The CFO transformation: From Chief Accountant to Change Agent

Few business roles have changed as dramatically during the last generation as that of the Chief Financial Officer. The classic model — the CFO as chief accountant and technical expert focused narrowly on the firm's financial statements and capital structure — has been passé for a decade or more.

The CFO now is seen more as a business partner with the CEO, closely involved in designing and overseeing strategy, operations, and performance. He or she is an active, innovative, and independent transformation agent. "When you take a look at a CFO's responsibility today, you also have operations planning and analysis, information technology, strategic planning, and M&A. As a member of the senior management team, you have to be able to take off your technical hat when you walk in the room," said David L. Shedlarz, CFO, Pfizer Inc.

For a new, cross-industry study on the evolution of the Chief Financial Officer's role, Booz Allen Hamilton interviewed CFOs of Pfizer, FedEx, Johnson & Johnson, BASF, Procter & Gamble, Deutsche Telekom, and 11 other U.S. and European companies. The interviews have been published in the book CFO Thought Leaders: Advancing the Frontiers of Finance. The conversations revealed that CFOs of leading global corporations spend half or more of their time on activities outside the traditional boundaries of the position.

Indeed, today's CFOs see themselves as strategic activists. "The growth agenda is of equal or even greater importance" compared with solid cost management, Johnson & Johnson CFO Robert J. Darretta Jr. told Booz Allen.

The study shows that, to a large extent, Chief Financial Officers are now viewed by their chief executives as CEOs' primary aides in driving company-wide transformation efforts. Although this development has occurred over a period of a decade or more, we observed at least eight trends that underscore how profound that evolution has been:
• CFOs are more closely engaged than ever in designing, adapting, and implementing their organizations' business models. "I am involved in all important operational and strategic group planning decisions," said Karl-Gerhard Eick, who is both CFO and deputy CEO of Deutsche Telekom, the German telecommunications company.
• With capital markets now as global as companies, CFOs increasingly take lead roles in tying their firms' business strategies more closely to models of shareholder value. "We have had to spread this culture of how to create value, how to get the best return on assets, throughout the company," said Renault CFO Thierry Moulonguet, a member of the multinational management team that helped revive the Japanese automaker Nissan.
• To ensure strategic alignment, finance chiefs find themselves serving additionally as "chief metrics officers." Robert L. Lumpkins, CFO of the food and agriculture giant Cargill, said, "Measurement drives behavior, and we need to know that we're getting the behavior that we want and that people are focusing on the right things. That's part of the job of the CFO."
• Chief Financial Officers say their role includes more and more performance management, as they work toward the goal of securing what Robert J. Dellinger, CFO of the telecommunications company Sprint, called the "execution premium" accorded by shareholders to top performers.
• CFOs increasingly are taking line management responsibility in operating businesses. For example, in addition to overseeing the finance organization, Caterpillar Group President Douglas Oberhelman manages the Peoria, Illinois, manufacturer's diesel engine business.
• The ability to communicate to various internal and external constituencies is now a critical competency for Chief Financial Officers. The CFO "should be half accountant and half strategist and, to an increasing degree, an efficient communicator in both roles," said Siegfried Luther, finance chief at Bertelsmann AG, the German media firm.
• CFOs are consumed with creating finance organizations stocked with men and women proficient in nontraditional skills, including experience in operations, in addition to traditional finance experience and acumen. "I encourage people within finance to leave the division and work elsewhere in the company," said Cathy Ross, CFO of FedEx Express, the largest division of Memphis-based FedEx Corporation. "It helps the company, and it broadens the individual."
• Finally, with senior managers and boards of directors taking a more expansive view of risk, Chief Financial Officers are overseeing the increasingly tight linkage of risk management to the firm's strategic agenda. "A more appropriate notion of value creation — post-9/11, post-Enron, post-WorldCom, post-Tyco, and so on — starts with the realization that risk matters as much as return does," said Thomas A. Fanning, the CFO of Southern Company, the U.S.'s second-largest electric utility by market capitalization.

Perhaps the greatest transformation in the CFO role, however, is a transcendent one. As Pfizer's Shedlarz put it: "People are asking the CFO, as well as the rest of the management team, to act as change agents."

Commenting on the impact of these trends in the Arab world, Joe Saddi, Booz Allen's Beirut-based partner and Vice President, said, "The Middle East is no exception to these trends. CFOs in the region are facing comparable challenges that are amplified by the sustained economic reform paths that countries are following, as well as their upcoming accessions to the WTO."

New dynamism
According to the Booz Allen study, the Chief Financial Officer position has grown more pressured in recent years.

Saddi added, "The emerging environment in the Middle East is creating increased competitive pressures and imposing new strategic priorities on companies and their CFOs. Specifically, the changing context is demanding that institutions streamline their businesses and focus on a portfolio which can develop a sustainable competitive advantage and shed many of their legacy businesses."

In a 2004 survey conducted by CFO Magazine, fully 68 percent of finance executives said they had experienced more job pressure during the past two years than before. Sixty-three percent said job stress had negatively affected their health.

But beneath what the New York Times has labeled "a steady drip-drip-drip of corporate announcements of CFO departures" is another story: the rising importance of the role within the hierarchy of the average large company, the improved qualifications of the men and women sought for the position, and the consequently enlarged expectations CEOs and directors have for their Chief Financial Officer.

Value creators
In years past, most CFOs of large companies completed a successful transition from being stewards of value preservation to being business partners in value creation. Today, the increasingly determined focus on creating shareholder value is yet another prompt that encourages a Chief Financial Officer to elevate his or her identity from reporter to executor.

Construction and mining equipment manufacturer Caterpillar initiated a new style of management reporting last year. Called Transparent Financial Reporting, it aligns the company's internal management reporting system closely with shareholders' returns. Procter & Gamble uses a model of shareholder value called Total Shareholder Return (TSR) as a strategic tool and method for evaluating management performance and calculating bonus payments, as well as for getting line managers focused not just on the income statement, but on the balance sheet and operating cash."

Evolving risks
Risk management is looming ever larger on most companies' — and most CFOs' — agendas. Certainly, the Sarbanes-Oxley legislation in the United States, which strengthened regulatory oversight of compliance, control, and governance programs, and increased the need for strict attention to P&L, balance sheet, and capital structure, has contributed to risk management's higher profile.

The CFOs to whom Booz Allen spoke said that Sarbanes-Oxley has been a less important factor in the evolution of the definition and control of risk than has the pace of change, driven by globalization and technology.

Fanning, the CFO of Southern Company, which provides electricity throughout the southeastern United States, pointed out that in the energy industry, whose colossal risks range from the uncertain future of nuclear power to the effects of potential environmental regulations, risk and return cannot easily be divorced.

Booz Allen's Saddi adds, "Institutions across diverse sectors in the region are now compelled to align their operating models to increasing market sophistication. As part of this evolutionary trend, some sectors where competition is an accomplished fact are experiencing in-depth restructuring and consolidation, while strategic alliances — particularly between domestic and multinational institutions — also are emerging."

Nearly all the CFOs with whom Booz Allen spoke felt similarly about the challenges of keeping pace with the increased complexity that accompanies growth. And they pointed out, as well, that technological advances have contributed to complexity even as they have revolutionized information technology and business processes.

Raising the bar
It should be clear that although the bar has been raised substantially for the CFO, the potential rewards are even larger for individuals and for their organizations. In an environment in which investors demand sustainable growth, precise forecasts, and earnings reliability, executives who can help their companies achieve these goals quickly become valued players.

Fortunately, the CFO is well positioned to play this more dynamic role. A view of the organization from 30,000 feet above ground provides the CFO with an enterprise-wide perspective; indeed, good Chief Financial Officers seem to have an innate ability to understand what makes each business in the portfolio tick. In addition, the CFO's traditional responsibilities in accounting and compliance give a tremendous amount of independence and objectivity to the position.
The CFO has only one core constituency: the shareholder. This fact, combined with the trusting relationships CFOs develop with senior business executives, allows the CFO to move seamlessly into a more transformational role. That role, Booz Allen discovered, is no fairy tale, but the new reality for Chief Financial Officers around the world.