Corporate Governance

Evolving CFO roles

18 February 2013

Numbers And Finance

Jirapa Suphakiatkamchorn, Vice President of Human Capital Alliance comments on a recent Mckinsey study “Today’s CFO: which profile best suits your company?”.

During the past decade, the Chief Financial Officers role has evolved and generally expanded for many of our clients.

After our companies began recovering from the devastating 1997 financial crisis, we noticed that the traditional CFO roles of financial reporting, audit and compliance, planning, treasury, and capital structuring gradually expanded to include corporate portfolio management and capital allocation.

Some of our other CFO placements became the company’s primary investor relations public face, leaders in performance management, and exporters of finance-experienced personnel to the rest of the organization.

During the decade, many CFOs were brought in purely to restructure organizations and prepare them for expansion and growth.

A recent McKinsey study “Today’s CFO: which profile best suits your company?”  suggested that CFOs should answer several questions when planning their own career-development plans — or CEOs and boards should answer when searching for CFOs.

1. What are your company’s strategies and aspirations—especially considering the nature of your industry?

CFO profiles often reflect the structure, conduct, and performance of a company’s industry. Stable sectors with large global footprints and extensive supply chains—such as oil and gas and consumer packaged goods—are more insular in their CFO selections.

Only 4 of 28 CFOs in McKinsey’s study in these industries were hired externally, and only 2 had significant experience outside the sector.

However, international experience was very important, with 9 of 13 CFOs in oil and gas and 10 of 15 in consumer packaged goods having worked in multiple geographies.

At the other end of the spectrum industries with rapidly changing technology and significant R&D, such as pharmaceuticals and medical products (PMP) and technology tended to have CFOs with more experience in strategy and transactions.

They were much more likely to select CFOs from outside the company or the sector. For example, of the 14 CFOs, 8 were hired externally, 6 had consulting or investment-banking backgrounds, and 9 had general-management backgrounds. Over half of CFOs in both the PMP and technology industries had experience outside their sector.

In addition to industry context, companies must consider how certain CFO characteristics might best support their own strategic plans.

Leadership teams of companies following inorganic (M&A) growth strategies require higher degrees of market insight and strategic orientation.

Senior executives of companies following organic growth strategies, meanwhile, exhibited high competencies in people and organizational leadership.

“So regardless of industry characteristics—and as long as candidates meet the threshold of finance expertise and performance-management skills—a company embarking on an ambitious M&A program, for example, would want to give a strong preference to those with significant transaction experience and industry insight, more akin to a growth champion.

A company lagging in profitability or undergoing significant industry consolidation may require a CFO more similar to the performance leader—strong in performance management and cost containment.”

2. What is the composition of your top-management team?

CFO selections cannot be made in isolation; companies must consider the top team’s strengths, paying specific attention to its blind spots and missing capabilities.

“Finding the right set of leaders is clearly an important determinant of corporate performance. This means that the specific profile of your CFO may need to be different from that of other companies—even those in the same industry or those that have similar strategic goals—in order to create a robust top team.”

For instance, companies with a disproportionate share of leaders with a few areas of deep expertise—so-called spiky leaders—tend to outperform those whose leaders have a broad range of more general skills. “This requires members of the top-management team to build on one another’s strengths and compensate for one another’s shortfalls.”

Companies with visionary CEOs may require CFOs with firm grasps of the business’s economics and enough influence capital inside the organization to counterbalance against potentially risky moves.

A company hiring a CEO from outside the organization may require a CFO with deep company expertise and a firm grasp of the numbers, such as a person who fits the finance-expert or generalist profile.

“The downside of mistakes in selecting the top team, and the CFO in particular, is significant. Myopic top teams can undertake risky or costly acquisitions, fall behind on innovations in the market, or fail to retain key talent. “

3. What is the current level of capability in your finance function?

As long as a CFO’s profile fits with a company’s strategy and complements the top team, further considerations are more tactical.

The finance function’s current capability is most important, since the CFO’s primary responsibility is ensuring the execution of the finance group’s core functions, particularly strong compliance and controls, accurate data, and systems integration.

“If a company struggles with efficiently performing the basic finance functions (relative to peers), then it may be necessary to promote CFO candidates with considerable experience in a variety of finance roles and a track record of performance improvement.

However, if strong capabilities are already present in the finance organization, a company may consider candidates with other competencies, such as broader management experience or strategic insight.

Companies that do so typically pair such a CFO with a senior finance executive who manages accounting and other traditional finance roles.”

I would appreciate any comments or remarks.

Jirapa Suphakiatkamchorn

pui@humancapitalalliance.com

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