CFOs Boxed Out By Compliance?

CFOs are now so consumed by the need to meet expanding compliance requirements, they’re finding it harder to focus on big-picture strategy.

For most of the 20th century, the chief financial officer position did not exist. It was only when financial regulations became complicated that financial managers (as they were then known) were elevated to new heights. In 1976 the SEC required more than 1,000 large public companies to use new accounting methods for reporting. Three years later, the Financial Accounting Standards Board extended the reporting requirements to insurance companies, banks and many other financial institutions. Companies began to promote financial managers to the C-suite. At the same time, CFOs began to promote themselves publicly as the answer to the new reporting challenges, able to translate complex financial concepts into everyday business language.

Michael Eisner, shortly before becoming CEO of Disney, said “until the accountants can come up with a common language, someone must make a free translation from Greek into English, directing top management on how best to benefit.” The best person to deal with that translation, he and others argued, was the CFO. In 1990, Disney’s CFO, Gary Wilson, said in an interview, “There aren’t many finance people who are responsible for the strategy of the business. I did that in my position at [prior employer] Marriott by accident. Now I do it at Disney by design because it was so successful at Marriott.” By 2000, the role of CFO was expanding in many companies to include CEO and COO responsibilities—tasks like actively managing relationships with shareholders and keeping tabs on market trends and expectations. Today 70% of billion-dollar companies have expanded the CFO’s brief to include strategic business analysis.

Yet since the 2008 crash, the growing demands of regulatory compliance have eaten away at the ability of finance leaders to step back for strategic thinking. “It’s still really important that people have good, old-fashioned basic finance,” Adidas CFO Robin Stalker noted recently. “We’ve seen what can happen if you don’t.”

According to a recent survey of CFO and treasury professionals by E&Y, the overall trend is for CFOs to expand their activities across both strategy and operations. But the data clearly shows that the financial crisis has forced CFOs to pay closer attention to cash, cost management and working capital. “This necessary focus on the fundamentals prevents CFOs from playing as big a role in broader corporate strategy as they would like,” the report finds. Only 37% of CFOs agree that they have enough time to focus on this area, while just under half agree that the crisis has caused them to refocus on controls and reporting, at the expense of more strategic activities.

Quin, Wilmington: The ability to translate financial issues for stakeholders is a key CFO skill.

Quin SQ Thong, managing director for Asia at Wilmington, a training company focusing on finance and compliance, found that CFO work went beyond accounting early in her career. At Texon International, a US-based global footwear materials maker, she found herself preparing plans for the board and considering the future of the firm. “As CFO Asia,” she explains “I had no COO or CEO, just the chairman, so inevitably I had to be concerned with looking 10 years into the future. This went way beyond bookkeeping!”

She also experienced the key role of communication as COO of DTZ, a property investor—where her understanding of the business made her a natural “internal salesperson,” articulating financial issues. These skills became critical when the subprime mortgage crisis hit global real estate in 2008. Having calculated the company might be looking at a 30% drop in revenue, Quin articulated the implied profit outcome and a number of alternatives to be carried out preemptively. “I was very insistent: 30% job cuts if we did nothing. Either we fire 400 staff or we begin aggressively to cut expenditure,” she says. “I told the business unit heads: We can avoid major losses, and you can keep your people. This was very scary. If I had pulled out the balance sheet and the P&L [profit & loss statement], they would have been lost.” But the work to make the numbers add up and effectively spread disseminate the message hampered her long-term efforts.


Compliance demands aren’t the only obstacle faced by strategic CFOs. Ian Hay, currently CFO of Harbour2, a large real estate investment company, was formerly at Macquarie Bank in Sydney as CFO of their managed funds. His role there very much encompassed strategizing with the front office to grow the business. Aggressively seeking out, structuring and executing deals was a key performance indicator for his finance team, and he led the purchase of major assets such as airports and toll roads. The core responsibilities of accurately reporting financial accounts and managing risk and compliance did not go away, but he and his team were expected to put at least 30% of their time into helping to grow the business.

Then, in 2011, he joined Keppel DC REIT, 70% owned by the government of Singapore, to build a private equity fund and take it to IPO. This was a critical strategic initiative, and it took three years to get Keppel to a Singapore Exchange listing. According to Hay, it was a struggle all the way.

Hay, Harbour2: A culture defined by fear of change really holds a company back.

“It was an eye-opener to me how closed they were to new thinking,” he says. “They hired me because I knew how to do a listing, but [they] strongly resisted many of the key changes required.” Hay says he was discouraged from introducing critical technology to track and report, to replace a long-standing manual process that required checks to be couriered from Ireland for signature. “It was like being a CFO in the 1980s,” he adds.

Hay says the culture suppressed new thinking—he was told he risked dismissal if he kept on coming up with new ideas—and even changes necessary for compliance were resisted if they threatened the status quo. “It wasn’t that compliance was not required; it was that innovation was seen as a threat,” he explains. “I found it hard to be the strategic CFO that was needed because of [the firm’s] deep reluctance to change, a fear of being made to look bad, and a deep conservatism.

“Eventually it became clear that they wanted a maintenance CFO. They were forced to use me to get past the listing, but in reality they wanted no change and smooth sailing,” Hay says. “It brought home to me how much a system driven by fear of change holds people back.”

Hay believes that, notwithstanding state or corporate dinosaurs and the constant pressure of increased compliance, the CFO role will continue to be strategic. In his new role at Harbour2 he is once again leading the search for assets and capital, modeling deals and helping with decision-making.  “It’s a relief to be back in a business where I can do what is necessary to move the business forward,” he says, “without fear of treading on toes or inadvertently breaking the rules.”