CFOs want to allocate assets to grow their organizations but are often over-cognizant of risk when it comes to seizing opportunity due to the contemporary volatility of markets, according to a recent McKinsey & Co. quarterly article. Identifying, navigating, and leveraging volatility with strong leadership is what sets the best executives apart from the rest, according to the report.
Two Types of Leaders
In senior partner and bylined author of the article Ishaan Seth’s meetings with CFOs across the globe, the “combination of shocks” has created what he has referred to as the most challenging environment some management teams have ever faced.
“Fundamentally, successful CFOs are leaders who are building an edge on insights, commitment, and execution,” Seth told CFO. “They are getting better insights, and more insights, from more diverse sources. They are going well beyond conventional sources. These CFOs are open-minded.”
Seth spoke extensively about the setting created by the best CFOs while highlighting the importance of an environment for fluid communication. “They create the space for the management team to have real dialogue on strategic issues, even in this environment,” said Seth. “It’s easy for the urgent firefighting of this current world to crowd out space for strategic conversation. The best leaders and CFOs don’t let that happen.”
A great leader at the chief financial officer position is a sought-after characteristic, according to McKinsey. However, those same traits aren’t sought after when CFOs are looking to hire staff to work on their team.
Data from CFO’s recent survey found few finance chiefs judge leadership skills or industry knowledge as one of the top two attributes most important in candidates. Many CFOs focus on delegating a large portion of their accounting and financial tasks to those with skills in accounting and data analysis.
Going on the offensive in a volatile market, from the CFO’s perspective, can be difficult. But is vital to the success of an organization long term, according to McKinsey. Many CFOs mistakenly adopt the “wait and watch mode,” adopting a cautious and defensive posture amid great uncertainty.
Is a Transition From Reactive to Proactive Possible?
Seth and his team stressed the importance of malleability in the skills of the best leaders. "The best leaders and companies are ambidextrous,” they wrote. “[They’re] prudent about managing the downside, while aggressively pursuing the upside.”
Seth echoed these points about a transition from stagnation to growth via mindset. “Successful leaders, who are both prudent and bold in today’s environment, are honing the three types of edge: insights, commitment, and execution. All three are important to create value from volatility."
For example, to develop an execution edge, organizations need to be "on their front feet and able to pivot rapidly as needed if the environment changes,” Seth continued. “This speed at which a company can pivot as circumstances change is a core part of developing execution edge.”
Timeliness of decision-making in the C-suite is also a major component of successfully navigating and growing through bear markets. “What differentiates bold leaders and leadership teams isn’t moving in the right direction — which most do eventually — but doing so decisively before others have mustered the collective confidence to commit,” according to the McKinsey report.
Building a Vision, Then Executing
Evaluating the value of particular risks and the upside to them is key to taking the first step toward growth. According to McKinsey research, “defense-only postures” tend to lead towards median results while offense-only stances deliver a mix of “occasional wins plus some catastrophic failures.”
The initial tactics that strong C-suite leaders might adopt in the current economy include re-evaluating M&A strategies amid lower valuations, making more dramatic resource reallocations, reimagining workforces and talent propositions post-pandemic, and taking a long-term view on innovation and growth.
A majority of CFOs (66%) in the recent CFO survey their organizations are experiencing accelerated growth or building business resilience. For the stagnant third who are not expanding, few are in actual decline, with either stabilization efforts or attempts to build business continuity preventing expansion.
"[Proactive CFOs'] moves are material and bold,” said Seth, when asked about the initial steps of execution towards growth. “Whether it’s in reallocating resources, doing programmatic M&A, or investing in innovation, they’re willing to commit at a threshold of materiality that matters.”