2 Mar 2012 03:43pm

Beyond numbers: The role of the CFO

As the role of finance director becomes more involved, high-profile and influential, Amy Duff asks whether there is any truth in the suggestion that numbers people have become the power behind the throne and, if so, which skills they have relied upon to earn their position at the top

What do we know about finance directors and group financial officers? We know that they have reached their position within the organisation because the board feels that they demonstrate the vital ingredients to ensure their business is managed through poor macro conditions as well as boom times.

Ultimately, that requires strong financial foundations, absolute technical integrity, commercial insight and the ability to build and lead a team so that the finance function works fluently with the rest of the business. The person filling the role also needs the personality and confidence to have a voice at the board table (which keeps the chairman and NEDs happy) and the skill to act as the face of the company with third parties such as banks, investors, auditors and the media on all issues related to financial performance.

In a recession companies have to be focused on their balance sheets, performance and margins, which goes to the heart of the FD role

Julia Wilson, group finance director at 3i

And then there is the relationship with the chief executive, which is where what we know is less clear-cut. By title, says Les Clifford, senior partner at Ernst & Young and leader of its CFO programme, “the chief financial officer is traditionally the strongest number two to the CEO”. But the function has morphed and evolved to such a great extent that “there’s a difference between the title that people carry against the role they do”.

As Ernst & Young’s 2010 report The DNA of the CFO announced, “The CFO’s unique optic across the business, their rare positioning as a purveyor of the truth and their fact-based discipline has raised their profile to an unprecedented degree.” What’s more, CFOs are embracing a more strategic remit within their organisations to the extent that the 700 interviewed by Ernst & Young placed the ability to design business strategy and to innovate as second only to “deep technical skills” as the most important capabilities they would expect to have in three years’ time.

The role has diversified in such breadth and depth over the past few decades that there is more potential than ever for finance executives to exert significant influence over setting and executing strategy. Combined with their exposure as the front face to the market, especially during difficult economic times, and their capacity to ensure that business decisions are grounded in sound financial rules, it is no wonder the theory that finance people are the real power behind the throne has been reignited.

When Deloitte examined the evolving role of the FD in 2006, it spoke to 250 CFOs and FDs from large organisations about how the skills required for their job had changed. “Massively” was the consensus. “There’s far more dependence on analysis, communication and leadership than on number crunching and accounting issues; a more business strategic view,” said one. “It’s less technical than it used to be; it’s more about getting others to do things and bringing the team together,” said another. Overall, it was considered to have become more of a general management role that encompassed not just risk analysis, but strategy as well.

It is true that the role has changed over time, says Julia Wilson, group finance director at 3i since 2008. But she is not a fan of the power behind the throne concept. She regards it more as a theme that comes in and out of focus depending on the macro conditions of the moment.

“It’s linked to economic cycles,” she says. “Because in a time of recession companies have to be really focused on their balance sheets, their refinancing requirements, they have to concentrate hard on driving performance and margins, which goes to the heart of the FD role. So what you get is the FD coming to the fore.” In an environment of flux and uncertainty, adds Wilson, the FD will be in the spotlight more, “because of their intense investor-relations schedule”.

It is no surprise that the CFO role has come to be regarded as one of the most critical components of a corporate hierarchy. Charlotte Boyle, associate partner of board search firm the Zygos Partnership, says people doing the job are now expected to be more influential and involved than they were historically. “The wording we use when recruiting is often ‘business partner’ to the CEO,” she says. “There is
a demand for more rounded FDs so whereas in the past the requirement was all around the finance function, now the expectation is that this person will be a business partner with a broader remit; will be able to contribute to strategy, will be strong enough to stand up to the CEO and someone the board can trust to be the conscience of an organisation”.

But controlling the CEO? No, replies Boyle, “The CEO is still the CEO and if the FD is too powerful then the CEO probably isn’t doing their job properly.”

Businesses like having someone at the top who uses what the numbers are saying to understand what is happening at all levels

Mark Freebairn, partner at Odgers Berndtson

It should be a form of partnership, albeit one that is in a defined hierarchy, according to Luke Johnson, business author and chairman of private equity house Risk Capital Partners. He says, “Accountants have always been in general management and in financial areas. The FD must have a great deal of input into many parts of the business – not just the annual budget, taxation and banking relationships but also strategy and tactics. However, the chief executive leads the business and ultimately the buck stops with them.”

There is a good reason why the role of the CFO is seen to be more powerful these days, says Philip Gregory, chairman of Medicals Direct Group and a mentor on ICAEW’s leadership programme for FDs. It is because risk management, corporate governance, compliance and strategy are “right up there in boards”.

He has also observed the balance shift over the years from what he calls the “cricket scorer” role – the traditional FD who is semi-detached from the business and does nothing but numbers – towards what he describes as the “general financial executive” where they are good at understanding the business and its strategy and, critically, are a contact and advocate for the executive team in terms of selling their business to the NEDs. Gregory explains, “The chairman and CEO are looking for what I call the hygiene factors; good with numbers, financial control systems, good treasury skills etc. But also good at putting a financial perspective into decision-making and selling the business externally to investors.”

What’s required of an FD differs from sector to sector, he adds, “In some industries, where the product is highly technical, such as software or chemicals, you see a traditional CFO. But in insurance, banking, general services – where it is easier for the CFO to understand the business and make contributions – you tend to see them being much more of a deputy chief executive,” he says.

It is a far cry from the criticism that used to be levelled against finance, which was that the function was too numbers-orientated and not commercial enough, says Mark Freebairn, partner at executive search firm Odgers Berndtson. The evolution is being felt in two ways.

First, he is seeing more FDs choosing a role that adds value and drives commercial change within a business rather the traditional “numbers, statutory reporting, expenses” version. Second, businesses are seeing the value of having someone at the top who uses what the numbers are telling them to understand what is happening at all levels.

In the last decade he has seen numerous examples of this trend at work. Construction firm Sir Robert McAlpine took group finance director Dominic Lavelle from retailer Allders in 2003. Then in 2008 Helen Weir, FD at retailer B&Q, moved over to the same role in financial services at Lloyds. Julie Southern’s 2009 move from chief financial officer to chief commercial officer at Virgin Atlantic is a more recent case in point.

But there is another dimension to this story – finance executives do not necessarily have to settle for being the power behind the throne because there is nothing stopping them one day taking it.

Says Freebairn, “If you look at the number of FDs who’ve become CEOs in the last three or four years, it’s substantial”. Why? Because they are considered a safe pair of hands.

As Zygos Partnership’s Boyle explains, strong financial skills and an ability to manage a company through difficult times are a big draw. “Currently, a lot of our boards feel comfortable having the FD as CEO,” she says.

It goes back to what 3i’s Wilson says about economic cycles influencing whom the board chooses to put at the top, although obviously personality and sector play their part. In a finance- or investment-type business, it makes sense to move an FD into the CEO role, Wilson points out, because finance is “at the heart of the business anyway and you see a lot more focus on FDs becoming CEOs. If you think of 3i, that’s something that’s quite easy to understand” (both Brian Larcombe and Michael Queen moved from the FD to the CEO role at 3i in 1997 and 2009 respectively).

But do CFOs make good CEOs? Gregory is someone able to speak with authority on this subject: not least because he’s taken the top job three times.

“I would say generally not,” he comments. “Each of the three times I took the job, it was because the company was in trouble, something had gone wrong and it needed sorting out. I think CFOs are very good in those sorts of situations. But I think the important thing is that you move on when the company is on the straight and narrow.”

The move from CFO to chairman, though, is a better fit. Gregory continues, “People generally expect the CFO to be a good chairman because the role is to have an oversight of the strategy, to evaluate how the business is doing and whether the CEO is leading that business as dynamically and positively as possible. You need to understand the numbers, the data and to be interested in things like corporate governance.”

A good example, he says, is Douglas Flint, who moved from group finance director to chairman at HSBC. That calmed City jitters because he was considered a steady hand.

But Ernst & Young’s Clifford says his firm’s research blows any suggestion that FDs and CFOs actually want the chief executive role out of the water. They see their career choice as one to be celebrated – not a staging post to the role of CEO.

He explains, “A lot of people say CFOs are frustrated CEOs. But what we found was that 73% are happy in their finance function, with only 10% saying they want to be a CEO. So that’s knocked that one on the head.” His explanation for the low 10% figure is that because the role of the CFO has changed so much to “business operational”, they don’t necessarily need the number one post to get an “all-round business challenge”.

But with prominence come extra demands. As the public face of company performance, and by extension a protector of company reputation, the experts agree that FDs and CFOs could do with improving their softer skills. And with just over half of respondents to The DNA of the CFO report saying that the shift from “focusing on financial performance to managing a complex stakeholder universe” is one of the most difficult challenges they face, those at the coalface tend to agree. 

So the message to aspiring FDs and CFOs is: brush up on relationship building, change management, communication, talent development and influencing skills. And to those established in their roles: become a hero to the aspirants and future leaders. It will make your organisation stand out from the crowd.

Nine steps to prepare for the Group CFO role

1. Gain a breadth of finance experience.

2. Develop commercial insight.

3. Seek out M&A experience.

4. Obtain a balance of traditional and non-traditional skills.

5. Develop leadership and team-building skills.

6. Get international exposure, particularly in emerging markets.

7. Gain experience of finance transformation initiatives.

8. Get exposure to the market and its stakeholders.

9. Build effective relationships with the board.