Today, the role of chief financial officer, or CFO, is no longer confined to accounting, financial reporting and risk management. It’s about being a strategic business partner of the chief executive officer, or CEO.
Frequently, in fact, it is the CFO more than the CEO whose insights on business performance are sought by shareholders as well as the board of directors, say experts. Many CFOs have assumed the role of innovative and independent change agents, using intensified scrutiny by shareholders and new regulatory systems to strengthen internal reporting systems and align them with company strategy.
Don Durfee, managing editor, CFO Asia, a magazine published by the Economist Group, explains the shift: “The basic change seen with the CFO job across Asia in recent years has been a shift from being essentially the chief accountant of a company to the executive in charge of all financial matters, both routine (cash management, bank loans) and strategic (capital raising and resource allocation).”
CFOs, he says, have a valuable view of operations and cash flow across the organization, and many are becoming more involved in corporate strategy decisions. “As a result, we increasingly see finance executives serving essentially as the No. 2 executive in many large companies,” he adds.
|WHAT A CFO USED TO DO||WHAT A CFO NOW DOES*|
|Treasury (cash management)||Profitability analysis (for example, by customer or product)|
|Preparing internal financial reports for management||Pricing analysis|
|Preparing quarterly, annual filings for investors||Decisions about outsourcing|
|Tax filing||Overseeing the IT function|
|Tracking accounts payable and accounts receivable||Overseeing the HR function|
|Travel and entertainment expense management||Strategic planning (sometimes overseeing this function)|
|Source: CFO Asia||* The exact list varies by company|
What has made the CFO’s role more important is that in the past few years, the ground rules for running a company have changed. Financial frauds by Enron Corp. and WorldCom Inc. in 2001 prompted stricter regulatory norms requiring better corporate governance. A slowing global economy, volatile markets and rising inflation have added to the challenge.
One way of testing the importance of a CFO is to ask a CEO about the person he or she would call first to discuss a business issue. It would most probably be the CFO, says Sanjiv Sachar, partner, Egon Zehnder International AG, a global executive search firm. Sachar, who leads the CFO practice for the firm in India, adds: “In the last couple of years, the function that has become the most prominent right after the CEO’s is the CFO’s, and finance chiefs are being positioned as the most important aspect of businesses today.”
Sachar uses an analogy from football to explain his point further. CFOs, he says, used to be like goalkeepers—the team’s last line of defence. Now, they are also required to be the mid-fielder to be able to add value to the business. A mid-fielder is a player whose position is midway between the attack and defence and because he occupies the most influential parts of the pitch, a mid-fielder is perhaps more likely to influence the outcome of a match. This is very similar to how today’s CFO is seen—a combination of business generalist, risk management expert and business intelligence source. Or, simply, a playmaker.
Today, companies want to see how CFOs collaborate with and influence the CEO and board of directors, how they can go beyond books of accounts and contribute to the business with a better understanding of customer needs and issues, such as why a particular market is important, why a business tie-up is necessary, why sales are not happening or how a company can motivate and retain people.
In India, the job profile has expanded rapidly post-liberalization. “Many of the Indian CFOs we talk with are deeply involved in their companies’ efforts to raise capital, allocate it internally and help plan and execute mergers and acquisitions,” says Durfee.
“The CFO today plays a critical role in assessing probable acquisitions, contemplating initial negotiation, carrying out due diligence, communicating to employees and investors about the M&A process,” says S.V. Narasimhan, director (finance), Indian Oil Corp. Ltd. “In addition to managing the existing and evolving role in the new entity after the merger or acquisition, it is the finance chief’s responsibility to deal with post-merger integration in the light of people issues,” he adds.
Egon Zehnder’s Sachar says that in the last three years, companies in India have begun wanting CFOs who can run the business—executives who are well-versed not just in managing the numbers but who also possess leadership and people skills. “In this respect, the skills set required for a CFO in today’s business environment is similar to that of the CEO,” adds Sachar.
Agrees P.K. Ghose, CFO, Tata Chemicals Ltd: “The chief executive officer, chief operating officer and CFO are the triad of a company which runs the business.”
For CFOs in India, the latest challenge is the requirement to adopt International Financial Reporting Standards or IFRS by 1 April 2011. This will require fundamental changes in the way financial data is collected and reported—changes that will resonate across business operations, may affect the viability of some products and the profitability of the business itself. And it is the CFO who has to steer the organization through this, taking along not just the board and the audit committee but the entire finance department, says Jamil Khatri, head, IFRS conversion, KPMG India, a consulting firm.
“Out of ET 500 companies (Top 500 companies identified by The Economic Times based on market capitalization), not more than 10 companies are prepared fully for IFRS adoption by 2011 as of today,” he says.
Across Asia, there has recently been an increased emphasis on risk management as fast-growing companies realize they need to better manage the risks that come with quick growth and diverse businesses, according to CFO Asia.
CFOs are starting to look into issues such as enterprise risk management (looking across different categories of risks across the enterprise to see if there are potential offsets), although these efforts are still at an early stage. Many of them are trying to understand post-merger integration better.
A slowing economy is bringing its own challenges, giving CFOs a chance to showcase their strengths in a downturn. Durfee says a slowdown results in an increased focus on cost control, which sometimes means simply saying no to most spending requests, new hires, etc., and at other times, taking a close look at how the company does business and seeing where it can be done more cheaply. One of the best things a CFO can do is put in a consistent process for allocating capital across the company, so that what little money the company has to invest gets used for the best projects.
Giri Giridhar, CFO, Aditya Birla Retail Ltd, sums it up: “The CFO is there upfront—alongside the CEO—articulating strategy and driving business performance.”
‘...CFO acts as the co-pilot to the CEO for shaping, steering and soaring value creation’
Vice-chairman and CFO, Hindustan Unilever Ltd
On the changing role of a CFO
CXOs (whether CEO, CFO, CTO or CIO) of today face continuous changes in the society and environment around them, with increasing expectations from stakeholders. Coping with such changes and expectations is critical for any CFO to ensure that the business and function remain contemporary and socially relevant.
On driving strategy
CFOs have to play their role effectively based on the twin pillars of business partnering and functional excellence. Business partnering skills extend well beyond mere support roles into a high degree of intimacy with the business, shaping and driving strategy and being a key thought leader in the company. Functional excellence demands a CFO provide leadership to the function within the company and keep the finance team and the processes modern and up-to-date. He should also ensure visible accountability for compliance, cash, cost, information, critical business metrics and corporate balance sheet.
On the CFO’s role in value creation
Value creation is critical in everything the company does. This rests on three facets—delight the consumer, reward the shareholder and govern responsibly. The levers of financial value creation that every CFO should use are growth, operating margins, tax flows, capital investments and cost of capital. Continuous focus on margins is critical in driving the quality of growth and earnings. It is every CFO’s responsibility in today’s context to ensure that the organization stays committed to value creation. In many ways, CFO acts as the co-pilot to the CEO for shaping, steering and soaring value creation.
On planning for the future
Today’s uncertainties require CFOs to bring about the culture of dynamic performance management in the company, continuous forecast of the business like the eight-quarter rolling plan (a plan is reviewed for eight quarters at any given point of time) which gives better visibility to both performance gaps and opportunity gaps. CFOs need to remember that an annual plan often becomes obsolete no sooner than it is completed!
On risk management
An important component of dynamic performance management is bringing about an effective risk management culture in the company. Proactive evaluation of business risks in terms of their likelihood, severity of impact and mitigation steps has to be done frequently. These risks may be externally imposed (for example, market growth or forex fluctuations) or internally induced (such as revenue accounting control weaknesses). A CFO should lead the risk management process so that the organization’s preparedness for difficult periods or opportune moments remains high.
On the importance of IT
A CFO should know how to stay connected to information technology or IT to leverage it for business performance. The CFO should drive IT-enabled business processes and demand delivery of benefits from IT investments.
On the traits of a CFO
A CFO has to be a savvy communicator. His engagement with investors has to be based on integrity and transparency, without undermining the confidentiality and competitiveness which will help the (stock) markets discover a fair valuation of the company. Similarly, the CFO should be committed to building a great team as delivering through people is key to execution. Ultimately, what he or she does in the company should help in the outstanding execution of well thought out strategies. He has to be a great team player with external orientation and high levels of accountability.
‘CFOs are required to look at the past as well as the future, local aspects as well as global aspects’
Executive vice-president and CFO,Tata Chemicals Ltd
On the changing role of a CFO
When we started out, a CFO was supposed to be inward-looking, mostly focusing on accounting, reporting and taxation. I have distinctly seen the role undergoing three or four phases. The second phase had CFOs involved in business planning, strategy formulation, fund raising and inducting information technology into the organization. Then came the era where corporate governance became one of the topmost focus areas for the CFO in the aftermath of accounting scandals that rocked the corporate world. This was followed by a stage when companies started extending their businesses overseas and the job of a CFO included overseeing mergers and acquisitions, risk management pertaining to overseas acquisition, restructuring and, most importantly, post-merger integration. Another challenging function that came under the finance chief’s ambit is consolidating the accounting practices according to national generally accepted accounting principles or GAAP, US GAAP or other accounting principles and standards.
On being a CFO today
As of today, the CEO, chief operating officer and CFO are the triad of a company which runs the business. For long, there has been a lot of debate on a CFO becoming a strategist. I have a word of caution here. A CFO now has a double role to play—that of someone looking at strategic growth and that of a finance controller. While mergers and acquisitions are exciting, CFOs can’t lose sight of control mechanisms which is the bedrock of wealth creation for any company.
At Tata Chemicals, a CFO is responsible for a part of the business planning. However, the lion’s share of responsibility is with the strategy group.
On expectations from a CFO
What do companies want a CFO to be today? The role of CFOs today can be likened to the Roman god Janus, who had two heads to look at opposite directions, the past with one face and the future with the other. Likewise, CFOs are required to look at the past as well as the future, local aspects as well as global aspects. In addition, an understanding of different regulatory environments, looking at valuation and undertaking thorough due diligence is very important for CFOs in the wake of increasing mergers and acquisitions. Another aspect that a finance head has to look at is talent management.
On a CFO’s role during a slowdown
An economic downturn or slowdown actually provides CFOs with an opportunity to focus on limited priorities. This is an ideal time to prune fat and focus on the most important aspects of the business. This is the time to increase value-added expenditure and cut costs elsewhere. Also, at a time like this when inflation has gone up frightfully, it’s extremely important to have cash in hand for handling wage costs. Cutting wages can offset the measures undertaken by a company to remain profitable in a downturn because it’s the people who contribute to the profitability.
On new challenges
A new area which is gaining ground is the convergence of accounting standards as we are increasingly witnessing that most countries, barring the US and a few others, have either adopted International Financial Reporting Standards (IFRS) or their national GAAPs are converging towards IFRS. As our government intends to achieve IFRS convergence/adoption for India by 2011, companies and the Institute of Chartered Accountants of India and the Institute of Cost and Works Accountants of India need to impart knowledge on IFRS. At Tata Chemicals, around 12 employees from the finance team are being trained in IFRS and made to undergo an online certificaton on IFRS from the Institute of Chartered Accountants in England and Wales, a leading professional accountancy body in Europe, so that we are prepared for 2011.
‘The business partnership between the CFO and the CEO has never been more crucial’
Chief financial officer,Aditya Birla Retail Ltd
On the CFO versus CEO
I consider myself first a member of the leadership team and then a CFO—which brings a completely different perspective to the role. The CFO is there upfront—alongside the CEO—articulating strategy and driving business performance. Over the last five years, I have experienced what being a CFO means in Europe (in times of recession) and in Asia (in times of growth). In both these instances, the common element is that the business partnership between the CFO and the CEO has never been more crucial.
On being a CFO in Europe
In Europe, the challenge has been in preventing a top-line decline, ensuring margin protection and cost control. Some very difficult strategic choices are required—and the CFO has to be up there in understanding and advising on the full implications of such choices. In one case, it was necessary to protect margins and we took a tough line with the customer even at the risk of losing some valuable seasonal sales. Effectiveness of marketing spends becomes a key priority. Pushing through overhead controls by a fundamental reassessment of the operating model is required. Tough product/country portfolio choices become imperative.
On being a CFO in Asia
In Asia, managing the growth agenda has posed different challenges. The CFO has to enable the growth by encouraging risk-taking through good risk management practices. Market share is the key. It is a great time to focus on the robustness of the operating model—so that it can stand any downturn subsequently. Wage inflation is a huge challenge, as India has discovered. Getting the systems and processes right is a worthwhile investment. The key is to ensure sustainable growth.
To achieve this, the CFO needs to think through the finance operating model. Having worked internationally at Diageo Plc., I saw this first-hand. In this model, country and regional CFOs had to drive great business performance in a backdrop of controls. Compliance with the Sarbanes-Oxley Act (which lays out financing and accounting disclosure norms) meant that good controls were crucial—through simplified processes and ways of working, with the focus on shaping the right behavioural patterns. Simplification meant that the traditional back office moved away to a dedicated global shared service centre which took over the accounting through a common enterprise resource planning solution. A central business support group provided specialist resources to the markets around mergers and acquisitions, treasury and tax. With this in place, the regional CFOs were free to focus on driving business performance.
To deliver all of these, the CFO needs to build a great finance team. No short cuts here!
‘As a finance head, my role has become very critical, especially in getting approval for projects’
Director (finance), Indian Oil Corp. Ltd
On being a CFO in a public sector unit
Unlike in private companies, whatever decisions are made in a public sector unit are passed through the finance department and that is why the finance executive has a lot of knowledge about all functions.
Having said that, a finance chief had a limited role till the mid-1990s. It was an era where the pricing mechanism was controlled. All decisions on prices were made by the oil coordination committee under the ministry of petroleum and natural gas.
Unlike now, we were ignorant of crude oil price (movements) because financial decisions then were based on cost plus return on investment. Crude oil prices were not relevant to us because prices were anyway controlled.
On functions in the pre-liberalization era
Most of our time then was spent on audit, financial concurrence and accounting. Also, accounting standards were not in place and therefore the accounting process was not as complex as it is now. Treasury management was also a lot simpler because we were in a comfortable position. Fund requirement in relation to projects was also not as high as it is today.
On changes post listing
We got listed on the Bombay Stock Exchange in 1995 and issues of disclosures and accountability to public shareholders came to the fore. Shareholders came for the annual general meeting, unlike earlier when only government nominees attended it.
With listing came new responsibilities and then deregulation happened. All our prices were now based on international crude and product prices. Optimal production of oil was based on the relative prices of different oil products because of which the finance head had a bigger role to play.
On how ‘Navratna’ status brought new responsibilities
The Navratna status gave enhanced financial and operational autonomy to select public sector undertakings. After IOC was bestowed navratna status in 1999, its core independent directors, who came from private companies or institutes such as the Indian Institute of Management, brought in a professional outlook. Earlier, all investment decisions amounting to more than Rs100 crore had to be approved by the government, while now the projects were reviewed by the project evaluation committee of the board comprising independent directors and then approved by the board. As a finance head, my role has become very critical, especially in getting approval for projects. While corporate governance has always existed at IOC, it has become far more structured now.
On the increased importance of treasury management
Treasury management has become more important. Now we are taking bilateral loans from domestic and foreign banks at the best interest rates (compared to rates offered to others) for working capital. For project loans, we take syndicated loans from a consortium of banks.
On new challenges
A big change that has come about in a finance chief’s role at IOC is that he has to reorient the business to sell in a losing market. In the last six months, we have been optimizing existing resources and cutting down on non-essential operational expenses. We need to ensure both short-term and long-term growth plans.
‘The CFO’s role has grown... (it) has changed from a regular Bollywood hero to that of a superman’
Chief financial officer, Infosys Technologies Ltd
On a CFO’s role since the 1970s
The CFO’s role was focused on accounting, internal reporting and budgeting. It involved dealing with financial matters such as raising money for the company and deploying its financial resources to enhance returns. The role centred on managing the expectations of one large constituent within the company—the management.
In the last decade, however, the role of the CFO has expanded and become much more strategic.
On key aspects of a CFO’s role today
Financial expertise: Globalization has made the financial markets better integrated and more sophisticated. They have become much more creative and innovative with complex structured products.
The risk-reward quotient has become very high and it takes sophisticated financial wizardry on the part of the CFO to understand this environment and operate effectively in it.
Global understanding of markets: With the financial markets becoming global, companies raise money in markets where it is cheaper to source and deploy it where it is more remunerative. This requires an understanding of the local regulations in various countries as well as adherence to them.
Business expertise and strategic knowledge: The CFO today is required to take an active role in business decisions. With exposure to regulatory, financial and international markets, the CFO is well placed to provide strategic input in business decisions. Also, the global investor community expects the CFO to articulate the company’s business strategy and its implications on the company’s future growth and cash flows.
Risk management: There are several risks a company faces today—including financial, regulatory, business and market risks.
The CFO plays a major role in putting together a structured risk management process and effectively accessing and managing risks.
Knowledge management and decision support: Knowledge management captures and leverages an organization’s collective content, experience and judgement to meet the corporate objectives. This requires a balanced approach to technology, process and culture in an organization.
Compliance:After the Enron Corp. episode in the US, regulations have become much more complex. Today there is a multitude of regulations across the globe and compliance to these is mandatory. The CFO has become the ombudsman for all compliance-related issues in an organization.
Apart from these, the CFO plays an active role in attracting and grooming the right talent within the finance group, as well as leading them. The CFO’s role has grown to include managing and meeting the expectations of not only an organization’s management but also other stakeholders such as investors, customers, regulators, media, etc. The role has changed from a regular Bollywood hero to that of a superman.