Other CFOs also expressed a preference — in many cases, an insistence — that up-and-coming finance executives spend time working with their companies’ business operating units. Kurt Bock, CFO of BASF, the world’s largest chemical company, based in Ludwigshafen, Germany, noted that it’s not enough for a senior executive to have expertise in a specific field such as finance.
“At some point, you have to try to broaden people,” said Dr. Bock. “That development process helps us identify our future leaders. Who is capable of becoming an entrepreneurial managing director, and who will be successful leading a business-enabling function? That’s the way we develop people in finance. After five, six years in a staff function, we try to move them out into a completely different area of responsibility, very often including an international appointment.”
Risk management is looming ever larger on most companies’ — and most CFOs’ — agendas. Certainly, the Sarbanes-Oxley legislation in the United States, which strengthened regulatory oversight of compliance, control, and governance programs, and increased the need for strict attention to P&L, balance sheet, and capital structure, has contributed to risk management’s higher profile.
“If you talk to a CFO of a publicly traded company who doesn’t have Sarbanes-Oxley as one of their top five agenda items, there’s either a problem or they’re about to go private,” said Dianne Neal, chief financial officer of Reynolds American Inc., the company formed in July 2004 by the combination of R.J. Reynolds Tobacco Company and the U.S. operations of Brown & Williamson Tobacco Corporation.
Yet overwhelmingly, the CFOs to whom we spoke said that Sarbanes-Oxley (SOX, in finance-speak) has been a less important factor in the evolution of the definition and control of risk than has the pace of change, driven by globalization and technology.
Cargill, for example, has long had a reputation for sophisticated risk management. “This is a core capability of Cargill,” said Mr. Lumpkins. “It’s a part of the mind-set of the company.” But the changing nature of the Minneapolis-based food and agriculture firm’s business, especially its rapid international growth, is compelling managers to think about risk in a wider context. Although Cargill has been a global business for decades, in just the past few years vast new areas in Eastern Europe and Asia that were once fenced off to U.S. companies have opened up. Today Cargill is operating in Romania, the Ukraine, and China, and further geographical expansion is envisioned. Increasing globalization, Mr. Lumpkins said, has brought with it increased attention to both risk assessment and compliance issues.
Cargill created an independent risk management function in 1999 in the wake of the Russian debt defaults, and its scope has increased since then, as has investment in risk assessment technology. The company now has a group of analysts and former traders who report to the treasurer, separate committees dealing specifically with commodity and financial risks, and a global risk management oversight function.
For other companies, managing risk is a central component in delivering shareholder value. Mr. Fanning, the CFO of Southern Company, which provides electricity throughout the southeastern United States, pointed out that a traditional way to look at shareholder value creation “would center on delivering net income, earnings per share, or return on equity.” But in the energy industry, whose colossal risks range from the uncertain future of nuclear power to the effects of potential environmental regulations, risk and return cannot easily be divorced.