CFOs need to become directors instead of critics

Source: Management Scope (02/2020)
Author: Angelo van Leemput, Visual: Erwin van Amstel

In the past, CFOs mainly worried about yesterday’s results. Nowadays the emphasis is on tomorrow’s value creation. What will the CFO’s role look like in the future and what can he or she do to keep up with the times? That is the theme that the leading experts of The Board are exploring together with Vlerick Professor Filip Roodhooft in the Dutch magazine Management Scope. ‘It’s all about business and data analytics. The rest is merely hygiene.’

The three Chief Financial Officers who have gathered on the executive floor of KPN’s head office in Rotterdam together manage great amounts of money. They are Jan Kees de Jager (who is hosting the meeting and who is leaving telecoms company KPN on 1 March), Taco Titulaer (the CFO of location technology company TomTom) and Annette Mosman (the CFRO of pension fund APG). They all have many years’ experience working in finance and have seen their job radically change in the past few years. In the past, CFOs focused on ‘yesterday’s results’. Nowadays they’re expected to contribute to ‘tomorrow’s value creation’. So what will the CFO’s role look like in the future and what can he or she do to keep up with the times? These were just a few of the questions that were addressed in this new meeting of The Board, which was chaired by Filip Roodhooft, Professor of Accounting & Finance at Vlerick Business School. The Board formulated eight recommendations for today’s CFOs.

1. Strive for more maturity

Filip Roodhooft started by outlining the CFO’s changing role. ‘We live in an automated world where transactional jobs are mainly done by robots, with massive data flows. Vlerick recently conducted a survey among CFOs and one of the conclusions was that their maturity is generally lower than the maturity of other C-level jobs. Ask CFOs to give themselves a score for maturity and experience on a 5-point scale and the score will generally be in the range of 2.2 to 2.5. CFOs indicate that they don’t know enough about big data, artificial intelligence and machine learning - all tools that can be used in their job. Marketing jobs, by contrast, are much more advanced in this respect’.

What do the participants of The Board make of this, in light of their own experience? De Jager: ‘I think that a lot has changed in the past few years, on every level. Five years ago, KPN didn’t make sufficient use of data company-wide. This has since changed across the board, and our Finance Department is just as far advanced as, for example, our Marketing Department’. Mosman: ‘The knowledge level is probably more apparent in marketing, because marketers focus on the “front end”, on the relationship with the outside world. At APG, Finance is currently focusing on the “back end”, on what’s going on behind the scenes. The emphasis in the first instance is mainly on structuring our own data. But to be honest, I don’t notice a real difference between the C-level jobs’. Titulaer agrees with Roodhooft: ‘When it comes to maturity, CFOs still have plenty of ground to cover. We are good at financial control, we ensure that the accounts are in order, that documents are provided on time, but we shouldn’t hide behind them. Expecting more from us is entirely justified. CFOs really should use data more often and better, to tell an even better story about the company’s future and opportunities’.

2. Don’t just look back

In recent years, the CFO’s job has changed radically. According to Titulaer, these changes also create opportunities: ‘Technology has changed the way we work. All the accents have shifted. A lot of our old, familiar jobs are now being done by technology. Financial reporting has become much more direct. Reports are written up much faster and are tailored. They are also much easier and quicker to check. This gives us the time to concentrate on other things’. De Jager: ‘When I joined KPN as CFO five years ago, Finance mainly looked back. We were good at reporting on the past. We took the classic approach to accounting: financial reporting, corporate control, financial control, accounting, and management control. We mainly looked in the rear-view mirror, instead of looking ahead. This is dangerous, because at some point you will run into a wall or a tree’.

De Jager thinks that looking back should become less of a priority in the CFO’s job description. ‘I want a third of the available time to be spent on reporting the past, a third on comprehending the present and a third on foreseeing the future. Thanks to data analysis, we can understand the past better than ever, as well as foresee the future’.

3. Look at other KPIs too

In addition to the traditional key performance indicators (KPIs), CFOs must also control and oversee other processes. Titulaer is currently making the transition, looking beyond the traditional KPIs. ‘Which is quite difficult, because other rules apply to them. Strictly speaking, it’s possible to say that a department has exceeded its budget but this doesn’t necessarily mean that they aren’t doing a good job’. Mosman: ‘CFOs are used to thinking in euros. Which makes perfect sense in our profession. Obviously, we also want to track other relevant KPIs - focusing more on strategy, vision, impact and decision support, but we still have some ground to cover. Ultimately it’s all about driving business value. If, however, you’re thinking in terms of the CFO as the architect of business value and all the KPIs that play a role in this, then I think that this will take more of an effort’. De Jager thinks there are various ways of overcoming this: ‘Employee skills are just as important. KPN has made some significant adjustments in terms of FTEs in recent years. We have substantially reduced the number of financial controllers, hiring more business analysts. Finance is now more forward-looking and in the future it will concentrate even more on more predictive KPIs’.

4. Directors, rather than critics

This transformation also has consequences for people working in finance, with the emphasis shifting from backward to forward looking. Roodhooft notes that this also means other profiles are needed. ‘A risk manager, perhaps, someone who looks at the strategic risks. You’ll need data scientists or data analysts. And business partners. Many CFOs seem to struggle with this necessary change’.

De Jager acknowledges this. ‘Obviously this process takes time. When I joined KPN, we had a relatively large number of employees in accounting and financial control. We needed to shift towards other skill areas, which is why we appointed navigators. I'm a rally driver in my spare time and I like to use a metaphor from this sport to explain what I mean. You can only win a rally with a good navigator because navigators will always tell you whether to go left or right at the right time. And business is no different in this respect. Business analytics and data analytics will increasingly make the difference in finance. As far as I'm concerned, the rest is merely hygiene. Don’t get me wrong: it is just as important, it must be superbly organized, like clockwork. But it won’t make the difference when you’re making business decisions’.

Mosman: ‘At APG we say that we need to become directors, rather than critics. Finance traditionally used to be extremely good at commenting on everything, much like Statler & Waldorf in the Muppet Show. But now it needs to take on a more directorial role. This can partly be achieved by hiring new people. Fifteen years ago, the prevailing idea was that this would be an evolutionary change, but in light of what has happened in recent years, as a result of new technology, it feels more like a revolution. This demands a lot from people, which is why substantial investments in training and development programs are necessary. APG wants to create a learning culture, make its employees more flexible. I think that employers should give their employees the time to take the required steps for this’.

Titulaer: ‘At TomTom we have an initiative called Great in Finance. An important aspect of this project consists of looking for a specific cultural match during the recruitment process. We don’t just hire people for their skills or their experience, but also because of their interests and their willingness to learn. Ultimately, the aim is to only recruit at the bottom end, to hire people straight out of university or college and then have them move up the ladder. Our aim is to make people move up the ranks in other words, limiting outside hires to a minimum’.

Vlerick conducted a survey among CFOs, which showed that most CFOs are not sufficiently up-to-speed with new developments and ideas about automation and digitization. According to Roodhooft, CFOs are able to conceal this by buying software or contracting this job to consultants. The knowledge gap can, however, cause problems, especially on a strategic level. Can the average CFO be in charge if he or she doesn’t know enough about digitization? In De Jager’s experience, many CFOs know exactly what is going on. ‘When I talk to the CFOs of listed companies, the high level of knowledge always strikes me. At the very least, they fundamentally acknowledge the relevance of this technological revolution. There are some generational differences now and then. If you’ve been a CFO for 20 years, you’ll be less inclined to focus on this. The type of company also makes a difference. All three of our companies work a lot with data. So you can see why this is top-of-mind for us. But regardless of the CFO’s job, data knowledge should become a priority on the boards of directors and on supervisory boards’.

5. Challenge the strategy

Based on the conclusions of the Vlerick survey, Roodhooft identified two big gaps, or shortcomings in CFOs. The first gap relates to technological changes, which CFOs don’t know enough about. The second gap relates to strategy. On the one hand, CFOs feel uncertain about strategic decision-making, about making or helping to make the right strategic decision. On the other hand, their shortcomings become apparent when measuring strategic performance. Within the board of directors, the CFO increasingly is the person the board looks to for the strategic path. This raises questions about the CFO’s role in this type of process.

Mosman: ‘I strongly believe in the CFO’s role as a devil’s advocate. A natural, positive tension exists between the CEO and the CFO. As a board, you obviously formulate a strategy together. The CFO’s job is to challenge you on the specifics. Where do we stand in terms of the execution? What do you want to achieve? How do you expect to do this? Which investment is needed for this? Make things more specific’. De Jager: ‘I also believe in the CFO’s role as a strategy challenger’. Titulaer: ‘The CFO’s role is to facilitate the strategy and make it measurable. Not to predict the future - that’s the CEO’s role after all - but to present it. So what does it mean when this happens? How do I organize the company accordingly? What should I spend more money on, and where should I reduce my spending? How will this affect our staffing levels?

6. Measure the strategy

On the financial level, the CFO is able to motivate and measure everything, but what about strategic measurements? A Vlerick survey among CFOs finds that everyone thinks strategic measurement is important, but how do you go about it? Titulaer: ‘We based our strategic evaluation on a book called Good Strategy/Bad Strategy by the American professor Richard Rumelt. Essentially this means you start by analysing the market and the situation that you want to achieve. Then you develop a guiding policy, with coherent actions and milestones. You list a number of clearly-formulated steps that you intend to take, with measurable indicators. Every few months, we assess the situation, making adjustments where necessary. That is how we measure the progress of our strategy. It’s a continuous process’.

7. Make social responsibility measurable

Ten years ago, CFOs were only marginally concerned about their social role. These days corporate social responsibility is important. Roodhooft: ‘CFOs now also talk about people, profit and planet. I’ve even noticed a trend of integrated reporting, with reporting including much more than just the financial figures’.

According to Titulaer, this development is completely in line with the current state of play. ‘CFOs can play a greater role when it comes to ensuring a company’s corporate social responsibility profile is measurable. The CFO can help develop this profile, making it measurable’. Mosman thinks integrated reporting is a good example of this trend. ‘I started to do that this year, albeit cautiously. It means that you discuss what type of value you really want to create with your board, how you intend to measure it and how you will report on this’. De Jager: ‘A few years ago, KPN was the first AEX company to publish a fully audited integrated report. It was quite an undertaking because the process was just as novel for our accountant. This isn’t always a comfortable position to be in. For decades, accountants have given their assurance for the financial part, but now they are suddenly required to give the green light for statements such as “We are the most sustainable telecoms company in Europe”. It’s not that easy. Nonetheless I find this exercise very important. A lot of corporates like to say that they take a socially responsible approach but how do you go about proving this? You can talk the talk, but can you walk the walk? The CFO’s job is to shed light on this’.

8. Go for the 1% improvement

All things considered, The Board has plenty of other advice for fellow CFOs. Titulaer: ‘Strive for continuous improvement and search for things that yield a 1% improvement. Don’t strive for 10% in one go. While a 10-per-cent improvement may sound nice, it is also often a very complex process. You can’t see right through it. So it makes more sense to focus on ten times one per cent rather than failing to achieve that one-off ten per cent.’ Mosman agrees. ‘Take action but do it gradually. It all starts with a joint vision and then you need to grow towards this vision, step by step. Transformation is a learning process, a journey. So try to learn and build in a feedback circle with the business’. De Jager: ‘My advice would be to look over the fence more often. There are plenty of other national and international companies that outperform your company in a specific respect. So learn from others, dare to copy what they do. It’s better to copy good behaviour, rather than devise bad behaviour yourself’’

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