Modernising the Finance Department’s Role

by François Masquelier, Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman, EACT

The new CFO has arrived in his most recently updated version. His job has evolved considerably over the last few years because of fundamental changes in the environment in which he operates, just as happened with the treasury manager’s job. After spending a huge amount of time on compliance, he is now being asked to improve the organisation’s performance. He is being asked to be transparent, multi-skilled, efficient, proactive and a visionary. This is a very wide-ranging job description which this article sets out to illustrate.

Parallel evolution

It is not only just technical jobs, such as the treasurers’, that have evolved greatly over the last few years. The CFO’s job has also obviously mutated for a number of reasons. It now requires qualities other than those needed in the past as well as new aptitudes to fulfil the growing expectations of the shareholders and the audit committee.

The CFO now sees his performance measured and evaluated. He can no longer just do his job and produce the financial results; in addition, he has to demonstrate that he has performed. We have moved into a yet more competitive era. We have to demonstrate that we are achieving fixed, pre-set targets effectively. This need to demonstrate that expectations have been fulfilled and that the job has been done, from a perspective that is not just backward-looking, creates the feeling of increased pressure on CFOs. Onto profit reporting has to be added the method, how we got there and how we will keep on getting there – a new predictive aspect of the job which goes well beyond producing cash flow forecasts and budgets. The management aspect is new because the methods and the control system are going to be of the essence and must be demonstrable. The days of taking people’s word for it or judging by past results are well and truly over. The neo-CFO in his 2011.0 version has become the multinational market standard.

Onto profit reporting has to be added; the method, how we got there and how we will keep on getting there.

The guardian of the temple

The CFO is often vital to strategic decision-making. He must protect the company against the  frequent biases arising from taking decisions on emotional or barely rational grounds.  Only a few CFOs use the lever that their job gives them to influence decision-making. They were frequently excluded from or little involved in the strategic decision-making process. CFOs often seemed to be distanced from strategic operations and were seen as ‘spoilsports’. The new CFOs must take a full part in the strategic decision-making progress and not only from a financial point of view (for example foreign exchange, finance and interest-rate risks, etc.). They are often also criticised for excessive and systematic evasiveness. All too often, this role of guardian of the temple and financial orthodoxy has been perceived as being incompatible with the strategic decision-making and acquisitions processes. He was a supplier of (financial) services rather than a major player in decision-making. Things have changed and the CFO is now vested with the role of adviser and joint decision-maker, for example in merger & acquisition activities.[[[PAGE]]]

Moreover, he has to display great nimbleness and flexibility in taking all the new expectations on board and fulfilling them in due course.

Challenges to today’s CFO

We can distinguish five essential interlocking areas of responsibility that all CFOs are going to have to address (if they have not already done so).

These five key areas are:
1. Transforming finances
2. Treasury management
3. Corporate reporting
4. Cost control
5. Measuring performance and risk management in the broadest sense

To confront these challenges and tasks, they could develop and expand their staff, subcontract or centralise services into specialist departments (for example shared service centres), by increasing the quality of technical and IT resources, laying down training and monitoring quality standards –   particularly in terms of change management.

The equation looks simple: do more, do it better, do it cheaper. That sums up the whole art of efficiency.

If you ask what the foremost quality of a modern CFO should be, the word ‘adaptability’ is the one that comes up most frequently, with the idea of flexibility and efficiency. Being efficient means being effective at moderate cost. Additional effort and marginal costs must always be justified and offset by the gains deriving from them (quantitative and qualitative). The CFO must think not only in terms of quantity (cost) but also in terms of quality (improvement in procedures, internal control, STP, etc.).

Future challenges and obstacles

It has been said that ‘adaptability’ is the keyword for the CFO who must learn but also, as the visionary economist Alvin Toffler wrote, must unlearn and then re-learn once again. This is a sort of never-ending crusade peppered with major technical challenges – technological, financial and regulatory. Like the treasury manager’s job, the CFO’s job has evolved considerably over the last few years. The CFO has a strategic role in driving operations rather than simply recording them (accounting/consolidation) or facilitating them (finance/management accounting). In the 21st century, the CFO must manage those factors that could affect operational performance, and take a view on and manage risk in the broadest sense. He must furthermore be a source of Business Intelligence (BI1). We are very fortunate that BI techniques have evolved and have now reached maturity. Today they enable the CFO to meet shareholders’ demands and requirements. The obstacles in front of him come from an external environment which is hostile and shifting, to say the least. The European regulatory framework has been changing fast since the London G20. Modern assets have become more virtual, intangible and sometimes intellectual. We have to draw on the last ounce of the available human resources. Not only has the decision-making process been trimmed down but the demands for information have increased, obliging the CFO to equip himself with (more) effective tools (for example IFRS 7 & 9, SOX, etc.). Demands are ever more pressing, the environment is less favourable and the time allowed has been shortened. This is like the soap powder washing whiter challenge – it has to do as much as possible at a very modest price. Another development is the need to invest in technology, something that CFOs did not do or do not like doing. That has certainly changed.

As in the USA, he has become an effective No.2 who must have excellent communication skills. He must also develop his soft skills. The CFO’s cockpit and instrument panel have been improved thanks to developments in BI. However, the aircraft is now supersonic and it needs solid training and different aptitudes to fly it. Finally, he must be a visionary. A jet plane with an inexperienced pilot does not make sense.

Similarly, producing reports, assessments and forecasts without a proactive view and without then taking the decisions, make no sense. If the CFO sees that he is going too fast, he must be able to put on the brakes or change course. It is this ability to anticipate that will give the company its competitive advantage. He must model and explore the future and predict the unforeseeable (even though it may never happen). This is why Financial Performance Management (FPM) is the bridge between finance and operations. This new role may seem daunting, but it is also exciting and rewarding. Technological knowledge and analytical skills are becoming essential qualities in fulfilling the CFO’s wider job functions.

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Adapting to survive

The crisis has given CFOs more power. Together with the financialisation of the economy, it is at the root of the growth and expansion of their responsibilities. The need to control and manage the financial component has been sublimated to a certain extent. Under pressure, businesses have enhanced the role of financial managers to maintain their profitability. CFOs have had to take this phenomenal post sub-prime financial crisis pressure on-board. In record time and with limited resources, they had to rethink their management and control techniques, to adapt them to an environment that is at best flimsy. Managing costs, rationalising expenses, controlling capital expenditure, seeking performance, budgetary orthodoxy, regulatory reporting and so on – all the CFO’s fields of responsibility have increased over the last three years.  

Conclusion

Nobody would dispute the challenges and changes in the CFO’s job. They have to become better technicians than they were in the past. This interest in things technical and IT (notably Business ‘“selling’ a SEPA or payment factory project, or again when the treasury manager suggests adopting a new TMS tool fully integrated and interfaced with the ERP. Communications between the treasury manager and the CFO have been improved by the financial liquidity crisis. Today, new regulations (such as OTC Derivatives, IFRS 9 and 7, MiFID, 8th Directive, etc.) have improved communication between the two, which is all to the good.

While the CFO may have moved closer to the CEO, the treasury manager has also moved closer to the CFO, producing an upward shift in financial management as a whole. This new and exciting environment presents not only challenges but also wonderful opportunities and fantastic technical possibilities. Just like the treasury manager, the CFO can re-invent his job and enrich it, breaking out of its purely financial bounds.  The modern CFO must have the qualities and skills of adaptability which will make him the true guardian of the temple. His intellectual curiosity will enable him to flex to these new requirements.  The desire to re-learn will also be an essential quality for him to succeed and blossom.