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Change Freaks: How Media CFOs Cope

The introduction of on-demand TV programming, MP3 downloads, and frequently updated blogs are among the shifts finance chiefs in the media industri...
Sarah JohnsonNovember 16, 2006

Kenneth West, executive vice president and CFO of Marvel Entertainment, thrives on the unexpected. “I plan for my day to be 60 percent unplanned,” he says.

That percentage sounds just about right at Marvel, where the changes have come thick and fast over the past decade. In 1996, the company filed for bankruptcy protection and began the long process of turning itself around, buoyed by its stuffed library of intellectual property—5,000 comic book characters including Spider-Man, the X-Men, and The Incredible Hulk—and a new business model that relies on its lucrative license agreements, which make up $5 billion in retail sales.

Now, the company is branching beyond its licensing, publishing, and toy business into making its own movies. For the first time, Marvel will independently produce two movies, scheduled for release in 2008, including “Iron Man,” starring Robert Downey Jr. The endeavor is spawning new challenges for West, who is concerned with online piracy of movies and DVDs.

Traditionally, it’s been a matter Marvel has left up to its distributors, such as Sony and Fox, which are distributing next year’s “Spider-Man 3,” and “Fantastic Four 2,” respectively. Along with working on the automation of Marvel’s accounting processes, the company is creating the internal controls for the internal studio group to make sure the spending on its first film is reined in, West told CFO.com.

For finance executives like West who work in the media and entertainment industries amid ever-changing consumer cravings—like on-demand TV programming, MP3 downloads, or frequently updated blogs—an appetite for the unexpected seems necessary for survival. “We definitely go through more frequent and rapid change than many other industries,” says John Nendick, global media and entertainment leader for Ernst & Young.

E&Y conducted in-person interviews with more than 60 CFOs and other finance execs from major media and entertainment companies, including Fox Entertainment Group, MTV Networks, Sony Pictures Entertainment, Time Warner, and Warner Bros., as well as 140 CFOs who filled out its survey online. The study found that to keep their companies on top of changes, these officers are taking on a more strategic role and entering into more of a partnership with their chief executives.

“Changes in the business itself and in the business models are causing companies and CEOs as a whole to deal with the changes and look to their finance brother for support,” Nendick told CFO.com. As a result, finance chiefs aren’t just dealing with such compliance issues as tackling Sarbanes-Oxley’s Section 404 validation. Instead, they’re also partnering with chief executives to set the company strategy and evaluate major deals, the E&Y report concludes: “The expanded role calls for balancing the discussion of big-picture issues in the executive suite with the management of the myriad of details associated with today’s stringent regulatory requirements.”

Partnering with the top executive is crucial for CFOs in this industry, says Frank Mergenthaler, executive vice president and CFO of The Interpublic Group, who formerly served as finance chief of Columbia House. “From talking with my counterparts at competitors and people I know in the industry where I came from, it’s clear we’re all trying to navigate where to place our bets and where to make investments,” he told CFO.com. “I think to do that from an organizational perspective, the CFO and CEO have to be aligned. The CFO has to have a seat at the table.”

Mergenthaler, who joined Interpublic in July 2005 as its fourth finance chief in three years, has seen his role change dramatically in the past eight months. Soon after he joined the advertising services company, the firm announced it was restating four years’ worth of financial statements because of accounting errors. After getting “history dealt with,” he says, he’s now able to focus on the future of Interpublic, and one priority is getting the company up to snuff with Sarbox requirements.

Indeed, when it comes to Sarbox, media and entertainment CFOs say they’re no different from their peers in other industries. Meeting Sarbox requirements, which “came out of the blue,” has kept West up at night thinking about higher external auditors’ and the increased workloads of his employees, who have to work harder to better document everything they do. Even though increased scrutiny from auditors hasn’t turned up material errors, West and his team have had to devote a great deal of time to proving the integrity of their internal controls.

Besides their compliance work, media and entertainment finance executives must make smart investments in fledgling technologies. Is the latest idea everyone’s talking about a fad or a way of the future? It’s a constant question for executives in an industry in which digital video recorders are considered the cool tool one day and Microsoft’s Zune is all the rage the day after. Chris Shean, senior vice president and controller of Liberty Media Group for the past six years, has decided to take a cautious approach. “You do as much diligence as you can, you get your facts straight, you discuss it, you debate it, and you make the best decision you can make,” he told CFO.com.

But the priorities for media and entertainment executives are always shifting. “I think the biggest change that’s going on in our industry is that the whole digital proliferation is causing not only content providers but distributed marketing service providers like us to look at a landscape that’s changing by the day,” Mergenthaler says. “Unless you are looking forward from a strategic perspective, you will become irrelevant.”