Professor Enrique R Arzac, an expert on corporate finance and valuations, has been in Trinidad this past week conducting a seminar organised by the Institute of Chartered Accountants on Financial Management For Creating Shareholder Value, at the Hilton Hotel.
Since my personal experience with financial management is limited strictly to my minute financial affairs which ends with the reconciliation of a very limited bank account, it was with a fast beating heart that I started interviewing this Argentinian gentleman who has published many articles on corporate finance, portfolio management and commodity markets, in finance and economic journals.
Married with one grown son, Professor Arzac lives in Long Island, New York. He is currently on a year's sabbatical from his position as the Director of Mergers and Acquisitions Programme at Columbia University, where he obtained his Master's degree, PH.D. and M.B.A. His first degree and Certification in Public Accounting were completed at the University of Buenos Aires in Argentina.
In recent years, the Professor has taught at the Graduate School of Business Administration in Zurich, Universidad Autonoma de Madrid, Theseus Institute - France , Universidad Di Tella - Argentina, DUXX Graduate School- Mexico and Euroforum Escorial- Madrid. And has also lectured in numerous executive programmes at many large corporations in North and South America and Europe.
Because Professor Arzac has been the recipient of many awards for teaching excellence, the most recent being best teacher by the Executive MBA class of 1995 both at Columbia Business School and GSBA -Zurich, it was with a great deal of pride that I listened as he spoke of his first-time lecturing to a Trinidad group, which included business leaders and financial decision makers at the highest level, and banking officers who analyse corporations: "One thing I can say is that I am very impressed with the participants, there has been very lively interaction and they raise excellent points. Your human capital is of a very high quality."
The days of bookkeepers acting as managers of the finance portfolio in any company are now over. The modern view, according to Professor Arzac is that "the real Financial Manager is more one of facilitating and implementing the strategy of the company. Whenever you have a firm and you have something good going you need to make investments. You need capital and raising capital can be easy but normally people are very suspicious. The Financial Manager has to be able to communicate with the investors and establish credibility for after all people are very cautious in parting with their money. The modern way of looking at the role of the Financial Manager is one of making things possible by facilitating and providing capital so that the company can grow and invest."
"So the Financial Manager has to understand how the capital market functions, what investors demand, and that is more or less what we are doing here in this seminar. We are discussing what are the sources of funding for corporations, how companies that can be world class operate in a small capital market. Most countries have a very small capital market because that depends on the size of the country, the amount of wealth accumulated and also on the institutional set up."
Professor Arzac drew examples with France: "a fairly large economy but the capital market is not large. The United Kingdom has a much larger capital market. There is also the risk, not that there is no rule of law in France but it is too regulated an economy, too costly to do business in France. If a company in Trinidad wants to raise money, they are not going to issue bonds or equity in France. London and New York are the competitive areas and they are very protective of the investor."
Financial Managers therefore have to understand the way those markets operate. What they require on investments in terms of parting with their money and investment. And understand Financial Instruments, such as, shares, stocks, and bonds.
Professor Arzac sees that "the Financial Comptroller's role as being redefined, it is broader and he must have the skills to use the tools of his trade. He has to know accounting but he is no longer a bookkeeper."
The Chief Executive Officer needs to rely more and more on someone who understands the working of the market, so that the Financial Manager and CEO have to work together. "It's an evolution" says the Professor as he simplified so that I could understand "the Financial Manager allows the engineer to see about production, as each one does what they are primarily supposed to do. In order to communicate with investors you need to understand finance."
The main topic dealt with at the seminar was a pretty new one - "Economic Value Added" or EVA- which simply put is the value that one adds to the equity of your company. If your company is trading in the stock market there would be an increase in price. In a private company, value added would be additional cash that is generated in excess to the cost of your capital. "This is a system which allows managers to think as owners, as they share in the profit of the company. If managers are to contribute you want them to be your partners" explained Professor Arzac.