This year, the Economist’s CFO Summit brought together some of the globe’s foremost finance leaders to discuss the ever-evolving challenges facing CFOs.
During the summit, finance leaders from organisations such as Goldman Sachs, GE Healthcare and Saatchi & Saatchi, shared their unique insights into the changing role of the CFO. Throughout the summit a number of presentations and panels explored issues such as managing risk, the importance of obtaining staff buy-in and the role’s shift from pure finance to strategic planning.
4C Associates was once again one of the main sponsors of the event and has put together a write-up of the CFO Summit 2014: “The Connected CFO.”
The Macro-Economic Climate, International Growth and Changing Challenges for the CFO
Jim O’Neill, Former Chairman and Chief Economist at Goldman Sachs Asset Management, opened the summit with a forward-looking presentation entitled: “The Macro-Economic Climate, International Growth and Changing Challenges for the CFO”.
O’Neill began his talk by congratulating finance leaders on having made it through turbulent times: “Given what you’ve had thrown at you in the past five years, it’s a great achievement that CFOs have remained sane.”
He added that although the financial landscape seemed to be returning to a certain level of stability, judging and managing risk was more challenging than ever. To illustrate this point, O’Neill explained that for the first time since 2008, the majority of western economies were performing well, but no one knows how sustainable this situation is.
“Even the poor, old battered Eurozone is showing increasing signs of growth.”
Using a series of graphs and charts tracking a number of growth indicators, O’Neill underlined just how much better the western world was performing following the economic crisis. He pointed out that world GDP for the last decade had been stronger than in the previous two, despite the financial crash. He examined a number of regions and countries, including the UK and Japan, before concluding that whether or not this positive trend would continue, depended on China.
China and maintaining sustainable growth
China, O’Neill explained, would continue to play a pivotal role in the global economy and this despite the country’s economic growth slowing down, as the government switches its focus to quality over quantity.
This decade, he said, would see China and the USA exchange roles, with the latter saving more and spending less and China seeking to do the opposite. “World indicators,” he explained, “are going sideways because China is slowing down.”
In this context, O’Neill urged CFOs to keep in mind China’s production and consumption patterns, as these will determine global commodity prices and consequently force many businesses to re-evaluate how they manage costs.
Asked to single out two nations he believed would continue to prosper in the coming 12 months, he named the UK and the USA, but added he could not guarantee this would be the case in two years. For this reason he again underlined the need for finance leaders to embrace a global outlook when it comes to mitigating risks and balancing costs.
O’Neill finished on a positive note and predicted that even with China’s economic growth slowing, the rest of the world will continue to improve. He did, however, add a note of caution and warned that the next few years would show the world how well the much heralded “developing nations” are actually doing and whether or not their growth is sustainable.
Balancing Growth with Risk and Regulatory Compliance
One of the key issues raised in O’Neill’s presentation, the need for CFOs to adopt a global outlook with regards to cost and risk, was very much the centre of a subsequent panel discussion. The conversation brought together finance leaders from wide range of industries, including banking and media.
Each speaker had their own interpretation of the role of the CFO and how it would evolve, but all agreed that its remit would continue to expand. Companies typically looked to their finance chiefs to mitigate risks and ensure practices comply with external regulations, however, this must now be balanced with achieving company growth.
Ansis Grasmanis, Chief Financial Officer at Swedbank Latvia, explained that due to the nature of the banking industry, he had a large team and sophisticated tools in place to ensure regulations were adhered to. This in turn allowed him a greater degree of freedom to focus on elements linked to growing the business.
“CFOs must look within the numbers to find the opportunity to grow profitably.”
More than a Bean Counter
The expectations levied at modern CFOs, in terms of balancing risk management and company growth, were further highlighted by Gorka Hermann, Financial Director at Paramount Pictures. He told attendees that the profile of the ideal CFO had changed dramatically in recent years, with companies looking for proactive problem solvers as opposed to those purely focussed on keeping the books in order.
“You have to understand the underlying risks affecting the business.”
There was, however, some recognition from the speakers that CFOs could not afford to pay less attention to the regulatory elements of the role. Compliance was defined as a “starting point” for any CFO and the base level at which any finance leader should operate. The area remains a pivotal part of any CFO’s job, although companies would no longer be satisfied with a CFO who limits his or her function to compliance and figures.
“Your CEO wants you at the board table and he expects you to move the business forwards.”
Speaking on how to balance keeping finances in order and managing risks aimed at growing margins, Hermann said a CFO’s insight into company figures and wider business issues, means he or she is perfectly positioned to help the CEO make the right decisions.
Managing Risks and the Value of Educating Employees
Hermann added that the risk management element was particularly relevant in the film business where it was his job to cut through conflicting views and reach a decision which has the businesses’ greater interests at heart. In this context, he argued, finance leaders need to be extremely analytical and always take into consideration worst case scenarios. In his industry, huge investments are made in films which all have the potential to flop. It is the CFO’s responsibility to ensure three flops do not result in the company going out of business.
Dalynn Hoch, Chief Financial Officer at Zurich North America, explained that in the insurance business, companies require a very robust model in order to ensure the financial well-being of the company. She gave an example of insuring homes in California, an area which will at some point in the future be hit by an earthquake.
In this case, it is impossible to accurately predict the impact of a future earthquake, however, the company must consider all possible scenarios when insuring homes. The key is to ensure a balance exists between return on capital and operating return. She underlined the need for the CFO to educate the whole of the business on cost and risk management in order for such scenarios to be managed effectively. The concept of educating employees across the company on finance issues was one which struck a chord with many finance leaders in attendance.
“Risk will always be an issue – it’s too easy to be optimistic.”
The need to get employees to understand cost risks saw Hoch and her team develop a system designed to engage and educate staff. The concept is simple and relies on using “Smiley’s” (a simple drawing of a face expressing an emotion such as happiness or confusion) in conjunction with figures. This process bypasses technical terms staff may not understand and forces them to look for the story behind the numbers. Hoch explained that this simple system had hugely increased employee understanding of businesses costs.
Guiding the Boardroom
The role of the CFO is increasingly coming to the fore. Gone are the days when finance was merely expected to balance the books and ensure compliance. The modern CFO is no longer fighting for a place at the board table, but is seated next to the CEO and is expected to contribute to the business’ strategic growth.
This new position brings about a set of challenges which require great dexterity and flexibility. CFOs can no longer exist within a silo and are now required to educate employees across various departments to make sure everyone within the company is aware of the story behind the numbers and how this affects their role.
The very concepts of cost and risk management have dramatically evolved in a world which is increasingly interconnected. Compliance remains key, however, a CFO’s position grants him or her invaluable insights into internal and external factors affecting the company. This viewpoint means a CFO is ideally placed to help the business make the right decisions and, crucially, spot opportunities for growth.