Government influence on business and the financial management framework

Two oil companies each want to merge with a rival. One merger is waved through. The other is blocked because it would leave one firm in control of the market. A bank lends to a company for ten years using money that savers can withdraw tomorrow. A finance manager inflates a forecast to win funding for a road.

Each of these shows how governments, markets and ethics shape what a company can do with money.

This topic covers how government affects business beyond tax and interest rates (competition policy, aid and governance rules), ethical dilemmas in finance and moral courage, sustainability, and the framework within which a company raises money: sources of finance, financial intermediaries, the trade-off between risk and return and the separation theorem. The previous topic covered the economy and institutions. The next covers the financial markets themselves.

Neither the May 2014 nor the November 2014 Pathfinder sets a stand-alone question on this topic.

Key terms in plain English

Syllabus check

This topic is in syllabus area A (the role of the senior finance executive, ESG and ethical issues). It covers:

• the regulatory and ethical context of financial decisions;
• the effect of investment and financing decisions on stakeholders and the environment;
• the sources of finance and the role of financial markets.

CAMA 2020 and this topic

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. Competition law is in the Federal Competition and Consumer Protection Act 2018.

Competition policy

Governments try to prevent anti-competitive behaviour. A monopoly can be useful where very large scale cuts costs (utilities are an example). But is usually seen as harmful: it can restrict supply, raise prices and has little reason to innovate or be efficient. Governments may:

• set up a body with power to investigate and block mergers or allow them on conditions, such as selling off part of the business;
• order a company that has grown too large to be broken up;
• ban cartels, in which firms secretly restrict supply, divide the market and fix the same price.

In Nigeria the Federal Competition and Consumer Protection Commission (FCCPC), under the Federal Competition and Consumer Protection Act 2018, is the main merger authority. The Securities and Exchange Commission (SEC) regulates public company and takeover matters under the Investments and Securities Act 2025, the Central Bank of Nigeria reviews bank mergers and the Nigerian Communications Commission reviews telecoms mergers. In the United Kingdom the body is the Competition and Markets Authority.

Government assistance and green policy

Governments may give cash grants to companies in particular industries or regions to persuade them to invest there. Development agencies in different countries may compete with grants to attract foreign investors. Green policies, such as pollution limits and incentives for clean energy, change the cost of some projects.

Governance regulation

Serious mismanagement leads governments to add rules. In the UK, scandals at Mirror Group Newspapers and Polly Peck in the 1980s led to calls for better governance. In the United States the Sarbanes-Oxley Act of 2002 followed the collapse of Enron and WorldCom. In Nigeria a code for banks followed the 2006 consolidation, and the SEC issued a revised code for public companies in 2011.

The 2007 sub-prime lending scandal led to pressure for tougher regulation of banks. Later codes have replaced the 2011 code; the topic on governance codes covers the current ones.

Ethical dilemmas in finance

An ethical dilemma arises when a financial decision pulls against fairness, openness or long-term sustainability. ICAN groups them by area:

• Capital investment: inflating projections to win funding; ignoring environmental harm or the displacement of communities (for example oil spills in the Niger Delta); bribes to win approval.
• Mergers and acquisitions: insider trading before an announcement; overstating the target’s health to raise its price; ignoring the human effect of job cuts.
• Reporting and disclosure: manipulating earnings to meet market expectations; leaving out risks; over-optimistic forecasts. ICAN cites the 2006 case in which the SEC found Cadbury Nigeria had overstated its profits.
• Governance: embezzlement or mismanagement by directors; weak oversight; unfair treatment of minority shareholders. ICAN mentions concerns about governance at Oando Plc and at state-owned enterprises.

Moral courage

Moral courage is acting ethically under pressure, even at the risk of professional backlash, lost income or reputation. It involves integrity, accountability, awareness of the risks, advocacy for ethical policy and resilience. Examples are whistleblowing on fraud, refusing bribes, giving a clear account of the company’s financial health and rejecting investments that harm the environment or human rights.

Sustainability

Sustainability in strategic financial management means building environmental, social and governance (ESG) factors into financial decisions for long-term value. It rests on a triple bottom line:

• Economic: efficient use of resources, resilience and inclusive growth (for example efficient irrigation, solar power, microfinance).
• Environmental: renewable resource management, less pollution and climate action (for example recycling and energy-efficient cement production).
• Social: equity, community development and human rights (for example education programmes and fair labour practices).

The three depend on each other. Cutting down forests for short-term profit harms the environment and displaces people. Clean energy needs money and community support. A healthy, educated workforce raises output without overusing resources.

The financial management framework

Businesses raise finance to invest. Long-term finance pays for long-term assets and working capital. Short-term finance covers cash flow gaps and the payment of suppliers. Finance has a cost because providers expect a return. The main sources are banks (overdrafts and loans), the capital markets and the money markets.

Financial intermediaries

An intermediary stands between savers and borrowers. Banks take deposits and lend them out, and they also create credit: when a bank lends, the money returns to the system as new deposits that can be lent again, while the bank keeps some cash or near-cash for withdrawals. Intermediaries perform four functions:

1. Go-between: they save savers and borrowers the time, effort and cost of finding each other.
2. Maturity transformation: savers can withdraw at short notice while borrowers get fixed-term loans with a known repayment plan. Banks manage this because of the volume of business.
3. Risk transformation: a saver bears the risk that the bank fails and not the risk that each borrower defaults. The bank spreads the risk over a wide portfolio.
4. Parcelling up: small savings are combined into large loans. A firm that wants ₦10,000 and finds savers who can lend ₦1,000 each would need ten savers. The intermediary does it for them.

Other intermediaries include investment banks that deal in the capital markets and the stock exchange itself. For small businesses, bank loans, overdrafts and leases may be the only borrowing available.

Risk and return

Investors expect a return and accept some risk: an investment may fall in value, lose all its value, or the borrower may not repay in full or on time. Equity returns are dividends plus capital gain and may be negative. In general, higher risk needs higher return.

The same applies to bank loans: a secured loan costs less than an unsecured one, and a subordinated loan costs more than a senior one to the same borrower.

The separation theorem says a financial manager looks at the risk and return of the market and the company, and does not need to follow each investor’s own choice of portfolio. The company’s task is to maximise value. Each investor then combines the company’s shares with other investments to match their own taste for risk.

The rules in more depth

Why monopolies are tolerated in utilities

Where one network is far cheaper than two, competition wastes money. The answer is regulation of prices and not a ban.

Why banks are fragile

They borrow short and lend long. If many savers withdraw at once, the bank may be unable to pay. That is why central banks act as lender of last resort and supervise banks.

Why subordinated debt costs more

It is paid after senior debt if the borrower fails, so the lender faces more loss and requires a higher rate.

Why moral courage is a finance topic

Most ethical failures in finance need many people to stay silent. A single refusal to sign off a false forecast can stop a loss.

Effect on analysis

When you advise on a deal, add a line on regulation and ethics: who must approve it, who could be harmed and how the decision would look if published.

Worked examples

1. They lend ₦900,000. That money is deposited again, and 10% is kept, so ₦810,000 can be lent.
2. The process continues.
   The most deposits that the first ₦1m can support = 1,000,000 ÷ 0.10 = ₦10m.
3. The bank has created new money by lending, not only passed on savers’ money.

1. Without a bank the firm must find ten savers and agree terms with each.
2. A bank takes the savers’ deposits and lends the firm ₦10m in one loan, with one agreement.
3. Savers can still withdraw at short notice (maturity transformation) and bear only the bank’s risk (risk transformation).

1. The request is a false projection. It misleads the lender and may breach the directors’ duty to act in good faith and the duty of care (CAMA 2020, ss. 305 and 308).
2. If the project fails, the company, the bank and the staff all suffer.
3. Moral courage: refuse to sign the forecast, put the realistic figures in writing, escalate to the audit committee and, if ignored, consider whistleblowing in line with professional rules.

1. The merged firm would hold 75%, so competition could be lessened. It is a case for the competition authority.
2. It may block the deal or allow it on conditions, such as selling off a division.
3. The company should include the cost and delay of approval in its plan.

How to score full marks

• Name the authority (use the current ones) and the likely result of a deal.
• Set out the dilemma and the stakeholders on each side.
• Recommend an action and justify it.
• Give the three dimensions of sustainability with an example of each.
• Explain the four functions of intermediaries with an example.
• Link risk to return and rank the instruments.

Common mistakes in the exam

• Naming the SEC as the Nigerian merger authority without noting the change.
• Describing ethics in general terms and not recommending an action.
• Confusing maturity transformation with risk transformation.
• Saying a lower-ranking (subordinated) loan is cheaper.
• Ignoring the environment and community in a sustainability answer.
• Treating the separation theorem as a rule for investors rather than for the company.

Quick revision

• Competition policy: block mergers, break up monopolies, ban cartels. FCCPC in Nigeria.
• Ethical dilemmas: investment, M&A, reporting, governance. Moral courage.
• Sustainability: economic, environmental, social.
• Intermediaries: go-between, maturity, risk, parcelling up.
• Risk ladder: equities, junk bonds, investment grade, government bonds.
• CAMA 2020: ss. 305, 306, 377(1), 378, 404(7).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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