Finance Flashcards
(27 cards)
Phase 0
is a preparation phase in which responsible managers = should understand the basic functions of financial management & the financial management paradigms that need to be questioned in order to conduct a truly responsible financial management
Phase 1
aims to examine the financing part of financial management by looking at the integration of sources of funding in the responsible finance process
–> • Responsible business provides a wide variety of financing mechanisms from socially responsible investment –> to sustainability indices, and microfinance, etc.
Phase 2
objective: is to show how the social return on investment (SROI) = can be used to make capital budgeting decisions in responsible management & to decide to which activities to allocate money
Phase 3
focuses on managing the results of financial management
BIG QUESTION: for whom do we manage finance, and how do we manage it in their best interests?
–> Also illustrates the governance of financial management
Goal cannot be and must be instead?
the goal = cannot be pure short-run profit maximum –> but responsible return on investment (RROI)
Responsible Return on investment (RROI)
is a measure of company success concerned w/ optimization of short-run-, and long-run returns –> in the form of maximum stakeholder value creation, and minimum ethical misconduct
–>More complex than short-run profit maximization
–>To achieve a maximum RROI: companies must make sure to achieve an optimum triple bottom line (sustainability) –> in the long run to create optimum stakeholder value (responsibility) and to achieve minimize ethical misconduct per dollar spent
EQUATION 1
illustrates how the responsible return on investment –> is composed of the triple bottom line return on investment, the stakeholder value return on investment, and the ethical return on investment
TRIPLE BOTTOM LINE RETURN ON INVESTMENT
measures the amount of economic, social, and environmental value created, per dollar spent
STAKEHOLDER VALUE RETURN ON INVESTMENT
or short stakeholder, measures the amount of value created for stakeholders per dollar spent
ETHICAL RETURN ON INVESTMENT
measures the amount of ethical misbehaviour per dollar spent
EQUATION 2
composed of the sum of all three types of triple bottom line value, economic, social, and environmental value per dollar spent;
–>How the stakeholder value return = a sum of all stakeholder value created (e.g., employee satisfaction)
–> And how the ethical return is the sum of all ethical misconduct (e.g. # of corruption incidents) per dollar spent
EQUATION 3
In order to maximize the RROI –> what companies have to do = optimize the triple bottom line, optimize the sum of stakeholder value, and to minimize the sum of ethical misconduct
Phase 0
More in-depth
introduces the basic structures & mechanisms of financial management–the basic decisions & functions of financial management in a company–including an understanding of how it is embedded into social structures & the financial market
FINANCIAL MANAGEMENT
involves the planning, organizing, budgeting, directing, controlling, and governance of the financial activities such as procurement & utilization of funds of an organization
–> In essence –> it’s the application of general management principles to the financial resources of the enterprise
–>Is both the way a company = able to manage its activities as well as a measure, grade, and benchmark of its performance
–>Very lifeblood of business; w/out finance & the measurement & documentation of financial management –> control & influence = would break down both internally (by the management and externally (by the owners, investors, and shareholders) in the management & procurement of funds & the business of investing
FUNCTIONS OF FINANCIAL MANAGEMENT
are to externally procure funds, to internally fund business assets & activities –> and to distribute the financial results of the business activity
FINANCING
refers to the activities necessary to procure the capital necessary for the conduct of the organization
SOCIALLY RESPONSIBLE INVESTING
the first motivation behind the emergence of sustainability, responsibility, and ethics in financing came w/ socially responsible investing (SRI)
SRI
defined as an investment practice that involves screening activities, through which investors = include the evaluation of social, environmental, and/or ethical issues in the analysis and selection of financial products
NEGATIVE SCREENING
is a process by which funds = not committed to investments in industries and organizations –> deemed unworthy on social, environmentally, or ethically criteria
• Such company’s shares (“sin stocks”) –> normally include items such as gambling, arms, tobacco, or “adult entertainment”
divestment
when responsible investors identify sin stocks in their portfolios
–> is the process by which stocks = removed from a portfolio based on social, environmental, and ethical objections
–> Particularly significant in large publicly held funds and pensions –> such as those of university endowments & labour union funds
POSITIVE SCREENING
process of identifying exemplary companies in the field of responsible business for investment purposes
SRI INDICES
as the amount of funds geared to responsible investment has increased exponentially –> responsible business, SRI indices (Dow Jones Sustainability DJSI, the FTSE4Good and others) have emerged to provide information on companies’ responsible business performance
SRI INDEX-
is a ranking of companies based on their responsible business performance
Representation in such an index makes an organization visible for positive screening & draws additional external funding
CROWDFUNDING
raises external finance from a large audience (the “crowd”), with each individual providing a very small amount
–Works similar to crowdsourcing –> but asks the online crowd for funding, instead of ideas
