- WORLDWIDE
- UNITED KINGDOM
Review
The Performance CFO: excellence in an exceptional climate - United Kingdom
On October 2nd 2009, Economist Conferences held a one-day event, entitled The Performance CFO: Excellence in an exceptional climate. Over ten sessions featuring high-level speakers and experts from a range of industries, the attendees considered the changing role of the chief financial officer and examined the outlook for the finance function in an uncertain environment. This report summarises these discussions.
VI. Bullet-proofing balance sheets
VIII. Characteristics of the performance CFO
IX. The tortoise and the hare in M&A
XI. Consumer goods in a downturn
The Performance CFO conference welcomed a number of high profile speakers including CEO’s, Audit Committee chairs and leading CFOs.
These are the top ten points that emerged from the sessions.
The crisis should be seen as an opportunity to accelerate vital initiatives. One bright spot of the current crisis is that it serves as a catalyst for companies to introduce and accelerate initiatives that may have been low on the priority list during more benign times. From formal cost reduction programmes to radical restructuring of the business, the crisis provides a window of opportunity for CFOs to implement necessary changes, and they should seize the opportunity while they can.
A shift in economic weight requires companies to make important structural changes. With developed economies in North America and Europe forecast to grow only slowly in the coming years, companies will need to think very differently about strategic decisions. Rather than see developed markets as core and emerging markets as destinations for incremental investment, CFOs may need to change their thinking, and shift their allocation of resources and capital to faster-growing markets.
There will be a temptation to conduct M&A transactions, but companies should consider carefully before taking the plunge. With most companies facing the prospect of low growth in the years ahead, there will be a strong temptation to grow by acquisition. Ambitious CEOs seeking a legacy will be especially prone to choosing this route. While there will undoubtedly be attractively priced assets available, executives should reflect carefully before taking the plunge. A disciplined and careful approach that considers the fit of company cultures should be adopted.
The CFO should lead the strategic debate, not just contribute to it. The CFO should be seen by the board and the business as a creator of ideas and not just a contributor to the strategic debate. This should evidence itself through visible leadership of components of the business strategy for change. At times, this may mean challenging the CEO’s view. But a healthy debate between these two most senior executives can be healthy, provided it is correctly managed.
The high-performance CFO is one that understands people and the importance of stakeholder management. As finance managers rise through the ranks of the organisation, the day-to-day role becomes less about the technical aspects, and more about personal relationships. The ability to manage and influence both internal and external stakeholders is a key part of the job, but it is one for which training provides little preparation.
Companies do not need more rules; they need a return to ethics. The magnitude of the current crisis can lead to a knee-jerk reaction by regulators and government to impose more stringent rules on the corporate world. This temptation for ‘check box compliance’ should be resisted as companies should look to instill an embedded culture and awareness of strong commercial and financial risk management. The aim should be for business units to behave automatically in a risk-aware manner, rather than for them to be swamped by rules.
Risk management is not just about protection; it should also add value to the business. Companies spend increasing amounts on compliance, risk and controls, but few are able to put a precise figure on their expenditure. Rather than see risk management as a function that protects the organisation, senior finance executives should also consider how it can add value to the business. Few companies adopt a truly strategic view of risk management, but by ignoring this aspect of the function they are missing out on key benefits.
The role of the non-executive will become more demanding and there may be question marks over relevant expertise. Corporate governance codes, and the possibility of a regulatory spill-over from banking, are likely to increase the demands on non-executives, particularly those that sit on audit committees. While codes tend to focus on the structure and composition of boards, they place less emphasis on experience and expertise. As the demands of the role and the time required to carry out board duties increase, it is likely that there will be a growing shortage of suitably qualified candidates for non-executive roles.
Relationships with investment banks must be managed carefully. In their relationships with investment banks, CFOs should consider whether the same institution that provides broking services should also be providing capital. While there are arguments to support this, the importance of an independent view cannot be underestimated, particularly in the current environment. An investment bank that provides a complete service can be a valuable asset – and the bank will also value the relationship – but CFOs should beware the dangers of conflicts of interest.
Cash management needs to come to the fore, both as a discipline and in financial reporting. During the good times, companies focused on revenues and EBITDA and became less focused on cash management, often burying the balance sheet deep in their annual report. Today, the emphasis has shifted. Companies are putting in place rigorous, long-term controls over cash management, and having to pay a proper price for capital, while investors are paying much greater attention to the balance sheet as an assessment of financial health.
More rules are not the answer to the crisis, says Ian Livingston, Chief Executive of BT Group. Instead, what is needed is honesty in business to drive stronger performance.
The recession that we are currently living through is very different to previous ones in the 1990s, 1980s or 1970s. Businesses are facing a global downturn, with entire countries, such as Iceland, in serious trouble. It is easy to blame the banks for the current crisis, but the real culprit is something much more fundamental. Particularly in the US and UK, there was too much consumption and borrowing, whereas China saved too much and produced too much. These are huge global imbalances and the only way to solve them is for US and UK consumers to save more and spend less, and for the Chinese to save less and spend more.
Policy-makers should be congratulated for their response to the banking crisis. But governments have also made mistakes. For example, if part of the problem in the UK has been that consumers were spending too much, where was the logic in reducing VAT? This money could have been used in far more productive ways – if it had been invested in business, the UK could have emerged from this recession with much better infrastructure. Instead, the government is encouraging consumers to spend more.
There is more to come
Times could get much more difficult for consumers. Tax rises and VAT increases are likely; there may be a rise in unemployment and, for those people that have already lost their jobs, redundancy packages are running out. There has already been a slowdown in spending on big-ticket items, such as plane trips and televisions, but in the coming year this is likely to spread to less costly purchases.
Until recently, it was assumed that free market capitalism would be dominant, but that thesis is now being challenged. We are facing the biggest challenge to capitalism since the fall of the Berlin Wall. Yet it is important to remember that big business has been responsible for lifting hundreds of millions of people out of poverty. Globalisation and business have created a huge middle class in emerging markets. We should bear in mind that business is typically a force for good.
It is important for executives not to use the recession as an excuse. Instead, they should concentrate on other problems and making their business emerge from the crisis in a stronger position. This is an opportunity to do things quickly and with urgency.
A new role for the board
There will be a big change in the role of the board. Scrutiny of board practices will increase, and there will be greater pressure on individual board members to commit their time and offer their expertise. There are question marks over the availability of suitably qualified candidates for some board committee positions, however. Non-executive directors need current business and financial experience, but they also need to spend up to 40 days of their time fulfilling their board responsibility. This all but excludes those with the most experience – current executives with full-time management roles.
Using an analogy from AA Milne, I would suggest that every business needs its Tigger – a born optimist – and its Eeyore – who sees the downside to everything. During the last boom, there were too many Tiggers, which meant that companies never properly addressed risk. But equally, you do not want too many Eeyores; otherwise the business will simply disappear. It is a mistake for executives to think that they can forecast the future. Rather than put resources into planning for an uncertain future, some companies might instead choose to invest in being able to react quickly and make the business more agile.
Rules and regulation
Governments and regulators will respond to the current crisis by introducing more rules. But business should fight against this reaction. More rules are not what we need – after all, was the Financial Services Authority short of people in the run-up to the crisis? Were compliance departments in banks too small? The problem was not a shortage of rules. Instead, what is needed is a return to ethics, which are far more important than rules. Every time something goes wrong, it’s a lack of honesty that is at the heart of the problem. People start to spin stories. Bad news becomes good news, and then people start to believe it. Honesty can drive better performance.
Home
LEADERSHIP AND THE CFO
Geoff Cooper, Chief Executive of Travis Perkins and former Finance Director of Gateway and Unichem plc, talks about the major business challenges informing the role of today’s finance leader.
There are the three major business challenges faced by today’s finance leaders.
Businesses have to become used to managing in a low-growth environment. They now have to pay a proper price for capital – having avoided it for the past eight years. And, they need to trade off between their appetite for protection and the cost they are willing to pay for it.
Embedding a risk culture
In this low growth environment, the CFO should aim to do him- or herself out of a job. During a crisis, there is a common knee-jerk response to impose greater controls and limit the freedom of operational managers. But I believe this is the wrong thing to do. If a company makes rules more stringent, the effect is that common sense goes out of the window. The objective should be to instill a culture of financial and risk management, through training and other means, so that operational managers think about risk naturally. It is important to recognise that it is the business’s role to manage risk, not the risk managers.
By relying on an audit system to tell the board about risk, it is easy to miss important issues. Instead, he stated that companies need a real-time audit system, which can provide both financial and non-financial risk information. This can also help to instill an awareness of risk among operational managers, rather than having risk management as a discipline that is imposed top-down by the finance function.
The return of mergers and acquisitions
Another consequence of operating in a low-growth environment is the return of mergers and acquisitions. Ambitious chief executives, concerned about their legacy and their ability to secure chairmanships, and facing difficulties securing organic growth, will seek to expand the business by acquisition. In order to increase their chances of success in M&A, companies should be more cautious and prepared for a long courtship before committing to a deal. This can be difficult, especially if the company faces competition from other potential acquirers, but more careful due diligence, and a reluctance to dive headlong into deals, will create benefits in the long run.
Companies should avoid trying to impose their own culture on an acquired company. We have a tribal desire to make an acquired organisation part of our homogeneity. We want it to behave like us, but in doing so, we often destroy the things that created the asset’s value in the first place.
Investing in innovation
Innovation will become essential in a low-growth environment. Typically, CFOs do not like innovation because it is risky and involves people asking for money. It is important, however, that they support innovation and are prepared to take risks within unproven technologies.
CFOs are often characterised as Scrooges and yet Scrooge understood where to invest; the finance director who applies caution, whilst being clever and innovative about where best to spend, will outperform more reckless peers.
The broker relationship
In their relationship with investment banks, CFOs should consider whether the same institutions that are providing broking services should also be providing capital. I believe that CFOs should not have a relationship with any advisor, unless that advisor is also prepared to provide the enterprise with capital. If a company has a broker who is not lending money, that company should be asking why not.
Compensation
The issue of compensation continues to be a very important one for CFOs. In a world in which capital is scarce, bonuses are very important, but we know that they can have a dysfunctional effect. The key is to put in place controls to prevent this effect from taking hold. This means working very closely with human resources functions to ensure that the company can put in place a programme that has a better rate of return. What are needed are incentive systems in which bureaucracy is relaxed so that people are properly and fairly rewarded.
CFOs can sometimes struggle because the most important aspect of their role – an understanding of people and how organisations work – is not part of their training. Often, people who become CFOs are ill-equipped to deal with these issues. But part of the solution is to accept that the finance director cannot be a superman. You gain control by giving up control and that is quite hard for some CFOs to accept.
Home
GLOBAL ECONOMIC OUTLOOOK
Robin Bew, Editorial Director and Chief Economist at the Economist Intelligence Unit discusses the prospects for the global economy as the world slowly emerges from a “balance sheet recession”.
The global environment has changed dramatically over the past 18 months. Although many businesses may be hoping that business as usual can be restored, it is likely that challenges will persist. In this environment, the role of the executive board will be crucial, and these individuals will need to think differently about their strategy.
In 2009, global growth will be negative for the first time since the 1930s. In previous downturns, companies could generally offset problems in one part of the world with better performance in others, but this recession is different. Most companies see their revenues under pressure in every market. Every country in Western Europe has fallen into recession, while the US and Japan have also seen negative growth. In emerging markets, not every country has suffered the same fate, but growth has certainly slowed.
Green shoots in the economy
It is clear that there are already genuine green shoots in the economy. First, the financial system has shown some recovery. The work that central banks and other policy-makers have been doing is having an effect. This does not mean that credit is easy to obtain, but spreads are falling, so it is clear that the “financial plumbing” is in a better state than it was six months ago. Surveys of procurement officers – which are often very useful at giving an indication of future demand – also show some positive signs. Six months ago, these surveys were very pessimistic, but today procurement is definitely resuming – most obviously in China, but also in US and Europe.
In the early months of this year, manufacturers ran down inventory in their warehouses and mothballed production. In emerging markets, there were huge lay-offs in countries such as China, with the very real threat of social unrest. Now, warehouses are empty and production is resuming. Large industrial companies, which have suffered from a severe slowdown in the first half of this year, are hiring again, and this pattern is being repeated in other sectors.
Policy measures are also starting to have an effect. Interest rates have been slashed – in the UK, they are at their lowest point since the foundation of the Bank of England in 1694. Countries such as the UK, US and Japan have introduced quantitative easing measures. There are major fiscal stimulus programmes in many countries, whereby the government steps in to make up the shortfall in consumption. In the UK, this programme has been smaller than in some other countries because the bail-out of the banks (which form a disproportionately large part of the UK economy) has been so significant.
Challenges ahead
Can the green shoots persist? While the world economy may have bottomed out, the shape of the recovery remains in doubt. The worry is that inventory will once again be run down because the strength of demand is simply not there. Policy-makers now have limited room for manoeuvre. They cannot cut interest rates further. Governments will also find it difficult to ramp up fiscal stimulus programmes because they will not be able to afford it. It will also take some time for the process of deleveraging to unwind, so the story over the next decade for corporate earnings is not as good as many might have hoped. Growth is likely to return a lot more slowly than in previous recessions. The current downturn can be characterised as “a balance sheet recession”, driven by debt. The closest parallel is Japan in the 1990s, although good policy decisions mean that the world economy is unlikely to suffer the scale of the problems seen in Japan over the past decade or so.
Following major intervention in industries such as banking and automotive, some problems have moved into the public sector. Government debt as a percentage of GDP is rising significantly, particularly in those countries that had large booms earlier this decade. The implications of this include higher taxes and weak public spending. In the longer term, the cost of capital will remain high and there will be higher inflation - as that will be seen as part of the solution to tackling the government debt problem. In three years’ time, it is likely that countries will tolerate inflation of 3% to 5% - indeed, they will effectively engineer it in order to reduce their debt.
Looking ahead
In conclusion, corporates should not assume that their revenues will return to 2005 levels any time soon. To succeed in the months ahead, they must consider structural change. In the past, most capital was committed to developed markets, such as the US and Europe, while Asia received only incremental capital. What is different today is that companies are likely to be committing too much capital to developed markets, and will need to think about reducing their allocation to these countries, and recycling their capital into Asia. This is an important structural change, which means that companies will increasingly take capital out of their home markets.
Many companies struggle with forecasting at the best of times, but in a highly volatile environment, the problems become even more acute. Here, Andrew Tivey, a Partner at Ernst & Young summarises the ten most common problems associated with forecasting in adversity.
In the current environment, it is unsurprising that companies are spending more time forecasting. But at the same time, many executives still lack confidence in their forecasts as the crisis has exposed underlying weaknesses in their forecasting processes. In more benign times, it was possible to tolerate these shortcomings, but when boards are asking for much more detailed information, and when there are such great uncertainties to contend with, the margin of error is so much smaller.
Below are the ten most common problems I see with forecasting and planning:
1. Unclear direction from the centre. It is important that the business explains clearly what it wants to get from the forecasting process. There is a clear correlation between clarity of explanations given and what you get back.
2. Inconsistent business unit approaches and responses to the centre. The way in which business units communicate information lacks consistency, which makes it difficult to aggregate information and present a clear picture of the current and expected situation.
3. Cash isn’t king. Although ‘cash is king’ in the current environment it is not often understood as well as it could be if companies adopted a more integrated forecasting capability.
4. Understanding key drivers. Planning relies on financial outputs without enough emphasis on the real drivers. The key is to set aside time to look at the drivers of customer demand.
5. No capability to answer ‘what if?’: It is possible to carry out some very detailed planning, but without an understanding of the underlying drivers, it is impossible to get the answer to “what if?” questions.
6. Poor data quality and consistency. This remains a massive challenge for many companies. Many find that they simply do not have the data, or have inaccurate or inconsistent data, which makes it very difficult for them to make decisions.
7. Excel rules. There has been an explosion in the use of Excel spreadsheets in business. It is a great planning tool, but only up to a point.
8. Unclear roles and accountability. This can have a huge impact on the quality of the planning process.
9. Misaligned incentives. In many companies, bonuses are aligned around certain performance measures, but there is a danger that other measures become ignored because they do not affect employees’ bonuses.
10. People skills. A common problem is that companies do not take enough account of people and the availability of resources when making planning assumptions.
BULLET-PROOFING BALANCE SHEETS
Careful cash management has never been more important, but as David Sage, Partner at Ernst & Young, Jeremy Townsend, Finance Director at Mitchells & Butlers and Stuart Hall, Chief Financial Officer at Pace discussed, stakeholder management is at the heart of the issue.
Cash is king
The mantra of “cash is king” has rarely been more important than it is today. Cash flow is certainly top of the agenda, but this has not always been the case. Until recently, companies were rewarded for revenues and EBITDA, but cash was considered the poor relative. The balance sheet was something that was buried in a financial report, rather than being regarded as an assessment of financial health. Today however, there is a more pressing need than ever to put in place controls to ensure greater visibility over cash management. For example, rolling cash flow forecasts can be implemented to get a clearer picture of performance against key metrics. New initiatives – from rolling cash forecasts to reviews of treasury and banking covenants – require careful stakeholder management. Companies must seek appropriate external advice, ensure that they are open in their communications with all relevant stakeholders, and deliver an agenda that is aligned with everyone’s interests.
Collaboration with suppliers
Relationships with suppliers are one example of how the requirements for stakeholder management have broadened. The withdrawal of credit insurance has been a particular problem for many suppliers, but chief financial officers have the opportunity to intervene by going beyond the supplier to talk directly to the credit insurers themselves. That can give CFOs the opportunity to talk to insurers about the strength of their organisation, and encourage them to focus on the specifics of the business, rather than make assumptions about the sector as a whole. CFOs could also put in place a reverse factoring programme, which enable suppliers to obtain prompt access to payment.
Companies are also being forced to re-think their relationships with financial providers. There continues to be disagreement among CFOs as to whether the roles of broker and finance provider should be combined. Some feel that this could give rise to conflicts of interest and highlight the importance of independent advice – especially in the current environment. Others, however, see a benefit in combining the two roles, partly in order to derive the economies of scale from a deeper relationship.
Internal stakeholder management has also emerged as a strong theme during the crisis. For example, CFOs more than ever see the value in educating operational parts of the business about working capital. To achieve this, senior executives must ensure that they put in place the right incentives and indicators to encourage appropriate behaviour.
The financial crisis has brought discussions about risk to the centre of boardroom conversations, says Gerard Gallagher, Partner, Ernst & Young. In addition to facing new and changing risks, forward-thinking companies are re-evaluating the role and responsibilities of the risk manager.
UK chief financial officers would do well to familiarise themselves with the Walker Review, which has been commissioned by the Treasury to look at corporate governance and the risk function in banking. Although this legislation currently pertains only to the financial services industry, it is quite likely that it will eventually have a much broader impact on the corporate landscape.
The review will look at the effectiveness of risk management on boards, and whether the skills on the board are appropriate. The recommendations are likely to include having a chief risk officer who is entirely independent of management, who has a veto over major transactions and who will report to the CFO. The board will also need to provide evidence that it is looking forwards when it considers risk.
For risk functions in every industry, there is a real need for clarity, which can be difficult to obtain in the current environment. Our clients tell us that the past year has been like being on the Titanic. They tell us that it’s been foggy and they’ve had water around their ankles. But they don’t know if a tap has been left on or if they’ve hit an iceberg.
A recent survey conducted by Ernst & Young revealed that, while operational risk management is fairly mature, few companies were paying sufficient attention to major strategic risks. One risk on the radar that is becoming much more important is radical greening – people care about where business is going. Business model redundancy is also seen as a key risk, and with capital markets moving from west to east, this is likely to become a more widespread phenomenon. At the moment, though, companies may be underestimating this risk.
Challenges for risk managers
The risk management function is currently a very tough place to be. Risk managers spend a lot of their time on compliance issues, but they want to add value. On the one hand, risk managers are asked to look in the rear mirror, but on the other hand, they are being asked to show where the organisation is going. More needs to be done to ensure that risk managers look to the future, rather than just the past.
Organisations tell us that they know they spend a lot of money on risk, but they don’t know how much. They are often frustrated about the return on investment they derive from risk. They know that they have rigorous controls, but they don’t know if it covers the right places.
Risk and control functions face a further challenge in the shape of efforts to cut costs. If efficiencies are sought in risk and controls, it is important that great care is taken. The control function is like the spinal cord of the organisation. If you’re going to cut close to it, you’ll need someone who is highly trained.
The board has a responsibility to move risk away from being a compliance function towards something that delivers value to the organisation. Risk is a good thing, because it can generate a return, and if executives know how to manage risk, they can drive strong performance. Risk should no longer be thought of solely as a protecting function, but as one that can add value.
Home
CHARACTERISTICS OF THE PERFORMANCE CFO
What is the skill set required by a CFO to compete in today’s environment? Cagla Bekbolet, Head of UK CFO Practice at Egon Zehnder discusses some of the key qualities. There are several common attributes shared by top CFOs. Typically, they will begin their career focused on technical aspects of the role, then at some point they will have the opportunity to broaden their experience and take part in strategic projects, such as mergers and acquisitions, or an initial public offering. At this point, they may start to develop the attributes of leadership. The next stage is all about building relationships – connecting, motivating and inspiring people. At this point, it’s less about what the individual does day to day, but how they influence internal and external stakeholders, and how they impact the environment around them.
There are certain competencies in high-performance CFOs that stand out. The first is all about collaboration, networking and relationship-building – using the network to impact performance and the direction in which the business is going. The second is the CFO’s relationship with his or her team. It is not just about how you hire and motivate, but about building high-performance teams that last. The third competency relates to change leadership – coming up with ideas for change and making sure that the organisation is behind you. The high performance CFO is not just a contributor to the strategic debate, but a leader of that debate.
There are several ways in which the role of the CFO has changed in the current crisis. One common theme is that the responsibilities of the role are greater than ever. The CFO is an integral part of strategic and commercial thinking, and currently has more leeway than ever to impact the business. Some CFOs have told us that the crisis has given them a new aura of confidence. With the CFO’s role now key to the survival of the business, a whole new set of possibilities had emerged. A crisis gives people an opportunity to build their skill set.
CFOs that are “best in class” are typically those that are effective at spotting what comes next. They paid close attention to the strategic agenda and kept the board abreast of everything that was happening. The outstanding CFO not only thinks about current challenges, but looks to the future and considers how to build an organisation that is even more robust than before.
Home
THE TORTOISE AND THE HARE IN M&A
In a post-crisis world, it will be the tortoise, not the hare, that is most likely to succeed in mergers and acquisitions, says John Studzinski, Senior Managing Director at The Blackstone Group
If 2007 was a great year for mergers and acquisitions, when private equity made up 25% of deal volume, 2008 was the year when deals were cancelled and transactions dried up. It became clear that a lot of companies had made mistakes. In cases where deals were cancelled, either shareholders did not like what was offered, or due diligence failed.
In considering where M&A is today, in late 2009, let us consider the analogy of Aesop’s Tortoise and the Hare. Just as the tortoise won the race in a slow and steady way, so M&A is returning for those companies that are prepared to see deals as a long-term investment that is made with great care and attention. It will be some time before M&A is back for the hares – those companies seeking quick, short-term gain.
There are several sectors that are most likely to be the sources of new deals. Technology is one, because it remains very fragmented and because a lot of companies are sitting on cash. Healthcare and consumer goods are also good candidates for consolidation, along with oil and gas, power and clean technology.
When planning or considering M&A, CFOs should bear several important points in mind:
• Institutional investors and rating agencies will be looking much more closely at expenses and there will be a lot of focus on balance sheets.
• CFOs should expect considerable skepticism about the potential benefits of M&A.
• Be prepared to embrace a wide range of disciplines that may not have been as relevant for previous generations of CFO. For example, many are learning about the importance of liquidity and where potential counterparty risks might lie.
• These issues are making boards a lot more conservative about balance sheets. Boards are now prepared to walk away from a deal. They are paying much more attention to governance.
• Companies should fund acquisitions with stock, rather than cash. They should conserve their cash in anticipation oF banks potentially cutting credit lines later this year. A combination of stock and cash encourages operational managers to look at synergies more carefully.
There will be a temptation, particularly among CEOs anxious for a legacy, to launch bids and seek acquisition opportunities. But companies would do well to think carefully before taking the plunge and should take a more reflective approach. Deals will take longer to execute. There will be fewer buyers. It’s a question of being cautious and disciplined.
Home
BOARDROOM DYNAMICS
Relationships in the boardroom have always been fluid and complex, but in the wake of the financial crisis, they are evolving more rapidly than ever. Here, Tony Bickerstaff, Group Finance Director of Costain Group, David Lindsell, Audit Committee Chair of Drax Group, Premier Oil and Gartmore Investments, Ian Durant, Group Finance Director of Liberty International and Ken Lever, Chief Financial Officer of Numonyx lead the discussion.
Corporate governance codes have expanded the role of non-executive directors, but while they have put more rules in place in terms of the composition of committees, there is less emphasis on the knowledge and experience of individual members. The code places emphasis on independence and not enough on expertise and quality of judgment.
The financial crisis has made changes to the combined code on corporate governance likely – probably in the shape of a requirement to report in greater detail. This is unfortunate, but will be an inevitable consequence of political pressure. One likely outcome of this trend would be greater tension in the relationship between the CFO and audit committee chairman.
Boards should ensure that they use the experience of non-executive directors to the full. NEDs need to be able to contribute, but they must be managed as well, and encouraged to keep to the point. This is also the case with the board as a whole – it is important for the group not to get distracted, and to ensure that key issues are debated and addressed.
Board meetings are often difficult environments in which to raise points of subtlety, as they tend to be dominated by form. Often, it is during informal occasions, such as dinners, that the real issues come to light. Board meetings can sometimes be seen as an opportunity to present everything that is good news, rather than tackle the real challenges facing the business.
Navigating board meetings
During board meetings, it is important to tread a careful line between the general and the specific. By and large, the board should focus on the general, and understand the direction of the business rather than get bogged down in the detail. It is important to get the balance of information right, so that it is clear that the board is in control of managing a difficult environment, but can see the broader direction of the business.
The relationship between the CFO and CEO can be a complex one that is sometimes prone to tension. To a certain extent, this is healthy, because it means that the board becomes aware of different views. You do not want the CEO and CFO to agree on everything. For example, the CFO may need to challenge the CEO – and he is often well-placed to do so because of his control over the metrics. In cases where there are disagreements, it is important to discuss these prior to the board meeting. In some cases, this can impact the relationship between the two executives, but the CFO also needs to preserve his or her integrity and ethics.
An important aspect of the chairman’s role is to manage these disagreements. There should be a tripartite relationship of trust between the CEO, CFO and chairman.
Jim Lawrence, Chief Financial Officer of Unilever, discusses the impact of the financial crisis on the consumer goods business with Andrew Palmer, finance editor of The Economist.
In September 2009, Unilever conducted a Euros 1.75bn acquisition of the personal care division of Sara Lee. This was the company’s biggest acquisition in nine years. The transaction was a good fit: Sara Lee had been keen to become a pure play food company, and Unilever saw these assets as fitting well into its business.
Mr Lawrence described how the company paid cash for the acquisition. “In the past nine months, the company has raised US$2.5bn, and we find the idea of taking that and turning it over to Sara Lee to gain access to these brands a good trade,” he said. While financial markets were extremely challenging for non-investment grade companies, he suggested that for Unilever, there was a window of opportunity when the company was fortunate to be able to raise capital.
Compared with many other companies, Mr Lawrence felt that the downturn had not affected Unilever severely. His company saw a small dip in volume in the fourth quarter of 2008 and the first quarter of 2009, but volumes returned in the second quarter and were forecast to grow for the rest of the year.
Like many companies, Unilever has embarked on a substantial restructuring programme during the downturn. For example, it closed half its manufacturing plants in the Netherlands – in what Mr Lawrence described as a “bold move” – to bring the cost base down. “When we entered the crisis, we had already embarked on a plan to take costs down,” said Mr Lawrence. “But during the crisis, we accelerated that plan.”
What about cutting marketing spend? Mr Lawrence felt that, while this would not have much impact on volumes in the short term, it would eventually prove damaging. He said that Unilever had increased its marketing spend as a percentage of sales in the second quarter of 2009. “That will be good for us in the long term,” he said.
The importance of emerging markets
Mr Lawrence described how 50% of the company’s sales now take place in emerging markets. He pointed out that, while certain parts of the emerging world had been very badly hit by the downturn, others had held up well. Over the long term, Mr Lawrence felt confident that the business would grow in the emerging world.
The interviewer suggested that one impact of the downturn is that consumers in many markets have less available money to spend, and that this must have had an effect on Unilever. Mr Lawrence countered by saying that the company tries to have a product offering in each segment. This means that, if consumers decide to spend less on an everyday product, such as shampoo, there is another option for them within the company’s range.
Regulatory change
Mr Lawrence felt that some kind of regulatory intervention spreading from banks to other industries was plausible. While he felt that it might be appropriate to regulate in some cases, he said that it was important to make sure that the company did not suffer from unfair intervention. To that end, he said that it used industry associations and lobbying to get across its views. In all likelihood, it seemed that taxes would rise, but Mr Lawrence hoped that this would happen in a way that was as neutral as possible. “We’re still in an environment in which governments are looking to fuel recovery, not increase taxes, but we can see this happening at some point in the future.”
Categories:
Send to friend
Comments (0)
Post new comment