The Evolution of CFO
In an increasingly global and complex operating environment, the boundaries of the CFO are shifting. Drawing on trends in our recent appointments and a body of insight from key summits around the world, we have observed an evolution in both the function of a CFO and their breadth of responsibility. Ultimately, the opportunity set for a CFO is vast but there are several issues on the horizon that must be recognised.
The primary role of a CFO remains to champion total shareholder return. Though historically well-understood, how this is best achieved in the current state of play is more ambiguous.
Through an operating lens, the most straightforward equation is to combine top line revenue growth with wider margins. This stance sees the CFO as an enabler of revenue whose task it is to identify and hit the markets with the most lucrative long term prospects. The difference today is that organisational culture and customer-centrism play a much more crucial role in owning a market. Disruptive influences are such that knowing exactly how the competitive landscape sits is less clear in a growing number of industries. Execution is contingent on two important and often omitted questions: what business are we truly in and who do we compete with? Having the right answers lends focus to the lifetime value of a customer – arguably the most simple and potent driver of any business.
A broader theme emerging speaks to the convergence of strategy and operations into the new CFO portfolio. Financial decision making has become progressively complemented by strategic initiative in choosing markets and operational expertise in structuring their execution. How the CFO can add the greatest value in this respect is by driving predictability into the business, through complete ownership over the mechanics of how money is made – the markets, the customers and the products.
Spotlight on Capex
The world is cash rich but capital poor. The gist is that companies are flush with cash but few are spending it. Indeed, public spending in developed economies is now at twice the level of private investment. Specific to the local context, underdeveloped capital markets and the prevalence of dividends are plausible causes but more apparent is the overcapacity littering many of our largest industries. Globally, two decades of overinvestment in fixed assets – particularly across the utilities, natural resources and general industrials sectors – has led to excess capacity and a reluctance to invest. Goldman Sachs projects a 5% decline in private sector capex for 2016 with sustained decreases through to 2020.
Irrespective of market, the reduction in spending marginalises attention on the future fixed asset requirements of businesses and any substitution toward technology spending that could arise. In mature economies, this causes the size of the pie to stagnate, forcing price competition in an attempt to utilise capacity. Consolidation that chases greater market share lends itself to M&A activity in such economies. In terms of emerging markets, exporters of commodities and mass-market goods are expected to interrupt the position of manufacturers in the developed world as domestic needs are met. The onus is on executives in developed economies to seek new niches for their businesses and think intently on where competitive advantage will manifest going forward.
As capital allocators, CFOs who wear a strategic hat and invest in a model competitive for the future will generate higher returns on capital. This is of clear benefit to the business and its shareholders.
McKinsey & Co. identify four profiles of CFO appointments. Though we have seen elements of each of these in our recent work, the most apparent trend is the emergence of CFOs as strategic partners to the Chief Executive and Board. This has become evident across a range of sectors and also corporate situations, which span mature models, high growth and turnarounds.
#1 – Media (2016)
Role Features: The candidate plays a lead role in strategic planning; commercial outcomes and the financial position of the business. Change focus with requirements for charismatic leadership. Heavy external relationship management with chief responsibility for raising capability internally.
Candidate Attributes: Top three are leadership, values and drive for change. Need gravitas and the esteem to lead change. Must be a true dealmaker and competent in front of other leadership teams and their boards.
#2 – Consumer Goods (2015)
Role Features: Financial and commercial support to the executive and board. Head responsibility for driving growth and bringing in revenue. Overall leadership of the finance function and team, with emphasis on reporting and compliance.
Candidate Attributes: Influence, presence and negotiation skills. Willing to challenge the status quo. Able to identify and hire the right people to generate growth and profit from new markets.
#3 – Financial Services (2016)
Role Features: Strategic partner to the CEO and a trusted business advisor. Role model across all functions of the business. Leadership of finance and risk functions with direct report into the board.
Candidate Attributes: Mix of executive leadership and people leadership. Operational versatility and focus on continuous improvement. Using data for business analytics purposes.
#4 – Financial Services (2013)
Role Features: High level of influence over strategic direction. Robust technical foundation. Ownership of the finance function as well as procurement and property. Provision of advice to the CEO, board and strategy executives.
Candidate Attributes: Large divisional and team leadership experience. History of change management and performance under ambiguity. Technical foundations in finance.
#5 – Manufacturing (2015)
Role Features: Core task is positioning the business for long term, sustainable profitability. Management of finance, accounting, risk and IT functions. Provision of financial support across other business divisions. Transformation initiatives to the CEO.
Candidate Attributes: Focus on budgeting, building an operating model, tax and risk management. Meeting targets under times of change.
#6 – Industrial (2015)
Role Features: Direction to the finance team, wider executive and the board. Sit on all board meetings. Responsible for finance, legal, strategy, regulatory, procurement, property and revenue. Manage the company brand in dealing with external stakeholders.
Candidate Attributes: Background in the industry with experience in asset heavy operations. Optimising balance sheet to maximise revenue generation. Strategic mind set and acumen in active and highly inactive cycles.
#7 – Public Sector (2014)
Role Features: Create a high-performance culture on the senior leadership team and bring commercial focus to the wider corporate team. Leading finance, property and IT functions within the business. Managing complex political relationships and shared services arrangements, internally and externally.
Candidate Attributes: Ability to lead a breadth of functions within the one role. Customer-centric outlook supplemented by expert financial knowledge.
Issues and their Learnings
There is an abundance of issues with which the modern CFO must contend. We have compiled insight on a handful of these, centred on technology, the macro environment and the finance function.
Fintech is a disruptive field that has penetrated financial services and will soon spread to other industries. A relevant application is the use of cloud and platform technologies to accelerate shared services and co-operative work streams. There are more product-driven innovations in banking, supported by infrastructural innovations like Blockchain. Easiest thought of as shared database, Blockchain is useful wherever there is co-ordination of activity among multiple parties and sharing of information is necessary to complete a transaction. It is a cost-saving and error-reducing technology that has wide application. In a B2B context, there are numerous benefits to CRM afforded by access to common information, particularly with respect to payments and pricing.
Cyber security is topical and of importance to CFOs, a growing number of whom are responsible for IT within their organisations. Rather than wait for regulatory directives, CFOs who police threats internally and hire the talent needed to do so will create nimbler protection that is cost effective and tailored to the needs of the business. Underpinning a response however, is the intrinsic motivation to manage cyber threats in the first place.
The New Zealand market is supported by several tailwinds. Notable among these are favourable demographics, expected persistent strength of the USD and wealth effects from surging asset prices. Countering these are longer term risks of high consumer and household debt, as well as underdeveloped capital markets. Globally, concern is for China in its transition from an export economy to an import economy, uncertainty over political and monetary stability in many countries and the adverse effects of a high USD on emerging markets.
Navigating the macroeconomic environment becomes complex when observed through the lens of predictability mentioned earlier. Essentially, the task is to communicate the realities of the market, build a pipeline of revenue and provide useful forecasts to this end. Where organic growth is possible, hiring sales staff who can drive revenue is a clear imperative. This requires the awareness that the skills which brought a company to one level might not be apt for its progression toward the next. Where M&A is an option, transactions will likely need a dedicated deal team along with the concession that other roles and functions will take secondary priority. Integration should start before the deal closes.
Fronting the market sits at the heart of stakeholder management and accurate forecasting is crucial to managing expectations. With an abundance of information and data there is the danger that CFOs can know so much to the point that its messy and destructive. Alarmingly, a Wall Street Journal survey showed that 85% of CFOs are confident in their forecasts, yet more than 50% of those provided were out by more than 4%. Selective exposure is a contributing factor in the sense that we tend to read what we already know and listen to those with whom we agree. A solid approach begins by recognising the sphere of plausibility and forecasting consistently and frequently. Integrated reports (such as this one) provide scope to add explanative and qualitative depth to data.