Deadline 10 Hours Maximum, no extension pleaseNumber of pages .docx

Deadline: 10 Hours Maximum, no extension please
Number of pages: 3 (825 words)
Academic Level: Postgraduate
Instructions: • Write a 3- to 4-page critique of Desai's 2008
article "The Finance Function of a Global Corporation," linked
in the Resources under the Required Resources heading.
Note that a critique is not just a summary or opinion—it
requires a formal analysis and critical review. Your critique
should address what the author is saying and what arguments
are being made. Be sure to examine whether the author's
arguments are supported with facts or data. Address what
implications the article may have. Consider what the author has
omitted from the article.
In your analysis, address the following points:
• Analyze the validity of finance and value creation arguments.
What are the facts and data upon which those arguments rest?
How do these facts validate or invalidate the author's
arguments?
• Assess the use of financial persuasion to support the
arguments.
What financial persuasion elements were present?
Were any financial data or facts omitted?
• Analyze the financial implications of the author's arguments.
What does this mean for the organization?
Are there implications for constituents and interested parties?
• Synthesize your analysis of the article and your observation of
the finance function at your workplace, or a major publicly
rated corporation.
What new or deeper understandings do you have about the
finance function?
What other insights do you have about the finance function?
Use the arguments, facts, data, and financial persuasion
elements from the article to support your understanding of the

finance function.
Your paper should be written in a manner that is professional
and consistent with expectations for members of the business
professions.
Additional Requirements
• Written communication: Written communication is free of
errors that detract from the overall message.
• APA formatting: Resources and citations are formatted
according to current APA style and formatting.
• Number of resources: Minimum of three references.
• Length of paper: 3–4 typed, double-spaced pages.
• Font and font size: Times New Roman, 12 point.
ORGANIZATION & CULTURE FINANCE & ACCOUNTING
MARKETING MANAGING TECHNOLOGY MARKETING
STRATEGY & COMPETITION HUMAN RESOURCES
MARKETING ORGANIZATION & CULTURE MANAGING
TECHNOLOGY FINANCE & ACCOUNTING
ORGANIZATION & CULTURE MARKETING STRATEGY &
COMPETITION
HUMAN RESOURCES MANAGING TECHNOLOGY
FINANCE & ACCOUNTING ORGANIZATION & CULTURE
MARKETING
STRATEGY & COMPETITION HUMAN RESOURCES
MANAGING TECHNOLOGY MARKETING STRATEGY &
COMPETITION HUMAN RESOURCES ORGANIZATION &
CULTURE FINANCE & ACCOUNTING HUMAN RESOURCES
H
HISTORICALLY, the fi nance functions in large U.S. and Euro-
pean fi rms have focused on cost control, operating budgets,

and internal auditing. But as corporations go global, a world of
fi nance opens up within them, presenting new opportunities
and challenges for CFOs. Rather than simply make aggre gate
capital-structure and dividend decisions, for example, they
also have to wrestle with the capital structure and profi t repa-
triation policies of their companies’ subsidiaries. Capital bud-
geting decisions and valuation must refl ect not only divisional
differences but also the complications introduced by currency,
tax, and country risks. Incentive systems need to measure and
reward managers operating in various economic and fi nancial
settings.
The existence of what amounts to internal markets for capi-
tal gives global corporations a powerful mechanism for arbi-
trage across national fi nancial markets. But in managing their
in a Global
Corporation
by Mihir A. Desai
Jo
h

n
H
e
rs
e
y
Honing Your Competitive Edge
108 Harvard Business Review | July–August 2008 | hbr.org
The
Finance
Function
1320 Desai.indd 1081320 Desai.indd 108 6/5/08 7:29:47
PM6/5/08 7:29:47 PM
G
G
N
G
&
S
PM6/5/08 7:30:01 PM
Honing Your Competitive Edge FINANCE & ACCOUNTING

internal markets to create a competitive advantage, fi nance
executives must delicately balance the fi nancial opportuni-
ties they offer with the strategic opportunities and challenges
presented by operating in multiple institutional environments,
each of which has it own legal regime and political risks. There
is also a critical managerial component: What looks like savvy
fi nancial management can ruin individual and organizational
motivation. As we’ll see in the following pages, some of the fi -
nancial opportunities available to global fi rms are affected by
institutional and managerial forces in three critical functions:
fi nancing, risk management, and capital budgeting.
Financing in the
Internal Capital Market
Institutional differences across a company’s operations allow
plenty of scope for creating value through wise fi nancing de-
cisions. Because interest is typically deductible, a CFO can
signifi cantly reduce a group’s overall tax bill by borrowing
disproportionately in countries with high tax rates and lend-

ing the excess cash to operations in countries with lower rates.
CFOs can also exploit tax differences by carefully timing and
sizing the fl ows of profi ts from subsidiaries to the parent.
However, tax is not the only relevant variable: Disparities in
creditors’ rights around the world result in differences in bor-
rowing costs. As a consequence, many global fi rms borrow in
certain foreign jurisdictions or at home and then lend to their
subsidiaries.
Multinational fi rms can also exploit their internal capital
markets in order to gain a competitive advantage in coun-
tries when fi nancing for local fi rms becomes very expensive.
When the Far East experienced a currency crisis in the 1990s,
for example, and companies in the region were struggling to
raise capital, a number of U.S. and European multinationals
decided to increase fi nancing to their local subsidiaries. This
move allowed them to win both market share and political
capital with local governments, who interpreted the increased
fi nancing as a gesture of solidarity.

But the global CFO needs to be aware of the downside of
getting strategic about fi nancing in these ways. Saddling the
managers of subsidiaries with debt can cloud their profi t per-
formance, affecting how they are perceived within the larger
organization and thereby limiting their professional opportu-
nities. Similar considerations should temper companies’ poli-
cies about the repatriation of profi ts. For U.S. companies, tax
incentives dictate lumpy and irregular profi t transfers to the
parent. But many fi rms choose to maintain smooth fl ows of
profi ts from subsidiaries to the parent because the require-
ment to disgorge cash makes it harder for managers to infl ate
their performance through fancy accounting. Finally, letting
managers rely too much on easy fi nancing from home saps
their autonomy and spirit of enterprise, which is why many
fi rms require subsidiaries to borrow locally, often at disadvan-
tageous rates.
Managing Risk Globally
The existence of an internal capital market also broadens a

fi rm’s risk-management options. For example, instead of man-
aging all currency exposures through the fi nancial market,
global fi rms can offset natural currency exposures through
their worldwide operations. Let’s say a European subsidiary
purchases local components and sells a fi nished product to
the Japanese market. Such operations create a long position
in the yen or a short position in the euro. That is, those opera-
tions will become stronger if the yen appreciates and weaker
if the euro appreciates. This exposure could be managed, in
part, by offsetting exposures elsewhere in the group or by hav-
ing the parent borrow in yen so that movements in the yen
asset would be cancelled by movements in the yen liability.
The fi nance function must locate decision making
at a geographic level where other strategic
decisions are made.
PM6/5/08 7:30:10 PM
hbr.org | July–August 2008 | Harvard Business Review 111
Given this potential for minimizing risk, it might seem

perverse that many multinationals let local subsidiaries and
regions manage their risks separately. General Motors is a
case in point. Even though its treasury function is widely
regarded as one of the strongest pools of talent within the
company – and one of the best corporate treasury functions
worldwide – GM’s hedging policy requires each geographic
region to hedge its exposures independently, thereby vitiating
the benefi ts of a strong, centralized trea-
sury. Why duplicate so many hedging
decisions? Because forcing a business’s
hedging decisions to correspond to its
geographic footprint gives GM more-
accurate measurements of the perfor-
mance of the individual business unit
and of the managers running it.
In a related vein, companies often
limit – in arbitrary and puzzling ways –
their considerable expertise in manag-

ing currency exposures. Many fi rms
require finance managers to follow
“passive” policies, which they apply in a
rote manner. For example, GM actively
measures various exposures but then
requires 50% of them to be hedged with
a prescribed ratio of futures and options.
Firms adhere to these passive strategies
because they limit the degree to which
fi nancial managers can undertake po-
sitions for accounting or speculative
reasons. So although functioning in the
global environment calls for consider-
able fi nancial expertise, organizational
strategy requires that expertise to be
constrained so that fi nancial incentives
don’t overwhelm operating ones.
Global Capital Budgeting

In addition to exploiting the de facto
internal fi nancial market to mediate be-
tween their operations and the external
fi nancial markets, CFOs can add a lot of
value by getting smarter about valuing
investment opportunities. When energy
giant AES began to develop global oper-
ations, in the early 1990s, managers ap-
plied the same hurdle rate to dividends
from around the world that they used
for domestic power projects, despite
the different business and country risks
they faced. That approach made risky
international investments look a lot
more attractive than they really were.
The company’s subsequent attempts to improve its capital-
investment decision process illustrate the organizational
challenges CFOs face as they move from domestic to foreign

markets. In order to improve the quality of valuations, AES
required managers to incorporate sovereign spreads into
their discount rates. Sovereign spreads measure the differ-
ence between the rates at which two countries can borrow in
the same currency, and they are widely tacked on to discount
rates in order to adjust for country risk.
Although this method created the sem-
blance of tremendous precision, it came
with some curious incentives, particu-
larly for managers charged with secur-
ing deals in emerging markets. Knowing
that their projects would face very high
discount rates, managers forecasted
infl ated cash fl ows to compensate. For
managers keen to complete transac-
tions, as some at AES were, excessive
penalties and precision can result in a
less robust process.

In extreme cases, the gaming that
takes place in a formalized process can
undermine the company’s strategy. Con-
sider Asahi Glass, one of the fi rst Japa-
nese corporations to rigorously imple-
ment Economic Value Added systems
worldwide in order to increase capital
efficiency. Asahi set country-specific
discount rates based on typical risk
measures, including sovereign spreads.
The result, however, was that manag-
ers overinvested in Japan (because of
very low discount rates) and underin-
vested in emerging markets (because of
very high ones). Once again, adopting
a narrowly fi nancial approach led to an
outcome directly at odds with the com-
pany’s strategic objectives. In response,

Asahi made a series of adjustments to
reconcile its initial, purely fi nancial ap-
proach to discount rates with its broader
organizational goals.
The moral of these stories is that for-
mal methods of valuation and capital
budgeting – which work quite well in a
domestic context, where the variables
are well understood – must be refi ned
as companies globalize. Firms need to
make sure that their fi nance profession-
als actively discuss potential risks with
the country managers who best under-
stand them.
AS CO M PAN I ES GLOBALIZE , they face
new fi nancial challenges. The fi rst
set of questions summarizes the
work of the traditional fi nance func-
tion with respect to external provid-
ers of capital. Because a global fi rm
is itself a capital market, the fi nance
function must consider a second set

of questions, which addresses the
internal capital market, in addition to
the fi rst.
Traditional
questions
for the
local fi nance
function
> How should
we fi nance
ourselves?
> How should
we return cash
to shareholders?
> How should
we analyze
investment
opportunities?
> How should we
communicate
information to
shareholders
and lenders?
> How should our
ownership struc-
ture infl uence
operations?
New
questions

for the
global fi nance
function
> How should
we fi nance our
subsidiaries?
> How should we
get money out of
our subsidiaries?
> How should we
analyze the same
investment op-
portunities in dif-
ferent countries?
> How should we
communicate
fi nancial informa-
tion inside the
fi rm?
> How should we
decide what to
own and with
whom?
The Globally
Competent
Finance Function
PM6/5/08 7:30:17 PM

Honing Your Competitive Edge FINANCE & ACCOUNTING
Creating a Global Finance Function
How can CFOs ensure that their global fi nance operations
make the most of the opportunities at their disposal? At a
minimum, they must inventory their fi nancial capabilities and
ensure their adaptation to institutional variation and their
alignment with organizational goals. To achieve this, a global
fi nance function must do three things well:
Establish the appropriate geographic locus of decision
making. The example of GM’s approach to hedging makes
clear that a fi nance function must locate decision making at
a geographic level where other strategic decisions are made.
Even if centralizing decisions can generate substantial savings,
these might need to be sacrifi ced to ensure that the fi nance
function refl ects the degree of centralization appropriate for
the fi rm overall. Highly centralized fi rms can have a large
fi nance function at headquarters that effectively dictates de-
cision making for all subsidiaries; such an arrangement can

capitalize on many fi nancial arbitrage opportunities without
sacrifi cing organizational goals substantially. Decentralized or-
ganizations, in which country managers are paramount, must
replicate some fi nancial decision making at the country level.
Create a professional fi nance staff that rotates globally.
Leading companies recruit and rotate fi nancial managers in
the same way that they do marketing and operational talent.
If companies groom a network of fi nance professionals who
are comfortable in various environments – and have rotated
through positions at the country, region,
and corporate levels – the dynamic between
the fi nancial headquarters, where most
expertise resides, and the subsidiary can
be a powerful resource in diffi cult times.
Drug giant Novartis is an example. In 2001,
the company had to decide whether to
continue fi nancing its Turkish subsidiary,
which had repeatedly delayed payment to

Novartis during periods of crisis. On the
numbers alone, the decision would have
been straightforward: Force the manag-
ers to fund locally or deny shipments of
life-saving drugs to the subsidiary. Compli-
cated negotiations ensured that the subsid-
iary would continue to operate, capitalize
on the weakness of its competitors, and
ultimately pay back the parent. A successful
outcome was achieved only because of the
trust built up over many years between fi -
nance managers at headquarters and those
in Turkey, many of whom had spent time
at Novartis subsidiaries around the world.
Codify priorities and practices that
can be adapted to local conditions. It is
tempting to stipulate that cash repatria-
tion policies or investment criteria be ap-
plied universally. Such a requirement, however, can sacrifi ce

opportunities that arise locally. Similarly, strategic objectives,
as in the Asahi example, may demand fl exibility in invest-
ment analyses. Smart companies, therefore, formulate policies
centrally with an understanding that local idiosyncrasies and
strategic imperatives may require exceptions. Specifying the
process for making exceptions, such as instituting a standing
committee of fi nance professionals to review possibilities, is
critical to ensuring that deviations from the norm are properly
managed.
• • •
Forty years ago, most fi rms didn’t have CFOs, and the fi nance
function was usually staffed by controllers. As external mar-
kets have become more demanding in terms of performance
and their requirements for disclosure, the fi nance function has
become more prominent. Now that multinational companies
have their own internal capital markets, the fi nance function
must graduate to a more strategically engaged level. A globally
competent fi nance department is one that understands how

to reconcile the fi rm’s fi nancial, managerial, and institutional
priorities across its business units. Does yours?
Mihir A. Desai ([email protected]) is a professor at Harvard
Business School in Boston.
Reprint R0807K To order, see page 163.
S
co
tt
H
ar
b
au
g
h
“We tried an incentive…it gave him vertigo.”
PM6/5/08 7:30:22 PM
Harvard Business Review Notice of Use Restrictions, May 2009
Harvard Business Review and Harvard Business Publishing
Newsletter content on EBSCOhost is licensed for

the private individual use of authorized EBSCOhost users. It is
not intended for use as assigned course material
in academic institutions nor as corporate learning or training
materials in businesses. Academic licensees may
not use this content in electronic reserves, electronic course
packs, persistent linking from syllabi or by any
other means of incorporating the content into course resources.
Business licensees may not host this content on
learning management systems or use persistent linking or other
means to incorporate the content into learning
management systems. Harvard Business Publishing will be
pleased to grant permission to make this content
available through such means. For rates and permission, contact
[email protected]

Deadline 10 Hours Maximum, no extension pleaseNumber of pages .docx

Recommended

Recommended

More Related Content

Similar to Deadline 10 Hours Maximum, no extension pleaseNumber of pages .docx

Similar to Deadline 10 Hours Maximum, no extension pleaseNumber of pages .docx (20)

More from simonithomas47935

More from simonithomas47935 (20)

Recently uploaded

Recently uploaded (20)

Deadline 10 Hours Maximum, no extension pleaseNumber of pages .docx