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In the Eye of the Storm

Have chief financial officers ever mattered more—or been less prepared?
Economist Staff, The Economist
October 31, 2008

"There is no Armageddon scenario," said Keith Sherin, the chief financial officer (CFO) of GE in an interview in July with 247wallst.com, a website. Two months later, Mr Sherin may have regretted his optimism. As the credit markets froze and investors panicked, he found himself embroiled in a frantic effort to stabilise the huge, triple-A-rated conglomerate. In the space of a few days, GE raised fresh capital from Warren Buffett and other investors; slashed its profit forecast; abandoned a share-repurchase programme; and paid extraordinary interest rates (for GE, at least) to meet its overnight financial needs in the commercial-paper market.

On October 27th GE became the first company to borrow from the Federal Reserve's new Commercial Paper Funding Facility—not, the firm insists, because it is having difficulty borrowing, but to help get the facility going. Meanwhile, Mr Sherin is trying to reduce GE's use of commercial paper (it is the world's largest issuer).

Mr Sherin is not alone in his struggles, and few of his fellow CFOs have the luxury of working for such a financially strong firm as GE. Is there a CFO anywhere who has not been asked the most basic questions by the chief executive in the past few weeks—along the lines of "Have we got enough cash to make it through the night?" and "What are the chances of us going bust?" And now they must oversee the annual budgeting, with the economic outlook for next year anybody's guess.

Even as they battle to stay afloat, many CFOs are haunted by past errors, thanks to an event almost as unexpected as the collapse of the financial system: the sudden reversal of the dollar’s seemingly permanent decline. A host of American exporters have seen their revenues fall alarmingly as the greenback's rise revealed hedging policies ranging from the inadequate to the non-existent. More ominously, on October 20th CITIC Pacific, a Chinese steel and property company, revealed losses that could reach $2 billion, stemming in part from a derivative that hedged currency movements within a band that proved too narrow to protect its revenues.

Asian companies are more likely to suffer such derivative-related losses than European and (especially) American firms. These have been more careful about their use of the instruments in recent years because of the "keep-it-simple culture" fostered by the Sarbanes-Oxley act, says Wolfgang Koester, boss of FiREapps, a firm that provides exchange-rate risk-management software. That said, many American firms lack a thorough understanding of their foreign-exchange exposures, having had little incentive to acquire one when the dollar was falling. In the past two months they have increased their hedge ratio from 40% to 55% of revenues earned abroad, but this mostly reflects hedging of rich-country currencies, ignoring the fact that exposure may be greater to more volatile emerging-market currencies, says Mr Koester.

Few of the CFOs grappling with this turmoil have ever experienced anything like it. Not many of them were in their jobs during the previous economic downturn, at the start of the decade. In common with chief executives, CFOs do not last as long as they used to. These days 25-30% of them move on each year, nearly twice the rate in the 1990s. This year, on average, the CFO of a Fortune 1,000 company has been in his job for just 30 months. Mr Sherin, GE's CFO for a decade, is a rare exception. And though he was promoted from within, a remarkable 40% of CFOs are hired from outside, and so are unlikely to know where the financial bodies are buried.

To their newness, add narrowness. In the late 1990s CFOs were increasingly hired for their expertise in capital markets and financial engineering, as shareholders and chief executives demanded ever higher short-term profits—paving the way for disasters such as the collapse of Enron and WorldCom, in which star CFOs Andrew Fastow and Scott Sullivan played central roles. However, this changed after Sarbanes-Oxley, when there was instead a "massive focus on people with technical accounting skills", says Eric Rehmann, head of the CFO practice of Korn Ferry, a recruitment firm. "There was a preference for people who had been financial controllers or certified practising accountants," he says. Audit committees wanted candidates with "technical experience and a track record, not breadth".

True, in the past few years many CFOs have seen their roles expand to include overseeing departments such as property, information technology and procurement, says Kurt Reisenburg, who heads the finance practice of the Corporate Executive Board, a support network for managers. But this was mostly about shifting the administrative burden from the chief executive, rather than playing the broader role in leading corporate strategy that Mr Reisenburg says is needed. "All these activities are cost-control focused, not about supporting growth decisions," he says. The few CFOs who have "learnt about operations, and have got relationships with key operating executives, are better placed than those who have focused on Sarbox compliance and financial engineering."

For example, the downturn will probably lead to tension between finance and sales in many firms—finance wants to keep prices high as commodity prices fall, whereas sales wants to cut prices to increase market share. A CFO who has spent time with the sales department, rather than just hanging out with the financial controller, is more likely to be able to resolve this conflict, says Mr Reisenburg.


There needs to be a return to the CFO’s role as "manager of the company’s balance sheet, overseer of corporate risk, insurer of the financial health of the enterprise", says Bill George, the former boss of Medtronic and author of "True North", a book on leadership. "A strong, conservative CFO is needed now more than ever, and should be given greater authority within the executive suite," he says, citing the roles of Don Humphreys of Exxon Mobil and David Viniar of Goldman Sachs. (Mr George is a director of both firms.)

As it happens, Mr Viniar is identified as the "most relatively highly paid CFO" in a recent paper by Graef Crystal, a compensation expert. (Mr Viniar took home $23.2m in 2007, according to Mr Crystal, though Salary.com reckons it was $42.2m.) As the American economy sinks, CFOs are "having to look at whole lots of unpalatable numbers. But there’s one set of numbers they still find thrilling to examine: their own pay," observes Mr Crystal dryly.

Although they take home less than chief executives, CFOs can get rich fast. Sharilyn Gasaway, the CFO of Alltel, a phone company, is reportedly now the highest-paid female executive in America. Overall, "CFOs are enjoying larger pay gains than other C-level executives", concludes the latest annual review of compensation trends by CFO Magazine, a sister publication of The Economist. Median direct total compensation (base pay plus incentives) rose by 5.4% for CFOs in 2007, but fell by 1.4% for chief executives and by 1.7% for chief operating officers.

Still, CFOs face a lot just now. After the dotcom crash, more CFOs were fired than chief executives. If history repeats itself, the CFOs who survive to take home a fat pay packet will probably have earned it.




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