The ‘Forward-looking’ CFO: Linking Financial Rigor with Leadership

Global organizations operating in the contemporary business landscape need to tightly link financial rigor and strategic insight. Increasingly, senior financial executives are playing influential roles in strategy development and implementation, working closely with the CEO and the board to creatively assess and design growth opportunities. The question is: Are CFOs prepared to move beyond the number-crunching function to act and lead in this capacity? CFOs are called upon to identify and assess profitable business ventures, lead mergers & acquisitions, establish alliances and shape complex change-management strategies. To do this, they must gain a deeper understanding of strategy, build leadership skills and better communicate financial knowledge to peers and subordinates. Targeted learning and development interventions are more necessary than ever in preparing senior financial executives to serve in this new leadership capacity. Jason Wingard, vice dean of executive education and adjunct professor of management at Wharton, and John Percival, adjunct professor of finance who conducts a program titled ‘The CFO: Becoming a Strategic Partner’ at Wharton, discuss this and other issues.

An edited transcript of the conversation follows.

Jason Wingard: Market analysis research supports the hypothesis that new organizational demands require the integration of financial acumen and strategic leadership. Can you highlight the prioritized skills that are critical in the modern C-suite?

John Percival: We at Wharton started working more closely with CFOs about seven or eight years ago. In our senior-level executive education programs, we had been hearing from the participants that there was an important issue being discussed at corporate headquarters or business unit headquarters. It related to growth of the unit. Sometimes it was too much growth and how to manage that, but most often it was trying to find growth — profitable growth, value-creating growth. There were groups of senior executives, C-suite people, sitting around a strategy table talking about the future of the business.

What we were hearing was that the contributions that were coming from the finance people were a bit disappointing. It seemed that the finance people didn’t feel totally comfortable talking about strategy. Sometimes the analysis they had done was not particularly useful and compelling to their non-finance colleagues who didn’t have the same financial expertise. Sometimes it wasn’t so much the analysis; it was the way they were communicating the results of that analysis. That didn’t seem to be particularly collaborative and helpful to their colleagues.

It was clear to us that there was an issue. We had a one-day forum for chief marketing officers at Wharton, and this wasn’t even on the agenda. But what came up in the conversations was the problem between finance and marketing folks in communicating with each other and talking about growth and the future. It looked to us that there was a need for skills in finance people in performing this more forward-looking aspect of finance.

Wingard: As global business boundaries have shifted, competition has intensified and product development cycles have shortened. The role of the CFO has evolved.

Percival: It definitely has. We were approached by IBM who heard that we were working closely with CFOs. They were doing a study of CFOs. They came to us and asked if we would collaborate with them, help put together the questions and process the answers. It seemed like a good fit because we were already doing some work with CFOs to find out what was on their plate and what was their agenda.

As part of the survey, we asked some specific questions about what was important to a CFO these days. We now had some hard data that supported what we had been learning from anecdotal information. For example, we asked them whether measuring and monitoring business performance was still important for CFOs. And they said, “Yes, that continues to be important.” We asked them, “How about meeting fiduciary and statutory requirements?” They said, “That’s been a traditionally important role for the CFO. It continues to be important.” We asked about continuous process and business improvement, both within the finance function and within the broader organization. They said it was a critical role for finance these days. We asked about aligning finance with the business more closely. This was, in particular, an important issue to them.

We have finance organizations now where local CFOs at business units have dual responsibility to a corporate CFO and to their business unit manager. What is their primary responsibility? Is it to the finance function or is it to the business unit manager? Can the business unit manager and the local finance person have a close relationship if the former believes that the finance person is a spy from corporate who’s there to monitor what’s going on? Is that going to be a close, collaborative relationship?

How about driving integration across the enterprise? They said that’s increasingly important. “We’ve got more hardware. We’ve got more software to do analysis and we’ve got to make sure that this is being used properly throughout the organization.” How about supporting managing and mitigating enterprise risk? “Critically important. There are so many non-finance issues now, operational issues that have huge financial implications. The CFO needs to be involved in discussions about, for example, how you manage a complex global supply chain in this difficult world we live in today.”

We asked about identifying and executing growth strategies. “Yes, very important. We finance people need to be part of that.” How about compliance programs, internal controls? “Oh yes, it continues to be critically important.”

Sarbanes-Oxley came along in the middle of finance people realizing the importance of this forward-looking aspect of finance. And the CFO said, “Now I’m personally responsible for the quality of the financial statements. I’m personally responsible for the internal controls. I was ready to trust my controller to do that stuff and spend more time with my business unit manager talking about the future. Now I’ve got to go back to doing traditional accounting again.”

How about driving cost reduction? “Absolutely. Critically important for companies all over the world today.” How about developing people in the finance function? “Critically important. Today the thing that differentiates companies is not physical capital, it’s human capital. We’ve got to make sure that we’ve got good folks.” We asked them, “What’s important on the agenda of the CFO today?” It turned out everything is important.

Then we asked them a series of questions that related to the importance and the execution. We found that the biggest gaps were in the forward-looking stuff. When it came to the traditional role of finance, of looking back and measuring and monitoring financial performance, they felt that continued to be important, but they were good at it. When it came to this more forward-looking stuff, they realized the importance, but they didn’t feel comfortable in their capabilities.

Wingard: In learning and development there are a myriad of methodological approaches used to develop executives. Executive coaching, peer mentoring, action learning projects and immersion experiences to name a few. How and why does a classroom-based executive education program work, and what are the critical design elements and implementation tactics?

Percival: We think in this area of broadening the CFO, the classroom experience is particularly meaningful. We bring together CFOs from companies that are publicly traded, closely held and from the public sector; big companies, small companies; corporate CFOs, business unit CFOs, segment CFOs. They get to share experiences on these issues.

We also have a number of different topics that we focus on, including different ways of doing the analysis to make it more compelling and meaningful, better ways of communicating to non-finance colleagues, and new ways of thinking about risk management as part of the future. In a classroom experience, we can integrate all these things. They don’t become separate and distinct topics. They become part of this changing role of the CFO and some of the things that CFOs need to do to prepare themselves better for this new role.

Wingard: Clearly, the CFO needs to find better ways of bringing his financial perspective and acumen to the discussion in the boardroom and C-suite conversations. He needs to be more strategic in his thinking, but he does not need to be a strategic expert. How can he insert his knowledge into the discussion, while still leaving room for the strategic experts to make their points?

Percival: That is correct. We emphasize in our programs that we’re not trying to turn CFOs into generalists. But they do need to understand enough about the strategy of the business to bring their very important financial perspective to these conversations. We in finance talk about the importance of profitable growth, value-creating growth. There’s lots of evidence that shows that the companies that create value are those that earn their cost of capital. That’s a finance perspective, but it has huge strategic implications. The companies that earn more than the cost of capital in a competitive business are the ones that have competitive advantage. At the strategy table, we need to bring up why this is the right growth opportunity for us to be pursuing, what capabilities do we have that indicate we’re going to be particularly good at it? Others are going to see the same opportunities that we’re seeing; why are we going to have competitive advantage over them? If we don’t have those capabilities now, will we be able to acquire them at a reasonable cost, within a reasonable period of time?

This involves understanding who the competition is going to be, who the customers are going to be and what they’re looking for. The CFO doesn’t have to be the expert on the customers and the competition. But he has a very important financial perspective to bring to the conversations about that.

Wingard: We have this evolving concept of enterprise risk management, which seems to be different from the way CFOs have had to manage the business in the past. How does that factor into the evolution of the new role for the CFO?

Percival: There was a time when risk management was defined fairly narrowly to be things like exchange rate risk and interest rate risk. Mitigating that risk, deciding when to hedge, what to hedge and how to hedge seemed to belong in the office of the CFO. Now we have this evolving idea of enterprise risk management, which is much broader. It’s got huge financial implications. But so many of these things seem to be operational risks and not the traditional financial risks.

Now the CFO asks: Does that really still belong in the office of the CFO? Should we have a CRO now, a chief risk officer? If we have a CRO, should the CRO report to the CFO or report directly to the CEO? What’s my role in this changing concept of risk management? When we’re talking about the future of the business and questions come up about operational things that could go wrong, is it my role to try to discuss how we might mitigate those kinds of risks? Can they be hedged in some way? With this evolving idea of enterprise risk management, where there are so many different things that people get worried about, perhaps the CFO needs to make sure the company holds more cash, because cash is a wonderful way of hedging all kinds of risk.

Wingard: In your experience, what are the practice interventions that have proven to work best for finance executives in training?

Percival: What we found in the feedback from our programs was that they feel we are able to help with the different ways of doing the analysis. We don’t try to teach CFOs how to do discounted cash flow; they know how to do that. We try to help them in doing it in a way that’s more compelling and more meaningful for their non-finance colleagues, to simplify the results, but also to do it in a way that you don’t waste people’s time about what’s going to happen in the future, because nobody knows.

We talk about some best practices from folks who seem to do this particularly well.

Wingard: On the flip side, what are some of the common implementation barriers that prevent CFOs from benefiting from some of these development approaches?

Percival: We found again, both from our surveys and from anecdotal information, that a lot of it is lack of comfort with this looking-forward aspect of being a CFO. It often wasn’t the way the person was trained. They were trained in accounting, which is an important part of the finance function. They might have CPAs. But it’s a bit different from thinking strategically and understanding things about competitive advantage and customers and products. So there’s a lack of comfort in those areas now. It’s important in our programs to get them out of their comfort zone and into this more forward-looking aspect of being a CFO.

Wingard: Can you highlight a specific client profile as a success case for a high-performing CFO?

Percival: We got feedback from a number of participants in our programs. One in particular who resonated with me is a CFO from a relatively large, but closely-held private, non-publicly-traded company that had been family owned. The CEO was a member of the founding family. He had put forth a bold proposal to double revenues over a relatively short period of time. The instincts of the CFO were that it was not a good idea. We may not be capable of doing this effectively over that short a period. She tried to communicate some of those concerns to the CEO but the CEO really wanted to do it. So she came to our program, learned some different ways of doing the analysis, of being persuasive and presenting the results of that analysis, being patient and not trying to get it all across in just one meeting. Later, we heard from her that she had convinced the CEO that, while growing the revenues was really important, the rate at which they were trying to grow the revenues was probably not going to work out well. They didn’t have the human capital to execute that well. There were some concerns about the financial capital to support that kind of growth also. So a compromise was achieved where they were going to grow and look forward to the future, but scale back some of the expectations of the growth, trying to focus more on the growth opportunities where they were going to have competitive advantage.

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