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Although CFOs are weighed down by growing compliance, control and regulatory demands, it is vital that they free themselves to keep business growth in sight

This article was first published in the May 2013 International edition of Accounting and Business magazine.

In October last year, ACCA and the Institute of Management Accountants (IMA) released a joint study examining the current and future role of the senior finance officer in companies around the world (The changing role of the CFO). It shows that CFOs will continue to be challenged by the tug of war between their role as senior strategist and business partner, and the ever-increasing demands placed on them by greater compliance, control and regulatory complexity.

Nancy Lala, CFO of Canadian telecom's provider About Communications, believes that CFOs have become Jacks of all trades, particularly in small companies like hers. She says that more than ever, CFOs are required to have split personalities to encompass the roles of compliance enforcement officer, public spokesperson and company cheerleader. ‘CFOs need to have a strong public presence to deal with investors and lenders whether the company is large or small. However, CFOs of smaller companies also need to roll up their sleeves and dive into more mundane tasks. They are chief cooks and bottle washers.’

‘Over the past 10 years particularly, with the dot.com crash, Sarbanes Oxley, US bank failures and International Financial Reporting Standards, CFOs have become accustomed to a constant barrage of change, and I don’t see this letting up any time soon,’ she says. ‘Also for smaller companies, the focus on cashflow is a constant and for CFOs, cash management is king,’ says Lala.

Harold Earley, CFO of US foam products manufacturer FXI Holdings Inc, says that CFOs, particularly in private companies, have become much more hands on with the business, beyond overseeing the numbers, forecasting and cashflow. ‘I’m in every one of our plants at least once a year if not more, and the big plants probably two or three times a year. So I’m really getting to know the people running the plants, what their issues and requirements are,’ says Earley. ‘I really understand what’s going on in that business, in that plant, which helps me make decisions a lot faster.’ At the same time, he explains, his role as CFO is also to support and help drive the sales function. ‘When issues arise around capital expenditures or special projects, I spend a lot of time working with the sales team, so I really understand what the competition is that they’re facing and what their challenges are.’

Compliance burden

For large public companies, compliance continues to dominate the CFO’s agenda. Alex Davern, CFO of automated test equipment producer National Instruments (NI), has witnessed a dramatic change in the regulatory environment over the past 10 years. ‘From where I sit, for CFOs, the compliance burden has exploded massively since 2003 with the first implementation of the Sarbanes-Oxley Act.’ Although, over time, the implementation of the act has become less of a burden, he explains, companies everywhere continue to get bombarded by incremental new regulations. ‘In the US, for example, with the 2010 Dodd-Frank Act, we’ve seen a significant ramp up in enforcement activity. So it goes without saying that we take compliance very, very seriously.’

Regulatory changes

While CFO certification has raised the risk profile for CFOs in the US, upcoming regulatory changes from the US Securities and Exchange Commission (SEC) will raise the stakes even further, explains Davern. ‘More and more non-financial elements are being added to the architecture or structure of regulatory compliance for financial statements, in an effort to solve other problems,’ he says. ‘For example, next year CFOs will be signing off on financial statements that contain disclosures related to conflict minerals.’ (On 22 August 2012 the SEC adopted a rule mandated by the Dodd-Frank Act to require companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country.)

‘Tracking down exactly where all the metals included in your products come from is not a traditional financial function. I believe it distracts the attention of the CFO away from their primary job. It’s a trend that I find worrying and hope that it won’t be continued forward,’ he says.

Against this backdrop, CFOs have still had to keep their eye on managing the business, he explains. ‘When we speak directly to the role of the CFO, for them to be a business partner and help run a large corporation like NI, the reality is that they can’t allow themselves to become a compliance executor. It’s been necessary for the CFO to delegate that role down to a very effective set of management who will handle those compliance challenges.

‘CFOs need to be conscious that these are properly managed and executed, but they need to also be determined to free up the vast majority of their time to focus on the growth of the business, the execution of the vision of the company, and on driving value for shareholders. So they have to be responsible for compliance, but they also have to effectively delegate that to be able to do their own job as a CFO.’

For financial services companies particularly, the financial crises have intensified the compliance role of the CFO. According to Colleen Johnston, CFO of TD Bank, post financial crises, the amount of disclosure and the scrutiny on disclosure has increased. ‘That’s probably been one of the most significant impacts on the finance function,’ she says. ‘That’s something where the need for excellence in financial reporting has never been greater.’ From a business standpoint she says, organisations have to figure out how to manage this higher regulatory and compliance standard – how to manage the costs of those initiatives, how to make sure they have the right business solutions that will meet the new standards and make sure that these aren’t completely overwhelming the business model.

Balancing act

‘Given my role as an adviser to our CEO, getting the right balance between risk and control, and at the same time grow the revenue base, is something I really think about,’ says Johnston. Meanwhile, as the focus on regulation and control increases, CFOs have to be even more focused on achieving lasting business results. Says Johnston: ‘The reality is that we’re in a much slower growth environment globally, and that means that as the whole regulatory and compliance burden increases, organisations like ours have to look for ways to improve core productivity, because it’s getting tougher to achieve positive operating leverage where your revenues are growing faster than your expenses. That’s a role where clearly the CFO is very, very involved – making sure that we manage the productivity agenda going forward.’

So what are the main characteristics of CFOs that will succeed in the future? According to Lala, the key to success as a senior finance executive is still a function of the people on your finance team. ‘You can’t know it all,’ she says, so CFOs need to surround themselves with experts and excellent executors.

For Johnston, in order to have a strong team you also need to be a strong leader with excellent business acumen. ‘Leadership is incredibly important – your leadership skills, communication skills, being able to understand the business, being able to be a good partner with the business, with the CEO, with your board – being a good adviser – all of those things really call for a much broader skill set for CFOs, now and going forward.’

The big picture

Meanwhile, CFOs will be expected to have a wide purview of the total operations of the company, beyond the finance function. According to Harold Earley, the key to success as a senior finance executive will increasingly be tied to their understanding of the entire business. ‘Your ability as a CFO to work with the sales organisation, with operations, with R&D, with the business units, is becoming more and more important.’ Dealing with the numbers and external capital markets is greatly required, but to really be able to accelerate the business, you have to be able to work horizontally, he says.

Similarly, for Alex Davern, in order to execute the role of CFO successfully now and in the future, financial executives have to go beyond their compliance and control function.

‘You have to remain focused on being a partner with the business, he says, on driving value for all the stakeholders in your company and execute the company’s vision. I think that’s the real role of the CFO. CFOs will increasingly have to become business generalists.’

Ramona Dzinkowski, economist and business journalist

 

Last updated: 22 Jul 2014