By Gilles des Roberts
Illustration: Joseph Salina
 ONCE THE CHAMPIONS OF CORPORATE GROWTH, TODAY'S CFOS HAVE BEEN TRANSFORMED INTO THE GUARDIANS OF INTEGRITY
Last summer, richard had two job offers on the table. One was from a large manufacturing concern, offering him the position of chief financial officer, with a generous compensation package; the other was to head an administrative techniques program at a local college. In September, having weighed the pros and cons, he took a bold step and proudly stood up in front of his first class.
A year ago, Richard would never have entertained the idea of teaching, but accounting scandals and stock market upheavals have changed both his mind and the work environment for executives. In his previous job as CFO with a large organization in Quebec, Richard was responsible for handling the financing of the president's acquisition program and delivering the quarterly figures. Now, he says, to be a CFO one has to be an expert in auditing, accounting, financial and risk management, an ethics specialist, as well as an influential and credible spokesperson for the organization. "That's too much for one person," says the 44-year-old CA. "After all, there are only 24 hours in a day."
Welcome to the new world of the CFO — an environment eroded by scandals, impatient investors, tighter capital markets and the increasing interventionist mood of governments and regulators. It's a world where, in the US at least, some CFOs may end their careers behind bars instead of behind a tee on the golf course.
Where once the priority was to devise accounting tricks to quickly pump up a company's share value, in the new order of things, the CFO's No. 1 task is a return to basics — the preparation of reliable and transparent financial statements. In simple terms, explains Robert Simons, CA, director of the accounting and control unit at the Harvard Business School, the role of the CFO has shifted from a partner of the company's senior management team to that of a policeman.
But ask Dale E. Richmond, president and CEO of the Ontario Municipal employees Retirement System, which managed $33.2 billion in net assets in 2001, and he will say CFOs are the guardians of an organization's discipline. "At all times, we have to understand two things: the content of financial statements and [its] impact on overall corporate performance, and the risks the company is taking and how to evaluate and control them," he says. "In this context, the role played by CFOs has never been so important."
However, with greater responsibility and a renewed demand for transparency and reliability comes tremendous pressure on CFOs — especially from financial players. Companies that adjust their financial statements or, worse, reveal questionable accounting or administrative practices immediately cut themselves off from financial markets.
For years, growth and development were the topics of discussion among CFOs and their partners. Now, as the finances of all organizations are being examined under a microscope, meeting agendas revolve around controls and rigorous practices. And ironically, it is the very same financial institutions — the same bankers and brokers reluctant to give their clients a second chance today — that are partly responsible for the current predicament CFOs find themselves in.
"The main pressure on CEOs and on CFOs in particular comes from those pushing them to achieve increasingly ambitious goals," says Denis Desautels, former auditor general of Canada. And the market pressures can cause companies to show a better financial picture than is warranted, he adds. High expectations have encouraged certain executives to exaggerate the numbers slightly or even outright cheat. In some cases, such as at Enron and WorldCom, negotiations took place between outside auditors and financial officers responsible for the preparation of the financial statements.
"This, combined with executive compensation plans heavily dependent on stock options, and you have a very tricky situation," says Desautels, now the executive director of the centre on governance at the university of Ottawa and a member of the CICA's accounting standards Oversight Council as well as a member of the International auditing and Assurance standards Board.
Historically, financial markets always put pressure on companies and rewarded growth, because growth usually meant rising profits. But in the 1990s, CFOs were at a crossroads. First, there was a new growth strategy, where it wasn't enough to grow; you had to grow very quickly. "The underlying logic was that by reaching critical mass as fast as possible, you won 'first mover advantages,' which in turn meant higher profits," says Simons, who is the Charles M. Williams Professor of business administration at Harvard.
The thinking is the first mover in any market niche has the best chance of cornering that particular market. Being the first on a new market combined with rapid growth held out the promise of higher returns, which lead people to believe the rules of the game had changed. The markets rewarded senior management based only on growth — even if the company was posting enormous losses. And a shortage of capital was not considered too serious either, because the company could always raise new capital quickly with a share issue. According to Simons, as a result, there was little discipline on the market. managers who could deliver on growth were being significantly rewarded, while more conservative managers were being left behind.
Needless to say, this state of affairs could not continue. In 2000, when the promised profits failed to materialize, investors felt betrayed and abandoned ship. Publicly traded companies reacted by shifting their focus to generating and increasing profit, slashing costs, increasing profit margins and boosting revenue. Often, this was carried out in an atmosphere where the bottom line was the only consideration. Many executives took short-cuts, as in the quality of their financial statements, the reconciliation of accounts and expense reporting.
"As a result of this corporate misconduct, we have seen a major reassessment of the role and influence of CFOs," says Dominion Bond Rating Service analyst and senior vice-president David Schroeder. "They are now walking a tightrope. They have to safeguard the integrity of their data and financial statements, not make any mistakes and avoid any nasty surprises." And today, there is little room to manoeuvre on financial markets since the new rules mean zero tolerance for error and useless risk.
Managing risk
Identifying and defining risk has more-over become the new rallying cry for business leaders. Take for example last december, the head of Quebec's largest pension fund Caisse de dépôt et placement du québec put optimal risk management at the top of the list of turnaround measures in an unprecedented restructuring of the organization.
Risk management has become the No. 1 task for CFOs, dominating all decisions and information gathering. "It's not an easy task to identify and analyse all the information, depending on the risk tolerance of the board of directors," says Andrée Lafortune, FCA, director of graduate studies at HEC Montréal and chair of the audit committee at the Mouvement Desjardins. "It calls for intimate knowledge of the company and its operations and an ongoing strategic risk-monitoring process." And it's not just about financial and economic risk. "The concept of risk is more global. It has expanded to take in the image of the company and its relations with employees, partners, customers and governments," she says.
"All this has led to an in-depth reflection on ways of formalizing risk management. We constantly have to be asking ourselves about the proper balance between risk and return."
Rigidity and severity
The backdrop to this climate of tighter risk management is an increasingly complicated and rigid regulatory environment, which does nothing to make things easy for CFOs. The first shockwave comes from the US, where the Sarbanes-Oxley Act makes top executives more accountable. Under the act, which affects 947 US public companies and Canadian companies listed on US exchanges or subject to SEC continuous communication rules, CEOs and CFOs must certify financial statements under oath. It also significantly changes communication and governance rules of publicly traded companies.
In addition, Sarbanes-Oxley also presents a major legal challenge for CFOs. "The short-term consequence is that principal executive officers and principal financial officers have to set up very detailed procedures to back up this certification," says James Turner, a lawyer specializing in business, securities, mergers and acquisitions and corporate governance, with Toronto's Torys LLP. "But what I am seeing among our clients is that most CFOs haven't waited for instructions from Canadian or American regulatory authorities, but have taken the initiative where communication is concerned. Some of them have made great strides, especially regarding their monetarization activities."
In Canada, a debate is brewing on the relevancy of a national regulatory agency for financial markets, while the security commissions of Alberta, BC, Ontario and Quebec are reviewing their procedures, regulations and policies. The Toronto Stock Exchange is also examining the issues of governance and risk management for organizations.
Whatever the conclusion, the result will be the same: organizations and their executives will have to comply with stricter accounting and governance standards.
Learning from the scandals
While a number of Canadian companies — Livent Inc., Cinar Corp. and Bre-X Minerals Ltd. to name a few — have had their share of scandals, their trials have in fact helped those delivering the goods for their investors. "Domtar early on established clear and very strict criteria and objectives," says Christian Dubé, senior vice-president and CFO of the specialized paper company, which posted sales of $5.8 billion in fiscal year 2002.
"In our case, our business plan was clear. When our president, Raymond Royer, arrived five years ago, he set an objective of seeking investors' support by offering superior financial performance. He committed himself to obtaining a return on investment of 15% for shareholders over an economic cycle."
By stating its intentions and delivering the goods, the company was able to stand out in many ways. The right data and the right approach, says Dubé, earned domtar a spot on the Dow Jones sustainability index of 2,000 companies. "We are now measured on a global basis," he says.
A more strategic role
In some cases, the wealth of disclosed information, technological changes and turbulent markets have propelled CFOs into a more strategic role in organizations as they are called on to do more than simply back up financial forecasts.
At Bell Nordiq, the CFO is not so preoccupied with day-to-day operations but is more involved in value-added services such as capital analysis and strategic financial planning, economic analysis and comparative assessments. This is the result of contracting out (which allows the company to subcontract specific routine tasks like accounts payable and expense accounts) and information technologies (which allow it to automate other tasks and obtain more accurate information). "In the end, contracting out and technologies boost the quality of the data we gather and let us move more quickly. The CFO has more time and can focus on more strategic tasks," says Michael Ross, CA, vice-president administration and CFO of Bell Nordiq, which is a Bell subsidiary that operates telephone companies in outlying regions. "Rather than dwelling on the past, we are now looking toward the future."
Realigning competencies
This more strategic role has also led to a realignment of competencies on the CFO's team. The result of all the changes was that Bell Nordiq hired more accountants because it needed more detailed analysis of data and processes to make the right decisions, says Ross. "In my department, automation and contracting out led to staff cuts of 40%. Of the remaining 60%, half were replaced by employees with different skills, more suited to the decision-making process than to making accounting entries."
According to recruiter Bernard Labrecque, president and partner with montreal firm of Laurendeau Labrecque/Ray & Berndtson, selection criteria for new CFOs have changed in the past 12 months. Where once a client wanted a traditional CFO — someone responsible for cash flow, risk management and financial statements — now they want someone willing to stand up to the bosses. "The core competencies still apply," Labrecque says, "but now our clients are seeking people with the guts to tell the CEO or the audit committee that project X, Y or Z simply doesn't make sense. They don't want people with elastic consciences. They're after candidates with a solid moral code, who know how to identify and quickly solve conflicts of interest."
A dangerous backlash
In this new climate, some fear the pendulum has swung too far — from a relatively lax approach to financial management to a policing function. "The balancing act now is to identify and apply simple and strict financial controls that don't interfere with decision-making and execution," says Simons, who, with his colleagues, is conducting a study on financial controls and the impact on innovation. "Controls and processes mustn't become our goal, but rather our means."
Most important, nothing should interfere with CFOs' role in dealings with CEOs and entrepreneurs, says Daniel Paillé, CFO with Canam Manac Group. "We have to remain the lightning rod for bosses, the ones who are able to sort out their ideas and give them the financial means to go ahead with the best of them. It's true that project analysis has become more complex, but that's a result of the economic picture as much as the new situation for CFOs. We still have to be part of the development process, helping to encourage some projects and understanding that the company's greatest successes are sometimes the projects it walked away from."
Summing up the new job description for CFOs, Desautels says there is more focus on the importance of their responsibilities. They play a more prominent role. Today's CFOs are more than just number-crunchers — they are responsible for keeping the administration on the straight and narrow, they are the ambassadors and spokespersons in dealings with the financial community and investors.
"They are more involved in all of the organization's major decisions," Desautels says. "And they will have to do all this while obeying the new golden rule for CFOs: substance takes precedence over form in providing data and preparing financial reports."
Gilles des Roberts is a Montreal-based writer. |
