The CFO: Filling Strategy Shoes While Wearing Tight SOX
The CFO’s position has been fundamentally transformed, not only by the scandals of Enron and WorldCom, and the Sarbanes-Oxley requirements that arose in response, but also due to new pressures for growth. In assessing acquisitions or organic growth initiatives, the CFO has to be the voice of reason, to ensure that the growth is profitable. But the CFO also needs the strategic perspective to not always be the one to say "no." In other words, the CFO has to think more like the CEO — to become a true strategic partner.
The Challenge: Balancing Strategy and Accountability
The CFO is expected to play a broader role in strategy. But at the same time, because of Sarbanes-Oxley, the CFO has to sign off personally on the company's financial statements. "The CFO is pulled in two different directions," said John Percival, academic co-director of Wharton's The CFO: Becoming a Strategic Partner executive program. "The CFO needs to work with the CEO in shaping the future strategy of the company and meet the demands of Sarbanes-Oxley."
Managing growth is a key issue for CFOs. Companies need to grow, but at the same time companies often have diversified into areas that they didn’t know anything about. "Companies did foolish things in pursuit of growth," Percival said. "What was missing was a financial perspective on strategy." But a CFO who turns down every project can end up dampening the company’s future prospects. "The role of the CFO is to make sure it is not growth for growth's sake," Percival said. "It has to be profitable growth, earning more than the cost of capital, as we say. The CFO should be an advocate of growth — the value of the firm is not going to grow if we are not growing the top line. But the CFO can suggest some alternatives. For example, what if we do a joint venture instead of an acquisition?"
At the same time, the CFO is also taking increasing responsibility for operations, sometimes even taking over the role of the Chief Operating Officer. This means CFOs need a deep understanding of all aspects of the business — insights that are also crucial for implementing strategy. "Anyone in a CFO position today really needs to be performing a different role than they did in the past," Percival said. "They can't just be doing accounting. They really need to be there to provide some financial perspective on the whole process of developing and implementing strategy."
The Skills
The CFO needs more than financial skills. These skills are a given. CFOs need to have rigorous accounting capabilities, or the ability to hire and supervise a great controller. But success depends upon communication, leadership, and strategic acumen. "The assumption is that you have the financial skills," Percival said. “The problem may be that you are not presenting them in the right way. You need to know how to present these insights so you don’t come across as a know-it-all, but are confident and persuasive."
The CFO also needs to speak to Wall Street, facing the challenge of telling the truth but not alarming investors. “There is some evidence that capital markets like smooth earnings,” Percival said. “Whether they should or not is another matter. But this means that the CFO to a certain extent is marketing the company to the capital markets. Are you smoothing earnings or lying to capital markets? One of the things we build into the CFO program is ethics. We can’t provide simple answers, but we can offer a framework for thinking about these issues.”
Effective CFOs probably always had strategic insights, but now they are crucial to success or even survival. “You might argue that you always needed these skills,” Percival said. “In the past, however, the U.S. was such a dominant country that you could succeed no matter what you were doing. That is not true anymore. It is getting tougher and tougher out there.”
The Career Track
While controllers may have been appointed CFO in the past, this is becoming less common. Research by Korn Ferry International found that only 4 percent of CFOs of Fortune 500 companies hired from outside the firm were controllers. More than half were corporate or divisional CFOs. Controllers were more likely to move up to the CFO position within the company, however, where 33 percent of insiders promoted to CFO were controllers.
Sarbanes-Oxley has led controllers to become increasingly specialized in compliance, reducing their chance of assuming the leadership position of the CFO. This means that if they aspire to become CFOs, controllers need to gain operating and strategic experience.
“The traditional path of going from accounting to finance is not as dominant as it used to be,” Percival said. “The CFO needs to be more of a renaissance person, with more diverse skills, and that is what we stress in the CFO program.”
© 2007 The Wharton School, University of Pennsylvania
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