- 27 March, 2010 23:00
- Skills required by today’s CFO.
- Has risk-taking and innovation suffered as a result of the expansion of the role?
- Should the CIO report to the CFO or the CEO?
Much has been made overseas about the expanding role and influence of CFOs over the strategic direction of business. That focus is never sharper than when companies hit the headlines for the wrong reasons. US-based CFO magazine describes the issue succinctly: “Often, in the wake of a major scandal, the blame is put on a lack of financial oversight and control, especially if a company is decentralised.”
CFO identifies fractured and dysfunctional reporting lines as a major cause of the sort of headline-grabbing financial meltdowns. However, it adds, there is no obvious best practice model to follow on reporting lines, especially in the age of trans-nationals.
At Microsoft the lessons of Enron and other infamous business scandals have been heeded. Microsoft New Zealand subsidiary controller Richard Paik does not report directly to his managing director, Kevin Ackhurst. Instead, his reporting line leads directly to the APAC region CFO, based in Singapore. That’s to uphold his independence, he says, and to ensure his role as champion of the shareholders is maintained. “The CFO’s priorities should be to the shareholders and not the executive within the local company. You have to have a level of independence.”
Corporate governance of the type embodied by the 2002 US Sarbanes-Oxley Act, has always been a key part of the CFO’s role. “[Microsoft] needs financial integrity, so we really need that corporate governance structure,” says US-born Paik, who speculates that Enron and other business scandals would have been far less likely to occur had corporate governance been stronger.
So how does New Zealand compare globally when it comes to corporate governance best practice? “New Zealand is already ranked as one of the least corrupt nations in the world to do business,” says Paik, who has been with Microsoft for nine years and has lived in New Zealand for the past two. “New Zealand companies already strive for integrity. Our role [at Microsoft] is to also protect the company in other countries, especially within the Asia region.”
But the complexity that comes with running a huge multinational such as Microsoft is a long way from the daily reality facing most CFOs in New Zealand and Australia. Here, to some extent, a broader skill base and greater flexibility are required because most businesses are small to medium-sized.
Chain of command
Most Australasian CFOs report directly to their CEO, and ex-pat Australian David Alley, general manager finance and corporate services for industry training organisation Competenz, confirms this is also “normal practice” across the Tasman.
But while this ‘chain of command’ remains largely unaltered, he and other industry experts agree that what is reported to the CEO has changed considerably over the years.
Kelvin Wong, the former CFO to the NZ Institute of Chartered Accountants, says reporting is usually “hardwired” to the CEO, although the board and the top-level management team will also get direct CFO input. Other business units likely receive their information indirectly. What has changed in the last 20 years is that the CFO role is no longer a straight financial one.
“The CFO needs to have more of a focus on the organisation’s KPIs,” confirms Alley of Competenz. “It’s not just the bottom line, although that’s still critical.”
Working for a not-for-profit does bring KPIs into sharper focus, he admits: “The ratio is 50-50 bottom line to KPIs. For a listed company with shareholders, that ratio may be 80-20.”
A CFO with a proven ability to understand the numbers is “worth their weight in gold” one expert said. “But having an understanding of benchmarking, of the ratios… that inspires confidence.”
Beyond the more obvious requirement of financial literacy, the skills wish-list can seem a little daunting. The ideal, contemporary CFO needs to be a risk-taker, but in a measured way. They need to have a broad understanding of the entire business — its IP, core profit streams and its direction. They need to have a solid understanding of the KPIs, return on investment, human resources, technology, marketing, compliance and tax law. And crucially, they need the diplomacy skills to win over the executive team.
“You definitely need people skills to deal with the board, and the management, finance and marketing teams,” says Wong. “You’ll also need broad commercial skills around IT, HR and procurement, but people skills account for around 50 per cent of the skills base needed to be effective.” Indeed, so important does the Institute of Chartered Accountants consider people skills that it runs courses specifically for developing them.
Marcel van den Assum, who describes himself as a professional director and industrial advisor, says today’s CFO is more of a specialist advisor. But, he adds, CFOs can become too powerful; to the ultimate detriment of the business, almost becoming an obstruction. “It’s about getting the right balance of leadership.”
He says an ideal way for aspiring CFOs to gain that broader understanding of all the business dimensions would be to run a small business and to “network outside the financial community”.
The former Fonterra CIO says the diary giant specifically sent its employees to all parts of the enterprise to achieve just that: “A good CFO would look for such opportunities.”
Another key driver for CFOs capturing ever-greater influence and responsibility has been technology. IT business tools have taken away much of the finance drudgery and allowed the CFO to take on that broader strategic role. “This was needed,” says Paik, “because we make poor investment decisions if we don’t have broader strategic thinking, especially if you’re investing hundreds of millions. And competition is getting harder. World markets are not growing as they once did. For companies to grow at the levels they want or expect, finance will play a larger role. Finance helps you take measured risks.”
According to van den Assum, taking risks is where many New Zealand CFOs fall down. “Some CFOs are cost-oriented and some are investment-oriented. Total cost of ownership is part of the job, but not the whole job and the majority of [New Zealand] CFO profiles fall into the cost end of the spectrum. But if all you are interested in is not spending money, you are not taking risks — you cannot save yourself for prosperity.”
He blames this partly on New Zealand culture: “We have prospered on the back of commodities, which are by nature cost-ordered.”
There is a constraining force around risk management, he says, and CFOs need to offer a more thorough approach to risk management — to develop techniques around taking risks.
“You need to quantify risks, so we can consciously manage them. The CFO can bring this to the table and convince the rest of the executive. It’s about risk return and risk reward. What sort of reward is satisfactory?
“Unfortunately, there is a Lotto-style ‘quick win’ mentality [in New Zealand] but substantial returns will never be made in, say, three years. A CFO with an investment mentality needs fortitude; the fortitude to look out 10 years. That takes a special person.”
Sidebar: 'The CIO should never report to the CFO'
The role of the CIO is still an evolving one, but while IT impacts on every business function from finance to marketing, many IT chiefs still report to the CFO rather than to the CEO. This, many say, leaves a vital voice out of decision-making at board level and too often casts IT purchases in purely financial terms.
It’s easy to understand the history of the CFO-CIO relationship: In its early years, IT was about data processing and finance was the first area to be automated, putting IT firmly under the purview of the finance department and the CFO. But today, every business function is impacted by IT and the role of the CIO — often now more a strategic IT generalist than IT specialist — is evolving to meet those demands.
The former CIO to diary multinational Fonterra is emphatic the CIO needs a voice at the executive level: “The CIO should never report to the CFO,” says Marcel van den Assum. “They’re fundamentally different roles, although complementary. You need the two at the top table working together, especially where information is the big asset of the company, as it so often is these days.”
CFO of New Zealand Post Group, Mark Yeoman, agrees both voices need to be heard, but feels CIOs also need to share the CFO’s appreciation of ROI.
“In Post Group we don’t have a CIO, but the individual businesses within New Zealand Post have people who are heads of technology, who are part of senior management team.
“I think it’s really important for technology to have a voice at the senior table. In terms of pushback, it’s really about sweating the business case harder and understanding what trade-offs are being represented and the options. It’s about making sure that the benefits realisation programme is being monitored after the initial assessment’s been made.”