The Evolution of the CFO

Chief Financial Officers (CFOs) have a big job on their hands. Increased regulation, competition and access to real-time data mean they are expected to be proactive strategic partners. Criticaleye spoke to a number of CFOs about how they are using financial insight to drive the business forward.

“The role of the CFO has changed significantly and they have become much more influential when it comes to business strategy and planning,” says Andrew Minton, Managing Director at Criticaleye. “Digital technology is enabling the CFO to transform their function from being expense and accounting focused, to one centred on predictive analytics and collaboration with other functions.”

In Criticaleye’s Eye to Eye video series, in association with Accenture, we asked a number of CFOs from large corporates how digital technology is transforming the finance function and how they see their role evolving. Here’s what they had to say:

Stephen Daintith
Group Finance Director
DMGT

Our technology development spend was around £15 million over the five years to 2010, in contrast over the next five years we will have capitalised and spent in excess of £300 million. There has been an enormous acceleration to keep up with competition, develop our products and to innovate stronger and harder than ever before.

That puts challenges and responsibilities on the CFO to ensure we’re always spending the money wisely, getting involved in the debate, understanding what it is we’re building and what the payback looks like, as with any sort of investment appraisal.

There’s another topic that’s come up – which is brand new for me and will be for many CFOs – and that’s the notion of measuring your technology debt. This is the understanding of your IT systems across an organisation and the cost of replacing or upgrading them. It isn’t recorded on your balance sheet, but is a contingent liability.

What’s also interesting is how we’re evaluating acquisitions. The technology assets they bring to DMGT is high up there on the list of reasons why we would acquire; it’s not just about the products or revenue streams. Technology is affecting us and it’s a case of CFOs having to learn fast.

One CTO gave me some good advice and said: ‘Ask more simple questions: ask why, how and what? And don’t accept our answers.’

Technology is a space where jargon can be used, so ask the common sense questions and flesh out real issues.

Patrick Lewis
Group Finance Director
John Lewis Partnership

I would pick three different lenses where I get the most value from technological improvement. The first [is about] our customers and making sure that we’re investing in the right place based on our digital understanding… That helps me with capital allocation and getting the best returns, so that we can provide the greatest service.

From an employee perspective, over the last five years we’ve managed to drive interaction with our partners… in a way that reduces the amount of time they have to spend on administration. This, in turn, increases the amount of time they provide adding value to the business [thus] enabling them to earn more. That’s very important, as a co-owned business my goals are slightly different from the CFO of a standard Plc.

Last but not least, the digital understanding right across our P&L helps us drive productivity. So, [to take an] example… the process by which we interact with our suppliers to pay them… used to be a very manual process, with different [procedures] right across the business. We have [now] put in [place] a number of systems that have standardised that, [allowing] us to manage the process all the way through our [supply] chain.

Simon Dingemans
CFO
GlaxoSmithKline

Enhanced digital capabilities across the company are transforming the way in which finance can engage with the business. In a traditional model of finance systems and finance IT, it would have been about controls and governance; it clearly still needs to be about those things, but you now include a much more comprehensive, capable analytics platform.

This allows you to engage with the business in a much more real-time environment. I think that is really the challenge: how do you think about the speed at which you need to make those decisions? You can invest exponential amounts in trying to accelerate that speed and, at some point, the trade-off and the value in that is questionable.

How you use data is also increasingly important. Many CFOs have invested in new systems and more standardisation, and GSK would be no exception. What you want to do is allow the whole business – not just the finance people – to see that data, understand it, interpret it quickly and in a practical way.

Stephen Jones
Former CFO
Santander UK

There’s a huge opportunity for the CFO to be able to drive their immediate business requirements in a manner that is better integrated across the firm.

Many of the requirements for a CFO… relates to ensuring that data is available in a manner that addresses accounting, capital, liquidity and other regulatory reporting requirements. [However], if you think beyond those narrow requirements it’s the same data that is driving credit risk, market risk, operational risk and could be driving customer relationship management.

I think the role of the CFO in relation to data overlaps very strongly, particularly with the roles of the Chief Risk Officer (CRO), Chief Technology Officer (CTO) and, to an extent, the Chief Marketing Officer.

Being digitally savvy and able to think about data in a manner [that] is based around golden, bullet-proof sources, [as well as] creating digital architecture which is being updated all the time with the latest requirements, are incredibly important skills.

CFOs need to become better at commissioning and executing data-related projects. The standoff I often see between the CFO and the CTO is [when] the CTO says: ‘You asked me to do this so I did it.’ Probably what the CFO asked [was] the wrong thing because they didn’t understand [the wider outcome]; they weren’t thinking beyond their own narrow scope. [CFOs need to be] lateral [and] understand the potential of technology.

Julie Brown
CFO
Smith & Nephew

There has been a big change in the role of the CFO. Previously, say ten years ago, the CFO would be a traditional accountant; they would know reporting, accounting standards and what you may call the finance specialisms, [such as] tax and treasury, extremely well.

The CFO of today is much more focused on business strategy and performance… The profile of [those] being sought after for CFO positions are now business orientated and commercial. When you think about the future… with macro-economic issues and [the fact that it’s harder to grow] in established markets, there’s an increased focus on cost, efficiency and resource allocation.

The CFO is ideally suited [to partner with the CEO in order to grow the company] because of their lens on the business and the numbers.[They can help an organisation to look] at the levers by which performance can be improved; I think that’s going to continue to become more important.

Getting top-line growth… requires someone that understands the business, looks at the granularity of the numbers and the return on investment in different parts of the business. [They need to] help the CEO channel investment towards the areas that are [ultimately] going to generate the greatest return.

By Dawn Murden, Editor, Advisory

Do you think the role of the CFO is changing? Please do send your thoughts to: dawn@criticaleye.com

Watch the latest Eye to Eye: The CFO as Architect of Business Value video series

Or why not read more from Accenture on how digital is killing the finance function as we know it.

Also, don’t miss next week’s Community Update on productivity.

Follow Criticaleye on LinkedIn 

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Becoming Chairman of the Board

A solid track record of excellence in an executive role, traditionally that of CEO or CFO, has been mandatory for anyone looking to become a non-executive chairman. While that still holds true in many cases, the qualities required to run a board are arguably growing in complexity, and this means that gaining NED experience before seeking to make the transition has become more important than ever.

Andrew Allner, Non-executive Chairman of transport concern Go-Ahead Group and landscaping manufacturer Marshalls, says: “It’s good for a senior executive to have at least one NED role while still in their executive function. That will really help, especially if they chair a committee, because they’ll see a board from a different perspective, learn how to influence as a non-executive and work with the executive team…

“It would be pretty tough to take on a chairman role without getting non-executive experience first, certainly for a bigger company.”

Debbie Hewitt, Non-executive Chairman of menswear retailer Moss Bros, glazing and lock specialist Evander Group and privately owned fashion retailer White Stuff, says: “It’s unusual for a board to take a risk with a first-time chairman. You’re more likely to get an opportunity from somebody who can strongly recommend you. If they have seen that you possess chairman-like qualities, they are much more likely to have influence in getting you appointed.”

When a position does become available, it’s a case of conducting thorough due diligence. Theresa Wallis, Non-executive Chairman of medical technology concern LiDCO, says: “You have to speak to the board and the directors. In my case, I spoke to the Chief Executive, the finance and sales directors, the outgoing Chairman, and I also actually spoke to a couple of the doctors who use the products.”

It’s a case of minimising surprises for both parties and doing everything you can to make sure your skills complement the business and its strategy. “A chairman will be taking a company through a particular stage and that will vary, so you need to understand whether you have the right experience and attributes for that journey,” she adds.

 
Philip Aiken, Non-executive Chairman of infrastructure services business Balfour Beatty and engineering software provider AVEVA, says: “A non-executive chairman has to think about what they bring to the table. Boards have to address strategy, corporate governance and succession, so you have to consider the general issues that the company faces and what you can personally contribute.

“It’s good to take a NED role while still an executive in order to understand what the responsibilities entail and broaden your experience away from your day job. It’s hard enough making the move to being a good NED but it’s a big stretch to suddenly being a non-executive chairman.”

Road to success  

To be effective, a chairman might not necessarily possess deep sector knowledge but they will absolutely need to have experience of how a business works, what good governance and corporate reporting look like, and how to influence others.

Egos should also be kept in check. “A chairman needs to be able to provide ‘air cover’ to let the chief exec get on with what they’re doing but they must also be prepared to take tough decisions, cutting through complex issues,” comments Joëlle Warren, Executive Chairman of executive and non-executive search firm Warren Partners.

“A hugely important responsibility for a chairman is to appoint a CEO and then to really back him or her. They have to be able to act as a mentor, providing support, but also be prepared to challenge and, ultimately, be prepared to sack them if they’re not performing.”

The magic ingredient for a chairman is to understand where mistakes are often made and what slows a business down. “They’re not just there to chair meetings and be a figurehead,” continues Joëlle. “It’s a case of being much more attuned to what’s going on, so they’ll know if management are tackling the big issues.”

It’s a point that Andrew echoes: “My objective, as Chairman, is to look at how to draw the best from the people round the table who have a lot of skill and experience between them. You need to create an environment where people feel comfortable about raising questions and issues they believe are important. It requires real transparency and honesty.”

If there are risks to the business, they need to be identified and addressed. However, a good chairman will frame the dialogue so that everyone can reflect on the bigger picture too. “There can be an awful lot of focus on the short term, but one of the jobs of the board is to extend the horizon so that we’re thinking about strategy for the medium to long term as well,” says Andrew.

Underpinning all of this will be the relationship between the CEO and chairman. When the two aren’t functioning correctly, it can have a hugely damaging effect on the entire organisation. Debbie says: “The chairman is accountable for making sure that the company has the right CEO and that they are performing.

“Any chief executive, whether they’re highly experienced or new to the role, needs support, encouragement, a sounding board and a mentoring-type relationship. It’s fundamentally about trust – does he or she respect your judgement when they ask for advice? They need to feel that you have a helpful and constructive perspective and value the contribution you can make.”

Philip of Balfour Beatty stresses how essential it is to create a healthy dynamic: “I’ve had long discussions with CEOs before taking on a position so we clearly understand our roles… It’s very important, as a chairman, to know when to be firm and when to be supportive.

“There are times, I think, when the chairman has to be the leader and in other instances they will need to be the counsel.”

Andrew Minton, Executive Director of Criticaleye, says: “To think of the chairman’s responsibility as being solely focused on governance is to misunderstand the role fundamentally. The real value lies in providing support and challenge for the CEO, and ensuring the board prioritises what’s right for the long-term interests of the business and its stakeholders.”

For anyone considering the move, they should never think of the position as simply being a facilitator or box-ticker. As Philip says: “I was once taught years ago that it’s very important that the CEO runs the company and the chairman runs the board.

“If there is conflict between the desires of management and the board, the chairman needs to be the one who tries to arbitrate, mediate and, in the end, he’s probably got to bite the bullet and make the final decision.”

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeUK

Reinventing the Role of the HRD

In the face of new technology, shifting demographics, the need for greater diversity and international competition, the boards of global companies expect a lot more from the Human Resources Director (HRD). While process and compliance matter, the fact is that the HRDs which provide the most value are the ones who understand why the talent and people agenda must be mapped to the business plan.

Matt Stripe, Group HR Director for food company Nestlé UK & Ireland, says: “The transactional element of the function can’t be ignored. You have to undertake performance development reviews, pay rises and so on, but that’s not the stuff that adds value to the organisation.

“What businesses are really looking for now, and I think line managers and business leaders are far more people-savvy than they’ve ever been, is for HR to participate in determining and shaping business strategy.”

Yetunde Hofmann, former Global HR Director for Imperial Tobacco, agrees that the “traditional terrain of HR” of policy, well-being, employee relations and health and safety, are not going to disappear. At the same time, because of HR’s critical role, it will need to align its agenda so it’s simultaneously operational and strategic.

In essence, it’s having the ability to facilitate the development of an organisation’s capabilities and culture in order to deliver on strategy. Debbie Hewitt, Chairman of retailer Moss Bros, comments: “HR Directors are increasingly around the top table… If you’re having the debate about whether they should be, you’re 20-years’ behind. Great HR Directors have a huge contribution to make in many places across the business.

“The challenge for a HR Director is to make sure they’re not at the board table just for HR. I take it for granted [that] they will do a brilliant presentation on talent, succession and HR strategy. Where I get massive added value from a strong HR Director is when they contribute to issues other than those specific to HR, such as if there’s an acquisition to be made or an investment – they can bring a unique perspective.”

Stuart Steele, Partner for Human Capital Consulting at professional services firm EY, says: “Chief HR Officers [CHROs], HR business partners and subject matter experts need to understand context… [and] have an appreciation of the organisation’s strategy, its competitors, [the wider] economic trends and how these are forecast to impact [the] current and future workforce. I meet practitioners who demonstrate this capability on a daily basis – however, they are probably still in the minority.

“Interestingly, we are increasingly seeing the appointment of CHROs who have not come from the HR function… In part, I believe this underlines the importance being placed on understanding business strategy and operations. As good leaders, these individuals are expected to be able to mobilise the HR function to develop and execute people initiatives in direct support of the business strategy and plan.”

Deborah Cooper, Director at search firm Warren Partners, says: “The strongest HR directors have had experience outside the HR function… They tend to have more business credibility and ask different questions, rather than having a narrow skill-set purely through HR. Those who are rounded and have broader business experience tend to be meeting demands more effectively.
“The most effective HRD is one who can bring strategic thinking, real enterprise vision and business understanding and not one who’s necessarily technically strong in siloed skill-sets.”

The role will continue to evolve in this manner, especially as the more process-driven elements of the function become easier and cheaper to outsource. For many HRDs, the question has to be: Unless they are involved in harnessing capabilities and culture to deliver against strategic goals, what value are they really adding?

A person of influence

The use of data and proper information management are a prerequisite for efficient HR functions. For Matt, the insights provided by technology to enhance performance need to be watched closely: “It’s exciting to think what analytics will give us in a very short period of time – we have bits of it, so I can pull off good information now but in the future, and we’re probably only talking a couple of years, you’ll be able to look at so much more.

“It won’t just be whether a business leader is delivering on their results; you’ll be able to add the 360 degree evaluation to that, plus some others tests to check on emotional and social intelligence, including an ability to measure employee stress levels. It will be a lot more holistic.”

Nicola Pattimore, HR Director for business process outsourcing concern Equiniti, comments that “the use of data analytics to help drive decision-making has increased hugely”. However, in order for this to be meaningful, HRDs need to be commercial in their thinking and strong-willed when presenting information to the top.

If this isn’t the case, there is the danger of data simply being used to create added layers of bureaucracy, or for HRDs to shy away from discussing harsh truths about performance. “It can be a lonely job because often you’re having to act as the conscience of the business, challenging senior leaders and sometimes telling them things they might not want to hear,” says Nicola.

“When you’re sat at the table with a CEO, CFO and COO, you need to be able to inform and help make strategic decisions. A lot of that will entail providing a perspective on people, but you need to have that impact and influence.”

Charlie Wagstaff, Managing Director of Corporate & Public Sector at Criticaleye, comments: “While being technically and commercially competent, effective HRDs are unerring in their focus on how talent can be utilised to deliver against the business plan, both for the short and long term.

“The very best HRDs are distinguished by their ability to collaborate and form partnerships across an organisation – they understand how to influence the CEO and the board.”

It’s a case of having a full appreciation of what levers need to be pulled in order to improve performance. Stuart says: “I aspire for CHROs to contribute to the determination of business strategy, however, where they can really come into their own is during the development of the organisation’s business [plan]…

“CHROs can also challenge untested assumptions around the business… As an example, if an organisation is [setting] up a new business in a new geography, should they implement along the lines of the existing operating model, or use this initiative as an opportunity to adopt a different approach?”

The difference in value lies in a HRD being involved in the formulation of plans, as opposed to merely responding to operational necessity. While some HRDs are functioning at this high level, it’s evident that others have a long way to go.

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

Leading Global Expansion

Comm update_10 SeptemberEvery stage of international expansion requires careful analysis. From evaluating market opportunities to deciding on whether to make an acquisition, form a joint venture (JV) or grow organically, a leadership team must do its homework and be prepared to adapt to the commercial realities of each country. Get it right and the rewards are such that business models can be transformed.

The first step is to give serious thought as to whether a country is a good fit. Paul Walsh, Chairman of FTSE 100 catering and support service Compass Group and former CEO of global drinks giant Diageo, says: “[It’s] about looking at the GDP projections, the populous and the ladder of aspirations. You look at the social acceptability of what you’re selling, the political environment [and question whether] this is a market whereby a non-local company can do well… All of these things have to be analysed, then [you] make your priorities accordingly.”

Bill Caplan, Chairman of crane hire company Weldex International and former Regional Director for Europe, the Middle East and Emerging Europe at temporary power firm Aggreko, says: “You generally look at the macro-economic activity in the country, fine tune it to what’s happening in the sectors that you’re strong in and then, within those sectors, decide on your addressable market.”

Boards should be wary of being taken in by a market’s size and fast-growing GDP. Bart Cornelissen, Head of Emerging Markets within the Global Joint Venture Practice at KPMG, comments: “There is another dimension to this and that’s the whole question of what the ease of entry is like and what the competitive landscape is really about? It’s easy to focus entirely on the potential but you can forget to ask: ‘How are we going to make this work? What’s the right business model, e.g. a joint venture or local partnership, and how do we ensure we have the necessary capabilities?’”

Best-laid plans

Once a market has been chosen, the next challenge is the small matter of deciding on an entry strategy. While some leaders have a formula which they claim can be rolled out, the consensus is that the decision will be based on the speed at which you plan to expand, the experience of your senior leadership team and the risks and regulatory structure of any given market.

“So much depends on the sector, the geography and the business model,” says Charlie Johnstone, Origination Partner at private equity firm ECI. “A good example is [our portfolio company] Fourth, whose software is excellent at helping the hospitality sector understand and control their costs… When we invested they were doing some work in North America but were definitely underweight there.

“As we didn’t need [to introduce] a new product to sell into the US, a sales-led office opening strategy seemed sensible. However… given the small, monthly payment nature of the contracts, it would have taken a long time to scale. So, we helped Fourth identify and buy a software business in Connecticut which was in the same sector… [and] this gave the company immediate scale in the US, a sales force and signature clients.”

Tea Colaianni, Group HR Director at Merlin Entertainments, explains how an acquisition in Istanbul has given the theme and leisure group a platform from which to grow: “We’ve always wanted to be in Turkey… [so] the location was very attractive and it gave us an opportunity to establish a relationship with a number of people: landlords, city officials and so forth. We’re [now] in discussion to open possibly another two attractions in the same location.”

Alternatively, JV may be the best option as this allows organisations to share not only the risks and capital investment, but capabilities as well. David Moore, Chief Portfolio Officer at private equity firm NorthEdge, comments: “JVs allow you to leverage a locally-based business’s infrastructure, whether that’s people, manufacturing capability, logistics, know-how of operating in the territory, customers, routes to market or an established supply chain.”

Andy Dunkley, CEO of clothing company Lee Cooper Brands, which was acquired by global fashion group Iconix in 2013, comments: “We’ve got a JV partner in Southeast Asia, Li & Fung… We add to the portfolio of products that they can sell and [the hope is] they’ll grow our business and provide a supply chain, which we as a company will never do. So they help us on that missing jigsaw piece, as it were.”

Not every country presents a series of choices when it comes to selecting your entry strategy. Paul says: “In Vietnam, for example, a lot of the entities that you’re looking at are actually state owned and the government will only allow you to take a partial stake.”

Starting from scratch

The other tactic to use when entering a new market is to opt for organic growth. It is generally a far slower route to take, but it does have its advantages. Giles Daubeney, COO at international recruitment consultancy Robert Walters, comments: “In our industry [the issue with] acquisitions is if I buy a company… and all the consultants decide to leave, which can happen if they’re unhappy with the new compensation package, you’re left with nothing.”

Giles goes on to explain that expansion has to be client led. “I was having a meeting with [a major client] and he said: ‘Listen, what are you guys doing in Japan? We’ve just entered that market and we think it’s a huge opportunity.’ We then went and did a bit of research and decided to open an office in Tokyo… We’ve been in Japan 15 years now and we’ve got just short of 200 people, two offices and it’s purely organically grown.”

For Mark Silver, CEO of European property management specialists VPS, if you’re going to grow organically, the management team needs to really understand the market. “If I was going into, say, Scandinavia, I’d look for an acquisition because… it’s a really new area for us. But if I was going to go into Portugal, where we’re not currently located, I might choose to do that via organic growth because we have a business in Spain, so it’s just down the road.”

Whatever route you choose it will require genuine focus from your senior leadership team. “If you are going to invest or build you are committing yourself and you can’t get cold feet part way through, so you must have done your homework,” comments Paul. “I think the leadership, wherever they may be based in the parent company, has to invest time in visiting the market, understanding the people and creating strong relationships.”

Without that first-hand attention to detail, you may not appreciate the need to make changes to strategy. Bill says: “[Don’t] be afraid to revisit your… business plan and change it as you go along… [because] no matter how much due diligence you do… once you’re in, more is revealed and, as a result of that, you end up having to be responsive to things that you didn’t necessarily anticipate.”

It’s universally agreed that it’s wise to hire people that know the market from the inside. Paul explains: “You have to get people with local knowledge. Where businesses fail, in my opinion, is where they think they can just have either ex-pats or people visiting from London; you’ve got to have people who are senior and know the market, and you have to establish a very firm bond of trust.”

International expansion is difficult to get right but, as long as the markets are carefully selected and the entry strategy is aligned with an organisation’s capability, the rewards will be very much worth the effort.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk 

The Role of the Board in M&A

ImageWhile the CEO and CFO will be responsible for driving a deal, it’s essential for other board members to play their part in providing robust input on whether an acquisition is in the best interests of the business and its shareholders. This begins by talking through the strategic fit of a target and continues with ongoing assessments of whether the integration process really is on track.

Terry Stannard, Chairman of interior furnishings company Walker Greenbank, says: “Once the initial excitement of an acquisition has taken place, the NED [non-executive director] has an absolutely critical role to play around reinforcing the milestones that have been set to ensure a successful acquisition is made, so that the integration and the synergy benefits are effectively managed…

“The NED needs to ground the executive team to ensure that the acquisition does actually create shareholder value and does not, like so many of them, become a rather wasteful distraction.”

Liz Claydon, UK Head of Consumer Markets at KPMG and a Partner in the Transaction team, comments: “I see a key role of other board members as being one of challenge: does this M&A strategy align with the overall strategy for the business? You see that playing out in their specific areas of expertise, be that the CIO [Chief Information Officer] in terms of how the different systems will integrate, or the HR Director in terms of the different culture of the target… Remember, the key priority for the board on behalf of the shareholders is that value is created.”

In practice, this means digging deeper into the transaction. Simon Denham, Founder of online trading concern London Capital Group, comments: “Many times an acquisition requires large synergy savings to back up the numbers. Synergy savings are notoriously hard to achieve and any number quoted by the CFO should be torn apart and re-analysed by the NEDs. In some circumstances it is wise to bring in outside consultants to go through the data, before going through the expensive bits of due diligence and legal costs.”

Much of this will be par for the course for a good NED; someone who knows how to walk the line by providing a healthy degree of challenge while also allowing the executives to get on with the job of driving the business. Jim Wilkinson, Chief Financial Officer at African investment concern Lonrho and former Group FD at online gambling company Sportingbet, comments: “The big danger obviously is that they get excited by the deal, as much as the management team do, and they race through [it].

“They really should be questioning why we’re doing it… [but] they need to be at a distance from the deal, remain impartial and be able to make a rational decision about whether it’s a good deal or not.”

Paul Staples, Managing Director of Investment Banking in Europe for BNP Paribas, comments: “A NED should aim to be a sounding board, facilitating – though seldom leading – a rigorous discussion regarding the wisdom of an acquisition. They need to display good judgement, understanding when to be supportive and when to put forward a more challenging perspective.”

In essence, the M&A process can be seen as a litmus test for the health of the executive and non-executive team. “Once a target has been identified then the whole board should be notified and the rationale explained normally by the CFO, but with assistance from the CEO,” observes Simon. “It is for the board as a whole to agree on whether the reasons for the acquisition are realistic, believable and attainable.”

A similar point is made by Mark Garrett, COO of global technology consultancy Ricardo. “The whole board should understand and agree to the rationale for the acquisition, but the rationale should be proposed by the executive team based on [how it fits with] corporate strategy,” he says.

Creating value

After the euphoria of signing a deal has passed, the danger is to just blithely move on to the next big thing. Bob Emmins, Finance Director for The Silver Spoon Company, which is a £250 million business within the grocery division of Associated British Foods, says: “The hardest thing about an acquisition is integrating it and thereafter achieving the objectives and financial goals. To succeed you’ve got to get your full team behind it, buying into those goals and recognising that they have an executive responsibility to deliver them post-acquisition.”

Anne Stevens, VP, People and Organisation at mining concern Rio Tinto Copper, says: “In recent years there’s been a big shift towards recognising the importance of getting the people aspects of a deal right.

“If you don’t get the people piece right… [and] if you don’t manage all the key stakeholders correctly then a deal, whether it’s a good commercial deal or not, is going to fall flat on its face.”

This is something that needs to be pursued by the board so everyone is clear that the original goals of the acquisition are being achieved and, if not, appropriate decisions are made to find out how to create value from the new company.

Bob says: “There needs to be a distinct view taken as to how the business or the cultural differences of what you acquire fit into your existing business… Increasingly, because it’s nearly all down to people, the HR director should have a greater say on whether the two businesses will fit together or, if not, where the clashes are going to be.”

As market conditions improve, corporates are finally loosening their grip on their balance sheets to make acquisitions. Yet it remains an environment where boards must demonstrate they are delivering long term, sustainable value. If that is to happen, directors need to work together and be fully aware of their roles and responsibilities on the M&A journey.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

The Curious Double-Act of CEO-CFO

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It doesn’t matter if the CEO and CFO/FD are a dynamic duo or something of an odd couple, what’s important is that they both understand the parameters of what is possible for a business. When the chemistry is right, the CFO will stand up to a CEO’s wilder flights of commercial fancy, while also having the ability to think like a leader who appreciates the need to take risks.

Rene Matthies, CFO at energy company E.ON UK, says: “The role of CEO and CFO is that of pilot and co-pilot [respectively]. It is a make or break relationship for any organisation… In simple terms, the CEO focuses on strategy and the big picture; the CFO is about delivering that vision on the ground, monitoring the situation with the flight instruments and making sure they are all working.”

The skills between the two have to be complementary. Murray Hennessy, CEO of online train ticket company The Trainline, says: “Both CEOs and CFOs need a broad church of perspectives and skills to be truly successful. The CFO needs to view the numbers in the context of operational, HR and commercial concerns, and have a deep appreciation of the long-term strategy of the business.”

Stuart Laird, COO of the Living Space Division of construction company Wates and a former CEO of support service concern Jarvis, says: “The balance of skills between a CEO and CFO is absolutely crucial to the business. The CEO might not necessarily be as numerate as the CFO; likewise, the CFO [may not] fully understand the business development issues.”

Trial balances and tribulations

While the CEO and CFO have to be on the same wavelength, there will inevitably be disagreements between the two. “Think of it like a marriage,” says Guy Strafford, Chief Client Officer at procurement specialists Proxima. “The relationship, like all good marriages, needs to evolve. Everyone gets a better mutual understanding of one another and as you face different challenges both parties adapt in compatible ways to deal with those issues.”

Justin Cochrane, CFO and Development Director at outdoor advertising company Clear Channel UK, comments: “The one thing that makes the CEO-CFO relationship work better is to have a slightly different public and private relationship. Between myself and the CEO, for example, if it’s just the two of us in the room, we’ll have a completely frank discussion and there’s no hierarchy at all. I want complete honesty when it’s just one-to one, then for us to be aligned on wider issues before we go to the board. So, while we might disagree on things privately, once in the boardroom, the CEO and I will have come to a consensus and be completely aligned.”

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Alison Hutchinson, CEO of not-for-profit concern The Pennies Foundation, and a former CEO of financial services company Kensington Group, comments: “The CFO has to be a really strong individual that can help analyse the real implications of what the CEO is trying to achieve.

“The business has got to deliver financially but it’s also got to deliver for customers and staff, so that combination of business objectives and financial achievement need to be knitted tightly together… A healthy tension is created by the CFO questioning some of the investments, making sure the business plan is written down and that it is delivered.”

Gavin Lewis, Finance Director of Royal Mail Estates, part of the Royal Mail Group, says: “I don’t think many boards can afford to carry anyone who is only doing a basic job and not performing a wider role on the board and adding real value. There’s a particular issue in the last five years that the environment is just moving too fast… which is why more than ever you need to be a counterpoint to the CEO as CFO, making sure that you’re covering all the bases, and that is rarely achieved by just making sure that the numbers for last year get produced on time.”

Similarly, Bob Emmins, Finance Director for The Silver Spoon Company, a division of Associated British Foods, reinforces the notion that it’s about being able to see the bigger picture: “The CEO will often be balancing a lot more balls in the air than if you’re the CFO, and you’ll be thinking of other aspects and perhaps giving the other party more of the benefit of the doubt, whereas in finance you can sometimes see things a little black and white.

“For example, as an FD you might feel that there won’t be enough analysis on a particular point, or that the CEO has actually been quite lax on a certain issue. What you’ll find is that the CEO, while recognising that, might choose not to react based on all the other things that are going on.”

In order to get optimal results, it’s actually healthy for there to be a degree of tension between the top two in the executive team. Bob Beveridge, Non-executive Director of mobile technology company InternetQ, says: “On the one hand, [CFOs are] the conscience of a business. You are always aware as a finance person that you are responsible for the integrity and probity of the business as well as the numbers. So you act as a foil to a certain extent to potentially more radical plans… but at the end of the day you are still the number two. The CEO will be the person who drives the decisions.”

Gavin says: “If there’s a difference in styles or a lack of compatibility between the CFO and CEO, one of them will need to go… and it won’t be the CEO. It’s therefore the responsibility of the CFO to make sure they are adapting their style and focus to support the CEO.”

The best CFOs are now leaders in their own right. It can make for a powerful partnership, where CEOs appreciate and respect the opinions, insights and judgements of their second in command… even if they don’t necessarily want to hear them.

The CFO and the Board

The CFO and the Board

“This is a commercially orientated role, involving promoting new checks and balances required for survival over growing the business long-term. "

In recent years the role of the chief financial officer has time and again come under the spotlight. Successful CFOs have emerged with strategic and operational experience that gives them greater influence in the boardroom than ever before. As organisations now shift their strategies towards driving growth, how can CFOs continue to develop the skill sets worthy of them being considered de facto deputy to the CEO?

As the role of the CFO has evolved from traditional number-crunching finance chief to second in command and driver of business growth, three essential qualities are needed:

• Commercial acumen
• Strategic thinking
• Convincing communication

Jim Wilkinson, CFO at Sportingbet plc, says: “The CFO is the custodian of the assets of a company, its recorder of past events and the cautionary voice on the board. However the role also requires the CFO to be the partner of the CEO in driving the company forward through all the levers that are available, including marketing, corporate activity and investment. This makes the CFO job particularly complicated and they have to be aware of which aspect of the role to emphasise at which time.”

Boardroom Influencer

Traditionally, the finance department has been the nerve-centre of every business. During the credit crisis, the CFO has needed to focus on the issue of working capital and liquidity. A critical part of the role has therefore been to manage the relationship with banks.

Bernard Cragg, Criticaleye Associate and Senior Independent Director at Mothercare plc, comments: “Whatever anybody says, the banks have become unreliable business partners and seek to gauge their corporate customers wherever they can. Having a CFO that is focused on managing the working capital, the forecasts and the banking relationships is completely essential.”

Ian Durant, Chairman of Capital & Counties Properties plc, says: “This is a commercially orientated role, involving promoting new checks and balances required for survival over growing the business long-term. CFOs have had to become bifocal at a tactical and strategic level with a very flexible attitude to fast changing circumstances. These CFO leadership roles in stressed organisations include helping the board understand the company’s trajectory and risks, priorities and management focus.”

Gayle Hares, CFO at IBM, agrees: “Beyond the numbers, CFOs need to identify the options available and work with the board to help it understand the impacts of these options, then develop a strategy to make the desired options a success. It’s about developing a mission in partnership with the board, putting that mission into practice, often when the inputs to that strategy are changing on a daily basis, and being able to communicate this effectively and simply to the team.”

Value Integrator

Certainly, the crisis required the CFO to bring financial relevance to an organisation, but it also highlighted the need to drive objectives and enhance value creation.

Ian Tyler, CEO of Balfour Beatty plc, says: “The first thing I always look for in a chief financial officer is their ability not to be just a chief financial officer. Crises tend to focus on immediate effects and there’s a tendency to ask who on the board takes responsibility for the perceived risks? The idea that there has to be a focus on the defensive nature of the organisation, and somehow that this is quintessentially the role of the CFO, is somewhat a caricature view of the role. The last thing you need is individuals with singular agendas. Rather, you need a management team that is aligned, integrated and maximising the totality of knowledge in that team. The more you fragment it, the less effective it will be.”

In his article, The CFO’s Journey – Becoming the Boardroom’s Value Integrator, IBM’s Sandy Khanna, VP Global Process Services, suggests that boardroom-level strategy is now as much a focus for the CFO as is the balance sheet. He says: “It no longer suffices to excel at core finance activities. CFOs – and their organisations – must and can help make their enterprises smarter by contributing to more sweeping, strategic concerns such as pricing models, supply chain policies and production levels.”

Getting interpersonal

While developments in corporate governance have arguably meant the role now involves more scorekeeping, the CFO is required to bridge the gap between corporate strategy and financial responsibility – essentially, the fulcrum between the board and the investors. In order to work with the CEO and the operators to build value-management capability into the company, a CFO’s communication skills are therefore increasingly important. Indeed, CFOs will often require even more highly-evolved interpersonal skills than the CEO, as their ability to influence both the board and investors are fundamental to their success.

Ian Durant says: “CFOs need to be prepared for the behavioural challenges of board and peer group politics and assisted to develop the skills to prepare impactful board reports and external investor relations presentations. All CFOs should have had some insolvency or directorial responsibilities. Team building skills are essential and, possibly, it ahould be recognised that the route to senior CFO should include operational responsibilities and strategic development, not just financial immersion.”

As the role of CFO has continued to expand, the finance function has taken on a larger role in influencing how the company performs and the direction that the company takes. “What is key is ensuring that the CFO is personable so people want to pass on their knowledge,” adds Gale. “You then have a good communicator who can articulate to non-financial people what the numbers mean in practice. The board needs this skill to develop the business and looks to the CFO to provide it.”

Jim adds: “As ever, communication of the state of the company is essential. Communication with banks, advisers and employees is probably more important in poor times than in better times. Externally the CFO needs to be networking to make sure they understand the mood of the investors and bankers. This allows the company to communicate the strategy and results effectively. It also allows the CFO to judge whether financing providers are likely to become more or less restrictive and what is happening to prices. In addition, financing methods not previously considered should be explored.”

In short, the CFO has much to gain from their heightened board-level exposure of the last few years. The experience will surely give them increasing influence to inform and influence board decisions as the cycle shifts from defensive plays towards growth-based strategies. Making sure they continue to develop a rounded skill-set will be essential to any CFO’s evolution. It may also allow them to step more regularly into the shoes of, and ultimately succeed, the CEO.

Our event on 9th June, The CFO and the Boardroom, will explore many of the themes covered in this newsletter and more. Please get in touch if you have any comments about the issues raised.

I hope to see you soon

Matthew

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