The Meaning of Corporate in Corporate Finance

March 30, 2020
by Noriyuki Morimoto

Finance typically means finance for corporations, or corporate finance. Now, a company that raises funds has a purpose, or an object, for using those funds. Modern financial methods have evolved to make such objects independent targets of finance. This method is called object finance. One of the advantages of object finance is its role in corporate governance reform.

From a financial aspect, optimal corporate governance can be achieved if a highly capable CFO is able to allocate funds the company procured to the activities of each business unit at optimal amounts and cost of capital. However, in human society, such a practice is possible only in small, specialized businesses. It is impossible, both in terms of physical capabilities and organizational dynamics, to do this in a regular corporation.

On the other hand, if companies switch from corporate-level fund procurement to object finance in the respective activities of each business unit, it would not be so difficult to achieve optimality, as each unit of object finance will have a simple structure. As a result, it should become easier for the entire corporation to achieve optimal financing.

However, here is the difficult question of whether risks should be dispersed or identified and separated for effective management. In corporate finance, risks are spread throughout the corporation, whereas in object finance, they are segregated within specific objects. It is not easy to determine which approach can manage risks more properly.

There is also a view that finance is viable only when business leadership takes full responsibility in handling inherent dangers of a business. If so, the basic financial method should have to be corporate finance. On the other hand, if you take the view that finance should directly bear the risks involved in business, there will be more room for object finance.

Getting to the root of object financing inevitably means to ask what must remain as the bare minimum of corporate function, which is the source of competitiveness supporting the corporate business. In other words, you need to answer the ultimate question of what a corporation is. That’s why we have to dig into object finance.

 

[ Category /Deconstruction of Finance]