CFO: A misnomer?

By Ken Weldin and Carol Adams

From recent discussions with the members of our network serving as CFOs, a common theme has emerged.

corporate governanceHaving reached the pinnacle of their career claiming the cherished CFO title, most feel professionally fulfilled and mentally stimulated, but the role is far wider reaching than when they assumed it. It requires involvement in governance, IT, risk and strategy and an understanding of how non-financial performance and a broader set of “capitals” influence value creation.

Being a CFO today is much more than simply being the numbers person or the “bean counter” of days gone by. Clearly numbers remain the bedrock of the CFO role, but with an increasing emphasis by regulators and investors on non-financial reporting, a decreasing proportion of those numbers are monetary. And today’s demands are such that maybe alternative, different titles are appropriate. Perhaps Chief Governance Officer (CGO) or Chief Value-creation Officer (CVO)?

The concept of what is, or who might be, a CGO is an interesting one and very much depends on your definition of governance. At the turn of the century, just prior to the Enron scandal, the phrase corporate governance was less widely used than today. It was somewhat staid throwing up images of besuited clerks with quilled pens tutting solemnly over policy scrolls. Indeed, a search in Google in 2002 of the term corporate governance would return seven million results. Today the same search provides just short of 40 million, each with its own definition or variants thereof.

For what it is worth, we prefer to define governance as the systems and processes used to manage and direct activities of an entity with the overriding goal of ensuring transparency, accountability and probity. From this starting point, we therefore challenged our CFO colleagues to consider what it was that took them beyond the numbers.

First and foremost was the need for information systems to gather, manage, interpret, report and protect information. CFOs are nothing if they cannot secure the right information, of the right quantity and the right quality, at the right time. While many CIOs are direct reports of the CEO, the desire to ensure that these “four Rs” are in place, often leads to there being a strong dotted line to the CFO role. CFOs tend to have a hands-on role in system development and approve the cost and scope of systems implementations and choices around architectures, data warehouses, business intelligence and Enterprise Resource Planning (ERP) solutions. Regardless of how reporting lines are set up under the CEO, it is clear that the finance and IT communities need to collaborate.

Strategy is another increasingly important part of the CFO role. CFOs are heavily involved in setting the strategic direction of the company and robust company-wide and department level KPIs. Similarly, property, procurement, business risk, disaster recovery, business continuity management, process improvement and a range of compliance obligations would all see the CFO’s hand, if for no other reason than to ensure the integrity and validity of internal assumptions and conclusions as well as the consistency of all external communications and messaging.

For listed organisations you would then add in corporate affairs or investor relations activities which determine who within the company can say what, where, when and to whom given continuous disclosure obligations. At a minimum, the CFO would again need to validate the content to ensure the consistency of market messages.

And then there is the increasing propensity of environmental, social and governance (ESG) risks to turn a profit into a loss and decrease share value overnight. Or, in an era where most of what adds value to a company doesn’t show up on the balance sheet, the increasing need for the CFO to have a much broader understanding of what creates value for their organisation. This is what is behind the global drive towards integrated reporting, a new reporting paradigm.

Mark Joiner, then outgoing finance director of the NAB in an interview with Carol Adams said: “Can we express a value that the natural world brings into our business decisions and our customers’ business decisions? We need to understand the risks we are taking on. Our agri-bankers have embraced this, particularly those in the biodiversity hot spots in Australia. Our work on natural value is about risk awareness, risk management and customer service all bundled together. Overfishing, impact on seawater through pollution, etc all bring risks.”

He doesn’t yet see many CFOs getting fired up by these issues.

This concept of doing the right thing and the upholding of personal and professional ethics and integrity are a cornerstone of the education programs from which many CFOs emerge. The Institute of Chartered Accountants of Scotland (ICAS), of which both authors are members, this year celebrates its 160th anniversary. At the ICAS admissions ceremony new members are required to take a professional oath as follows: “As a CA, I commit myself to acting in the public interest and will conduct myself with integrity, objectivity and in accordance with the high ethical standards of ICAS.”

This reflects the all-encompassing scope and expectations of the modern CFO including signing off (together with the CEO) of Sarbanes Oxley 404 statements and their equivalent certifications around the world.

It is only with a full understanding of governance, risk and internal audit processes and the judgements therein that any certification sign-off or indeed month or year-end close can be effected with confidence by the CFO.

A colleague recently told of his unease of being CFO while not being a member of the executive leadership team because it compromised his ability to influence and drive meaningful change into the various areas noted above, and therefore to address the key issues in the underlying long term financial performance of the business. He resigned not long after sharing this story.

One can ponder the reason for these developments in terms of being a traditional evolution of the CFO as life generally becomes more complicated or as a by-product of increased expectations following the GFC, but is not hard to see a situation where a CFO could successfully argue that he or she had no interest in such areas or could fully delegate away responsibility for them. These reflections lead to the conclusion that there has never been a more interesting, strategically important or exciting time to be a CFO.

Ken Weldin

Ken Weldin

Note: Ken Weldin is a Director at EY. Ken Weldin and Carol Adams are members of ICAS.

This article has also been posted here by the Chartered Accountants Australia and New Zealand

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