operations in an organization. There is no single organization that can operate properly without a financial aspect. Thus, several aspects of finance drive how operations are done in companies and all aspects are interrelated in one way or the other. Corporate governance, strategy, and risk management are all interrelated aspects of finance. In particular, the dividend policy, corporate strategy, capital structure, and mergers and acquisitions are closely linked. This paper discusses the relationship between the various aspects of finance in a company.
First, capital structure and dividend policy are closely related. The type of capital structure that exists in a company has a direct impact on dividend policy. A company whose capital structure does not allow it to receive financing from banks will be over-reliant on shareholder’s equity. In case such a company’s cash flow is affected, it may cease to pay dividends so that it retains cash to boost operations. In the case of Qantas Airlines, the impact of capital structure on dividend policy can be seen. The company did not pay dividends to shareholders for a long time due to a weak capital structure. Profits are retained to boost cash availability in the company.
Secondly, corporate strategy greatly affects mergers and acquisitions in a company. It is the vision of every small company to grow. The growth process may either be natural or through mergers and acquisitions. The decisions on how to expand operations squarely lie on the company’s top management. Corporate leadership is the driving force behind the growth agenda. The board and the CEO can decide to expand operations naturally or acquire other entities or merge with other firms. Thus, the corporate strategy is what determines the path to follow towards growth. Since corporate strategy provides a focus for companies, acquisitions will depend on whether a company will revise its strategy or not. For the Bega, the board of directors had to decide on revising the strategy to include diversification into other products other than dairy products alone.
Thirdly, acquisitions and mergers can help to reduce the financial distress of companies. Merging with firms that can generate revenues easily can help struggling companies to improve their cash flows. Some companies are asset intense: the assets generate little cash to fund day-to-day operations. Converting such assets to cash is not easy and such a company is at a higher risk of insolvency. A company might be having valuable assets but fail to raise sufficient cash. This is the case with Olam Company whose over-reliance on assets exposes the company to insolvency. The company took over companies that were deemed not efficient in generating cash. The type of companies acquired by a company may either increase or decrease financial distress. Acquiring firms that are not efficient in generating revenues increases financial distress, while acquiring companies that are efficient in generating revenues reduce financial distress.
Cash management is an influential process in every company. Ensuring that there is always enough cash in a company is crucial in maintaining a strong capital structure. Efficient cash generation can help boost a healthy capital structure. With operations that generate enough cash, companies can easily find loans to fund operations such as acquisitions. DePaul Industries is a perfect example of a company that could not secure funding from banks since it had no consistent cash-generating activities. From its cash flow statements, the company’s cash was shrinking gradually and this discouraged banks from lending to the company. It is difficult to pay back loans when there is no enough cash in a company. Furthermore, the company is likely to face financial distress due to the lack of enough cash in the company.
