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You're needed in the corner office.
Jason Karaian, CFO Europe Magazine
March 2, 2009
It's unusual to come across debt issues, dividend increases and share buybacks much these days. And even more unusual to see a company doing all three. But that's what Dutch telecom group KPN has been up to in recent months.
"Our consistency is a great value," claims its CEO, Ad Scheepbouwer. That said, the decision to maintain pre-recession practices during deepening economic turmoil hasn't been easy. Two years ago, when "you could get money at any moment you wanted it," Scheepbouwer recalls, approving such actions was relatively routine. Now, the CEO spends a lot more time with Marcel Smits, KPN's finance chief, devising strategies to steer the company through the downturn. "I see him more often, because there are so many more issues to talk about," notes Scheepbouwer. "As the news gets more grim, the role of the CFO grows in importance."
Already enjoying a close relationship, Sheepbouwer and Smits aren't the only CEO-CFO team getting closer in hard times. While every CEO reacts to adversity differently, there is one thing every finance chief can be sure of: they will be spending a lot more time in the corner office in the coming months.
What this entails depends on the CEO. For Scheepbouwer, the key is "fast, correct and detailed information." He cites cash flow, margins, taxes and other basic financial data as the information he now tracks most closely. "In hectic times, the basics become more important," he says. Patrick Kron, chief executive of French engineering group Alstom, acknowledges that the traditional metrics are important, but he expects his finance chief, Henri Poupart-Lafarge, to keep him abreast of macroeconomic and capital-markets information as well. In a fast-changing world, such a perspective is as critical as an internal one, he notes. For Ben Noteboom, CEO of Randstad, a Dutch recruitment firm, his conversations with Robert-Jan van de Kraats, Randstad's CFO, are "the same as in the past, only a bit more." Though his priorities have not changed, he says, "execution has become a lot more complicated."
It's a good thing that his office is right next door to the CFO's, jokes Noteboom. Since taking over similarly sized Vedior last year, Randstad must now service nearly €2 billion of debt. "The short-term worries are obvious," the CEO says. The long-term prospects for the temporary staffing market, particularly in Europe, are good, but to ensure that Randstad can take advantage of them, Noteboom is relying on his finance chief to engender cash-consciousness throughout the company. "We have to make sure that we save costs without killing growth opportunities," notes the CEO. "This requires a sophisticated system where we delegate cost-cutting and investment decisions to as low a level in the organisation as possible." The finance function is a critical partner in this exercise, as the information it provides helps to "make sure that we do what we have to do fast," Noteboom says.
Amid volatility and uncertainty, comments about boosting the frequency and speed of information generated by finance are common to all CEOs at companies of all sizes. The chief executive's readiness to delve into the nitty-gritty of cash management, including details of working capital processes, is also a sign of the times. In reporting for this story, it was sometimes difficult to tell if CEOs were describing their relationships with their CFOs, treasurers or supply chain managers.
This doesn't surprise David Lovett, a managing director at turnaround consultancy AlixPartners in London. "No company is going out of business by making losses," he says. "They go out of business because they run out of cash."
As this becomes clear to all but the most blinkered CEOs, they are embracing an aspect of the CFO's role that many once mocked: "the natural pessimism that comes with the finance function," as Noteboom of Randstad puts it. "As the markets fall, they add another layer of how bad it could get," he adds. "It gets your attention, that's for sure." Whereas in the past such gloominess may have been criticised for slowing a company down, these days it may end up saving it.
At Draka, a cable manufacturer based in Amsterdam, CEO Sandy Lyons is grateful for Frank Dorjee, a CFO who "thinks there's something bad around every corner." In contrast, Lyons describes himself as a natural optimist, casting the company's executive team in the usual roles.
When the duo was finalising its annual budget in late 2007, they believed that in 2008 or 2009 the economic cycle would turn. Dorjee refinanced credit lines, arranging a new facility that covered the firm's financing requirements through to 2012. Without it, the company would have had to renew this year, a considerably more difficult and expensive exercise, Lyons says.
The company also enacted a capital-spending and hiring freeze in last July, avoiding more severe actions had it waited for the drop in activity later in the year. In addition, leading a project to cut working capital from nearly 30% of revenue three years ago, the CFO helped bring it down to between 16% and 18% in recent quarters, standing the firm in relatively good stead as cash flow becomes critical. All of which makes the CEO beam.
When it comes to the ideal finance chief, Lyons says that "hopefully the primary strengths of the individual line up with the primary responsibilities of the role." As far as his current CFO goes, Lyons describes him as "calm, conservative and courageous." As it happens, the company's themes for this year are similarly alliterative: "customers, costs and cash." It is a good match, which is lucky for the finance chief, as Lyons notes that his father, a physician, used to joke that the best way to ensure good health is to pick your parents. In a similar vein, "the best way to deal with economic stress is to pick your CFO," he says. Indeed, some companies are responding to a financial slump by replacing their finance chiefs. (See "Friendly Fire" at the end of this article.)
But Karl-Heinz Streibich stands by his management team, for good reason. At Software AG, the German business software firm where Streibich is CEO, recent financial results have defied the downturn, with 2008 revenue up 16%, operating earnings up 32% and cash flow 62% higher than the year before. With each key department — be it finance, sales or marketing — the CEO practises "full empowerment," as he puts it. "We agree on stretch targets and I then give my fellow board members the freedom to achieve them. It has worked well."
When he became chief executive in 2003, he elevated the responsibilities of Arnd Zinnhardt, the firm's CFO, from a role that was considered a "numbers expert and assistant to the CEO" to a "fully empowered board member responsible for all financial aspects of the business," Streibich recalls.
But there are limits to empowerment, Streibich insists. "Sometimes when CFOs are empowered, they become disloyal and behave like the CEO," he says. "If times are tough and there is loyalty issue as well, it is a crucial issue and the CEO will not accept it."
After all, chief executives are looking for partners that complement, rather than duplicate, their skills. Though CFOs now often appear as frequently as CEOs in front of analysts, investors and the press, it's often a different story internally. Take it from Gary Parke, CEO of Evolve Energy, a fast-growing energy management firm in the UK. "As a CEO, you have to be pretty guarded in what and how you say things," he says. CFOs, by contrast, "can be a little less diplomatic in the language that they use. It's a classic good cop-bad cop routine."
Though he is careful not to cast his finance chief, Nusrat Shah, exclusively in the "bad cop" role — both because it can be dispiriting for the CFO and disruptive if the CFO were to embrace confrontation too readily — Parke relies heavily on her ability to play a strong hand. "CFOs are one of the very few on the senior management team who get to look right across a business," he says. "They can go into any unit and ask the tough questions."
As more tough questions now need to be asked, Parke, like Streibich at Software AG, is wary of finance allowing any newfound power to go to its head. "Some see finance as a being unto itself. Especially during downturns, this sometimes leads to delusions of grandeur," he says. "But at the end of the day, it's a service function."
Lean on Me
That said, in the midst of the worst economic slump in a generation, many CEOs are giving their CFOs leeway to shape their company's cost base, capital structure and more. During good times, a common complaint among CFOs is that finance is subjected to relentless pressure to boost efficiency. Now the fruits of their labour are gaining wider appreciation, not least by CEOs.
At Randstad, after closing the deal for Vedior, the company found that it achieved between two and three fewer days sales outstanding than its recent purchase, giving scope for €50m to €70m in working-capital improvements. "Our people are even more talented than I knew they were," CEO Noteboom says.
Meanwhile, Alstom's chief executive Kron notes the "broader importance" that risk management, financing and cost control are taking. Despite a healthy order backlog, finance has "proven it can react quickly with the launch of an efficiency programme" to safeguard margins, he says. The firm increased its profit guidance in May 2008, and confirmed it in January, after unveiling double-digit sales growth during a difficult fourth quarter.
And back at KPN, Scheepbouwer offers an historical perspective. "I'm 64, so I've seen many ups and downs," he says. "In the down periods, you always see the finance function blossom. Around the highs, when everything is possible, finance becomes relatively less important. Whether that's smart is another matter, but that's the way it goes."
Scheepbouwer admits that finance at KPN has seen "a lot of turnover and reduction in personnel" as part of a multi-year benchmarking and efficiency drive. At the same time, the quality of information produced by the department has improved, he says appreciatively. "They do an excellent job."
One of their most important jobs currently is to develop a set of contingency plans, as the depth and length of the downturn remain difficult to predict. In September, Scheepbouwer and his finance chief drew up plans for "a mild recession, a serious recession and a depression, including all of the steps we can take, in detail, to protect earnings and cash flow depending on whether it becomes a bit serious, very serious or disastrous."
Like so many other CEOs going through similar exercises, he is relying on his CFO's natural caution to develop a "balanced strategy whereby we take the risks that we can afford to take." And it isn't only about survival, he asserts, as industries are often transformed during downturns. "Competitive positions always change during down times. The opportunity is now."
The same could be said for CFOs. With their star shining brighter, everyone — including the boss — is looking to them for guidance. As the data guru, devil's advocate or some combination of roles, CFOs can use this downturn to cement their reputations and set the stage for larger roles in the future.
"Normally people work very hard in finance, a fact relatively unknown to the rest of the organisation," says Scheepbouwer. After spending some of his formative years in finance, he appreciates the function at all stages of the economic cycle, he explains. Some of his peers, possibly facing their first recession as CEO, may only now realise how important finance can be at companies under siege. "I appreciate the department," Scheepbouwer says, "because it is very important in times like these."
Jason Karaian is deputy editor at CFO Europe.
At work, as in life, relationships can be difficult to sustain. Ever-shrinking executive tenure makes it especially difficult for a CEO and CFO to stay together for long. And with a severe downturn challenging companies' strategy and business models, some opt to change tack by making changes at the top. This often means looking for a new finance chief.
Over the past year, Caroline Raggett, a member of the financial officers practice at headhunter Russell Reynolds, says that boards haven't wavered in their profile of the ideal CFO candidate: it must be someone who's done the job before, preferably for a long time. "In a bull market, companies are open to the idea of a young, up-and-coming CFO who might add a new perspective, more modern practices and inject a bit more dynamism into the boardroom," she says. Now, however, boards want to speak with experienced CFOs, some going as far as limiting their search to candidates who were finance chiefs during the recession of the early 1990s. "Companies now recognise that experience from 17 or 18 years ago is relevant to today's market," she says. "The dotcom bust doesn't compare."
Once a CV has been examined, how much does the rapport with the CEO influence hiring? "Chemistry is critical," says Suzzane Wood, a partner at Heidrick & Struggles specialising in finance searches. For her, this means "complementary skills and empathy; they do not have to be friends." In fact, "the minute you fall in love with your CEO, you lose all value," she adds.
At the same time, good CEOs don't hire CFOs based solely on personal affinity. "The CFO is your co-pilot, so why would you hire you again?" Wood asks. A "healthy tension" between the top two members of the executive team is generally preferred, and especially encouraged at private equity-owned companies, she adds. In general, "CEOs are CEOs because they know that building a talented, diverse team is critical to their success. They're not marrying these people for love. They're marrying for profit."