Finance refers to a branch of economics that deals with appropriate allocation and management of resources, acquisition, as well as investment. It is a field concerned with the study of investments. Financial management can be defined as the efficient and effective planning and management of assets and investments in a manner that meets the objectives of an organization ( Brigham & Houston, 2012 ). It is a specialized function that involves planning and utilization of an entity’s financial resources to accomplish its business. The major sub-branches of finance include public finance, corporate finance, and personal finance.
A sole proprietorship is a business owned and managed by one person. Its advantages are being one’s boss, little startup capital, and ease of business termination. It is disadvantages include limited financial resources, unlimited limited, and a lot of commitment ( Aziri, 2014 ). A partnership refers to a business run by more than one individuals. Its advantages include more financial resources, shared ideas and management, and longer survival. It is limited by unlimited liability, sharing of returns, partner conflicts, and difficulty to terminate ( Aziri, 2014 ). Lastly, a corporation is a legal entity where management and liability are separate from its owners. Its strengths include more capital for investment, limited liability, large size, and perpetual life. However, they are limited by high initial costs, double taxation, and conflict between management and board members ( Aziri, 2014 ).
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An agency relationship arises when a principal grants legal authority to an agent to take action on the behalf of the former ( Chen, Lu & Sougiannis, 2012 ). However, the agent does not assume full responsibility for the decision made. Because the agent and the principal might hold different objectives, a conflict of interest arises out of this relationship. Agent problem is a conflict of interest between the management of a firm and the company’s stockholder. This problem can be minimized by through incentives like performance-based compensation, direct influence by shareholders, the threat of firing and the threat of takeovers ( Chen, Lu & Sougiannis, 2012 ).
Ethical behavior is very critical to finance because the field involves the management of capital or assets of other individuals ( Nilsson, 2008 ). Investors can only invest their capital with others when they anticipate the economy to flourish or are certain those professionals they assign the legal authority to manage their capital will not take advantage of their investment. Therefore, investors pay more attention to the ethics of those they entrust their capital, and they do more diligence to ensure these professionals manage the capital within the limits of law and ethical standards.
Shareholder wealth maximization refers to the attempt by a company’s management to maximize the wealth of their company that causes a rise in stock prices, and in turn, improve the net worth of shareholders ( Windsor & Boatright, 2010 ). There is no conflict between the goal of shareholder wealth maximization and the financial manager’s need to act in an ethical manner management has a fiduciary relationship both to the company and to stakeholders. Managers are expected to act in the interest of shareholders as their agent. At the same time, they need to act within the boundaries of their professional code of ethics.
References
Aziri, B. (2014). Corporate Governance: A Literature Review. Management Research and Practice , 6 (3), 53.
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management . Cengage Learning.
Chen, C. X., Lu, H., & Sougiannis, T. (2012). The agency problem, corporate governance, and the asymmetrical behavior of selling, general, and administrative costs. Contemporary Accounting Research , 29 (1), 252-282.
Nilsson, J. (2008). Investment with a conscience: Examining the impact of pro-social attitudes and perceived financial performance on socially responsible investment behavior. Journal of Business Ethics , 83 (2), 307-325.
Windsor, D., & Boatright, J. R. (2010). Shareholder wealth maximization. Finance ethics: Critical issues in theory, practice , 437-455.
