Combining finance, strategy and corporate governance

Corporate life has always been full of events of various kinds: a success story here, difficulties or even a crash there, a spectacular turnaround elsewhere.

Cross-referencing analysis elements

The analyst can call on the bodies of knowledge that have gradually been built up on each of these components - Finance, Strategy, Governance - but cannot stop there; he must strive to highlight the sometimes antagonistic relationships between these analytical elements.
In our view, this recommendation is justified for several converging reasons:

• on the one hand, business realities inevitably call for a cross-fertilization of analyses drawn from these different corpuses, leading to a dialogue between them
• on the other hand, by bringing together different angles of study, we can highlight links, tensions and even deadlocks in the lives of the companies concerned.
• finally, using analysis tools from different corpora together can sometimes reveal the conceptual framework, sometimes implicit, of these tools.

Following a reminder of the main links between the fields studied, backed up by a few examples, we'll present some thoughts on current developments.

Fruitful relationships

To summarize, the following main links can be observed
The corporate project and its associated strategy are linked to the governance system:

• The managers of a family business that is part of an inter-generational line will be keen to retain control of it; consequently, in their business plan underpinning the strategy, sustainability objectives will often take precedence, here over profitability, there over growth ;
• A start-up, on the other hand, will aim for strong growth driven by the major innovation that gave birth to it; it will not hesitate to take major risks to achieve this (the mortality rate of these start-ups is high); profitability will not be the main goal, at least not immediately, because in the event of success it can turn out to be considerable (cf. the famous "unicorns");
• A large listed company, whose capital is distributed among a large number of investment funds, including a few so-called "activist" funds, will have to pay greater attention to its profitability and justify its strategic choices to its shareholders.

Strategy and finance form an inseparable and sometimes antagonistic pair:
The link seems obvious to anyone who has had to draw up or study a business plan, whether for an individual entrepreneur or for a large-scale project emanating from a major group. Any industrial and commercial strategy, if it is to be implemented, needs resources and therefore finance to acquire these resources externally or to produce them internally. Financial constraints can limit the constitution of these potential resources, and thus restrict the strategy.

The finance-strategy link is more than just a quantitative limitation

The strategy-finance pairing may be inseparable, but it can also be antagonistic. An example of this is the objective of "diversifying the business portfolio", one of the classic questions in strategy since Ansoff.
The entrepreneur, as a prudent strategist, will be tempted to diversify in order to reduce his risks, rather than sticking to a single activity; a bit like the farmer who prefers polyculture to monoculture (following the popular adage of "not putting all your eggs in one basket"). The financial professional will take the opposite view, believing that the company should concentrate on its "core business", abandoning non-essential activities to become a "pure player".
Diversification retains its risk-reducing qualities - "diversification must pay", as the statisticians say - but it's not up to the industrialist to implement it, but to the financier, in the management of his portfolio ideally made up of N pure player stocks.
Which of the two parties is right? Both, in fact, but each for his own institution: the strategic manager for his company, the financier for his investment fund. Their interests are antagonistic here, as are their conceptual frames of reference: organizational sustainability here, financial market fluidity there...

The governance system influences financial decisions: two cases

To illustrate the role of corporate governance on financial decisions, let's take the case of two companies, both aiming to become major players in their respective sectors within the space of a few decades. This ambition is driven by their respective No. 1s, both of whom are strong personalities. If the sectors concerned are already mature or in the process of becoming so, organic growth alone will not enable them to realize this project, which will consequently require external growth, via mergers and acquisitions with other companies in their sectors. How can these operations be financed? This is where the governance system comes into play:

• Company A has an "old-fashioned" form of governance, in which the No.1 is all-powerful vis-à-vis his internal teams, his board of directors and shareholders. This was the case for many companies and groups a few decades ago, such as Antoine Riboud's Danone (formerly BSN). In this case, external growth operations are often financed through share swaps, with firm A offering to pay the shareholders of target firm C in A shares, and carrying out a capital increase to this end. Antoine Riboud has even gone so far as to say that "BSN's acquisitions didn't cost him a penny...". We also know the consequences of this recourse to financing by issuing new shares: a dilution effect on A's shares in the A + C group, which can pose problems for current shareholders, and even their managers. This was also the case with the BSN group, where the Riboud family, one of the founders of the company, saw its shareholding fall to the almost symbolic level of 1%, forcing Antoine Riboud to set up a defense mechanism in case of an unexpected attack.
• Company B also has an all-powerful No. 1, simply because he is, by far, the main shareholder, either directly or through a more or less sophisticated architecture. This is the case for many contemporary companies, including some of the biggest; for example, to take a topical case, the Altice group created and run by Patrick Drahi. As the group's majority shareholder (estimated at 60%), and with the intention of remaining so, Drahi avoids diluting his power of control, on the one hand by resorting to an architecture of holdings and differentiated voting rights (from 1 to 15 for his latest issue), but above all by resorting to borrowing as his main means of financing. This policy, favored by very favorable interest rates, lowering the average cost of capital, resulted - as we know - in a mountain of debt ($50 billion), putting the group in great difficulty...

So, in both cases, the governance regime had a strong influence on financial choices.

On current developments

We live in a fast-changing world, characterized by the interaction of several movements of varying scale and scope. Three of these constitute the "profound forces" referred to by Braudel: globalization, financialization and societal issues.

• globalization is a "long movement" if ever there was one, beginning in the ^16th century with the Great Discoveries, but particularly marked throughout the 20th century, despite the wars of the same name and the "walls" erected here and there by nations that reject it.
• Financialization is also a long-term process, sometimes accompanying the previous one. It was spectacular in the second half of the ^20th century, despite periodic crises. Little by little, it has dominated the economy, which in turn dominates society, in a reversal of the "embedding" (à la Polanyi) that would be desirable.
• the societal stakes appear very low compared to previous movements, and it may be thought that placing them on the same level is an exaggeration. That may be, but we cannot underestimate the growing awareness, beyond the social inequalities that persist, of societal issues linked to ethnic origins, gender, religions and cultures... as well as the increasingly pressing concerns about the future of the ecosystem, this "Anthropocene", which we do not yet know will seal the fate of humanity.

The final, and most recent, component concerns digital technology, the symbol of a new Industrial Revolution that is beginning to make its full impact felt. These include the previous movements, which they tend to accelerate:

• digital technology is accelerating globalization, facilitating the emergence of new multinationals, particularly in its own sector (the GAFAMs), and shaking up the business models of other firms, of all sizes and in all sectors
• digital technology accelerates financialization, facilitating ultra-fast arbitrage (high-frequency trading)
• Finally, digital technology can speed up the consideration of societal issues by enabling the emergence of a global public opinion, like the "global village".

It's in this fast-changing environment, this emerging "new world", that we need to rethink the links between finance, strategy and governance, not to repeat the successes or mistakes of the past, but to invent new models to meet today's challenges.

A plea for crossed perspectives

As a first step in this reflection on the corpus of finance, strategy and corporate governance, and on their respective evolution, it would seem advisable to advocate "cross-views" at several levels:

• Between the sub-disciplines of the field of management science: this is what this paper has attempted to do for the three chosen fields - finance-strategy-governance - and which should be extended to other fields: marketing, human resources management, information systems...
• Between management sciences (MS) and other established knowledge. In a repository of knowledge based on a criterion of content on the one hand, and purpose on the other, management sciences, which deal with human organizations, are in the field of human and social sciences (SHS) in terms of content, and, being intended to be applied, are in terms of purpose, close to other "action knowledge" such as engineering or health sciences. They need to maintain this dual relationship, without favouring one over the other.
• Between researchers and practitioners. Each of these categories has a legitimate voice: researchers, through the conceptual and methodological advances resulting from their research, and practitioners, through their tacit knowledge and field experience. Crossing perspectives between representatives of each category is useful for both.
• Between socio-economic and cultural contexts: as this is a corpus belonging to the field of social sciences and humanities, we cannot use the analytical tools of SG without contextualizing them. On this important point, we need to distance ourselves from many "made in the USA" works (in finance, strategy or governance) that wrongly believe themselves to be universal in scope.
• Between generations. In any finalized human organization, the players involved - their personalities, training and culture - sometimes play a major role in the life of these organizations, and it is also desirable to cross the views of players belonging to several generations. This is often the case in business, when it comes to the succession of managers; it also applies to research, including management science research...

Roland Pérez, University Professor (e.r.), Montpellier Research in Management, University of Montpellier
The original version of this article was published on The Conversation.