The Finance Profession has faced enormous challenges over the past three years. Economic downturn precipitated by severe and ongoing dislocation in the financial markets is placing new demands on CFOs and the Finance Function. The slow return to growth demands that CFOs tightly control costs and are simultaneously mandated to promote growth. Critical to growth is securing access to funding. In Overture we explore how corporates are becoming more self-reliant as CFOs increasingly access investors directly.
Gillian Karran-Cumberlege
It is received economic wisdom that the Finance Function increases in importance in times of downturn as companies shift from growth to cost cutting. And we certainly saw a high turnover in CFOs in 2008 as the requirement for strong accounting skills was once again at the forefront. Since 2008 economic signals have been confused. It is presumed that the nature of the CFO role is as cyclical as the economy; once growth feeds through, CFOs will be deemed less critical than business developers.
We beg to differ. From Fidelio’s perspective, we see structural changes underway in the market resulting in a new breed of CFO supported by a more highly-specialised in-house capability.
“A strong, conservative CFO is needed now more than ever, and should be given greater authority within the executive suite,” Bill George (former CEO, Medtronic) says, citing the roles of Don Humphreys of Exxon Mobil and David Viniar of Goldman Sachs.
– In the Eye of the Storm, The Economist, 30th October 2008
It is, of course clear, that little is clear. With such confusing economic indicators, we can hardly expect companies to shift aggressively into an expansionist mode. The Q4 2010 Deloitte CFO Survey showed a marked drop in confidence in the UK but noted that CFOs of businesses deriving 70 per cent or more of revenues from outside the UK still saw expansion as their top priority. Today’s CFO is both custodian of the cost cutting achieved over the past two years and is also mandated to prepare for growth.
Not only is the CFO required to simultaneously wear two distinct hats, the complexity of the Finance Function has also increased. For example, in this age of prudence many corporates are sitting on substantial amounts of cash. Post Lehman Brothers the fiduciary challenge of responsible cash management has increased dramatically. Correspondingly there is a premium for Corporate Treasurers with an established track record across currencies, geographies and instruments.
Indeed Risk Aversion at a macro-level is creating new challenges and opportunities at the professional level. The FSA’s insistence on hardcore, hands-on financial experience for Non-Executive Directors undoubtedly opens career opportunities for CFOs and senior Finance Professionals within Financial Institutions. While the Risk Officer may well join the C-Suite, there remains a clear expectation on the part of shareholders that the CFO has a firm grasp of risk exposure and the management thereof. As risk is defined more broadly, extending beyond financial and operational into reputational risk for example, this also extends the reach of the CFO very broadly into the business.
Above all, the dislocation in the financial markets over the past three years has disrupted corporate access to both equity and debt. It has therefore been imperative for CFOs to ensure capital adequacy, optimise capital structures and diversify sources of refinancing. While the E&Y 2011 Survey “The Future of Finance Leadership” concurred that CFOs needed to acquire an increasingly broad range of experience, capital market exposure in the form of Investor Relations ranked low. In our opinion CFOs with experience of raising debt and equity and of maintaining solid relationships with investors are better positioned to navigate volatile and even hostile financial markets.
Indeed, in an environment where providers of debt and equity have become severely constrained by capital pressures, cost cutting or plain risk aversion, the quality of the investment case is critical. In this context we have witnessed a number of companies bring their Investor Relations and Strategy functions more closely together. The CFO is typically instrumental in ensuring the integrity and quality of a company’s short and long term expectation management, the sine qua non of attracting investment.
Not only does the CFO have to compete more effectively for capital from existing providers, in current markets it is often necessary to identify new sources of funding. Witness the US$28 billion of US private placements this year, almost half of which was raised by European businesses turning directly to institutional investors. Corporates need to be agile in addressing their refinancing requirements. Whereas prior to 2008 banks were often sources of highly integrated advisory services, as well as providers of capital, today’s CFO is by necessity much more self-reliant. The consequence is very often a considerably strengthened in-house capability.
If we look at the CFO’s direct reports, we see investment on a number of fronts. We have already touched upon the increasing sophistication of cash management and the broader understanding of risk, both of which frequently require new skill sets. Similarly in-house corporate finance is clearly a beneficiary of the woes of the banks, as is IR. Cutting edge IR is expected to identify pools of capital, target intrinsic investors and attract inward investment with far less dependence on intermediaries than has been customary. A pronounced willingness on the part of many bankers to move across to corporate roles is undoubtedly hastening this process.
While the importance of core Finance responsibilities has not diminished in any way, CFOs’ focus on company-wide concerns has increased sharply. Simply stated, CEOs and Boards are counting on their CFOs to be fact-based voices of reason and insight.
– The New Value Integrator, IBM CFO Study, 2010
Thus, even against the current recessionary backdrop we are seeing the CFO and the senior Finance Team become integral to growth and business development. The new breed of CFO has often come up through the corporate ranks and on this journey acquired broad managerial skills, as well as financial and technical experience, while direct reports to the CFO often bring banking or advisory skills to the mix.
The dramatic demands currently being made of the Finance Team equip CFOs and the senior Finance Professionals to step into the most senior management roles. It is no coincidence that the CFO is frequently a leading, if not the leading contender, for the CEO role. As the economy wavers between recession and anaemic growth, Finance Professionals remain very much on the front foot.
Coming Up…
Overture explores how talent drives valuation. Future editions of Overture will deal with
• Valuing Human Capital in the Automotive Sector
• What Governments can learn from Corporate IR
• The Strategist and the Communicator
• Adding Value to Comp & Bens – Finance or HR?
• Quoted and Unquoted IR – a Convergence
• The Art of Building Shareholder Buy-in
Please email us with comments at info@fideliopartners.com or for more information visit fidelio.fuse-clients.co.uk.