CFO: Through CEO’s Lens

A close ally of the CEO, the CFO has a complex role to play by acting as the organisation’s conscience keeper as well.

I have been a CFO for over two decades. And during this time, I have wondered what it takes to be a CEO? How does my CEO look at me? With the roles having been reversed, it’s nice to look at the other side of the coin.

Usually the CFO is the number two management person of an organisation. With the power of the purse strings vested in him, a CFO provides the impression of enjoying unbridled power. In the earlier days of my career, as a relatively junior finance executive, I looked at the CFO with awe – a feeling of dread and reverence.

After becoming CFO, my job description changed to advising the CEO on a day to day basis on issues ranging from strategies that needed to dovetail, financial position and productivity that that needed to improve and profit numbers that needed to sharpen.

‘Conscience’ of an organisation

During a job interview, the CEO of a Fortune-500 company once told me what he thinks of his dream CFO. He gave me the example of General Electric, one of the most respected companies in the world. He sighted Jack Welch, the then GE CEO, who declared growth in quarterly results, for a continuous period of over 40 quarters.

The CEO often desires his CFO to deliver incessant growth, manage shareholder expectations and protect the CEO from embarrassing results of any goof-ups.

To take the example of GE further, during 1995 and 2004, GE either met or exceeded the earnings estimate, quarter after quarter. The company was the darling of the stock market. Can you believe that a company can declare earnings growth for 10 continuous years? No wonder, Jack Welch used to eat literally from his CFO’s hands.

What transpired thereafter was unnerving. GE falsified accounts to the extent of a whopping $1 billion. GE created ‘accounting reserves’ at good times, known as “cookie-jar reserves” and used it to top-up in quarters showing earning shortfalls. Gross accounting shenanigans at the very least!

CFOs need to cogently guard against expectations of some CEOs to generate profits out of thin-air. Accounting misdemeanours have engulfed numerous organisations and destroyed many. The Satyam, Enron, World-com or Lehman Brothers episodes are well-known. Others include Microsoft, Olympus, IBM, Coca-Cola, AOL, Reebok-India, AIG, Marriott, Vestas, Dell, just to name a few. All of them carried out deceitful accounting some time or the other, to project ‘holier than thou’ image.

Internal controls – the harbinger of growth

CFOs are required to protect shareholder interests and preserve organisations from loss of assets. ‘Internal controls’ are like moral prophylactics. Many a times internal controls are neglected leading to severe losses. HSBC admitted to internal control weakness leading to failure to detect money-laundering activities within the bank in US.

JPMorgan Chase incurred multi-billion dollar trading losses in 2012 as it ignored internal controls. A rogue-trader piled up huge losses in Societe Generale during 2005 and 2007, due to serious lapses in internal controls in the bank.

It may be unbelievable but it’s true. Globally companies lose about 5 per cent of revenue or a whopping $3.5 trillion (nearly double of India’s GDP) due to frauds. Worse is that only a small proportion of frauds detected are reported, which in turn is a fraction of fraud that remains of out sight.

 

 

About The Author

Robin BanerjeeManaging Director, Caprihans, India Ltd, With more than 25 years of experience across countries and companies such as Unilever, Arcelor-Mittal, Thomas Cook, Essar Steel and Suzlon Energy, Mr Banerjee brings to the table his seasoned and measured view of the finance profession

CFO expectations in the arena of internal controls have thus enhanced over period of time, especially when both the CEO and CFO have to certify every quarter that their accounts reflect true and fair view of business activities and there is no accounting jugglery or unreported fraud. It is a heavy burden to fulfil in the era that follows Enron and Satyam.

The moneyman

Which CEO does not want to have adequate money for running the business and to fund growth? Who does he go to fulfil this need? The CFO is the obvious and unchallenged answer.

In these days of high NPAs, banks are extra careful to vet funding proposals. With some banks being under CBI scanner, it is becoming increasingly difficult to convince banks to open their coffers.

The money-manager has to exhibit and demonstrate his prowess to the financiers that their money is safe and will produce sound results.

Tipping point

The CEO needs a business partner so that he can step away from books and concentrate on the other aspects of business. The CFO fills the gap.

The CFO typically works on accounting, budgeting, financial-analysis, banking, financing and investor-relations along with overseeing IT, M&A, insurance, procurement and legal.

When the CEO is getting distracted from critical revenue generating activities to handle financing or similar issues, it’s usually the ‘tipping point’ for a CFO to come in. Normally, a company of size exceeding Rs 50-75 crore needs a finance head, whatever be the nomenclature used, to support organisational success.

Organisational patriarch

The ‘corner-office-guy’ depends heavily on his CFO to act as a mentor to speed people along the learning curve. No silver-bullet theories but effective leadership to help the daily running of the organisation. Make no mistake – leadership is all about getting results. It’s about getting people excited to perform and to make a difference to organisational performance.

The CFO role, hence, is shifting with the changing times. From the traditional role of a ‘steward’ to minimise risk, and an ‘operator’ to run a tight finance organisation, the role has shifted to being a ‘strategist’ and a ‘catalyst’. The core competencies thus go beyond controlling cash, cost and capital.

Investors value a company by projecting future cash flows and then discounting them to present value. Ultimately, it’s all about the future.

The CFO too needs to continuously rediscover himself to convert investor-hope into reality. I almost view the CFO to be the next step to the CEO. It has happened to me. And it should happen to most. They understand everything, they look at an organisation with a helicopter view and yet scan the details through a magnifying glass. There is hardly anyone else better suited to be the future boss of any organisation.


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