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How CFO´s can better support board directors?


Indeed the reverse is also applicable. How the board can support the CFO?

We can all agree that there has never ever been a time when a Board needed more a sharp, fact-based opinion from a value-savvy CFO. With market forces intensifying, technology creating broad-scale digital disruption, and systemic threats looming in the form of cyber and geopolitical shifts, even the best-positioned board member can benefit from a strong relationship with the CFO. Fortunately, modern CFO’s are realising that they have to prepare for the new expectations, more than up to the task and go well beyond the traditional role of helping boards ensure regulatory compliance. Yet we still see CFO’s—typically those who are new to the role or those who are for decades in the role—who are unpractised at engaging their board directors effectively. They do not engage and just execute. There is no cookbook how to engage, it all comes down to the individual CFO, CEO, and board.

Regardless of where they sit, many CFOs should spend more time helping board directors understand a company’s strategy and defining value creation in the context of both the financial outcomes of the past and forecasts of future performance. The lessons go both ways: CFOs can benefit from effective relationships with board directors and CFO’s should be more assertive in anticipating questions from the board and providing the needed information to connect data to strategic and operating decisions. CFO’s should more actively collaborate with the CEO and other executives to present a unified perspective. The worst thing a CFO can do is to become a solitaire, sitting on a pile of figures and results. Define value creation in context

The traditional role of the CFO is to go through the results with the board, explain what happened, and look at the variances versus the prior period. It takes a very historical view on what the company just did. This does not add a lot of insight with respect to potential future value creation. This inward-looking view focuses on the company and its results without comparisons to the market and how peers and competitors are performing, and it does not help the board understand what is good or bad. A board might celebrate organically growing 12 percent revenue growth in a given year and then discover from a press release that company’s peers all grew at 20 percent. But even the 20% would be the case. How much is from organic growth, from acquisitions or from exchange rates?

The biggest opportunity for a CFO’s relationship with the board often hinges on being able to put together an objective view on what a business’s performance has been, how it compares to the market and what the board can expect of future performance. The CFO’s input is especially important for giving a clear picture on resource allocation to higher-growth businesses, the value potential of increasing the drive towards digital transformation and/or what Mergers & Acquisitions will bring us and what impact might be expected from performace transformations. That input need not reflect the most-sophisticated, in-depth analyses. In most cases, qualitative observations will be sufficient.

The CFO’s strategic assessment of a company’s performance relative to peers can be helpful and can be just based on metrics such as organic growth or margin expansion. Those types of contextual insights can tee up the questions that the board needs to ask regarding value creation and strategy. CFO’s can help board members understand the areas they should watch to reveal the company’s potential advantages or weak spots. The impact can be striking. It does not mean the CFO presenting a business case for operational restructuring or recommending specific strategic actions. But the CFO needs to go beyond pure financial reporting to put the company’s performance in the context of its strategic direction and peers with the right level of detail so that board members could learn what they needed to do.

Proactively engage with the board

The more CFO’s engage with board members, the better they can anticipate on questions. CFO’s can expect to receive valuable support and advice in return. These relationships are most effective when CFO’s have active roles in every board meeting. Such involvement allows the CFO to understand board dynamics. In particular in family driven businesses. This practice, of course, also requires the CEO to be open to the CFO’s more inclusive participation.

When the board of a multi-industrial business was weighing its acquisition priorities, the discussion came back to the point of how the company created the most value. Would the company do better to trade off assets through M&A deals or grow its business organically? Having joined that board meeting, the CFO was better able to follow up in subsequent board meetings by adding several analyses to his reports to the board. Those included an overview of the company’s organic growth relevant to its markets, some pre- and post-acquisition data on some of its businesses, and highlights of the company’s strengths and weaknesses with respect to organic growth.

That input led the board into a more nuanced discussion. Instead of an “either/or” focus on deal making or organic growth, it considered the businesses in which it would or would not want to pursue acquisitions, whether the company had established the right assets and capabilities to execute those acquisitions, and whether it should pursue certain operational priorities before jumping into an active set of acquisition choices.

The importance of proactive CFO behaviour spans industries. The mechanisms for capital reallocation at banks or other financial institutions do look different from those at an industrial company. But a CFO’s role looks nearly identical when it comes to identifying where to shift resources to create more value. In one instance, the CFO of a financial-services company observed that the company had allocated so much capital to high-priority growth areas that it had underinvested in lower-growth businesses with higher, faster returns. That is the same growth v.s. returns dilemma that industrial companies are facing and leads to the same predictably lower returns. Proactively raising the issue with the board enabled the company to adjust its capital-allocation rules and make relatively small adjustments that would improve returns without sacrificing new growth opportunities. Manage board interactions as a team

Taking a more proactive role is not something a CFO can do alone; the CEO formally governs the CFO’s relationship with the board. As head of the management team, CEOs are in the best position to judge how—and how often—their senior managers interact with boards. In our experience, reshaping the interaction typically happens only when a new CEO either redefines the current CFO’s role or brings on a new CFO explicitly tasked with developing a refreshed level of engagement with the board.

From there, managing interactions between the senior management team and the board generally is most effective when it is some form of a team effort. The CEO leads the effort. But the CEO’s success comes not just from knowing the facts and sharing perspectives but also from understanding the questions on board directors’ minds, the context in which they are asking those questions, their own personal experience and the interactions between board directors. Who among the directors in the room will ask questions? Who will hold back? Who will be the doubters? And who will be open to providing support and advice to the CFO?

As a trusted source of facts and data as well as a strategic advisor, often alongside a COO, the CFO is usually a lieutenant to the CEO in making successful board interactions happen. The team’s efforts can allow the CEO to focus more mental energy on managing the discussion, understanding the way the board engages, and ensuring that the board is heading to the right outcome.

A time for boards to act

At a very minimum, CFOs should think of their role as improving the way boards and senior management teams work together by identifying, surfacing, and answering questions about different decisions well in advance of the formal meetings during which votes will occur. That effort helps avoid putting board directors on the spot and asking them to vote with limited information. It also helps ensure that if there are points of contention, there are facts on the table when boards engage in a formal setting.

A CFO should be especially mindful of his or her relationship with the audit committee chair. Audit committee chairs are often the board’s biggest advocates for value creation, cash protection, and the board’s fiduciary responsibility. Here, too, the relationship varies from company to company. But the one constant is that the audit committee chair is typically very engaged and often asks questions regarding value creation, the company’s use of cash, payments back to shareholders, and the investors’ perspectives.

The CFO’s relationship with the audit committee chair can also be an important driver of talent development and succession planning. For instance, the CFO and audit committee chair may schedule private sessions to identify strong candidates for senior finance positions. We have seen several instances in which the audit committee chair has offered coaching and mentoring to members of the finance team—particularly those in line for the CFO role. These high-potentials may be invited to audit committee meetings to make presentations on special projects and initiatives, giving them some exposure to board directors. We have also seen CFOs invite audit committee chairs to meetings of the finance function to help inform important discussions—for instance, changes required as a result of new accounting standards.

The way that CFOs should communicate with audit committee chairs will depend on the governance within a given board. In some situations, it might be most effective to establish a continuous dialogue between the CFO and the audit committee chair so they can jointly prepare for board meetings: the audit committee chair would have ample opportunity to review the issues at hand and provide relevant information ahead of full board discussions. Indeed, the audit committee chair can serve as a powerful ally for the CFO—holding board directors to task on financial discussions, translating complex concepts for the group, and reinforcing points that the CFO had previously been unable to make on his own.

As demands on board directors grow, CFO’s will be increasingly important as resources to support them. Our experience learns that the CFO’s who can define value creation in context and proactively anticipate boards’ needs will excel. Those CFO’s can also accelerate their own development by working more closely with board directors and taking in their insights and experiences. (Re)Defining their relationships with the board in the context of the rest of senior management is critical.


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HamiltonRoche B.V. 

Pedro de Medinalaan 45

1070 AS AMSTERDAM

info@hamiltonroche.com

+ 31 (0)20-2600 191

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