Evolving Expectations of the Chief Financial Officer
As organizations face truly unprecedented times, the role the Chief Financial Officer plays in steering companies through crisis is more pronounced than ever before. Whilst most finance leaders braced themselves for some form of an economic slowdown to strike this year, advanced preparation was impossible against the inconceivable severity and pace of the downturn brought by the unfolding pandemic.
The demands that a pivot from enjoying an upmarket, to entering survival mode and then to optimizing organizations to face an unknown new normal, call for an extremely skilled Chief Financial Officer and pushes expectations for this role to the highest level. The quicksand like disruption of the market requires finance chiefs to constantly align financial planning and action strategy to protect their business during and out of this radical and unpredictable shift.
As we have seen recently and in previous recessions, finance capability is one of the first areas reviewed by a board to ensure nothing is left to chance in a climate where survival is not a certainty. As well as cross examining the rigor of financial expertise, soft skills which play into the less visible elements of a Chief Financial Officer’s remit must be considered in order to provide the best chance of weathering the current storm and prospering beyond it.
PARTNER AND CHALLENGER
Whilst a Chief Financial Officer’s role as a partner to the executive team is not a new enlightenment by any means, what is left as a footnote to this now presumed requirement, is that finance leaders must not solely inform strategy, but challenge it. This is a significant departure from a traditional focus on the numbers and the competencies required to successfully counter the views of peers and superiors are complex and intangible. This quality is hard to identify initially, yet on further evaluation of behavioral cues we find the soft skills of an otherwise excellent finance executive often point to a more benign approach to their role as challenger. During an upmarket, shortcomings in this area sometimes do not come to the surface when many paths can lead to revenue, but during a downturn the ability to confidently challenge the direction taken by the business is critical in ensuring that the optimal and sometimes only, route is taken.
Across the search and due diligence assignments we have worked on, an ability to openly challenge is often overlooked as a critical competency however we believe that boards must actively pursue this as a key behavior in their Chief Financial Officer hiring process. Whilst reference to this skill is touched upon, there needs to be an embedded expectation that finance leaders effectively communicate and influence alternative viewpoints. To build this in a healthy way, the mentality of the executive team needs to be one where open minded conversations on strategy occur regularly with all parties involved. A closed door discussion being presented every quarter effectively cements an isolated direction as rigid decision; which can at best light the fire for an avoidable turf war between leadership, or at worst cause reluctance to suggest a conflicting view point, deteriorating companies by cultivating a culture of complacency.
For the Chief Financial Officer, ensuring that they provide consultative advantage as a trusted partner beyond just the provision of empirical data will establish them as central pillar of such planning. Finance chiefs must exhibit strong self awareness in where they bring value, but equally where they lack it and involve other leaders to add to their knowledge, or lean on those with elevated understanding of the situation at hand. In leadership teams where self awareness is lacking or disproportionate, we have seen relationships become frayed due to tensions arising from a valid yet contrary view being voiced. Significant gravitas and tact are required to challenge and shepherd strategic direction in a collaborative manner, particularly where there exists a deep rooted norm, or preconceived notion that a model for previous success can be relied upon when company and market economics have evolved considerably.
In addition to influencing the fundamental strategy of a business, the Chief Financial Officer should also verify the impact of smaller scale proposals and temper these if necessary. One such example may be countering an initiative intended to spark a boost in near term earnings that will negatively impact near term cash flow. When there is room for maneuver on the balance sheet, many Chief Financial Officers might avoid providing input on such agendas, instead picking their fights to focus on big ticket items, however the consequences of not speaking up on a potential risk of any size which threatens already scarce resources, run far deeper during a downturn.
It is now more important than ever for finance leaders to work hand in glove with the broader executive team and board, playing a significant role in critical decision making. The Chief Financial Officer must act as a balanced partner, focusing the attention of executives on efforts which provide the most realistic value to the business, rather than those which are the most visible. As the world shifts to cycle out of the near-term reaction to the current crisis, finance executives will need to be comfortable in a hands on approach to informing and challenging assumptions on what the path to recovery could look like.
CATALYST OF CHANGE
Finance chiefs must adopt a forward looking view at every turn, not just in regards to carrying out forecasting, but leading by example and acting as a catalyst of change in ensuring reporting is translated into tangible business models which can actioned to adapt to the state of market. Success lies in facilitating meaningful impact with a one step ahead mentality, implementing the necessary actions to align the business to financial forecasts with quick and coordinated precision.
Effectively driving change requires an elevated skill set above and beyond planning to gain buy-in from the organization. This can only be earned by Chief Financial Officers who demonstrate through their actions that they have the initiative to execute with agility and conviction, bringing to light the value of action taken as it relates to multiple levels and functions within the business. A pragmatic strategy must be built that encompasses the entire business, incorporating consistent measures of change across every area of operations; a disjointed approach or lack of visibility between different departments and regions can mean any positive value gained is offset, both in terms of dollar amounts and the adoption and buy in to current and future transformations.
Whilst the initiatives which finance leaders are being forced to enact as a response to the current market are likely to be unpopular as an understatement, those who maintain respect in their role in spite of this have worked to strengthen trust in a human sense as opposed to relying on their numerical competence. For both new and established finance executives, this can often be an unseen challenge. Leaders who have been steering the finance function of a company through prosperous times are now navigating uncharted territory and the decisions they make, or don’t make, will be under a new level scrutiny.
Those incoming to the position from both internal and external routes face a further set of objections. Internal successors who join from a career in their company’s finance function before progressing to Chief Financial Officer may be recognized for their financial expertise, but questioned by some at the front end of their tenure on their range of market insight and strategic influence. Such candidates will need to show a different side of their ability early in their role as finance chief by making and driving decisions more visibly to build on the conviction of the broader organization in their ownership of the position.
Generally, we have seen that appointments from external routes find it easier to gain early buy in based on perceptions informed by their background and track record, but have more difficulty in terms of adoption on the back end of decision making, particularly if improvement initiatives are seen to swim against the current of long standing processes. Developing relationships through emphasizing the personal impact which an optimization project brings and combining this with a reference to past learnings from historic traditions can help break down these walls before savings are realized.
For all directions to the position, there has been an increase in the placement Chief Financial Officers who have experience beyond the finance function. After the global financial crisis, companies reexamined the profile of finance leaders and in 2009, a Deloitte survey reported a marked increase of appointments were those who had been trained in finance but cycled into a general management position; up from 12% to 22%. The tectonic shift in not only forming a company’s financial strategy, but making and driving decisions through the life cycle of the downturn will require a leader who fully understands the nuances of the business and the market it operates in. We expect to see a similar jump in placements which address recent turnover in this role due to the deep understanding of operational dynamics acting as a solid foundation from which to build credibility where there exists an urgent need to hit the ground running.
Chief Financial Officers should also apply this insight in the broader business, whether gained from hands on experience or through others, to build a value adding agile finance function which enables operations. This should be shaped with intention; eliminating process for the sake of process and instead take a proactive and innovative approach to what execution teams really require at their fingertips. Finance should provide leaders with a streamlined means to access meaningful, accurate information that can allow them to focus on delivery rather than being subjected to administrative burden or being forced to supplement or second guess data analysis. Whilst it may be an uphill battle to justify investment at present, ensuring a company’s finance team and internal processes are helping not hindering execution is critical.
Particularly in today’s uncertain environment, it is pivotal that finance executives must continue to show a strong focus on financial control. There is currently a pressing need to reset businesses to focus on their foundation of success at the most basic level; where is cash being generated and where is it being burnt? Chief Financial Officers require a wide lens view when it comes to crunching the numbers, studying which internal and external levers play into headline figures before taking a deliberate and considered approach to financial planning.
Strong technical skills are of course a requirement to enable Chief Financial Officers to accurately drill down on a very fluid baseline and control costs in an extremely challenging set of circumstances. This being said, finance executives must be capable of walking the tightrope between managing cash with a keen eye and stepping back to see the bigger picture where they may be forced to act on imperfect information, requiring discipline in not allowing rigidity to swallow decision making by working forecasts down to the last dollar.
To balance control, it is also important that Chief Financial Officers must provide empowerment. While the current economy demands tighter cost restraints, it also has given rise to a more competitive commercial approach to projects and flatter organizational structures with less need for multiple stage gates to monitor spending. Finance leaders must show consideration of these factors by appropriately adjusting the reigns or layers of approval margins, providing a welcome relief of flexibility as a nod to disruption; exercising trust in employees rather than spending their own time reviewing the minutia of every threshold.
Despite the profile boards are now seeking for this role shifting in line with the growing impetus on the elements that were once thought of as extracurricular activities to core fiscal oversight, the need to lead traditional financial control has not diminished. A firm grasp on the numbers rightfully remains as part of the Chief Financial Officer’s oversight, however transacting and reporting matters should not cripple strategic influence, even at the best of times.