Systems; Corporate Finance: The multi functional Money man

TRIMILLENNIUM MANAGEMENT : CORPORATE FINANCE
The Multi functional Money man

By R.Ravimohan

At the outset, it is presumptuous to write about financial management issues-or, for that matter, any issue-for the whole of this millennium. However, one can, on the basis of current trends, talk about a few discerning trends that are relevant in the early years of this millennium. These involve 3 contextual issues: performance improvement, risk containment, and perception management. These need to be addressed in the background of financial markets, and emerging technologies.

GLOBALISATION. Let us first explore the impact of increased globalisation. Progressive financial managers benefit because globalisation will increase the choice of markets for funds. However, it is evident that such marketplaces will place the entity raising funds under more scrutiny than it is used to in the domestic market.

Companies should also be prepared for greater volatility, not only in parameter values such as interest and exchange rates, but even in perceptions. This may yield huge variations in fund inflows and outflows in different marketplaces. Thus, while globalisation places greater manoeuvrability in the hands of the millennial finance manager, it requires him to be agile to cope with the increased vicissitudes of the global marketplace.

TECHNOLOGY. Often, good finance managers are completely unable to comprehend the spreading influence of technology on matters financial! Technology will impact financial markets in several ways, particularly in the areas of information flow, speed of transactions, and complex modelling. This calls for speedy decisions, which require trusty and analytically-sound decision support systems. Warning: while increased financial information flow is a great enabler, it also spreads news about one's own performance in a global marketplace. And quickly!

INNOVATION. Finance professionals will need to both learn and keep pace with the innovations taking place in the market, as well as innovate in their own workplace to achieve a competitive edge. Structuring innovative instruments to reduce the cost of funds, or to contain risk, are likely to be the main driving-force for innovation. Tracer shares, securitisation, parameter-linked coupon debt, synthetic hedge instruments, and hybrids that allow tiered gearing are some innovations that our markets will see in the near future.

PERCEPTION MANAGEMENT. So, in the light of these convergent trends, the millennial finance manager will need to focus on increasing the shareholder's wealth, containing risk, and maintaining a healthy and positive image of the company. Perception management has been mentioned as part of financial management so as to consciously highlight 3 issues: sources of finance are getting disparate and varied; image perceptions matter as much (if not more) as substance; and, most importantly, financial markets are getting highly competitive.

Therefore, it is increasingly becoming the lot of a financial manager to maintain the market's perception of the company. In a simplistic way, the market price of a company's share could be thought of as a product of its earning and the price-earnings multiple. While in the past, the widespread belief was that management was responsible for the earnings, it is increasingly becoming clear that market perception of the company plays an important role in this. It is, thus, essential to include that aspect also as a central, front-line function of finance management.

In today's world, it has become a necessity to add non-financial parameters to the successful financial manager's armoury. Thus, maintaining the prescribed degree of transparency in disclosures, the management of expectations, the maintenance of good investor relations, regulatory compliance, and the creation and implementation of contingency financial-rescue plans will become part of the responsibilities of the finance manager in this millennium. The millennial finance manager must also be able to manage several performance variables to satisfy different analytical points of view (for instance, one analyst might emphasis return on equity, while another may be worried about the debt-equity ratio). This becomes critical to the successful stewardship of the financial affairs of any entity.

RISK CONTAINMENT. As in a game of chess, while it is imperative to beat your opponent, it is more important to also safeguard one's own financial strengths, position, and franchise. I am of the view that not many financial managers are today actually engaged in this crucial role of risk containment and abatement. Only a few risk-savvy finance professionals have impressed me with their understanding of risk elements and even fewer have shown the ability to reduce the risk by assertive actions. Failure to appreciate the presence of risk in the business-compounded by a false sense of hope that identified risks may not precipitate have contributed to the current levels of distress in the corporate and financial sectors in India today.

Risks may arise from the inherent mismatches between the input and output sides of business: thus, it could stem from the asset liability of banks, or from borrowing at a fixed rate, and lending at a floating rate, or from borrowing in a currency different from the one in which the lender's products are priced. Risk may also be caused by market developments (like the liquidity squeeze by the Central Bank or the introduction of derivatives trading). Understanding these risks and productively managing them will require a good finance professional to use structural measures such as alternative models and methods of doing business itself. A holistic appreciation of the role of millennial finance manager, and a comprehensive understanding of sustainable solutions to risk management are, therefore, critical to the continued well being of the company.

In conclusion, all this adds up to a new approach to the discipline of financial management in order to ensure that the companies continue to progress in a highly competitive and volatile environment without facing uncertainties on the financial front. Thus, the 21st Century finance manager must hone his ability to enhance performance by reducing finance costs and increasing returns to investors. At the same time, he must improve the perception of his company in the marketplace while reducing the risks associated with discontinuity and financial impairment. This will require the finance manager to not only be an expert in matters of finance in a highly-volatile environment, but also become an expert in allied matters relating to technology, risk management, perception management, and corporate governance.

R. Ravimohan is the CEO of the credit rating & Information services of India

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