## **Learning Outcomes**

This article explains the senior financial advisor’s responsibilities in balancing shareholder wealth with stakeholder interests, recognising the agency problem, and ensuring effective corporate governance. By the end, you will be able to describe key agency risks, governance practices, and stakeholder management techniques expected at ACCA Advanced Financial Management level.

## **ACCA Advanced Financial Management (AFM) Syllabus**

For ACCA Advanced Financial Management (AFM), you are required to understand how financial advisors contribute to organisational goals while managing the interests of diverse stakeholders, agency concerns, and governance structures. When revising, concentrate on:

- Functions and responsibilities of a senior financial advisor
- The concept and implications of stakeholder value
- The agency problem between management and owners
- Corporate governance codes and control mechanisms to address agency issues
- Strategies for resolving stakeholder conflict
- Influence of governance and ethics on financial decision making

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following best describes an agency problem in a company?  
   a) A dispute between customers and suppliers  
   b) Management pursuing personal goals over shareholders’ interests  
   c) Legal requirements being breached  
   d) A breakdown in risk assessment procedures
2. Name one key principle of effective corporate governance that helps align managers’ actions with shareholder interests.
3. A board is evaluating a project with high returns but faces heavy opposition over planned workforce redundancies. Identify the main stakeholder conflict and suggest one way to address it.
4. List two mechanisms that can reduce the risk of management acting against shareholder interests.

## **Introduction**

Senior financial advisors must oversee financial decisions that serve shareholder value, while also considering the expectations of many other groups such as employees, customers, and regulators. Their work involves complex judgements about allocating resources, setting financial policies, and encourage ethical conduct. At the same time, they must address potential conflicts of interest (agency issues) and put in place governance structures to hold decision makers accountable.

## The Primary Objective: Shareholder Wealth vs. Stakeholder Value

The classic goal for most commercial firms is to maximise shareholder wealth, usually evidenced by rising share prices and dividends. However, long-term value is increasingly affected by how the needs of wider stakeholders are met. Senior advisors must factor in sustainability, reputation, and regulatory compliance to ensure company success is not compromised by short-term favouritism of only one group.

> **Key Term: stakeholder value**  
> The broader concept that companies create value not only for shareholders but also for employees, customers, suppliers, and society at large.

## Balancing Stakeholder Interests

Stakeholder groups can have conflicting aims. For instance, shareholders may wish to maximise short-term profits, whereas employees may prioritise job security, and communities may oppose actions that damage the environment. Senior finance roles require identifying, assessing, and sometimes negotiating trade-offs.

### Key Stakeholder Groups

- Shareholders and potential investors
- Employees at all levels
- Customers and suppliers
- Regulatory bodies and governments
- Local communities and wider society

Ignoring any major group can lead to reputational harm, legal penalties, or loss of operational capacity.

## The Agency Problem Explained

> **Key Term: agency problem**  
> The risk that managers (agents) may prioritise their own goals over those of shareholders (principals), causing a divergence in decision making and value outcomes.

The separation between ownership (shareholders) and day-to-day control (managers) creates opportunities for managers to pursue their own interests, for example, by awarding themselves high pay, avoiding risk to protect their positions, or investing in unnecessary prestige projects.

> **Key Term: principal**  
> The party (such as shareholders) who delegates authority to another (the agent) to act on their behalf.
>
> **Key Term: agent**  
> The individual or group (such as managers) authorised to make decisions or carry out actions for the principal, potentially resulting in conflicts of interest.

### Causes of Agency Problems

- Information asymmetry—managers possess information unavailable to shareholders.
- Inadequate incentives—managerial rewards are not properly linked to shareholder value.
- Weak monitoring—lack of effective oversight or controls.

## Strategies to Manage Agency Issues

Prevention and resolution require a mix of incentives and control:

- Performance-related pay, share options, and bonuses to align management rewards with company performance
- Monitoring by non-executive directors or independent audit and remuneration committees
- Transparent reporting and regular disclosures to stakeholders
- Shareholder voting rights on major decisions and executive appointments

### **Worked Example 1.1**

**A manufacturing firm’s CEO pursues an acquisition that will double the company’s size, increase their own remuneration, but offers only marginal investor returns. How should the board address this agency issue?**

> **Answer:**  
> The board should scrutinise whether the acquisition genuinely benefits shareholders or primarily serves management’s interests. They might commission an independent valuation, seek shareholder approval for the acquisition, and review the CEO’s remuneration structure to ensure it is tied to actual value creation, not just company size.

## Corporate Governance: Frameworks and Controls

> **Key Term: corporate governance**  
> The set of structures, rules, and processes by which companies are directed and controlled, aiming to ensure accountability and alignment between management, owners, and stakeholders.

Effective governance is fundamental for reducing agency risks and ensuring that management decisions reflect organisational and stakeholder priorities.

### Common Governance Features

- A board of directors with an adequate balance of executive and independent non-executive members
- Audit, remuneration, and risk committees to oversee financial integrity and executive pay
- Stakeholder consultation and clear ethical codes
- Regular performance monitoring against clear measures linked to shareholder value

Failure to uphold good governance can result in financial misstatements, fraud, reputational damage, or regulatory sanction.

### **Worked Example 1.2**

**A utilities company’s board lacks any independent non-executive directors. Management is under-delivering on key performance metrics, yet receives significant bonuses. What governance improvements are advised?**

> **Answer:**  
> The company should appoint independent non-executive directors to provide impartial oversight. Establishing well-defined performance criteria for executive pay, a fully independent remuneration committee, and robust external audit processes will make excessive, undeserved bonuses less likely.

## Resolving Stakeholder Conflicts

Stakeholder tensions are inevitable. Advanced governance approaches include:

- Stakeholder forums or advisory panels to gather feedback on high-impact decisions
- Explicit decision hierarchies where sensitive matters (e.g., plant closures, major restructures) require board or shareholder consent
- Transparent policies that clarify how trade-offs are considered and communicated

### **Worked Example 1.3**

**An energy company’s planned closure of an older plant is financially justifiable but will cause significant local job losses. What should the senior financial advisor consider, and how should stakeholder concerns be managed?**

> **Answer:**  
> The advisor should balance shareholder gains from efficiency against the social impact on employees and the community. Engaging in early dialogue with stakeholders, exploring mitigation steps (such as retraining employees or community investment), and disclosing rationale transparently reduces resistance and reputational risk.

## Ethics and ESG in Financial Leadership

Responsibility extends beyond compliance. Leading practice requires that financial policies reflect high ethical standards and integrate Environmental, Social, and Governance (ESG) factors.

> **Key Term: ESG criteria**  
> Environmental, Social, and Governance considerations used by investors and regulators to assess responsible organisational behaviour.

Board-approved policies, regular ethics training, and integrated ESG reporting are now standard expectations for senior advisors.

### **Revision Tip**

Stay familiar with local and international governance codes and common agency risk scenarios. Practice writing concise board recommendations on resolving stakeholder disputes for examination.

## **Summary**

Senior financial advisors must ensure that all financial actions maximise value for shareholders, while accounting for wider stakeholder needs, potential agency problems, and governance requirements. A robust system of incentives and oversight is essential for long-term sustainable corporate success.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- The balance between shareholder wealth and stakeholder value in financial management
- Typical agency problems and mechanisms for resolution
- Key features and benefits of corporate governance
- How to identify and manage stakeholder conflicts
- The financial advisor's duty to encourage ethical practices and integrate ESG factors

## **Key Terms and Concepts**

- stakeholder value
- agency problem
- principal
- agent
- corporate governance
- ESG criteria

Role of the senior financial advisor - Stakeholder value, agency issues, and governance links