Georgia State: Red Faces or Real Options

Busy finance chiefs get the latest word from academia on arbitrage theory, intellectual capital, IT.
David KatzApril 2, 2002

It was an embarrassing moment.

Having recently finished a two-year MBA program at Georgia State University, a midcareer finance executive was eager to display his new theoretical wares to his CFO. The exec trotted out the notion of adjusted present value (APV) during a business discussion he was having with the finance chief.

Oops! “The CFO didn’t quite know what [the executive was] talking about,” recounts James Owers, a finance professor at Georgia State’s J. Mack Robinson College of Business who heard the tale from the student. The CFO registered immediate discomfort. But his ignorance might have had worse results than a red face, the professor thinks, noting that he’s heard a number of similar anecdotes about finance chiefs.

Such knowledge gaps make CFOs “vulnerable to criticism of their analytical tool kit,” says Owers. Word could get out, threatening the executive’s job and future career prospects. And the CFO’s relationship with junior executives could get testy. “I’m having to be very delicate” with the CFO now, the executive who brought up the APV reference told the professor.

Owers tells the story to illustrate CFOs’ need to keep pace with current academic ideas that have legs in the business world. The problem, however, is that senior finance executives’ “ability to track the latest developments is limited by the extensive demands of their positions,” he says.

The demands of their day jobs also keep many CFOs out of extensive executive ed programs. So where can they find out about how to use real options or integrate Economic Value Added metrics into their operations?

The answer from Georgia State is: bring the academy to the finance chiefs, rather than vice versa. For its “CFO Roundtable” program, the school’s finance department brings prominent academics and other experts eight or nine times a year to an Atlanta hotel to tell 30 finance chiefs what they should be thinking about. The CFO group includes such local luminaries as AFLAC’s Kriss Cloninger, Equifax’s Phil Mazzilli, Bank of America’s Jim Hance, and Home Depot’s Carol Tome.

Pauses that Refresh

Part coffee klatch and part university fund-raising venue, the roundtable is mainly a professional development program for people at the top of their profession, professors and participants insist. “It’s been 20 years since I got my MBA, so there are things being taught in MBA programs I need updating on and refreshing on,” says Wyatt Engwall, senior vice president of finance for Morrison Management Specialists.

In that light, the faculty would seem to fill the bill. For a $5,000 annual fee, CFOs can, along with a guest, hear such past and future speakers as Yale’s Stephen Ross, inventor of arbitrage pricing theory (an approach to determining asset prices); Harvard’s Lynda Applegate, an expert on information technology’s impact on industries; and New York University’s Baruch Lev, the intellectual-capital whiz. Among nonacademic speakers, CFO magazine’s Stephen Barr has provided the lowdown on financial disclosure and stock options.

Despite the stress on trends and theory, the instructors-for-a-day do provide news CFOs can use at sessions. Engwall says, for instance, that tips about how to structure contracts with 401(k) service providers that he got at one session were particularly timely. His company, which provides food services to hospitals, was seeking a new plan administrator at the time. The session helped him make sure Morrison was making the change for the right reasons and that it was choosing the right administrators, he says.

Some subjects, however, demand more teaching than the single hour-and-a-half breakfast programs can deliver. One way the roundtable’s organizers have supplied more depth has been to run sequences of sessions built around a single topic. In 1999, a string of four was devoted to real options.

Taught by different instructors, the first three sessions covered real option pricing, IT applications, and strategy. For the fourth, Georgia State brought in computers for a half-day, hands-on class in using real options to create value. The workshop was led by Thomas E. Copeland, CFO of The Monitor Co. After taking the classes, Morrison Management’s Engwall says, he’s been talking with senior operations managers about ways the company might use real options analysis.

Some roundtable sessions have provided just enough detail to induce in the finance chiefs a desire to act like ostriches, however. Ernest Swift, the Georgia State associate finance professor who runs the roundtable, recalls a sense of exasperation pervading the room during a program on Financial Accounting Standards Board Statement 133, which covers derivatives accounting.

At the February 2001 session, about six months after FAS 133 went into effect, the finance chiefs learned about the time, cost, and abundant documentation involved in complying with the standard. “CFOs were shaking their heads and saying, ‘Maybe it’s not worth it to use derivatives,’” remembers Swift.

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