22 September 2005
Address to the CFO Awards Night
Tom Honan, National President, Group of 100
Ladies & gentlemen – good evening.
I am delighted to be with you tonight and to speak to you on this important occasion for CFOs – the CFO Awards for 2005.
As Roger has mentioned, I have only recently “taken the chair” at the G100 succeeding John Stanhope of Telstra as national president so I am still moving through the learning curve.
They say it never rains but it pours. The last 12 to 18 months has been one of significant challenge for CFOs as Corporate Australia prepared for and subsequently transitioned to Australia’s new corporate governance regime as well as moving to adopt and apply international accounting standards.
The business community is now coming to grips with the reality of new regulation and the harmonization of accounting standards, a situation you all would appreciate has not been without some pain.
At the same time and as a consequence of these developments the CFO and the function he or she drives has become more public and, it seems, of increasing interest to business commentators.
It is against this background I speak to you this evening and in doing so would like to touch on the following:
In looking at challenges, the most important one facing CFOs today, I believe, is one related to striking the right balance. That is, achieving a balance within the dynamics which impact on business performance and outcomes.
Firstly, the growth imperative versus cost control.
For any of our businesses to succeed we cannot stand still. New products, new markets, new customers must be sought in order for the company to grow and prosper. As CFO’s we are often asked to approve plans to assist in delivering this growth. However at the same time we are often viewed as being the Chief Cost Controller (the person who is good at saying “no”). So our choice comes down to which programs or acquisitions do we approve. An old boss of mine used to say that you waste 50% of all marketing spend – you just never know which 50%. I had a discussion with some of my peers recently and the conclusion was that we as a group said “no” to around 50% of requests (for staff, capital, cost increases) How do we as CFO’s make sure that we don’t say “no” to the wrong 50% of requests. The same can be said for cost cutting Will such action provide for sustained operational improvements or will these savings be transitory and essentially one-off? Conversely, unbridled pursuit of the top line, sales or revenue at any cost leads to just that – potentially negative impacts on the cost line with attendant flow-through to the bottom line.
Another area for balance is that between strategist and steward. The CFO of today is expected to be at the right hand of the CEO providing him or her with strong strategic direction.
In practice this means the delivery of high value decision support to the CEO and Executive Management Team. It is also about providing astute financial analysis and ensuring the control and compliance systems are in place for the corporation.
However, the introduction of CLERP9, the ASX Corporate Governance recommendations, and for some us Sarbanes-Oxley has increased dramatically the CFOs stewardship function. One only has to read the latest set of annual reports that focus far more on corporate governance and IFRS implementation (and dare I say exec remuneration tables) than about how the business is performing.
We (as CFOs) would all like to spend more time on the strategist role – and in fact the CFO Executive Board in the USA has found that “Strategic Sense” is the greatest strength in what they have defined as “Exceptional” CFO’s. Our challenge is to balance what the external community requires of us from a stewardship perspective to what our CEOs and Boards require of us from a Strategist role.
Having the right team around you is also crucial. You need team players who can look forward not back. Who can not only identify problems but who can also deliver solutions. In short, a team containing the right balance of skills sets. And that brings me to my next challenge – the balance between talent and experience. One of my old bosses used to say that any new hire should “enhance the gene pool” – in other words should increase the overall talent in the team. But does that mean we should hire people who have done the job before in a similar organization or provide a talented person with the challenge to grow into the role. In my career I have always tried to follow the advice of retired US General Colin Powell when from his “Great Lessons in Leadership” he states (in Lesson 13);
“Powell’s rules for picking people” - Look for intelligence and judgement and, most critically, a capacity to anticipate to see around corners. Also look for loyalty, integrity, a high energy drive, a balanced ego and the drive to get things done.
Another area for attention and one that is gaining momentum in terms of public debate, or at least debate in the business community, is balancing short term expectations against long term growth - the six month or indeed three month snapshot (that most fund managers are focused on) versus the three to five year company growth plan and vision. The difference, if you like, between peering through the porthole of a ship for a snapshot of the sea, versus climbing up onto the bridge and taking a proper, more considered look at direction and progress.
The G100 believes it is important that the short term performance of companies is assessed in the context of progress towards the achievement of an entity’s long-term objectives.
One of the ways to do this is to provide regular communication to shareholders which focuses on the consistent creation of long term shareholder value. Another is to ensure employee compensation schemes and incentive plans align with progress towards long term objectives rather than being skewed towards delivering on short term performance.
If these are some of the challenges where does the opportunity lie?
I think the opportunity in front of every CFO, in its purest form, is getting that balance right. If one gets the balance right across the dimensions mentioned, as well as others I could add, you will achieve competitive advantage and the sky is the limit.
Being competitive is fundamental to growth just as it is fundamental to Australia’s sustainability as a generator of wealth and destination for investment capital.
The G100 has, as a core objective, contributing to Australia’s overall global competitiveness through the development and maintenance of a fair regulatory environment which serves to advance business in Australia. As such we seek to be heard on matters vital to our role in business and on our country’s position in a highly competitive global environment. In this context we have been an active participant in the ASX’s Corporate Governance Council, in submissions to Treasury re Clerp 9 in the research, preparation and delivery of corporate best practice initiatives expressed in comprehensive guidance publications. Two such examples are guidance publications covering Compliance with ASX Principle 7 – Recognising and Managing Risk and our Guide to Review of Operations & Financial Condition – both well received by business.
Some months ago we also moved to form an IASB Liaison Group to interface with the Board in London thereby ensuring a direct channel to that body and to facilitate discussion and exploration of issues surrounding standards.
Looking ahead some of the objectives we have identified for the Group of 100 in 2005/2006 are:
As an organisation we maintain close liaison with the CFO Executive Board in the USA which provides us with a window into US best practice, the opportunity to participate in joint workshops and to access research such as a recent study into the shift in skills requirements for the CFO of tomorrow – one finding being that 80 per cent of CFOs polled in a survey late last year considered that a majority of finance staff lacked decision support skills such as influencing and presenting the application of data, negotiation capability and critical thinking.
There are issues ahead of us as we move forward. Two that I feel deserve consideration by the G100 - are enhanced communication and information practices to better meet the needs and expectations of an increasingly activist investor community and the other is the somewhat vexed subject of short termism.
In respect to the former I commend CFO Magazine for addressing this subject
from time to time in its publication. The G100 believes the provision of
accurate financial information is the lifeblood of markets. Such initiatives as
our research and preparation of an Operating and Financial Review Guide fill an
important gap in Australian financial reporting, and we hope contribute to
improved levels of communication and information.
In respect to the latter, this is an issue which is gaining traction in the
business community and the media, and is one deserving of further debate. We
live in a culture increasingly characterised by instant gratification and heady
expectations. Effecting any change to such a culture, as it pertains to the
corporate sector, will not happen overnight. But it is an issue worthy of
further discussion. I note that an increasing number of major listeds in
Australia are departing from giving specific profit targets or forecasts – Coles
Myer, Wesfarmers, AMP, Coca-Cola Amatil are just some. I think we can
confidently expect further instalments and developments on this front.
Finally, as we move through 2005 and into 2006 and beyond, the CFO will increasingly be called upon to lead from the front, to be an important contributor to strategy and of advice to the Board. As the CFO role swung in the late nineties to more of that of strategist and less on financial integrity, corporate collapses like Enron and WorldCom followed. The balance in the US (and here) then swung sharply to compliance, integrity of processes and corporate governance as a plethora of new regulation descended on business. Now a better balance between the two extremes is being restored. It will be those CFOs who get the balance right who will be the winners.
And I think that’s about where I came in – on the subject of balance - so I think it appropriate that it is now where I exit.
I should like to thank Roger Hogan for his kind invitation to be with you tonight. The G100 enjoys a good and at times robust relationship with CFO Magazine. It’s been gratifying to see the publication develop and I congratulate you on tonight’s Awards. I would also like to say well done to all the winners and in particular to tonight’s CFO of the Year for 2005.
Thank you.
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