CFO 2010
As the role of the chief financial executive evolves and expands, we explore three developing areas that weigh on today’s finance leader.
By Carolyn Tang
“Public scrutiny of the executive finance function has intensified of late, driven by hesitant ripples and unexpected fluctuations in the economic landscape. The spotlight is specifically focused on the CFO, since investors, employees and even government branches are looking to companies to play a more active, vocal part in financial accountability. ”
STRATEGIC IT
Less than a generation ago, company finances were tracked using paper ledgers and calculators. Today, information technology comprises a significant chunk of overall spending, which means CFOs have had to get their knowledge bases up to speed—quickly.
Marc Linden, CFO of Intacct, an award-winning provider of financial management and accounting applications, says it’s more important than ever for a CFO to be involved in IT investment decisions in order to maintain company competitiveness and to ensure financial decisions are held to the same standards as any other investment. “IT investments should be made to meet specific business objectives; for example, to increase revenue, improve efficiency or meet regulatory requirements,” he explains.
When it comes to enterprise software, says Linden, the CFO is often the purchasing program’s executive sponsor, largely because the software is used for financial management and insight into revenue and cost. In other words, it is a mission critical tool for the finance function.
“CFOs steer the selection process, marshal internal resources, and are often in charge of overseeing implementation of the software,” explains Charles Rathmann, a marketing analyst with IFS North America. “Enterprise resource planning (ERP) has a real impact (beyond) the operation of the finance function of a company by tying various departmental functions into the general ledger.”
Michael Bechara is the managing director of Granite Consulting Group, a corporate governance, IT and financial management consultancy. In his experience, the typical CFO has influence over how much money is spent, but not as much influence over what the money is spent on.
“In many ways, IT is still a ‘black box,’ as technology remains mysterious and intimidating for many,” he explains. “The challenge is that IT professionals are very tech savvy, but are not particularly focused on return on investment. The CFO needs to delve into the IT area to a greater degree in order to understand exactly what benefits are received from the investments made.”
Linden sees benchmarking IT spending against other possible investments as essential in ensuring the highest possible returns. He says the CFO is uniquely positioned to make these decisions because he/she has the training and experience necessary to maximize the outcome of any financial trade-offs. Additionally, the CFO is one of the few executives in a firm that has insight into all aspects of the business.
“While it isn’t practical or appropriate for a CFO to be involved in every IT spending decision, the CFO should be involved in developing the company’s overall IT strategy and objectives, ensuring proper investment justifications are made, setting and managing an overall IT and capital budget, setting appropriate approval levels, and ensuring reporting of actual versus plan information for key IT measures,” he says.
While some CFOs have technology backgrounds, others are slow to get up to IT speed. In fact, in a Deloitte survey of CFO headhunters, it was revealed that many CFOs aren’t keeping pace with the business marketplace, and subsequently are setting the wrong priorities.
“A lot of CFOs are just too ‘GAAP-centric’ these days,” answered one respondent. “They’re focused on operations and, as a result, they’re too cautious. This is a real challenge in organizations where the CFO should be participating in the strategic development of the company.”
Overall, however, Lawrena Colombo, a partner at PricewaterhouseCoopers, LLP, believes the impact of this rapid evolution has been positive. “Individuals with high professional and personal standards have been stepping up to CFO roles or have been acting with great integrity in this challenging environment, and have been bringing credibility to their companies. In turn, the investor community has been clearly differentiating well-run, transparent companies in these recessionary times, and the share prices have reflected this. The reward for the risk of being a CFO remains positive, as long as accountability and performance remain high,” she says.
DE FACTO DECISION-MAKING
Of course, this “evolutionary phenomenon” is not limited to the IT function. These days, the CFO is taking an increasingly active role in large-scale company decision-making, and is more likely to partner with, rather than merely serve, the all-knowing, all-powerful CEO.
“Great CFOs have always been the most important business partner for the CEO, and should be involved in every key decision that adds or subtracts substantially from the value of the organization,” says Colombo.
Bill Graf, a partner with Deloitte & Touche LLP, agrees that CFOs have unique leadership and organizational skills that position them well to be trusted advisors to the CEO. Not only does the CFO have a bird’s eye view of organizational needs from both a financial and a strategic vantage point, but in the case of public companies, CFOs also tend to have a feel for shareholder and market expectations.
Graf identifies four key roles that fall under the CFO function:
Operator: CFOs have to operate an efficient and effective finance organization, providing a variety of services such as financial planning, financial analysis, treasury, tax, and more.
Steward: As the steward of corporate value, CFOs work to protect the vital assets of the company, ensure compliance with financial regulations, close the books correctly and communicate value and risk issues to stakeholders.
Catalyst: CFOs stimulate and drive the timely execution of change in the finance function or enterprise. Using the power of the purse, they can selectively drive business improvement initiatives, such as enhanced enterprise cost reduction and pricing execution—all of which will add value to the company.
Strategist: CFOs take an important seat at the strategic planning table, and influence the future direction of the company. They are vital in providing financial leadership, and aligning business and finance strategy to grow the business.
With each of these responsibilities, the CFO role is inextricably intertwined with that of the CEO, and as such, significantly more visible than it once was. This increased exposure adds another dimension to the CFO’s responsibilities.
THE PEOPLE PERSON
Faizal Chaudhury manages the internal audit department at Stepan Company, a global chemicals manufacturer located just north of Chicago. He believes that increased scrutiny and accountability in the corporate finance arena has certainly contributed to an increase in the CFO’s oversight and visibility.
“The Sarbanes-Oxley Act of 2002 fundamentally changed the finance landscape, putting accountability front and center. But I think this trend of partnering instead of serving is also based on a realization that objective financial advice is critical to success, and the way to achieve this is by making the finance function a value-added partner as opposed to thinking of it as a cost center,” he explains.
The CFO is also the point person when it comes to the investor community. “As the financial crisis has dragged on, investment analysts are asking evermore penetrating questions about the company’s finances,” says Bechara. “In an environment of shifting accounting rules and transactions of increasing complexity, having a CFO who clearly explains to investors the company’s strategy is priceless.”
But with this increase in responsibility comes an increase in personal risk; the greater a CFO’s public visibility, the greater his or her assumption of blame when expectations are not met. What’s more, the CFO may be expected to take the heat and direct public attention away from the CEO office in an effort to protect the company as a whole.
“As a senior executive of the organization, CFOs position themselves to be in the public domain, delivering company information, including historical results, outlook for the future and company strategy,” Graf explains. “Those that deliver a message tend to be held fully or partially accountable when expectations are not reached or desired results are not achieved.”
Which is not to say that the CEO should try to protect or shelter the CFO. “The savvy CEO knows how valuable a CFO can be as a representative of the management strength of the company, and will give them room to establish relationships with the investor community, the board of directors, and other external and internal constituents,” says Colombo.
A symbiotic relationship often exists between the CEO and the CFO. For instance when the CEO leaves, the CFO may well go with them. A few prominent examples include former SIGMA Pharmaceuticals CEO John Stocker and CFO Elmo de Alwis in April of this year; and former Porsche CEO Wendelin Wiedeking and his CFO, Holge Härter, in 2009.
The fact that the CFO often takes over the executive seat when a CEO leaves is another illustration of just how much of a company’s brain trust resides in both roles. This happened earlier this year when AIG CFO Alan Lund assumed the reins when acting chief executive Jon Plueger resigned less than two months after taking over.
Whether CFO or interim CEO, the weight of responsibility is a heavy one. Both internal and external stakeholders hold the CFO responsible for establishing a culture of accurate reporting, fair dealing and consistent, visible performance. “Accountability for CFOs is much more personal than in the past. Senior executives across organizations are under great scrutiny concerning their personal behavior and their judgment in both private and public settings,” Colombo explains.
Because of this, CFOs are being very particular about the people to whom they give their allegiance. “Increasingly, qualified CFO candidates are being very choosy in terms of accepting CFO positions, especially with publicly traded companies,” says Chaudhury. “Given that there are financial and criminal penalties involved with Sarbanes-Oxley, potential CFOs are now facing more than just the loss of reputation if things don’t work out quite as planned.”