Construction and mining equipment manufacturer Caterpillar initiated a new style of management reporting last year. Called Transparent Financial Reporting, it aligns the company’s internal management reporting system closely with shareholders’ returns. “It’s much more ‘live’ in terms of what’s actually happening as a shareholder would see it,” said Mr. Oberhelman, the group president of Caterpillar with oversight of the finance operation.
Another Caterpillar initiative matches the objectives and financial rewards of each of the company’s business units with shareholder value creation. One of the goals at Caterpillar, whose industry and business have always been cyclical, has been to remain profitable at the bottom of the cycle, and “attractively profitable” at the top. From now on, the goal is to ensure that the next cycle’s bottom is higher than the last one’s. By ensuring that the internal reporting and the business units’ common goals correspond to the shareholders’ rewards, said Mr. Oberhelman, “We have a real running chance to better our game all the way through.”
Rock the Boat
Procter & Gamble uses a model of shareholder value called Total Shareholder Return (TSR) as a strategic tool and as a method for evaluating management performance and calculating bonus payments. The performance model has become institutionalized, said Mr. Daley. “You could walk into any general manager’s office in this company and ask somebody about TSR and they could tell you what it is and how they think about it,” he said. Mr. Daley credited this focus on shareholder value as a major reason that capital spending as a percentage of sales has declined at P&G from 6 percent to 4 percent. “I never thought I’d live long enough to see this company’s capital spending go below 4 percent of sales,” said Mr. Daley, who joined Procter & Gamble in 1974. “TSR has been an enabler to get the line management focused not just on the income statement, but on the balance sheet and operating cash.”
CFOs uniformly rank talent identification and organizational development as two of their top agenda areas. Mr. Darretta, CFO at Johnson & Johnson, for example, considers “people development” his No. 1 focus. J&J’s businesses in consumer products, pharmaceuticals, and medical devices and diagnostics include more than 200 operating companies, each with its own chief financial officer. Mr. Darretta himself and Johnson & Johnson as an organization put enormous time and effort into the process of selecting these individuals, beginning with college recruitment.
New hires at J&J go through a two-year finance leadership program, culminating in an elaborate, formal process intended to identify future CFOs. Among the attributes sought are a focus on customers, understanding of the marketplace, an aptitude for teamwork, innovativeness, and the ability to be a positive change agent. “What we do over the course of their career development is to make sure it’s the business first, the finance function second,” said Mr. Darretta.