When a CFO is absent from the strategy dimension, it can be compared to a co-pilot of a commercial airliner sleeping in the economy section during a long haul flight. The CFO is the co-pilot for the CEO as he/she charts the course for the company and navigates the changing "weather patterns" of the various constituents (board of directors, shareholders, employees, analysts, creditors, customers).
The focus of the CFO as a strategist is to actively support the CEO in setting the future direction of the company to enhance business performance and shareholder value. The business environment is too complex to be managed by one person and therefore the CFO as a sounding board and information filter for the CEO on a range of regulatory, economic, legal and competitive issues is a must in contributing a balanced, conservative, risk-based perspective to the vision being crafted. To free up the necessary time investment, the CFO should be an effective delegator of other finance responsibilities and give greater priority and importance to activities within the strategy dimension. If important strategic or investment decisions are taken without the CFO's input, this should not discourage him or her from performing an effective analysis and recommendation after the fact - and for the record. Better late than never, especially when the board of directors and CEO do not yet fully realize what an asset they have in the CFO as a voice on strategic matters. No board today should approve a strategic plan without the CFO's "fingerprints" on it. The impact on resulting business performance and shareholder value could be the difference between a mirage and an oasis.
The roles a CFO undertakes within the strategy process are to provide the CEO with the following:
• A financial perspective which improves risk awareness - The CFO should offer insight as well as pose questions such as whether a strategy entailing the focus on a few large customers results in the potential for an excessive concentration of credit risk.
• Strategic decision-making - The CFO should challenge a company on whether it understands how its profits are truly derived. Is the company segmenting its markets geographically rather than on a customer basis resulting in the mispricing of contracts and misaligned sales and marketing efforts? The strategic thinking CFO starts with the business first then works back toward the numbers.
• Integrating performance management - The CFO should be leading this initiative and communicating the results to ensure internal alignment of resources with the external strategy of the company. Does the company understand the key value drivers from within and across functions and are they clearly aligned and document mapped to the company's overall strategy? Through this exercise the CFO not only prioritizes the finance agenda alignment but supports other functional heads by doing the same. Value mapping leads to the elimination of evaluation criteria and incentive schemes which promote activities and decisions disconnected from the strategy of the company, and which would otherwise lead to inefficiencies and waste of resources.
A CFO demonstrates the following competencies as a strategist:
• Critical thinking ability - A CFO should temper the wave of euphoria demonstrated by others in a company about a good idea which has yet to be placed under the rigors of analysis and due diligence. A steady dose of persistence in questioning and willingness to stand on the ground of rational thought in the face of irrational emotions can save a company from betting the farm on a whim or following others in the industry who might be doing so in a herd like mentality.
• Analysis and presentation of data - A CFO should understand the difference between forward looking managerial financial information and backward looking accounting information and which type applies to a particular decision-making process.
• Global financial perspective - A CFO should recognize the importance of cross-border investment laws and regulations, effective tax planning, and actively managing the components of the company's cost of capital - an example of topics which many CEOs may overlook in the strategic planning process otherwise.
• Dealing with ambiguity - The CFO should be a thought leader to the company in forming points of view around the changing business environment and demonstrate the ability to move out of the drudgery of the numbers and step back to understand the wider picture. Thinking outside of the box is essential to a CFO operating within a dynamic, ever-changing environment.
A CFO actively addresses the following critical issues as a strategist:
• Providing a financial perspective on innovation and profitable growth. CFOs should be actively engaged from the beginning through "what if scenario analysis" discussions and analysis with company management as new business ideas are considered. The CFO should be a leader in the company for instilling a "value mindset" culture for all activities and decisions taken.
• Translating expectations of the capital markets into internal business imperatives. If liquidity in capital markets is drying up, this is a factor which needs to be dealt with proactively rather than reactively. The CFO needs to sound the warning alarm to the rest of the company with persistence until business plans are properly reviewed and responsive measures taken.
• Providing the information and tools necessary for the organization to make sound business decisions. Addressing outdated business intelligence systems, unsophisticated processes, and fragmented technology are just a few of the challenges facing a CFO to ensure the infrastructure supports the strategic direction of the company.
(James Babb is CFO program leader at Deloitte in the Middle East.)
Next week: The CFO as operator
