Adding to CFO’s Responsibilities

Chief financial officers are under pressure. Their directors and managers are demanding more and more information about business performance, risk factors and forecasts while hawk-eyed regulators and angry shareholders scrutinize their every action.

At the same time, as Jeremy Hope writes in “Reinventing the CFO: How Financial Managers Can Transform Their Roles and Add Greater Value,” most finance chiefs “remain prisoners of dysfunctional systems and mental models that were developed for a role that is fast becoming obsolete.”

“Until the 1980s, the world of the CFO hadn’t changed much for decades,” says Hope, research director of the Beyond Budgeting Round Table, a think tank. “Success was seen in terms of balance sheets. The annual planning process dictated what was made and sold and informed people what they had to achieve by when.”

That is no longer the case. Chief financial officers are now expected to be business generalists with full knowledge of what is happening across the business. By default, many have become custodians of organizational knowledge.

Most chief financial officers are ill-suited to this general management role, Hope writes. They tend to come from accounting backgrounds and have risen through the ranks within corporate finance departments. They have high levels of expertise in managing finance but are ill equipped for the many other roles now heaped on them, especially forecasting and risk management.

According to one survey conducted in 2003, fewer than 20% of executives believed their chief financial officers were doing a good job of managing risk. Only 21% thought their chief financial officers were preparing adequate forecasts.

Instead of being proactive managers, helping to drive strategy and execution, chief financial officers are increasingly seen by their colleagues as impediments to progress.

Chief financial officers know that their colleagues do not like them. What is more, they seem not to like themselves very much.

According to Hope, nearly half of the chief financial officers of Fortune 500 companies quit from 2001 to 2004. Looking at financial managers in general, more than a third, surveyed in 2004, said they were planning a career change.

The problem, writes Hope, is that many chief financial officers are suffering from role stress: They have been trained to do one kind of job, only to find that another is now expected of them. Again, this applies not just to chief financial officers but to most financial managers.

Hope’s solution is to reinvent the post of chief financial officer, offering seven roles that finance chiefs can play within the business. Some of these have off-putting names, such as “freedom fighter” or “warrior against waste.” One expects the chief financial officer to emerge as a kind of Hulk Hogan figure, bulging with muscles and smiting the enemies of business progress.

Hope must be forgiven his melodramatic touches. He is trying to reach out to a confused and often demoralized group of men and women and give them a new enthusiasm for their jobs.

He urges finance chiefs to take on other roles too, becoming “regulators of risk,” “champions of change” and “architects of adaptive management.”

All of these require chief financial officers to become more proactive and to move away from their traditional roles as makers of plans and preparers of budgets.

The chapter on adaptive management is particularly intriguing: Planning and budgeting systems need to become much more sophisticated, with responsibility for much of the process devolved to frontline managers. Fixed performance targets should be abandoned and more flexible measures introduced. Hope advocates, for example, measuring performance from the customer’s perspective.

This does not mean that financial controls are abandoned. Rather, responsibility for financial management and financial control is spread around the business. The result is that more people have access to information, and the business itself becomes more flexible and adaptive.

The chief financial officer, who champions and drives these changes, will regain the respect of colleagues for having helped transform the business.

The same applies to waste. The “warrior against waste” role does not require the chief financial officer personally to inspect all costs and budgets to eliminate waste, but to help create a climate and culture where waste is eliminated naturally.

Although tantalizing, it is a vision with two serious potential drawbacks.

Contending that chief financial officers should become “champions of change” or “masters of adaptive management,” taking responsibility for introducing these concepts across the business, runs a risk of role duplication. There is already someone in every business who is supposed to be in charge of these things: the chief executive officer.

It is vital that the CEO and the chief financial officer work together and form a partnership. If instead the finance chief’s office becomes an alternative power base, then there is a risk of divided authority, confusion and conflict.

The other problem is where to find managers with the skills to fill these roles. Can old-fashioned accountancy-based financial managers transform themselves into “freedom fighters”?

Hope is largely silent on this issue. In spite of this, his book is a valuable and interesting read as a wake-up call for financial managers on how their role is changing and must continue to change.

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20th Century Lesson About Globalization

Those who forget the past are condemned to repeat it. That is the lesson of this well-timed account of the recent history of capitalism, from the first golden age of globalization in the late 19th century to the uncertain present.

Though broad and ambitious in its sweep, Jeffry A. Frieden’s “Global Capitalism: Its Fall and Rise in the Twentieth Century” breaks little new ground in its narrative or its analysis. Still, it provides a useful synthesis, particularly for those unfamiliar with the area.

One lesson with enormous contemporary resonance repeatedly emerges: Globalization is neither inevitable nor irreversible. Governments can choose to retreat into isolation and have frequently done so.

The book’s most penetrating section is the exploration of the dark time between World War I and World War II, which bookended the conclusion of the first great rush of globalization and the cautious coming of the second. The rejection of open markets and trade by many countries then was, as Frieden points out, testament to the perceived failures of globalization and particularly the strictures of the gold standard that stabilized prices and exchange rates at the expense of volatility in wages and jobs.

Frieden makes a parallel with the current discontent with globalization that periodically threatens rich countries as well as poor, but he offers few solutions apart from a rather vague rallying cry for governments to harness the power of capitalism to generate social progress. Still, the difficulty in drawing up plans for the future does not diminish the importance of learning from the past.

These reviews appear by special arrangement with the Financial Times, where they first appeared.

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Beyond finances

* Reinventing the CFO: How Financial Managers Can Transform Their Roles and Add Greater Value

* By Jeremy Hope

* Harvard Business School Press, $29.99, 258 pages

Source: Publisher

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World view

* Global Capitalism: Its Fall and Rise in the Twentieth Century

* By Jeffry A. Frieden

* W.W. Norton, $29.95, 448 pages

Source: Publisher