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CA Sri Lanka addresses the challenging role of today’s CFOs

The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) recently featured two key international accounting personalities, Mr. Fayez Choudhury, Chief Executive Officer of the International Federation of Accountants (IFAC), and Mr. Rob Ward, Head of Leadership & Advocacy of the Institute of Chartered Accountants of Australia at a CFO Forum held recently in Colombo, which focused on the complex and constantly demanding role of today’s Chief Financial Officer.

Excerpts of the speeches:

Thank you very much. Although I’m from Bangladesh, it’s the first time I’ve been in Colombo. It’s a great pleasure to be here.

I’m particularly interested in talking about this topic to you today because I’m completely ‘knocked out’, as they say in America, at the buzz that seems to be going on in Colombo. There seems to be so much development, there seems to be so much progress, so much vibrancy… so I think if you believe, as I do, that the private sector is really the engine of economic growth, then certainly, there’s a lot going on in Sri Lanka at the moment and people like yourselves are extremely important to make sure that development takes place in a very controlled, strategic and managed way.

The Big Picture

Let’s put the role of the CFO in the context of what’s been going on globally, because there’s no avoiding globalization. Everyone is global now. You either operate globally, or you supply globally… you compete with people in the same industry around the world… and you look for comparative advantage, whether it’s wage arbitrage, government incentives, or whatever. We are all global citizens now. There’s no such thing as a local market.

We still have corporate failures going on, unfortunately all over the world. It’s the bigger ones in America and Europe that get the attention, but increasingly we are seeing global failures going on in very unexpected places—like the Bitcoin disaster. But the corporate failures remain a norm and that will happen continuously—and when they happen, depending on the market, they can threaten global stability.

We have also obviously come out of the period of the financial crisis, and I think fortunately, that seems to be behind us, but other global economic threats remain. I think if you look at the recent reports from the IMF, World Bank, etc., they point to a macro level relatively healthy picture. And there’s economic growth that’s going to occur in most parts of the world—in some regions higher than others—Asia obviously continues to grow; Africa continues to grow from a fairly low base; Europe is relatively stagnant; and the US is showing some signs of economic recovery. I think one trend is increasing economic disparity. And that’s potentially dangerous going forward because it threatens social stability. I don’t know how many of you have heard of the French writer Thomas Picketty. He has written a book which is, I’m told, 543 pages, I wouldn’t recommend that you take it and try reading it in a short flight, but I think it’s the best seller now in Europe and in America. But it’s really challenging whether society can survive with this kind of global economic disparity, with the “haves” getting more and the “have knots” getting less, and the aging populations, demographics changing, increased urbanization, more and more people going to cities, the prospect of mega cities, imposing different demands on infrastructure, on the distribution of societal support systems like education, healthcare, etc.

Although we are out of the economic crisis, arguably threats always remain. Where there are governments that are responsive to those threats, unfortunately the responses are often regulation. And where they are not responsive to those threats, there is usually inaction. So I think the global CFOs of today—and as I say we are all global citizens now—have to be cognizant of some of these trends, and as they plan and help steer their organizations into the future, they should understand that it’s not necessarily a stable and perfect world.

But having said all that, corporations have to respond to that external environment. But at the same time there’s no getting around the fact that you also have to improve internal organizational performance, because that’s what defines one important element of your comparative advantage. You can try and read the tea leaves of what’s happening in the global markets and position your organization accordingly. But unless you are geared to having your internal organizational performance live up to those expectations, to that demand, you won’t really be able to avail your full potential.

So one key requirement of an organization is transparent, relevant reporting, both internally to be able to manage and assess your performance, but also externally to create the transparency and the trust in the reliability and integrity of your numbers so that your investors trust you, the capital markets trust you, your suppliers trust you.

That’s really key for the sustainable generation of wealth within the business world. But what’s often ignored is the public sector, because the private sector can operate within a dysfunctional public sector for only so long. There’s a limit to growth that’s imposed by a dysfunctional public sector. So increasingly the public sector also has to create an environment where they are transparent, where they manage citizens’ finances transparently, reliably and with accountability and create a stable macro-economic environment where corporations can flourish.

And of course responsible entrepreneurial business behavior has to predominate, whether you are a public or a private sector organization, because without those ethical principals you will eventually fail.

So how do we improve organizational performance within a company? I think increasingly good governance is being seen as key. You can have the right product, you can have great distribution, you can have great manufacturing, but if you don’t have the right governance structures that make sure that everything works in the right context, you will be at risk. You also need better and more integrated management. Companies of today, as you well know, are complex. And unless you get that integration where you have cross-cutting themes and risk management and effective control procedures and systematic and consistent reporting practices, and an eye on sustainability, you are not going to get the operational performance management that is a pre-condition of your competitive success.

The Changing CFO Role

Within that context, the CFO role is stretched and scrutinized. Rarely do you hear about the Chief Marketing Officer or the Chief Human Resources Officer or the Chief Engineering Officer—you don’t read much about them in the press. You do read a lot about the CFOs. Arguably sometimes you read more about the CFOs than the CEOs. Certainly as you all know, your performance and your work is very carefully scrutinized. You are really stretched because there are two competing demands. One as stewards and one as business partners and I’ll come back to this at the end and pose a provocative question to you. But for the purpose of this slide you are stewards because you support effective governance and compliance and control and business ethics. You are custodians of the reputation of the financial integrity of an organization.

But at the same time, you are also a business partner. You have to provide the CEO and the Board with proactive leadership, direction, decision making, contribution to strategic directions—you have to finance growth, diversification, acquisitions, stability. You are a key person in the organization. But at the same time, you have to make sure that you are a steward of the corporation’s resources.

CFOs have to manage the collaborative relationships and potential conflicts as trusted proactive partners, but they also need to own and manage the safeguards that are built into the organization design, reporting structures, and required professional development.

So the old role of the CFO was as the number cruncher. Keep the books, make sure that the financial transactions are properly processed, do the right projections, and we are happy. But the new role puts the premium on issues such as ethical leadership and business integrity. Many people say that the breakdown in trust is probably the single most damaging thing for a company’s long term success. I don’t know how things are for listed companies in the Sri Lankan context, but we all know in the major capital markets, it’s a major issue when there’s such a focus on quarterly earnings, the bottom line, bonus pay and incentives for the staff… How do you balance of short-term concerns and pressures with the long-term vision, success, and managed, sustainable growth? How do you balance fulfilling the stewardship responsibilities and sharing the strategic leadership with CEO and senior management? There is a balancing act there.

If you are trying to make sure that you have the right risk management tools and techniques, the right controls—and at the same time you are trying to drive growth and entrepreneurship. There’s a tension there that has to be balanced. That can be very difficult sometimes. You have to ensure that the finance accounting function supports the business… accounting is based on certain principles, and the accountants in the room will know you can’t deviate from those. At the same time you have to provide the business with the right sort of numbers to enable their decision making. Non-accountants will sometimes make suggestions… ‘I don’t like the way you are valuing this,’‘I don’t like the accounting treatment of these project expenses.’ So you have to make sure you are fulfilling your statutory requirements in accordance with sound accounting principles, and at the same time meeting the principles of business in providing reliable management information.

You have to drive and manage innovation. Again, critical for success, and not only for success, but critical for survival. But sometimes in conflict with stability, risk management and effective controls. Again a balance to be maintained that is sometimes difficult. And you have to engage and communicate effectively, internally and externally. Very often, in my experience, the CFO is actually looked at as a more reliable source than a CEO. People look to them as the stewards of the organization. People look to them for what they are projecting in terms of the financial situation of an organization. And once the CFO loses that trust with the stakeholders, that CFO becomes far less effective.

IFAC Discussion Paper

So just a little plug for a publication that IFAC has recently issued. It’s a discussion paper on the role of the CFO and its being prepared by our Professional Accountants in the Business Committee which comprises 18 senior experts from around the world. It has had inputs from accounting bodies and CFOs and it’s had direct endorsement by many CFOs and it’s currently open for public comment. So I would urge you to go on the IFAC website, have a look at it and I think you’ll find it interesting, but we would also welcome your comments because I think it would be enriched by the more perspectives that we can get.

Some of the things that are brought out in that report are that the CFO needs to be an effective organization leader and a key member of the senior management. They need to balance the responsibilities of stewardship with business partnership. They need to act as the integrator and navigator for the organization. It all comes together in the CFO’s office. There needs to be an effective leader of the finance and accounting function. And they need to bring professional qualities to the role and the organization.

Accountants are trained with a certain code of conduct with certain ethical requirements, with a very rigorous approach to what they can and cannot do and subject to investigation and disciplinary requirements. That’s the discipline that doesn’t exist in any other functional area in any organization. So a CFO really has to bring that mindset and bring that leadership to an organization of what constitutes ethical behavior, what constitutes discipline and principled behavior.

Professional accountants bring some very valuable talents to the CFO role. They are trained to exercise professional judgment as an auditor, strong ethical leadership. If you want to call yourselves a CPA or whatever the designation is, you are required to comply with ethical requirements of your institute. And you obviously have deep financial acumen and a distinctive way of thinking, which again is drummed into you and which is very, very relevant and useful to the CFO.

And a little plug for IFAC. We have recently started something called the Global Knowledge Gateway, where we provide a global platform for topics of interest, not just to accountants but more broadly to finance professionals. We organize it under a number of topical areas and we provide links under each topical area to the worldwide set of resources that are available from accounting bodies and other authoritative sources. We also have viewpoints where leading figures in finance, regulation of accounting, etc., provide insights on certain topics and we invite discussion and dialogue around those issues.

I would strongly urge you to visit the Gateway, and I think you will find it interesting and a good resource, not just for yourselves but also for the finance staff within your own organizations to use. It is a free resource, you don’t have to be a member of an accounting body to access it and I think you will find it very helpful.

And let me just conclude, if I may, by being provocative because I think it’s so interesting to do that. Let me give a scenario, which a former boss of mine painted quite vividly—his words were “the currently defined role of the CFO is toxic. It is unsustainable, and it does more harm than good.” He says that trying to balance the roles of stewardship and the roles of business partner are fundamentally incompatible. That the finance function in terms of the controllership function, the integrity of financial transactions, the strategic reporting for a company should be an independent function, which has not only a direct link to the CEO but also a direct link to the audit committee.

And the finance official who guides the CEO and the board on driving the business, managing the business, growing the business should be separated from the controllership role. So in many ways that’s a reversion back to the model of 20, 30 years ago, but when you look at some of the major corporate failures that occurred and if you look at the role of this CFO in many of those cases, the judgment was bad because the tensions could not be managed. Are we putting far too much pressure on a CFO? Because the CFO is supposed to be balancing the stewardship role and driving the business role. But he or she has got the CEO looking for a certain set of results, has the board looking for a certain set of results, has investors in the short term looking for a certain set of results and has his or her own pay check looking for a certain set of results. And when you throw in an incentive pay, which can be significant multiples of base pay and depend on the performance of the organization,which often happens in Europe and North America, are you really making the situation much worse?

I think that’s an interesting discussion and in the course of the Q&A, maybe some of you can comment on that. It’s nontraditional thinking and it would be interesting to explore that.

Anyway, I hope you found these insights and thoughts helpful and I look forward to Rob’s comments and thereafter to a dialogue around this topic.

Thank you.

This is my first visit to Sri Lanka. The hospitality has been marvellous and the city is very impressive and it caused me to reflecton the debate in Australia at the moment which is reassessing its budget and how infrastructure is always considered a good indicator of a thriving economy. The renewal in infrastructure and the way the city presents itself it is always very encouraging. Congratulations to all of you and thank you for the opportunity to speak today along with Fayez on this topic. Fayez and I have a long history going back.

His presentation was excellent and there’s a lot of experience in there.

What I’m going to do is, make you do a little bit of work privately. I’d like you to think about what does Fayez’s presentation mean for you personally?

Some of the words Fayez used,  are quite overwhelming words, if you take them one by one, for example, stewardship, if you take the role seriously, you are the steward of an organisation. Transparency, meeting and competing goals, and being transparent about it is not easy. Business partner, integrated management, what do they mean? Collaborative relationships in a competing world, building a network internally and externally, on relationships that make a difference is key. How do you do that when people are competing for their own survival? What do you do about that? And safeguards, how do you make sure you protect your organisation and how do you protect yourself?

Now he used another two words. Bean Counter. So it’s quite interesting considering my background as described in the introduction. I have started many speeches with “I’m an auditor and I’m exciting”. I have also had a background, 40 years in the profession and responsible for over 7,000 auditors in 148 countries, I’ve had a fantastic time. I’ve seen great growth stories such as the emergence of Asia but also stories of arrests and auditors being followed by intelligence agencies, and people call, being an auditor boring! I can assure you it’s not boring to be in a practice like that and it’s not boring being an auditor.

So I’ve had the great privilege of being a managing director, an auditor, a chief financial officer, managing partner.We all share a broad experience and I’d like to draw upon that and that to give you a secret to success. All organisations that succeed, every organisation that I see succeed, has a team of three people that run it. The Chair of the Board charged with governance. The second person in the partnership is the CEO. And person No. 3 is “Another”. The CEO needs Another, and so does the Chair. Who is that Another in your organisation? Just think about that for a second. That really is Faiz’s point, Are you Another? If you’re not, do you want to be? Stewardship is part of that role, because it’s part of what you do, transparency that brings to life the dreams of the organisation that the CEO is probably trying to bring to life. They can’t do it without one another.

You know the work you do as the CFO, accounting standards, auditing, taxation law, enterprise wide systems, HR staff, and marketing, all of that, if you try to think of that as just all the things you’ve got to do.

Five Steps to success

The overarching secret is the five-step process of bringing to life the governance structure that Fayez mentioned. I am going to go through the five steps, give you an example of how to bring those five steps to life, and how you can apply it in your organisation.

Step No. 1
: What are the principles that will guide our organisation forward? What are the guiding principles that will lead our organisation to success?
Step No. 2
: Having established those principles, have you communicated them to every person in the organisation? So your team knows where you are going and how to lead your organisation.
Step No. 3
: How you are going to train your people in what those principles mean? Not only how they now understand what you are doing, but also how you are going to teach them to do it. I’ll come back to that example in a second.
Step No. 4
: How you are going to provide assurance that the substance behind those principles is working?
Step No. 5
: How you are going to provide insight back to the board on how you are going against the principles. So it’s a loop. Can you see the loop? Start at 1, finish at 5 and that’s insight back to the board on those principles.

So let’s have a look at a couple of principles. A clear principle. We have a clear vision where we want to be and a plan to get there. That’s a principle. Another principle. We treat our people with respect. A third principle: We respect the laws of the land in which we operate – for example, It is ultimately up to your organisation to come up with the principles for your organisation. You’ve got to come up with the guiding principles for your organisation.

Another principle: We consider all of our stakeholders in ensuring our mutual success. That’s another principle. So let me take any one of those. We have a clear system of financial control and stewardship of the shareholders’ funds. Let’s take that one as an example. So we have a system of control and stewardship of those funds. You do this one actually every day. How do you communicate that principle to all the people in the organisation? How do you actually show them how that works?, right through to the person at reception. How do you train them in their responsibility to do that? Are you certain that all of your appropriate people are trained properly? How do you provide assurance, not in a negative way, but in a positive way, that the funds of the company are well and truly subjected to a stewardship and control and reported correctly. And what insight you provide back to the board. Everybody in this room probably does that every month.

So let’s consider another one. We treat people with respect. It’s a bit harder. How do you communicate what your code of conduct is? How do you train people in the Code of Conduct, the way they treat each other and how they treat their customers. What assurance do you get as to how your people are treated well? And what insight from this step is brought back to the Board on a regular basis about that principle?

We have a clear, strategic direction to maximize shareholder value. And that’s another principle. How do you get that message out to everyone in your organisation? How do you train them and what it means for their daily job? Had you trained them on that? Do you have system of assurance that all the goals of the business plan are actually on track? And what insight are they giving back to the board. So I am sure you could imagine, if you shaped and adopted nine key guiding principles, you could put the organisation on a path that would bring your organization to readiness for a bright and happy life.

And I don’t think there’s a better person in the organisation than the CFO to be ‘Another’ and lead that change.

The role of CFO at this time and in business is becoming more sophisticated, and the demand upon all of us is great. The role of the CFO is an excellent one. All you have to do is step up to the challenge.

Thank you very much, everyone.