CFOs: From accountant to strategist, deal maker and growth leader
The c-suite role that has changed the most in the last decade is that of the Chief Financial Officer (CFO). From a internally focused bean counting role, theCFO has morphed into a strategist, dealmaker, risk officer and growth leader, second only to the CEO in importance.
Mckinsey's leader of strategy andcorporate finance practice,Bill Huyett has witnessed seen this evolution closely. The author of 'Value: The Four Cornerstones of Corporate Finance' was recently in India to address top CFOs on corporate finance issues. In a chat with CD he spoke about the emergence of the new new CFO:
How has the CFO's role changed?
The CFO always had two core roles. The first is as operating manager of the finance function, controlling compliance and statutory reporting in publicly traded companies. They have a second, less formal role, which I will call counseling. In the core finance function there is now a higher performance expectation. If you closed the month in 14 days, people now expect it in three days after the close of business. People are talking about reducing the cost to the finance function by 25-40% in large corporations. The counseling role is also deepening and broadening.
But there is a third set of functions which barely existed a decade ago, where the CFO has to play a thought leadership role. The CFO's role in the past had been to make sure the strategy fits with the budget. Over that past five years there is a realisation that corporate strategy is very different from business unit strategy. CFOs are in a central position because corporate strategy involves making radical shifts in where the corporation spends resources, be it capital spending, P&L spending in R&D or marketing and sales or whether it is in deployment of talent to do businesses in new geographies. A decade ago these processes did not exist or they were highly informal.
I think it is going to be an especially powerful role in India where you have a much richer composition of corporate forms than in America or Europe. You have the interplay of not only publicly traded companies but large family owned companies, companies with partial public listing. That makes for a richer set of questions and, frankly, more interesting portfolios of businesses.
Earlier a CFO had to be a charted accountant or a MBA in finance. Has that changed?
At the end of the day the single biggest legal responsibility of a CFO is related to accounting, reporting and compliance with statutory regulations. That is not going to go away. What has happened is that you have added a whole another array of responsibilities around thought leadership, around counseling business leaders about value creation.
In publicly traded corporations, the interaction with investors is now more sophisticated, more global. In many industries, regulatory interactions may not be the direct responsibility of the CFO but they have big economic consequences and the CFO needs to be in the middle of those. Many of the forces that will affect the value creation trajectory are rooted in technology trends, demographic trends and political trends. CEOs expect CFOs will be more externally aware. The caricature has been more of them being focused on numbers and internal affairs.
I think that myth is being exploded. But few companies have the talent development approach required to create fully rounded finance leaders. Most management education had not prepared management teams for dealing in worlds they cannot predict.
Mckinsey's leader of strategy andcorporate finance practice,Bill Huyett has witnessed seen this evolution closely. The author of 'Value: The Four Cornerstones of Corporate Finance' was recently in India to address top CFOs on corporate finance issues. In a chat with CD he spoke about the emergence of the new new CFO:
How has the CFO's role changed?
The CFO always had two core roles. The first is as operating manager of the finance function, controlling compliance and statutory reporting in publicly traded companies. They have a second, less formal role, which I will call counseling. In the core finance function there is now a higher performance expectation. If you closed the month in 14 days, people now expect it in three days after the close of business. People are talking about reducing the cost to the finance function by 25-40% in large corporations. The counseling role is also deepening and broadening.
But there is a third set of functions which barely existed a decade ago, where the CFO has to play a thought leadership role. The CFO's role in the past had been to make sure the strategy fits with the budget. Over that past five years there is a realisation that corporate strategy is very different from business unit strategy. CFOs are in a central position because corporate strategy involves making radical shifts in where the corporation spends resources, be it capital spending, P&L spending in R&D or marketing and sales or whether it is in deployment of talent to do businesses in new geographies. A decade ago these processes did not exist or they were highly informal.
I think it is going to be an especially powerful role in India where you have a much richer composition of corporate forms than in America or Europe. You have the interplay of not only publicly traded companies but large family owned companies, companies with partial public listing. That makes for a richer set of questions and, frankly, more interesting portfolios of businesses.
Earlier a CFO had to be a charted accountant or a MBA in finance. Has that changed?
At the end of the day the single biggest legal responsibility of a CFO is related to accounting, reporting and compliance with statutory regulations. That is not going to go away. What has happened is that you have added a whole another array of responsibilities around thought leadership, around counseling business leaders about value creation.
In publicly traded corporations, the interaction with investors is now more sophisticated, more global. In many industries, regulatory interactions may not be the direct responsibility of the CFO but they have big economic consequences and the CFO needs to be in the middle of those. Many of the forces that will affect the value creation trajectory are rooted in technology trends, demographic trends and political trends. CEOs expect CFOs will be more externally aware. The caricature has been more of them being focused on numbers and internal affairs.
I think that myth is being exploded. But few companies have the talent development approach required to create fully rounded finance leaders. Most management education had not prepared management teams for dealing in worlds they cannot predict.
How would you rate the performance of CFOs during the recession?
The bulk of my work is with CFOs outside the financial sector. I tend to work in the industrial, technologies, life sciences world. I would actually say that the actions of CFOs in these sectors have actually been quite good. The best took the lessons from prior recessions and applied them more quickly and systematically in this one than any of the ones that have happened during my working lifetime. And as a result companies have come out of the recession with very large cash reserves, poised either for internal investment or M&A capital expenditure.
Has the role of CFO as a risk officer changed?
There is a debate as to whether a chief risk officer is an appropriate function in a corporate organisation. It is common in financial institutions. It is unclear whether that would be the dominant form or whether the CFO in fact will assume the risk management function. In non-financial companies, risks are more diverse. They run the range from input price hedging in to regulatory risk in healthcare and event risk of tsunamis. There is no doubt in my mind that in all sectors the finance function will be playing a greater role in risk management and helping quarterback more affective discussion of risk at the board level then they have been asked to in the past.
The CEO and the CFO have been hand in glove in scams like Satyam in India. How do you ensure the CEO/CFO combination does not turn toxic to the company?
In most economies it starts with the role of the board audit committee and the external auditor. These are two of the most powerful tools. In the US, for the past 10-15 years, the expectations of the audit committee, the amount of time the board audit committee spends on precisely what you described is much more significant that it use to be. It has become a quite time consuming role for the board of directors but one that is probably necessary.
Are CFOs using cash on balance sheets in the best way?
In aMckinsey Quarterly Review report, one of my colleagues demonstrated that any well managed company will generate more cash than it can use, and has to return it to share holders at some point. It is hard to point to the CFO and criticise how the cash is being used in a narrow sense. The treasury function is quite well managed in most large corporations.
How different will the CFO's role be ten years down the line?
The dominant trend of the next decade or two is the global integrative leader. The CFO is a global integrative leader with a significant external orientation and I think we are of late seeing how that develops.
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