Among all the characteristics you would look for in a CFO, clearly the most important is integrity and honesty. Little can disable a company faster than a dishonest CFO. But be careful, the accounting profession is a little odd when it comes to integrity; an accountant can stick purely to accounting standards and rules to a fault, fail to provide a company important internal decision support information that can promote greater profitability, and still have high professional integrity. I like to think of the key responsibilities of a CFO as a simple matrix ( see image).
External stakeholders are particularly important to public companies. Private companies also pay taxes, have regulators, and probably creditors that require some form of regulated financial reporting. The CFO must ensure the company’s credibility and reputation is strong with external audiences. Information presented must be highly credible and meet the specifications required. Mistakes can lead to loss of reputation, criminal indictments and fines, and loss of financing. External reporting is the area of greatest educational focus for accountants and where expert assistance is most available.
The CEO and board are very interested in high quality external reporting and the company’s reputation, and they are responsible for strategic planning and management requiring a wider range of information to guide the company to long-term profitability and viability. Regulated external reporting presents a version of profitability, but it tends to have a short-term focus and be oriented toward short-term market expectations which can distort longer term strategic considerations. An example is offshoring manufacturing to improve the return on investment metric by shrinking investment rather than improving return and injecting huge quality and supply chain risks. A CFO must be able to look at company performance and organizational incentives from multiple financial perspectives, including external reporting and internal decision support. This is a challenging realm for an innovative CFO because individual and organizational performance incentives have long been based on external reporting metrics and most executives are very skilled at gaming those metrics to their short-term advantage—even when it may disadvantage the organization in the longer term.
The skill set in shortest supply among CFOs is internal decision support. This area is the most difficult to assess because the knowledge and skills are not widely taught in accounting curriculum. Managers and employees benefit greatly, in terms of innovation and process improvement, from financial information that clearly reflects and directly applies to the operations, resources, and decisions they use and make daily. A few examples:
- Overhead allocations should be replaced with strong causal assignments showing fixed and proportional costs that reflect the resources used in processes.
- Selling costs, collection costs, and other cause and effect related costs should be causally modeled into product and/or customer costs.
- Depreciation should be based on use and actual longevity periods.
How do you evaluate the internal decision support capability in a CFO? First, you want a CFO with a proven track record of creating a collaborative work environment and culture, not just in the finance space, but across a broader part of the organization. Second, a clear record on innovation within finance and the broader organization. Experience with Lean, Six Sigma, agile, and scrum techniques are good indicators of an innovative mindset. Third, a genuine interest in your business from production to sales and logistics to strategic planning, as well as evidence that they have engaged functionally in other businesses beyond finance. Finally, all business requires taking risks to advance and improve. Yes, a risk-supporting CFO is essential. The CFO you want must enable the risk profile needed to achieve your organization’s strategy. A CFO that will venture aggressively into internal decision support information projects will rapidly gain an understanding and effectively communicate what is needed for success in your organization.
