I’m really getting tired of hearing about the changing role of today’s Chief Financial Officer (CFO), particularly all of the consulting hype about the “need to be strategic.” Good CFO's have always been strategic! This recent barrage about the advent of the strategic CFO is simply 21st century spin that masks a major human resource dilemma at today’s global companies: the wrong individual is in the CFO seat. And then there’s the compulsive need to anoint the “Best CFO.” Yes, we live in a rankings crazed society, but those who feel compelled to create such a list simply don’t know anything about business, much less what CFO’s do, or are supposed to do. All of this has prompted this former CFO to share my “Ten Commandments” so that readers can judge for themselves who the top CFO’s just might be. But first, some context is in order.
The “Pragmatic Strategist”
A recent blatant sales pitch in the CFO Journal titled “The CFO as Pragmatic Strategist: Lessons from the Lab,” really made this Grumpy Old Accountant’s blood boil. This superficial piece resurrects an old theme, and repackages it as something new, this time as coming from the “lab.” But as my colleague Noah Barsky and I pointed out in “What Makes a CFO ‘the Best’?”, there already exists a rich reading list going back a decade, which offers meaningful insights into the skills needed by a CFO. And not surprisingly, one of these is a strategic mindset. It also really bothers me that this article attempts to cloak a consulting exercise in the robes of scientific inquiry by suggesting that its rather obvious finding came from a “lab.” So, exactly what did the “lab” yield? The big takeaway was a seven question CFO guide to value creation that targeted two main areas: does the CFO know the company’s strategy and the related risks to executing it? Duh…
In an attempt to reign in my cynicism about this article, I did find one potentially worthwhile nugget. Maybe the “lab” stumbled on to a serious problem in the C-suite. Presumably the lab assistants evaluated a large sample of CFO’s. If so, their finding that CFO’s need to “cultivate” a strategic mindset suggests that currently many CFO positions are being filled by unqualified individuals! That just might explain the rash of disappointing IPO’s, accounting restatements, internal control weaknesses, and frauds that continue to plague global companies. Maybe we should be addressing this issue in the growing laundry list of risks disclosed in today’s security registration statements and annual reports…it might read something like this:
The “Best CFO”
Determining who might be the “best” CFO may be an impossible task because there are just too many determinants. As with so many of today’s rankings (e.g., best company, top college, etc.), there is simply no one answer because the metrics used in these CFO “studies” are generally biased, incomplete, or otherwise flawed. The CFO role is a function of a variety of factors including organization age, growth, scale, industry, market, etc. Small firms often get along just fine with using their controller to fill the role of financial leader. And other companies often bridge the gap between controller and CFO using temporary help providers like CFO Edge. But as companies continue to grow, they realize the need for a CFO to specifically oversee the link between strategy and financial success.
When discussing what makes a CFO “the best,” I feel compelled to demystify the notion of the strategic CFO. First, we have to understand just exactly what a CFO does, vis-a-vis the controller. A controller’s duties generally center around such traditional financial and managerial reporting tasks as preparing financial statements, budgets, cash flow projections, performance measurement reports; and creating and monitoring accounting policies, procedures, and internal controls. And recently, in larger (or more diverse) entities that are suffering the burden of GAAP overload, some of the controller’s financial reporting duties have been spun off into the Chief Accounting Officer position.
In contrast, the CFO’s role is to specifically link strategy to financial performance. Every company engages in three primary activities: financing, investing, and operating. The CFO plays a major role in orchestrating all three as a company strives to execute its strategy. Of course a CFO needs to be strategic! Without a detailed understanding of how a company intends to create value for its customers and differentiate itself in the marketplace, there is little chance that a CFO will be effective. After all, CFO financing activities will be driven by investment decisions that are made to execute corporate strategy. So, it is not surprising that today’s CFO’s find themselves increasingly on executive management teams, involved in planning and implementing growth strategies, IPO’s, and acquisitions. All of these activities clearly fall under “investing responsibilities.” And to make good investments, the CFO has to be an expert analyst skilled in both financial and tax strategy, as well as risk management.
But the CFO’s responsibilities don’t stop there…they need a strategic focus not only for their investing and financing roles, but also so that they can monitor the efficiency and effectiveness of the company’s business model. For example, are all of the business model processes adequately financed and sourced? And what about process evaluation and risk management? In short, three terms define the role of today’s CFO: strategy, process, measurement. These provide the criteria by which CFO greatness should be evaluated.
Several McKinsey consultants also seem to support my contention that “one size does not fit all” when it comes to evaluating CFOs. They suggest that because management roles can vary by organization, industry characteristics, and investor demand, there may actually be different types of CFO's. Their review of CFO's at the top 100 global companies by market capitalization revealed four profiles for today’s CFO: the finance expert, the generalist, the performance leader, and the growth champion. The finance expert is what we normally would have expected to fill the CFO position historically, a former accountant and controller with audit experience and an advanced accounting degree. The generalist CFO is typically an MBA with significant experience in strategy and business operations and strategy, but significantly lighter in accounting expertise. The performance leader is simply a generalist CFO who specializes in restructuring situations. Consequently, the performance CFO’s focus are costs, and performance metrics to assess progress on re-engineering efforts central to strategy execution. Finally, there is the growth champion CFO whose role is to effect growth strategies through dramatic changes in resource allocation (i.e., acquisitions, divestitures, etc.). Not surprisingly, the growth champion skill set includes those of the finance expert, generalist, and performance leader, as they must be able to address strategy, process, and measurement challenges across the firm. The McKinsey consultants, Agrawal, Goldie, and Huyett, sum it up as follows:
And Kristina Salen, the new CFO at Etsy seems to also validate my perspective. She definitely gets it. At the top of her advice list on making better investments is “Invest in a Strategy,” followed by “Investing in the Entire Management Team.” Particularly telling, is her admission that quarterly numbers have little to do with strategy, and likely are poor measures of strategic success.
So, it is simply ludicrous to suggest that CFOs can be somehow classified, compared, and ranked with any degree of validity. How then will you recognize a top CFO? You will know them when you see them…they follow this Grumpy Old Accountant’s “Ten Commandments.”
“Ten Commandments” for CFOs
- Be honest. Robin Freestone, CFO at Pearson Group and chairman of the Hundred Group of FTSE CFO’s, sums it up nicely: "Your greatest asset is your personal credibility. That will travel with you, no matter who you’re working for. Lose it, and you render yourself valueless. The only real way to maintain that credibility is to tell it like it is."
- Honor thy creditors and investors. Hold the interests and needs of these stakeholders above all others, including your own and those of your management team. Remember that without the financing provided by these parties, your vision and strategy cannot be achieved.
- Put a premium on strategy and process. As Lewis Carroll stated, “if you don’t know where you’re going, any road will get you there.” A strategic focus implicitly fosters innovation and promotes world class performance.
- Run your own company. Don’t turn the keys over to consultants…they will never understand your strategy and processes as well as you do, no matter their purported business acumen.
- Embrace risk and risk management. Risk is fundamental to business model processes. Avoid temptations created by financial reengineering...there is never a good “quick fix.”
- Be transparent. Place a premium on clear, concise, relevant information, and communication. Avoid MBA speak and accounting jargon.
- Make “real” performance measurement a priority. Recognize GAAP reporting for what it is, a flawed, politically-based, judgment-ridden, and historically focused financial assessment. Link strategy to performance by adopting a balanced scorecard perspective.
- Shun the “earnings game” and avoid all who play it. Abandon all earnings management activities including aggressive accounting and non-GAAP disclosures. Instead of asking your independent auditors to “bless” outrageous accruals, require them to do real audits which just might benefit the company.
- Think long-term when evaluating performance. Reject all short-term performance metrics and related incentives, including stock based compensation. Recognize that it takes time to get things done. Take your pay only in salary and bonus, after you have earned it. Man up!
- Respect experience. Recognize the value that work history and a proven record of accomplishment actually bring to a company. Don’t mistake academic pedigrees, certifications, and high energy for real competence.
This essay reflects the opinion of the author and not necessarily that of The American College, or Villanova University.