“In 2003, we saw all kinds of indications that interest rates were going to go up,” said Mr. Fanning, to illustrate Southern Company’s risk management process at work. “That is generally a bad signal for utility stocks, which tend to be yield-oriented investments.” Southern Company acted quickly, prefinancing five years’ worth of equity, taking the company’s equity ratio from 38 percent to 41 percent by the end of the year, and reducing short-term debt from more than 10 percent of debt capital to about 5 percent. At the same time, Southern Company increased the average life of the long-term securities it sold, from eight years in 2002 to 23 years in 2004.
Nearly all the CFOs with whom we spoke felt similarly about the challenges of keeping pace with the increased complexity that accompanies growth. And they pointed out, as well, that technological advances have contributed to complexity even as they have revolutionized information technology and business processes.
At Pfizer, for example, revenues have more than tripled and the head count has more than doubled over the last five years, because of a combination of core growth and acquisitions. The result, said Mr. Shedlarz, has been “an exponential increase in complexity.”
Evolution of Risk
The rapid advances in information technology for business processes present a quandary for CFOs, said Caterpillar’s Mr. Oberhelman. “That to me is the part of the accounting and financial operations function that really is our single biggest challenge,” he said. “How do I make sure we get good management reporting back to our divisions to give them all the tools they need to take advantage of all the things they can take advantage of today? Few companies can take advantage of all the technology that’s available today without significant cost and change. How do we balance that?”
Raising the Bar
It should be clear that the bar has been raised substantially for the CFO. But although the challenges are large, the potential rewards are even more substantial, for individuals and for their organization. In an environment in which investors demand sustainable growth, precise forecasts, and earnings reliability, executives who can help their companies achieve these goals quickly become valued players. The old CFO model simply won’t do in this era. Only the transformational CFO can meet the requirements of the modern corporation.
Fortunately, the CFO is well positioned to play this more dynamic role. As the interviews in this book make clear, the traditional tasks give the chief financial officer a unique vantage point from which to address the new challenges. A view of the organization from 30,000 feet above ground provides the CFO with an enterprise-wide perspective; indeed, good chief financial officers seem to have an innate ability to understand what makes each business in the portfolio tick. In addition, the CFO’s traditional responsibilities in accounting and compliance give a tremendous amount of independence and objectivity to the position.
The CFO has only one core constituency: the shareholder. This fact, combined with the trusting relationships CFOs develop with senior business executives, allows the CFO to move seamlessly into a more transformational role. That role, we discovered, is no fairy tale, but the new reality for chief financial officers around the world.