Whitepaper - CFO New South Wales · For the Chief Financial Officer (CFO), opportunities to create value have increased considerably as boards expect more from the role than ever

Whitepaper:

What Boards Expect from their Chief Financial Officer

2CFO Paper September 2011

Strategist, Pragmatist, Leader and Steward

What Boards Expect from their Chief Financial Officer

“The CFO of tomorrow should be a big-picture thinker, rather than detail-oriented, outspoken

rather than reserved, prefer to delegate rather than be hands-on, emphasise what gets done

rather than how things are done, and make collaborative rather than unilateral decisions.I”

The ongoing instability of the global economy has seen widespread review of board and executive positions as organisations seek to mitigate the risks of potential governance failures. The Global Financial Crisis (GFC) brought a renewed focus to improving internal efficiencies and brought into question the broader contribution of each senior management and board position. More than ever, these positions are required to add value to operations and key stakeholders are demanding that this value be both visible and measurable.

For the Chief Financial Officer (CFO), opportunities to create value have increased considerably as boards expect more from the role than ever before. The CFO must serve as the financial authority in the organisation, ensuring the integrity of fiscal data and modelling transparency and accountability.

The CFO is as much a part of governance and oversight as the Chief Executive Officer (CEO), playing a fundamental role in the development and critique of strategic choices. The CFO is now expected to be a key player in stakeholder education and communication and is clearly seen as a leader and team builder who sets the finance agenda for the organisation, supports the CEO directly and provides timely advice to the board of directors.

Commentators have continually raised the importance of CFO’s in contributing to the enhancement of corporate governance

in Australia. As expressed by Pat Barrett II the Auditor General for Australia in 2002, “Ideally, the CFO will be the executive responsible for both the strategic and operational aspects of financial planning, management and record-keeping of the organisation...the CFO is expected to discharge accountability for the financial management activities of the organisation”.

The focus of the CFO’s role is moving much more towards that of a key strategic executive and valued advisor to the CEO and the board. This paper proposes to highlight the changed role of the CFO and clearly identify today’s CFO as a key strategic advisor to corporate Australia.

The Changing Nature of the Position

Traditional perceptions of the CFO function now hold limited relevance. High profile corporate collapses, the GFC, Sarbanes-Oxley, ASX Corporate Governance Guidelines and other market reforms have renewed calls for accountability within organisations, particularly at the board and executive management levels. Transparency is the order of the day and the integrity of financial reporting is crucial in securing stakeholder confidence. The prominence of the CFO position has grown as a direct result. The CFO now sits alongside the CEO as central to the efficient running of the enterprise and in many ways has become more publicly accountable than the CEO.

Traditionally the CFO existed as a part of the ‘C-suite’, operating solely at the executive management level. The CFO is now central to operations, providing financial expertise to the board and emerging as key player in strategic development and operational planning. In most organisations, the CFO is at the very least a regular attendee at board meetings and in most cases actually plays a key role in forming the agenda.


The Centre for Effective Organisations III surveyed over 200 directors, from various boards across Fortune 1000 companies in the United States. The survey addressed the involvement of the CFO in board activity, with 91% of respondents indicating the CFO attended all board meetings (Chart1).

Clearly, the relationship between the board and the CFO has changed considerably. The CFO has become a key player in steering operations and is now considered a leading partner in the activities of upper management and the board, especially with regards to the formulation of the strategic agenda. The role has emerged as a position which, not unlike that of the CEO, transcends the senior management portfolio.

Chart1: Percentage of respondents indicating personnel who ‘always’ attend board meetings (Canadian Institute of Chartered Accountants)

It is important to note that despite increasing expectations and re-classification of the role, a standard definition of the CFO position is difficult to establish as the requirements will vary considerably across organisations. In smaller organisations for example, the CFO may be working with limited resource capabilities and be restricted in the amount of delegation that can be exercised. In larger organisations, the CFO may have an abundance of resources at his or her disposal and therefore will have greater need for leadership and team-building skills to motivate those who support the finance function. The challenge for the modern CFO lies in meeting the varied expectations of the role.


CFO Archetypes

Our research, combined with work completed with senior executives and directors over many years has led us to identify three archetypes of the modern CFO.


Board Dependence upon the CFO

Effective Governance Pty Ltd, a specialist board and governance consulting firm, as part of its role in assisting boards, directors and senior executives has completed over 350 board and director performance assessments. This exposure has helped the firm develop a strong understanding of the relationship between board and senior management.

The experience of Effective Governance Pty Ltd identifies that boards, as well as CEOs, now expect the CFO to provide expertise across all areas of the organisation. Findings indicate that boards depend upon their CFO to provide financial stewardship, compliance expertise, risk management direction, strategy advice, leadership development, executive partnership, strong communication and educational skills, not only to the board but across the organisation. Having the ability and skills in each of these areas has seen the evolution of the CFO of today. We discuss each of these below.

Financial Stewardship – A financially astute CFO is a given. However, “...the true test of the CFO is in the quality of

decisions made on topics that affect a company’s finances” VII . Moreover, the processes that inform the decisions of the CFO with regard to the deployment and direction of the finance function and how these are communicated are of greatest importance.

The work of Bragg VII proposes eight areas of fiscal responsibility for the CFO: financial, tax and IT strategy, accounting practice, financial analysis, funding, IPOs, securities listing, reporting and risk management. Across these eight areas the board expects the CFO will develop applicable methodologies and openly communicate strategic and operational advice.

Compliance – Compliance has become a holistic imperative for today’s CFO. The CFO is no longer merely responsible for ensuring compliance with regards to the financial operations of the organisation. The modern CFO is expected to demonstrate leadership in ensuring compliance across the entire operation.

Risk Management – Boards now expect their CFOs to be an active part of the risk management approach across the whole organisation. The Canadian Institute of Chartered Accountants (CICA) highlights the framing questions shown at Figure 1 as central to the risk management role of the CFO.


The CICA VIII suggest that recognition of the CFO’s responsibilities will be evidenced in their familiarity with and regular review of the organisation’s business model, risk profile, current and future market risk, critical economic factors, the organisation’s risk appetite, value drivers, formulas, mechanics and metrics and early warning systems.

Boards expect their CFO will support the risk management practices of the organisation, whilst providing a critical voice to board and management, regularly questioning assumptions, quantifying risk outcomes and proposing informed courses of action.

Strategy – Boards expect the CFO to be an active player in determining the strategic direction of the organisation. Boards are increasingly aware that their CFO can:

• Contribute important financial information and expertise to the development of the strategic plan;

• Bring their broad knowledge of the organisation and analytical skills to the process of evaluating the strategic plan’s quality and viability;

• Understand capital markets and the business and economic environments in which the organisation operates; and

• Play a critical role in determining the organisation’s capacity to deal with risks related to strategic objectives. IX

The CFO will provide key direction and test the financial viability of organisational strategic imperatives, and will, in conjunction with the CEO, drive the planning process, coordinating those identified imperatives.


Leadership – The increased prominence of the CFO has brought with it heightened leadership expectations. These expectations transcend the finance function and are more broadly embedded in an increased demand for organisational leadership.

Research undertaken by Effective Governance Pty Ltd identifies that boards expect the CFO to provide:

• leadership directed at the financial culture of the organisation, particularly in delivering a sustainable and profitable business;

• transformational leadership designed to change behaviours and cultures and deliver market value;

• strategic leadership, particularly in providing strategic advice to the board; and

• closely managing the physical and human resources leading to continual efficiency gains.

Executive Partnership – The relationship between the CFO and other executive members is critical. The position requires intense collaboration with key stakeholders within and external to the organisation (such as investment partners, shareholders etc.). Boards recognise that partnerships with the executive team, the CEO in particular, are critical to the effective execution of the CFO’s core functions.

To foster effective executive partnerships, today’s CFO is expected to:

• become a partner in initiatives outside the finance function;

• hold regular informal meetings with executives outside of the boardroom (CEO, CIO etc); and

• be aligned with the direction and outlook set by the CEO.

Communication and Education – The CFO must work to meet this obligation by developing relationships, educating stakeholders and concisely relaying information to the board and management.

“The CFO’s role in the company has changed, such that the CFO is now an important player in communicating with the company’s stakeholders (the creditors, shareholders and others) not only the financial condition and operating performance

of the company, but the risks and strategies of the company. X”

An Exciting Future

In conclusion, the work of Effective Governance Pty Ltd has found that CFOs will continue to be an invaluable resource to the board, having a direct impact on board processes and providing critical strategic advice. The organisational imperatives of financial stewardship, compliance, risk management, strategy, leadership, executive partnership, communication and education discussed in this paper will all be key performance areas for the CFO of tomorrow. The challenge for the CFO will be in finding balance around the attention given to these imperatives.

So, what does the future hold? The current level of expertise and skill demanded of CFOs together with the heightened expectation of boards will see CFOs well placed to drive the new paradigm of organisational reporting – integrated reporting; the strategic and integrated balance between financial and non-financial reporting which will further enhance the sphere of CFO responsibility.


For further information please contact

Mr Stephen Howell FCPA FAMI MAICD

Senior Advisor

Effective Governance Pty Ltd

Level 3, 16 McDougall Street | PO Box 2140 | Milton QLD 4064

T: +61 7 3510 8111 | F: +61 3510 8181 | M: +61 411 549 164

W: www.effectivegovernance.com.au

Notes

I Future Perfect: The CFO of Tomorrow’, (2008), KPMG/CFO Research Services Asia, CFO Publishing Corporation, Hong Kong, p. 6

II Barrett, P. (2002) ‘An analysis of the Chief Financial Officer function in Commonwealth organisations’, Auditor General’s Office, Audit Report 28 2001-2002, Australian National Audit Office, Commonwealth of Australia, Canberra, p. 9

III Lawler, E. and Finegold, D. (2005) ‘Who’s in the boardroom and does it matter: The impact of having non-executive director executives attend board meetings’, CEO Publication 487, Centre for Effective Organisations, Los Angeles, p. 3-7

IV As cited in Management Advisory Board (1997), ‘Beyond bean counting: Effective financial management in the APS- 1998 & beyond’, Commonwealth of Australia, Public Services and Merit Protection Commission, Canberra, p. 43

V Lindsay, H. (2004), “Financial Aspects of Governance: What board should expect from CFOs”, Canadian Institute of Chartered Accountants, Toronto, p. 5

VI Skinner K. & Gustafson, S. (2011), Deloitte CFO Survey, 2nd Quarter 2011, Sydney, p. 5

VII Bragg, S. (2011), “The new CFO financial leadership manual”, (3rd Edition), John Wiley and Sons, New Jersey

VIII Lindsay, H. (2005), “Risk management: What board should expect from CFOs”, Canadian Institute of Chartered Accountants, Toronto, Canada

IX Lindsay, H. (2003), “Strategic Planning: What board should expect from CFOs”, Canadian Institute of Chartered Accountants, Toronto, p. 9

X Fabozzi, F. Drake, P. & Polimeni, R. (2008), ‘The Complete CFO Handbook’, John Wiley & Sons Incorporated, New Jersey, p. 12

Whitepaper - CFO New South Wales · For the Chief Financial Officer (CFO), opportunities to create value have increased considerably as boards expect more from the role than ever

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