Over the past decade, the corporate world has been witness to a dramatic shift in the roles and the responsibilities of the Chief Financial Officer. There are various factors and circumstances that have contributed to the role being evaluated and upgraded to a higher level. I shall not delve upon the circumstances; however I shall try and explain the growing importance of the role of the CFO.
The roles and the responsibilities of the CFO various depending upon the organization – there different types of organization in the corporate world, some of them include
- a public sector organization
- a multinational corporation
- a state run organization
- a private sector listed organization
- a private sector unlisted organization
In each of these corporate, the basic principles governing their roles and the responsibilities are similar; however there are certain unique responsibilities that get assigned in some of the corporate.
Qualities of a Chief Financial Officer
Before discussing the expectations from the CFO in detail, it must be known that there are certain core qualities that the CFO should exhibit to qualify to reach to this position. There are primarily 3 core qualities that should be inherit and imbibed in the person, and these are
Insight
The CFO is required to be firmly rooted to the ground. The role demands that he/she provides the right guidance / advice to the senior management of the company in order to ensure that the correct decisions are considered and taken for onward implementation. As a senior spokesman of the Board, the CFO is also expected provide the right directions, working on behalf of the CEO to the business heads in order to help them work towards their business objectives. The CFO is in an enviable position – he/she has access to the internal business dynamics and also to the external environment. Therefore, the role demands that the CFO balances aggression and caution and shares appropriately with the business heads.
Efficiency
In an operating role, the CFO is expected to demonstrate considerable understanding of the business across all functions. He/she is expected to devise operating parameters to evaluate the day to day operating indices in the business. The role is also expected to conceptualize, devise and report on the performance indices affecting the business in the company on a fairly regular basis. The role has a far reaching bearing on the company since many of the growth drivers of the company get generated and crystallized through a process of intense debate and discussion – the CFO plays a significant role in leading the discussion and act as coordinator to lead the team to logical decision making.
Trust
The CFO is expected to demonstrate the highest standards of integrity and trust. He should be above board and should command high respect amongst the peers and subordinates working in the organization. In a number of organizations, there is a model code of conduct that is required to be read by every employee of the organization. An ideal CFO should not only believe in the Code of conduct, but also tutor the organization to appreciate and implement in practice the high ethics.
The significance of the CFO’s role in an organization can be crystallized in the following buckets
- Maximizing shareholder wealth
- Partner the CEO in the running the current operations
- The strategic role in building long lasting businesses
- Implementing ethics and good corporate governance
- Be the change agent in technological advancement and up gradation
- Lead and provide directions to the team
- Compliance Officer
Maximize Shareholder Wealth
All organizations work toward one common aim “maximize wealth for the owners”. The definition of the owners might change depending upon the type of the organization.
An organization is respected and known for “the Wealth and Value” created over a period of time. Wealth and Value have different connotations. Wealth creation is associated with the ability of the organization to regularly provide return to its owners in the form of dividends, bonus shares and the right to participate in the future capital structure of the company. Value creation would include building businesses of scale over a period of time, which helps the owners to exponentially multiply their capital in the organization. The CFO is expected to therefore play a very important role in ensuring that the organization is poised towards building wealth and value to the owners. The strategic intent, business plan and deliverance of the business plan are therefore an important milestone that is driven by the CFO in the ultimate analysis towards maximizing wealth and value creation.
There is an equally important and vibrant role that the CFO performs – communicate and update the investor and shareholder community. Transparency, consistency and simplicity in reporting are an important function that the CFO has to perform regularly. It is also very important that the CFO speaks delivers the true and fair message in all the communications with the external world. Bad news, if any, should be spoken and communicated in the same way, as success stories and achievements are shared.
There is also a fairly useful role that is the CFO is expected to perform while dealing with potential external partners / investors. In today’s world, a number of organizations raised funds through a number of innovative channels – road shows and investor presentation are therefore fairly prevalent. The CFO is pretty much a part of these actions and is expected to play a very critical role in projecting the organizations performance.
Partnering the Business and the CEO
I call this role as the “bread and butter role” of the CFO. In a traditional career path the finance professional would work his/her way through a number of different functions within finance – be it in the factory, commercial and purchase, sales supply and distribution and corporate finance. A seasoned CFO should have an all round appreciation of all the operating roles within the finance function – till he is mature enough to move in to the pivot role.
The CFO is required to provide directions and suggestions, given the vast experience and awareness that he/she has gained over a period of time. In this role, the primary objective of the CFO would be guide in the implementation and regular review of the operating parameters of the businesses – both intra and inter. Operating indices across the business divisions are framed from time to time and it is essential that the finance organization works with the CFO’s input to consistently reassess them and apply the indices that is close to the best practices followed in the industry.
There is another critical role that the CFO has to take charge of – the pricing decisions. In a number of organizations pricing decisions are stable over a given period of time – these decisions are agreed at the time of framing the annual operating plan. However, situations may arise at various points in time between products and geographies to review the prevailing pricing structures. Any revision in the pricing decision is normally a defined process that is followed by the business, with the initiation at the corporate level and implementation at the operating level. The CFO weighs a number of parameters around the business before recommending and approving a pricing decision.
A great number of organizations across the world are very concerned about the “demand and supply” play of the product or the services offered to the customers. An accurate forecasting tool is important. The finance system under the guidance of the CFO plays an important role in assessing the demand and supply parameters. It is critical for the finance team to take a balanced view of the supply requirement in line with the demand forecasted by the sales organization. Managing working capital optimally therefore is an important function for the CFO and his team.
Last but not the least, all organizations realize the need to produce and provide products to the ultimate consumer at competitive prices at the right place and the right time. It is therefore critical for the finance team to be able to provide the sales team with the right pricing, promotion and discounting tool in order to ensure that sales is maximized. In a number of organizations, finance plays a leading role in supporting the sales team, at the time of negotiating with channel partners while agreeing on volumes and market shares.
Finally, as someone said “a good plan is like a road map, it shows the final destination and usually the best way to get there”.
The Strategic Role in building long lasting businesses
The role of the CFO is by far measured by his/her contribution in this role. There are a number of areas that the corporate strategy team works on an ongoing basis. These areas could be for immediate implementation or could be work in process for a decision and implementation over a longer period of time.
Some of the key strategic functions include decisions around new acquisitions, mergers and de-mergers, structuring and tax planning, innovative fund raising exercises, growth planning tools and business development. Each of the areas mentioned above is a wholesome function in itself and devours a fair amount of time and effort.
The strategic function is carved from the Vision document of the organization and is normally a long term goal. The intent of this role is to ensure that the corporate strategy is well inter-linked with the Vision statement and is being consistently reviewed with its progress. The strategic role determines his success and elevation and his/her future growth and career.
Ethics and Corporate Governance
In the earlier sections, I had briefly written about the important of “Trust”. Trust encompasses a wider definition to include ethical business practice, corporate governance and high standard of an individual’s integrity.
The role of a Finance Controller, working with the CFO, is therefore extremely critical in framing the code of conduct with the right list of “dos and don’ts.” Awareness and recall to this list is important and every employee needs to follow the code of conduct. Organizations across the world are known for their employees who exhibit high standard of integrity, trust and caliber – these characters are shaped in the employees through the ethics manual that they accept and abide to.
Ethical business practices are also shaped and imbibed in the managers dealing with the external environment. It is essential that managers abide and adhere to clean business practices and are not swayed by short term gains and temporary benefits. Many of these ethical practices are actually enshrined in the organization’s manifesto and code of conduct manual. The market place clearly distinguishes a clean organization from the other – ethical practices go a long way in building strong brands, reputation, goodwill, recall, image and stability.
Transparency and clarity in reporting and compliances to regulatory requirements is keystone to good corporate governance. Many organizations have over a period of time implemented a number of measures in order to provide maximum transparency to its stakeholders and external parties affected by their working.
Corporate Social Responsibility is a very important area and a number of organizations are proactively involved in providing services to the society. As the saying goes “the more you give to the society, the more you get back from it”. Organizations have a stable CSR programme towards their immediate community and the society at large. As a valuable member of the corporate public relations group, the CFO is expected to work with the team in devising plans and implementing the CSR initiatives of the organization.
The final word in the role is very clear “reputation matters more than size” and there is a “price for being upright” – organizations in the long run survive if the ensure that they do not compromise on these ideologies.
Change Agents – Drive technological improvements
Information Technology is an important business enabling tool. Technology has to be used in the right way to add value to the business. It is therefore very essential that the CFO works closely with the IT Team in constantly evaluating the technological needs of the organization. Technology is fast changing and every organization needs to ensure that they have the right kind of technology to help them produce/provide the product/service to the consumer in the shortest and fastest possible time. Every such technological change that fosters this objective will have to be implemented real fast and successfully – patchy and incomplete implementation would be a liability to the organization and should be avoided at all costs. Technology should be aligned to the business and appropriately customized to ensure that business derives the maximum benefit.
It is also equally critical that the organization has a permanent technology research and development team to reassess the existing systems and scout around for improvements and refinements. What next and best in technology? and how to get there are important questions that needs to be consistently questioned and answered found, if business have to survive and grow and prosper.
As someone said “if you do not drive your business well, the business will drive you out.”
Leader
As the saying goes “the leader is as good as the team that he is leading”. In corporates across the strata, the CFO assumes a significant role towards people management and leadership. It is therefore important for the CFO to work towards building the right team. The right team should get defined as “the optimal mix of efficient and effective people resources, with the right qualification, experience, aptitude and passion for the role”. In a fairly large number of organizations, the CFOs are also expected to balance and employ local talent in the organization. The Diversity policy in a number of organizations has ensured women are given equal opportunity role. As a part of the larger corporate social responsibility, organizations have involved in ensuring that these policies are indeed implemented successfully.
Training and Development of the talent working in the finance organization is the next conceivable action that the CFO has to perform. Talent in any organized industry is scare and it is therefore important that in-house talent is nurtured through time bound training programmes. Training could be both in-house and external. Individual development and career progression depends also on the broader outlook and maturity that comes in an individual through training workshops. The CFOs are therefore expected to ensure that their team members are mandatorily asked to step aside from their daily rigour and spend atleast on an average 8-10 days in a year on training – both on the job and off the job.
One of the important attributes that a CFO needs to consistently exhibit is to celebrate the success and significant moments in the lives of their team members. A promotion in the organization or indeed a significant personal event in the lives of the team member should evoke spontaneous celebration. In a number of organizations such celebrations are restricted to the human resources function to remind or carry out – worthwhile for the CFO to proactively ensure that such events are implements in the finance organization.
Passion towards the organization vision and working towards the immediate mission is something that the CFO should imbibe in the team. In a number of organizations, the finance team is pretty much relegated to the support service role and indeed not considered or expected to demonstrate passion towards the organization vision or their immediate mission. As a senior member of the management team, the CFO is ingrained and expected to demonstrate the organization vision and mission and it is equally important that the CFO inculcates similar feeling towards the team as well.
Finally, true success of the CFO in largely measured in terms of his/her ability to build long lasting teams – teams that will inspire confidence and trust to the other functions in the organization and which portrays the positive side of the organization to the external environment.
Finally, I leave with this borrowed quote “a good objective of leadership is to help those who do poorly to do well and to help those who do well to do better”.
Compliance Officer
Over the last few years, the world has witnessed a number of corporate scandals and frauds. The regulatory authorities have over a period of time come up with a number of control mechanisms to ensure that such frauds and scandals are not repeated. The compliances that are expected from organizations have increased substantially. Rightly so, the regulatory authorities expect these compliances to be in place and in order.
An Indian company, listed in the stock exchanges has to be well versed with a number of regulatory and legal compliances. The role of the compliance officer assumes a very significant role, given that the corporate is answerable to the vast corpus of shareholders who have invested in the company. Transparency and timely reporting to the regulatory watch dog is perhaps a given compliance need for the listed companies. A number of new regulatory requirements were introduced in India as well, given the scandals that rocked the world with the Enron. In India too, there have been instances of frauds, over the last few years that has lead to the regulatory watch dogs reviewing the parameters of reporting and compliance.
In Conclusion
There is a wide basket of roles that the CFO covers in his function – the above description might illustrate and explain some of the key roles. There might be other important areas that have gone uncovered here. There is no hiding of the fact the CFO occupies a very strategic position in any organization and is possibly next to the CEO/MD. He/she is the next known face that the board / stakeholders of the organization are familiar.
In a demanding and ever changing corporate world, it is essential and critical for the CFO to display maturity, trust, awareness and resilience in all times – both good times and not so good times.
I sign off with this last quote “if it is to be, it is up to me.”
Disclaimer: the thoughts expressed in this article is mine and solely mine, it has no bearing or influence on the Institute, the organizations that I worked or am working for…...
(Shashidhar Jayaraman, works as the Chief Financial Officer with Infomedia 18 Limited and could be contacted at jshashidhar01@gmail.com)
No comments:
Post a Comment