Friday, July 18, 2008

The Finance Function in a Global Corporation

The Finance Function in a Global Corporation.
By: Desai, Mihir A.,
Harvard Business Review,
Jul-Aug 2008, Vol. 86, Issue 7/8

HISTORICALLY, the finance functions in large U.S. and European firms have focused on cost control, operating budgets, and internal auditing.

But as corporations go global, a world of finance opens up within them, presenting new opportunities and challenges for CFOs. Rather than simply make aggregate capital-structure and dividend decisions, for example, they also have to wrestle with the capital structure and profit repatriation policies of their companies' subsidiaries.

Capital budgeting decisions and valuation must reflect 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 financial settings.

Managing Risk Globally
The existence of an internal capital market also broadens a firm's risk-management options. For example, instead of managing all currency exposures through the financial market, global firms can offset natural currency exposures through their worldwide operations. Let's say a European subsidiary purchases local components and sells a finished product to the Japanese market. Such operations create a long position in the yen or a short position in the euro. That is, those operations 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 having the parent borrow in yen so that movements in the yen asset would be cancelled by movements in the yen liability.

A global finance function must do three things well:

Establish the appropriate geographic locus of decision making.

Create a professional finance staff that rotates globally.

Codify priorities and practices that can be adapted to local conditions.

Mihir A. Desai ( is a professor at Harvard Business School in Boston.

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