## **Learning Outcomes**

After reading this article, you will be able to explain how financial objectives link to corporate strategy, identify different stakeholder groups and their objectives, and discuss the role of management and corporate governance in aligning interests and managing conflicts. You will understand key agency problems and the implications of governance codes for financial decision-making in organisations.

## **ACCA Financial Management (FM) Syllabus**

For ACCA Financial Management (FM), you are required to understand how financial objectives relate to wider corporate aims and how stakeholder and governance issues affect financial management. This article is relevant to your revision for the following syllabus topics:

- The relationship between financial objectives, corporate objectives, and strategy
- Stakeholder groups and their potential conflicting objectives
- The role of management in meeting stakeholder objectives, including agency theory
- The impact of regulatory requirements such as corporate governance codes and listing rules
- Ways to encourage goal alignment, including remuneration schemes and governance best practices

## **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. What is the main agency problem in listed companies, and which two groups does it primarily involve?
2. Why might management’s objectives differ from those of shareholders?
3. Name two ways corporate governance codes attempt to reduce agency problems.
4. Explain briefly how a well-designed managerial reward scheme can encourage managers to act in the interests of shareholders.

## **Introduction**

In financial management, setting appropriate objectives and ensuring their achievement are essential to business success. However, organisations do not exist in isolation—their actions impact a broad spectrum of stakeholders, each with their own aims. Balancing these interests often leads to conflicts that management must address, especially when those responsible for running the company (agents) are not the same individuals as those who own it (principals).

Modern financial management also operates within frameworks of governance and regulation designed to protect stakeholders and ensure effective, ethical decision-making. This article examines the connections between financial objectives, stakeholder interests, and the corporate governance mechanisms that influence how these objectives are set, monitored, and achieved.

## **Financial Objectives and Corporate Strategy**

Setting financial objectives is a core management responsibility. These objectives typically include:

- Maximising shareholder wealth (usually reflected in share price and dividends)
- Ensuring sustainable profitability and growth
- Maintaining corporate solvency and appropriate risk levels

These financial aims support, and are supported by, broader commercial or operational objectives (such as market expansion or product quality improvements), all woven into the overall corporate strategy.

> **Key Term: financial objectives**
> Targets related to the financial performance and position of an organisation, such as profitability, growth, or shareholder value.

Management must ensure financial objectives are consistent with corporate strategy and cascade these goals into operational targets for departments and individuals.

## **Stakeholders and Conflicting Objectives**

Every organisation has a range of stakeholders, including:

- Shareholders (owners)
- Directors and managers
- Employees
- Lenders and creditors
- Customers
- Suppliers
- Government and regulators
- The wider community

Each group has its own priorities. For example, shareholders may seek higher returns, while employees may prefer better job security or pay. Lenders want to ensure loans are repaid, and regulators demand legal and ethical compliance.

Conflicting objectives are therefore inevitable. It is management’s job to balance these, often through negotiation, compromise, and clear articulation of corporate priorities.

> **Key Term: stakeholder**
> Any individual or group with a direct or indirect interest in the activities and outcomes of an organisation.

## **The Agency Problem**

When ownership and control are separated, as is common in large corporations, agency problems arise. Managers (as agents) may not always act in the best interest of shareholders (the principals). This misalignment may occur because managers:

- Pursue personal goals (such as higher remuneration, prestige, or job security)
- Prefer projects that boost short-term performance, disregarding long-term value
- Avoid reasonable risks to protect their own position

> **Key Term: agency theory**
> The framework analysing conflicts of interest between principals (shareholders) and agents (managers) in an organisation.
>
> **Key Term: agency problem**
> The conflict arising when agents act in their own interests rather than advancing the objectives of principals they represent.

### **Worked Example 1.1**

**Question:**
A listed business pays managers annual bonuses based purely on profit growth. Last year, the managers delayed maintenance spending to boost reported profit, even though the repairs will cost more in the future. Which financial management issue does this behaviour illustrate?

> **Answer:**
> This is an example of the agency problem. Managers acted to maximise short-term profits (and their bonus) rather than protecting long-term shareholder value, potentially damaging the company.

## **Corporate Governance and Its Implications for Finance**

Corporate governance refers to structures and processes for directing and controlling companies. Good governance aims to ensure that:

- Boards act in the company’s and stakeholders’ best interests
- Management is held accountable
- Risks arising from agency problems are addressed

Regulatory codes, such as the UK Corporate Governance Code, require listed firms to observe specific best practices, including:

- Separation of Chair and CEO roles
- Appointment of independent non-executive directors (NEDs)
- Existence of audit, nomination, and remuneration committees
- Transparent reporting and regular director re-elections

> **Key Term: corporate governance**
> The system of rules, practices, and processes for directing and controlling a company, aimed at protecting stakeholder interests and ensuring effective management.

Sound governance can reduce the risk of managers putting personal interests ahead of those of shareholders or other stakeholders.

### **Worked Example 1.2**

**Question:**
A board is dominated by a single executive with close ties to other board members. What governance risk does this present?

> **Answer:**
> The dominance of one executive and lack of independent scrutiny increases the risk of poor oversight and agency problems, allowing decisions driven by personal interests rather than those of the shareholders or the company as a whole.

## **Aligning Management and Shareholder Interests**

To help align the actions of managers and shareholders, companies use methods such as:

- Performance-based remuneration (bonuses linked to long-term metrics, not just annual profit)
- Executive share option schemes (management gains only if share price rises)
- Regular performance appraisals and clear reporting
- Board committees led by independent NEDs

These tools encourage managers to act in ways that benefit shareholders and discourage short-termism or self-serving behaviour.

> **Key Term: managerial reward schemes**
> Incentive systems designed to link management compensation to performance metrics, aligning managers’ interests with those of shareholders.
>
> **Key Term: non-executive director (NED)**
> A board member who does not partake in the company’s day-to-day management, providing independent oversight and guidance.

### **Worked Example 1.3**

**Question:**
A company introduces a long-term share option plan for executives. What is the intended governance benefit?

> **Answer:**
> By tying part of executives’ rewards to share price growth, the plan encourages managers to make decisions that increase shareholder wealth over time, aligning their interests more closely with owners.

## **Measuring Progress and Achievement of Objectives**

Management, investors, and other stakeholders must be able to assess whether objectives—financial and otherwise—are being met. Common measurement tools include:

- Financial ratios (e.g., return on capital employed [ROCE], earnings per share [EPS])
- Changes in share price and dividends (total shareholder return)
- Non-financial metrics (e.g., customer satisfaction, employee turnover)
- Regular independent audits and transparent reporting

These measures help ensure management is held to account and provides early warnings if objectives are at risk.

### **Exam Warning**

> Do not assume that all companies seek only to maximise profit or that financial and stakeholder interests always align. The FM exam requires you to recognise potential conflicts and explain how governance and reward systems are used to manage them.

## **Summary**

Balancing financial objectives with stakeholder needs is a central management challenge. Agency problems can undermine this balance—but well-designed corporate governance structures and reward schemes can help align the interests of managers, shareholders, and other stakeholders. Effective measurement, transparency, and independent oversight underpin sound financial decision-making and long-term value creation.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define and explain financial objectives within corporate strategy
- Identify major stakeholders and describe possible conflicts between their objectives
- Explain agency theory and the nature of agency problems in corporate management
- Describe how corporate governance codes mitigate agency risk
- Outline the use of reward schemes and NEDs in encouraging goal alignment
- Understand common metrics to measure achievement of objectives

## **Key Terms and Concepts**

- financial objectives
- stakeholder
- agency theory
- agency problem
- corporate governance
- managerial reward schemes
- non-executive director (NED)

Financial objectives and stakeholders - Corporate governance implications for finance