They know the drill

Nobody mines a company’s ledger better than the CFO. Which is precisely why so many of Canada’s chief financial folks are morphing into chief catalyst officers.

About three years ago when Sunil Gandhi was working as vice-president of finance for the Mark Anthony Group, a Vancouver alcohol and beverage firm, he embarked on an analytical project that went beyond the more traditional financial reporting and compliance tasks associated with such positions.

Several years ago, Mark Anthony developed Mike’s Hard Lemonade, and the firm produces and markets a range of other spirits, including the Mission Hill wine label. As a producer of perishable consumer products, the company was grappling with how to manage sharply fluctuating inventory levels, which sometimes led to spoilage. And that meant finding the sweet spot between having enough stock on hand to satisfy customer orders but not so much that unshipped cases went bad in the warehouse.

To home in on the right production levels, Gandhi built a team and created a process that leveraged some statistical modelling software the company had already purchased that could predict demand more accurately using historical patterns.

Normally, observes Gandhi, who is now CFO for Trophy Foods in Mississauga, Ont., that kind of work would fall to an operations team. But company officials felt that the analysis should be done within the finance department, which has a perspective on the company’s whole operation, not just parts of it. As Gandhi points out, sales and marketing managers have an inherent bias to make sure they don’t run out of stock, so their forecasts tend to be high, while production managers have a bias toward lowballing their forecasts to prevent inventory backups. Using new statistical modelling tools and processes, his finance staff worked with sales and operations to calculate cutting-edge forecasts that would create optimal production runs and inventory levels.

A HOT TOPIC

The subject of the CFO’s true role has become a “hot topic,” says Gandhi. “It seems to be all people are talking about.” In an era when companies face massive challenges due to technological disruption, rapid regulatory change and new forms of cyber-risk, there’s mounting pressure on CFOs to involve themselves and their teams in roles that extend well beyond the accounting duties — financial statement preparation, audit, controllership, financing and compliance — they’ve long per- formed. As a 2016 Ernst & Young report on the evolution of this role pointed out, “Our research shows that many CFOs believe that their current financial function is not equipped to meet the demands the future will place on it.”

While some observers wonder whether artificial intelligence-driven innovations in financial accounting, audit and disclosure may actually reduce the role of CFOs, others say that many CEOs are eager to see their second-in-commands become full partners in the business of developing and executing a company’s strategic plans.

“Over the past number of years, the expectation is to become a trusted business partner to the CEO, a voice of reason for the board,” says Gord Nelson, who has served as CFO for Cineplex since 2004. Paul Fletcher, a Deloitte audit and assurance partner and head of the firm’s CFO leadership program, says these executives should aspire to become “chief catalyst officers,” responsible for operationalizing strategic course corrections. “That’s the biggest opportunity I see coming,” he says.

Giri Kanagaretnam, a professor of accounting at York University’s Schulich School of Business, adds that in an age of intensive scrutiny, it falls increasingly to CFOs to set and then clearly communicate the company’s corporate values while ensuring transparency and encouraging responsible risk-taking. “It’s about strategy and how you see the big picture and [the company’s] systems at the broadest level,” he says.

Yet as Nelson acknowledges, many companies and nonfinancial C-suite executives still resist the notion that the chief bean counter — a.k.a. the CF-No — should venture into other corners of the firm. Much depends on the tone set by the top executive. “If the CEO has communicated implicitly or explicitly that the CFO is back of house and the numbers person, that’s a tough bridge to cross,” says Gandhi. Adds Nelson: “In some organizations, there’s a true partnership [between the CEO and the CFO]. But that’s not available for all organizations.”

Recent surveys of CFOs show that a steadily growing number now conceptualize their departments’ tasks as extending beyond traditional roles. A December 2016 McKinsey & Co. global survey found that fully 40% of CFOs now spend the majority of their work time on nontraditional tasks, including strategic management, organizational change, big data and performance management. Some have added tasks such as cybersecurity and information technology management to their portfolios.

A 2014 survey by Financial Executives International (FEI) Canada concluded CFOs do want to exert more influence outside their divisions, especially in fields such as mergers and acquisitions, while fully 79% of survey respondents reported that CFO responsibilities in their companies had expanded in the previous three years. At the same time, the extent of their clout tended to be more limited in larger companies, where other C-suite executives compete for mandates that cut across divisions, such as information technology.

Some operational areas, FEI Canada's report pointed out, seem more amenable to CFO involvement, such as IT and analytics. By contrast, CFOs were seen to have little ability to influence specializations such as marketing, public relations, sales and R&D, although the study noted that increased CFO involvement in R&D and M&A activity would have “a significant impact on the performance of a company.”

Before its meltdown, Quebec drug maker Valeant recruited a CFO to drive its M&A activity. Elsewhere, the CEOs of some very large multinationals, among them Hewlett Packard’s Meg Whitman, deliberately delegated responsibility for acquisitions to their CFOs, according to a 2017 University of Liverpool study. The authors concluded that strong CFOs not only play an important role in driving acquisitions but also in ensuring a successful integration afterwards.

Annie Ropar, CFO for Aequitas Innovations Inc., agrees: “Because the CFO has a good sense of all the business and touches everything, they have a good view of how all these pieces will fit together so the post-acquisition gains are realized.”

CHANGING PERCEPTIONS

Despite the fact that CFOs are now involved in many non-financial aspects of a company’s operations — Ropar, for example, also oversees HR and general administration at Aequitas — they still confront the problem of how firms and other senior executives perceive them: “I think the CFO’s role has been underestimated,” says Richard Powers, academic director of the directors education program at the Rotman School of Management at the University of Toronto. “They’re treated like the accountant.”

The McKinsey survey bears out Powers’ observation. While almost three in four CFOs felt they were significantly involved in deploying employees and allocating resources, fewer than three in 10 of the non-CFO executives who responded to the survey agreed. What’s more, just more than half of those non-CFO executives surveyed felt their firms’ CFOs were effective in their own portfolios, while many described them as lacking an innovative approach to the business. In other words, many CFOs overestimated their own role in the company’s operations.

Seasoned CFOs who have carved out genuine leadership positions for themselves say that CPAs who are working in finance roles and aspire to become CFOs should make a point of diversifying their skills early on. While Ropar began in public practice at Deloitte & Touche, she later sought out positions in private equity financing before landing her current gig as a CFO. Nelson, for his part, urges younger CPAs to seize opportunities to volunteer for multidivisional company teams tasked with solving some kind of business development project or planning problem. “That’s how you gain a real understanding of how the overall business works and garner experience in real-life situations,” he says, adding that such projects also encourage team building and strategic thinking skills.

Gandhi adds that when CFOs or their staff have involved themselves in a forward-looking business decision, their imprimatur will inevitably matter when it comes time to allocate resources. “If a decision is vetted by the CFO,” says Gandhi, “we’re more likely to get it approved when it’s presented by the CEO to the board.”

CFOs for other firms have sought to institutionalize this approach, notes Fletcher. He mentions a telecom client where the CFO has recruited a cadre of six CPAs in the controller’s group and dispatches them on 18-month rotations in other divisions. “They’ll come back to the controllership with more experience and have a broader network of contacts around the company,” he says.

But for young professionals who have come up through rigorous financial accounting courses and internships in public accounting firms, this kind of professional development may often feel very freewheeling and improvisational. “The academic route prepares you for none of this,” says Gandhi, adding, “I’m not going to lie to you: sometimes, it’s baptism by fire.”

A STRUCTURAL SHIFT AHEAD?

That tension is especially pronounced in two of the areas that CFOs should be paying most attention to: data analytics and cyber-risk, both fields that change by the day. Jo Mark Zurel, a former CFO for CHC Helicopter Corp. who sits on numerous boards, including Fortis and the Canada Pension Plan Investment Board, where he chairs the audit committee, says CFOs in particular need to build competency in the use of sophisticated data analytics to drive strategy. “This is something that’s emerging and the ambitious CFO has an opportunity to [use analytics] to add extra value,” he says. “They should also know when to seek help from outside.”

Nelson says Cineplex did just that when his team began drilling into all the data in the company’s storehouse of 8.5 million customer loyalty profiles. His group hired four data analysts and acquired specialized analytics software specifically to glean information from all that data. Nelson adds that this analytics team has been set up as a companywide resource, available to all divisions, not just finance. The team’s analysis of Cineplex’s giant customer base is used to develop marketing strategies.

The expanded responsibilities will bring greater respect across the company and from the CEO, but Powers points to a structural shift that could further entrench a broader role for CFOs. In the UK and Europe, Powers says, CFOs don’t just present to and observe board or audit committee meetings; they often serve alongside the CEO as directors. “I think this model works,” he says. “As [CFOs’ expanded] roles become better known, I can see us adopting more of a British or European model.”

Others have made similar predictions. In a recent column in The Wall Street Journal, former Pitney Bowes CFO Bruce Nolop predicted that by 2025, these finance executives would serve as their CEOs’ explicit partners, responsible for articulating the business model to a range of stakeholders, among many other tasks.

Some firms and their CFOs are already there. At Trophy Foods, a confection and snack producer with three manufacturing locations and 450 employees, Gandhi says the president views him as a full partner in taking the company forward. “There’s almost an expectation that the finance head is a co-pilot and a moral compass,” he says. “Ultimately, you have a duty of care to the organization.”

In fact, Ropar believes that in coming years, boards will be looking more regularly to their CFOs when developing CEO succession short lists. The reason: their roles have evolved so much in recent years that they touch most areas of a firm’s operations, not just accounting. “That,” she says, “is the natural next step.”