CFO in focus
The finance function
Our monthly round-up from CFO.com: the difficulties of industry-switching, new anti-fraud measures and performance benchmarks, an unusual executive search, and more
Jan 26th 2010 | From The Economist online
Sector benders
“Power Hitters, Industry Switchers”
Chris Liddell, the newly installed finance chief of General Motors, could be the poster boy for the portability of finance skills. Coming from Microsoft, Mr Liddell has a sterling reputation but no direct experience with the motor industry and its various manufacturing and distribution challenges (and GM is one of the most challenged companies of all).
Mr Liddell is one of a few finance functionaries who have switched to unfamiliar industries lately: Tom Casey, the former CFO of Washington Mutual, has taken the same role at Clear Channel Communications with no prior media industry experience; Brian MacDonald joined Sunoco as CFO from Dell; and Peter Hathaway became JDA Software's CFO after 14 years in finance at Alliance Waste Systems. Nevertheless, it remains fairly rare these days for large companies to take a bet on a finance chief from an industry far afield of their own.
An analysis of data shows that of the approximately 77 S&P 500 companies that have had a new CFO start since January 1st 2009, only 15, or about 20%, came from other industries. Even then, many of the other industries were closely related to that of the hiring company. Most companies preferred to promote from within; only 40% of new CFOs came from outside the company. This article explores what it takes for finance folks jump to a different sector.
Why is it so hard for finance executives to switch sectors? Often, boards and CEOs may simply be wary of taking chances. “Finance skills travel, but what I've found is that there are CEOs who have it stuck in their heads that they want someone with a specific background” says Linda Havard, who became CFO of Playboy Enterprises after 17 years at ARCO, an oil company.
Tools of tattle
Witnesses to securities fraud have had little incentive to tattle on their errant co-workers—or accomplices, as the case may be. Coming forward, after all, can put one's career, reputation, and wallet at risk. “In terms of your legal exposure, there [has been] little or no incentive to step forward and report a violation [to the Securities and Exchange Commission]” says Russell Ryan, a partner at King & Spalding who spent a decade in SEC enforcement. But a new set of guidelines within the SEC aims to change things.
Borrowed from the Americans Department of Justice, the guidelines outline “co-operation tools”—formal written agreements with co-operating companies or individuals that could result in lesser penalties or no enforcement. Securities lawyers predict that if these tools are fully used by the SEC, they will lead to a higher number of enforcement actions but lower penalties.
Yet one of the strongest incentives for fraud witnesses to come forward is still missing: cash. Although whistle-blowers are protected under the Sarbanes-Oxley Act, the law has a very high burden of proof, and its only reward is the right to keep your job. Mary Schapiro, the SEC's chairman, has frequently asked Congress to give the SEC the authority to provide monetary awards to people who reveal violations, but to date, the only carrot the SEC can offer is no stick.
An unusual talent
Wanted: a CFO who can go toe-to-toe with a CEO in a confident, constructive way. One who sees compatibility between long-term profit...and kindness...“When I say I've got a cool idea, the CFO latches on and helps me work it through.” These requirements, along with more standard ones such as previous industry experience, come straight out of the job description King Arthur Flour sent out in its search for a new CFO, which was launched last September.
Heavy on prose but tight on time, the unorthodox search resembled an accelerated MBA course for those who made it through to the first round. In return for an unusually detailed description of the business, candidates were asked to write essays about why they should get the job, with just days to complete their assignments. The quest ended less than three months after it started, with the hiring of Susan Renaud, an M&A consultant from London.
How am I doing?
“Today KPIs, Tomorrow Benchmarks?”
How do finance executives evaluate whether their department does its job well? Internal IT systems can provide some measure, but there is no way to compare that against peer companies. For years, the only answer has been to purchase benchmark data. But that means providing the benchmark firm with a picture of one's own performance—a massive information gathering exercise that too often can tempt busy staffers to respond with their best guess.
“It [would be] surprising to me if none of the benchmarking firms had thought of the idea that you ought to be doing this from a systems perspective,” says Stewart Glendinning, CFO at Molson Coors Brewing Company. Recently, he began working with a small software company that is doing just that: pulling performance data from its customers' financial systems, scrubbing off the names, and sharing the results with those customers.
To date, alas, it only has 20 customers—far too few for a meaningful benchmark. But the concept represents a potential automation breakthrough in what has long been one of the most manually intensive of corporate measurement exercises.
Cash caches
“Benchmarking Credit Risk: Cash Is the Key”
Despite distressing levels of unemployment, some readers of economic tea leaves began to see signs of an improving American economy late last year. One hopeful glimmer: the percentage of 550 midcaps with decreasing cash as a percentage of revenue dropped to 38% in the third quarter of 2009 from 47% in the same quarter of 2008, according to CFO's Credit Risk Benchmarking Report. Companies' increased ability to turn sales into cash seems to have helped them pay their bills more quickly. With more cash on hand, creditors could start to invest in inventory, plant and equipment. Whether that leads to rehiring remains to be seen.
Start from scratch
“How to Save 11% of Your IT Spend”
During the downturn, companies held off on technology purchases and retooled existing systems to squeeze out extra efficiency. But most could have achieved significant savings merely by revamping the IT-budgeting process. How significant? In some cases, more than 11% of the pie, says the CIO Executive Board, a networking and research group.
After surveying 200 IT executives about their budget planning for 2009, the board found that some companies wasted 5% to 9% by failing to start from scratch with a zero-based budget. Additional losses were pegged to the effort expended to revise budgets multiple times and to errors such as not planning well for possible changes in projects. The board counsels companies to become faster and more flexible with their budgeting, rather than trying harder to forecast changes.
Editor's note: This is the final feature in this series. Material will continue to be published at CFO.com.
