── .✦ ‧₊˚.
BANKiNG & FiNANCE
MODERN CORPORATiON
Learning objectives:
• List the advantages of organizing a business as a corporation.
• Explain the separation of ownership and control.
• Describe the role of financial managers, especially the CFO.
• Identify examples of investment and financing decisions.
• Distinguish between real assets and financial assets.
• Explain why unethical behavior can destroy, not maximize, firm value.
1. Corporate Structure
A corporation is a distinct legal entity that separates ownership (shareholders) from
control (management). This means the company has its own legal rights and
obligations — it can own property, enter contracts, and be sued or sue others,
independent of its owners.
• It can live on even after its founder die (perpetual existence)
→ E.g.: Hudson’s Bay (1670) still exists centuries later
• Owners can sell their shares to others (transferable ownership)
→ E.g.: Coca-Cola is run by a CEO and CFO chosen by a board rather than by shareholders directly
= Ownership and control are separated
• Owners don’t risk losing personal assets if company fails (limited liability)
→ E.g.: Lehman Brothers (bankruptcy 2008) shareholders lost their investment but didn’t lose
houses/cares/etc.…
• A management team (e.g. CEO, CFO) runs day-to-day operations and reports to
a Board of Directors (management hierarchy)
• Legal structures differ across countries (regulatory variation)
→ E.g.: SA in France, PLC in UK, AG in Germany)
, ── .✦ ‧₊˚.
2. Separation of Ownership and Control
• Shareholders: owners, want profit (through dividends, rising stock prices, ...)
• Board of Directors: controllers, elected by shareholders, oversees big decisions
• Management (CEO, CFO, ...): runs the daily business, reports to the board
⚠ Agency Problem = conflict of interest due to separation of ownership and control.
Example: Managers might prioritize personal bonuses or prestige projects rather than maximizing
shareholder value.
Solution: Align incentives (e.g. performance-based pay, transparency, audits, ...)
3. Corporate Goals – Beyond Profit Maximization
• Traditional goal: Maximize shareholder wealth within legal limit
• Modern goal: Also care about other stakeholders:
• Employees → Fair pay, safe working conditions
• Costumers → Good products, fair prices
• Suppliers → Fair treatment, reliable
• Community → Jobs, sustainability, social responsibility
• Environment → Reduce harm, think long-term
Modern frameworks
• ESG (Environment, Social, Governance) → measuring ethical and sustainable
performance
• Triple Bottom Line → People, Planet, Profit – evaluates success on social and
environmental impact, not just profit.
• B-Corporations (B-Corps): Certified companies legally committed to considering
all stakeholders in decision-making.
, ── .✦ ‧₊˚.
4. Ethics in Value Maximization
Acting ethically isn’t just “nice” — it protects long-term value and builds trust.
Madoff Ponzi scheme
• Falsified investment returns, deceived thousands of investors
• Result: billions lost, collapse of investor confidence
• Lesson: Violating fiduciary duty (acting in clients’ best interest) destroys corporate
value
Theranos
• Claimed breakthrough blood-testing technology that didn’t work
• Misled investors and regulators for years
• Lesson: Overvaluing image over ethics leads to legal and reputational disaster
4. Role of the CFO (Chief Financial Officer)
The CFO is the financial leader of a corporation.
Capital Allocation
• Deciding how to distribute company funds across projects
• Ensures optimal capital structure (mix of debt and equity)
Risk Management
• Identifies, measures and mitigates financial risks
• Ensures compliance with financial and legal regulations
Stakeholder Management
• Maintains trust and transparency with banks, investors, and regulators
Data Analytics & Strategy
• Oversees budgeting, forecasting, and long-term financial planning
• Translates financial data into business strategy
, ── .✦ ‧₊˚.
5. Investment and Financing Decisions
Corporations constantly make two types of major financial decisions
1. Investment Decision (a.k.a. Capital Budgeting/CAPEX)
• Determine how to spend money to acquire assets that generate future returns.
• Involve evaluating potential projects (factories, R&D, technology)
• Goal: Maximize shareholder value by selecting profitable long-term investments.
Types of Assets:
• Real Assets
• (In)tangible resources used in production (machinery, patents, brand)
→ E.g.: Amazon AWS → risky £3B project that became a £70B revenue engine.
→ E.g.: AB InBev investing in breweries = real assets.
• Financial Assets
• Instruments like shares or bonds used to raise capital
Steps in Capital Allocation
• Identify projects aligned with company strategy.
• Estimate cash flows (inflows/outflows).
• Assess risk and timing of said flows.
• Select projects with the best risk-adjusted return.
2. Financing Decisions
• Concern how to raise money for investments and operations
• Goal: Choose the optimal financing mix that minimizes the cost of capital
Capital Structure = Debt + Equity Mix
Financing type Characteristics Investor View
Debt Financing Fixed interest payments, no Lower risk, fixed income
ownership, must be repaid.
Equity Financing Selling ownership shares, no Higher risk, higher potential
repayment obligation. return
⚠ Risks: Bad financing decisions or market instability can destroy shareholder value
→ E.g.: Over-borrowing before a downturn
BANKiNG & FiNANCE
MODERN CORPORATiON
Learning objectives:
• List the advantages of organizing a business as a corporation.
• Explain the separation of ownership and control.
• Describe the role of financial managers, especially the CFO.
• Identify examples of investment and financing decisions.
• Distinguish between real assets and financial assets.
• Explain why unethical behavior can destroy, not maximize, firm value.
1. Corporate Structure
A corporation is a distinct legal entity that separates ownership (shareholders) from
control (management). This means the company has its own legal rights and
obligations — it can own property, enter contracts, and be sued or sue others,
independent of its owners.
• It can live on even after its founder die (perpetual existence)
→ E.g.: Hudson’s Bay (1670) still exists centuries later
• Owners can sell their shares to others (transferable ownership)
→ E.g.: Coca-Cola is run by a CEO and CFO chosen by a board rather than by shareholders directly
= Ownership and control are separated
• Owners don’t risk losing personal assets if company fails (limited liability)
→ E.g.: Lehman Brothers (bankruptcy 2008) shareholders lost their investment but didn’t lose
houses/cares/etc.…
• A management team (e.g. CEO, CFO) runs day-to-day operations and reports to
a Board of Directors (management hierarchy)
• Legal structures differ across countries (regulatory variation)
→ E.g.: SA in France, PLC in UK, AG in Germany)
, ── .✦ ‧₊˚.
2. Separation of Ownership and Control
• Shareholders: owners, want profit (through dividends, rising stock prices, ...)
• Board of Directors: controllers, elected by shareholders, oversees big decisions
• Management (CEO, CFO, ...): runs the daily business, reports to the board
⚠ Agency Problem = conflict of interest due to separation of ownership and control.
Example: Managers might prioritize personal bonuses or prestige projects rather than maximizing
shareholder value.
Solution: Align incentives (e.g. performance-based pay, transparency, audits, ...)
3. Corporate Goals – Beyond Profit Maximization
• Traditional goal: Maximize shareholder wealth within legal limit
• Modern goal: Also care about other stakeholders:
• Employees → Fair pay, safe working conditions
• Costumers → Good products, fair prices
• Suppliers → Fair treatment, reliable
• Community → Jobs, sustainability, social responsibility
• Environment → Reduce harm, think long-term
Modern frameworks
• ESG (Environment, Social, Governance) → measuring ethical and sustainable
performance
• Triple Bottom Line → People, Planet, Profit – evaluates success on social and
environmental impact, not just profit.
• B-Corporations (B-Corps): Certified companies legally committed to considering
all stakeholders in decision-making.
, ── .✦ ‧₊˚.
4. Ethics in Value Maximization
Acting ethically isn’t just “nice” — it protects long-term value and builds trust.
Madoff Ponzi scheme
• Falsified investment returns, deceived thousands of investors
• Result: billions lost, collapse of investor confidence
• Lesson: Violating fiduciary duty (acting in clients’ best interest) destroys corporate
value
Theranos
• Claimed breakthrough blood-testing technology that didn’t work
• Misled investors and regulators for years
• Lesson: Overvaluing image over ethics leads to legal and reputational disaster
4. Role of the CFO (Chief Financial Officer)
The CFO is the financial leader of a corporation.
Capital Allocation
• Deciding how to distribute company funds across projects
• Ensures optimal capital structure (mix of debt and equity)
Risk Management
• Identifies, measures and mitigates financial risks
• Ensures compliance with financial and legal regulations
Stakeholder Management
• Maintains trust and transparency with banks, investors, and regulators
Data Analytics & Strategy
• Oversees budgeting, forecasting, and long-term financial planning
• Translates financial data into business strategy
, ── .✦ ‧₊˚.
5. Investment and Financing Decisions
Corporations constantly make two types of major financial decisions
1. Investment Decision (a.k.a. Capital Budgeting/CAPEX)
• Determine how to spend money to acquire assets that generate future returns.
• Involve evaluating potential projects (factories, R&D, technology)
• Goal: Maximize shareholder value by selecting profitable long-term investments.
Types of Assets:
• Real Assets
• (In)tangible resources used in production (machinery, patents, brand)
→ E.g.: Amazon AWS → risky £3B project that became a £70B revenue engine.
→ E.g.: AB InBev investing in breweries = real assets.
• Financial Assets
• Instruments like shares or bonds used to raise capital
Steps in Capital Allocation
• Identify projects aligned with company strategy.
• Estimate cash flows (inflows/outflows).
• Assess risk and timing of said flows.
• Select projects with the best risk-adjusted return.
2. Financing Decisions
• Concern how to raise money for investments and operations
• Goal: Choose the optimal financing mix that minimizes the cost of capital
Capital Structure = Debt + Equity Mix
Financing type Characteristics Investor View
Debt Financing Fixed interest payments, no Lower risk, fixed income
ownership, must be repaid.
Equity Financing Selling ownership shares, no Higher risk, higher potential
repayment obligation. return
⚠ Risks: Bad financing decisions or market instability can destroy shareholder value
→ E.g.: Over-borrowing before a downturn
