A) Corporate Governance

The financial manager's duties include different tasks aimed to maximize the shareholders' wealth.

It has been observed, however, that in practice not all management decisions are consistent with this objective.

In other words, there often is a divergence between the shareholder wealth maximization goal and the actual goals pursued by management.

Instead of seeking to maximize shareholder wealth, management try to satisfy their own welfare. In doing so managers are concerned with their job security. The concern for long-run survival may lead management to minimize (or limit) the amount of risk incurred by the firm, since unfavourable outcomes can lead to their dismissal or possible bankruptcy for the firm.

The existence of divergent objectives between owners and managers is an example of problems arising from agency relationships. Agency relationships take place when one or more individuals (the principals) hire another individual (the agent) to perform a service on behalf of the principals.

In an agency relationship, decision-making authority is often delegated to the agent from the principals.

Conflicts between corporate managements and shareholders surfaced as a major public policy issue in the 1980s. The potentially adversarial principal-agent relationship between corporation owners and managers has long been recognized. In the last decade, however, two major developments brought this issue to greater prominence.

First, corporate managements, responding to a wave of hostile corporate takeovers, instituted various defensive strategies. These defences were designed to prevent the target companies from being acquired easily, thereby protecting the jobs of existing management. Indeed, they appear to have had the intended result of making those companies worth less to prospective acquirers. However, they also reduced the value of the companies to their existing shareholders.

Second, large shareholders came to realize that they wielded considerable corporate voting power. The growth of institutional investors has concentrated corporate ownership in the hands of a relatively few organizations. The resources of these large organizations enabled them to actively oppose management decisions that diminished the value of their investment. Corporate governance has become the catchall description for institutional investor efforts to influence the fundamental business policies of corporate managements.

Words you may need:

corporate governance руководство корпорациями

to be consistent (with) соответствовать

divergence n отклонение, расхождение

survival n выживание

to incur a risk нести риск

agency relationships взаимоотношения между агентом и принципалом

adversarial adj содержащий элемент соперничества

wield v владеть, иметь в руках (власть, влияние и т.п.)

catchall adj всеобъемлющий, полный

B) Investment Management

Investment management relates to the selection of assets in which funds will be invested by a firm. The assets which can be acquired fall into two broad groups: long-term assets and short-term, or current assets.

Nowadays investors face a lot of choices. Along with stocks and bonds of large companies and government debt securities, investors can now own stocks of small companies, the stocks and bonds of companies headquartered in foreign countries, high-yield bonds, collateralized mortgage obligations, floating-rate notes, swaps, puts, calls, and futures contracts. The list is seemingly endless and it continues to grow. Furthermore, the ability to purchase these securities has become both less expensive and more convenient with the advent of advanced communications and computer networks. The challenge to investors is increasing because the investment environment is becoming more and more complex. With the rapid evolution that the investment industry is undergoing, new securities, markets, investment management techniques have appeared.

When making decisions with regard to what marketable securities to invest in, how big the investment should be, and when the investment should be made, the investor:

• sets investment policy and determines objectives,

• performs security analysis,

• constructs a portfolio,

• revises the portfolio,

• evaluates the performance of the portfolio.

For any type of security, the risk can by reduced by investing in more than one firm. This is called "diversification". An investor with stocks and bonds issued by a number of firms is said to have a diversified portfolio.

Diversification does not eliminate all risks. Events like recession, high interest rates, and so on may depress profits and stock prices of all firms.

Words you may need:

collatcralized mortgage obligation облигация, обеспеченная пулом ипотек

floating-rate note облигация с плавающей ставкой

advent n приход, появление

to construct a portfolio создать портфель

to revise a portfolio пересмотреть портфель

to depress the profits снижать прибыль