Money Matters

Many challenges

Money Matters
By Kamran Hafeez
Mon, 07, 21

Majority of board executives agree that the best way for CFOs to ensure their company’s success would be to spend more time on strategy. Within the new corporate structure, it is increasingly common for CFOs to be taking on more strategic decision-making. Today’s corporate boards value the hard data and empirical mind-set that a finance chief can lend to strategic planning, especially around forecasting trends, building strategic capabilities, or managing key stakeholder relationships.

Many challenges

Majority of board executives agree that the best way for CFOs to ensure their company’s success would be to spend more time on strategy. Within the new corporate structure, it is increasingly common for CFOs to be taking on more strategic decision-making. Today’s corporate boards value the hard data and empirical mind-set that a finance chief can lend to strategic planning, especially around forecasting trends, building strategic capabilities, or managing key stakeholder relationships.

However, the challenge for the present day CFO is not only an increasing range of strategic responsibilities, but the role overlapping issues and sometimes conflicting views with the traditional strategy leaders, and business-unit heads. Rather than having such conflicts create friction these need to be used productively to outline the best approach forward and influence how the Board makes decisions to improve a company’s performance. Many CFOs are the first among equals on a company’s board of directors and can assist the CEO/business unit leaders at improving board productivity on strategy. Having timely and structured communication about expectations of such roles and expected outcomes can certainly better manage the complex task of strategy building. A more define defined identification of these roles between finance and business leaders can certainly improve the dynamics of strategic decision-making by ensuring a better link between a company’s capital allocation and its strategic priorities and by better balancing a company’s strategy for long-term growth with its short-term strategy for profitability and shareholder returns.

Most companies would allocate their resources on the same projects and activities year after year, regardless of changes in the environment or their product-related market strategies. Companies that are more proactive in their strategic decision-making reallocate resources more actively to deliver better returns to shareholders more particularly during business downturns. In such companies, CFOs work closely with business unit heads to bring insights to create a better link between resource allocation and strategy development. This means, among other things, developing a structure, encouraging better and more frequent communication with the key management team members; and ensuring that the corporate strategy and budgeting processes are fully integrated with capital allocation processes. This integrated view of strategic direction and resulting allocation of corporate resources demands close collaboration between finance and strategy.

Whereas the Board provides the vision and overall strategic direction it needs to also develop an ongoing collaboration mechanism through ideally a board level strategic committee with key business unit heads and the finance leadership/CFO. Such a committee must be tasked to discuss strategic issues, growth opportunities, and funding needs. For each of the promising opportunities which have the approval of the relevant business unit heads and the CFO, the committee should assign the same to a strategic leader. In order to be effective, the Committee must be presented with data through the finance leadership, to continually review the overall expenses and potential areas for rationalisation attributed to running the business and set aside a defined amount for investment in new opportunities and growing the business instead. The Board can through the role of the committee, track how critical resources such as growth investments are used and the key milestones for such investments achieved. The committee through the monitoring process can also assess whether resources are allocated to support strategy or whether each year’s capital allocations unduly influence the next.

The last couple of years with the changing and highly competitive landscape, majority of the companies have been forced to evolve and manage product/market related disruption through active strategic decision-making. Such companies need to also focus on the way strategic decisions are made, for example, by managing the executive team’s strategic agenda and prompting debate on competing options and scenarios. This thus requires an effective balance between the CFO/finance leadership thought process and numbered data from assumptions based on prior decisions compared to external data models/ new technology/ strategic options for shifting resources away from traditional cash cows towards new initiatives.

CFOs need to understand these trends and step up their game in a wide range of growth-related activities, particularly managing disruptive trends, driving organic growth, expanding into new markets, and pursuing new initiatives. However, at times where the CFOs take the lead in such strategic decisions, they are unable to effectively take in to account the changing macroeconomic trends, understanding of the competitive advantage in any particular market and competitor strategies. In such cases, CFOs and their companies would struggle to find growth: they’re looking at a mirror and not a window. Accordingly, the role of committees with active participation of key business unit heads is critical to apprise the Board and help in direction setting for strategic decision-making. Business unit leads must own the organisation’s trend-forecasting and competitor-analysis function. Good trend forecasting involves creating proprietary insight into trends, discontinuities, and potential shocks to find growth opportunities and manage business risk. Similarly, good competitor analysis involves gathering competitive intelligence, closely tracking the behaviour of competitors, monitoring their potential responses to a company’s strategic moves, and evaluating their sources of competitive advantage. All are necessary to understand how a company creates value which is the foundation of the strategic decisions that best balance the corporate business plan for risk and return. Armed with such insights, CFOs and business unit leads together are better placed to go beyond a CFO’s traditional strengths in managing the business plan, navigating it toward new opportunities, setting objectives for organic growth, and planning the strategy.

A key challenge at any company is balancing the long-term growth strategy against the demands of shareholders/short-term investors. It is in this scenario where the CEO/ business unit leadership has the biggest role to play. Their understanding of regulation, innovation, and microeconomic industry trends complements a CFO’s understanding of cost and revenue, capital allocation, and stakeholder issues. Together, they can put forth options that improve both a company’s short-term earnings and its longer-term growth in a way that is compelling to management, boards and investors.

These objectives may only be effectively met when a formal structure is constituted to facilitate collaboration, and an empowered strategic planning team exists and includes people from both business unit and finance lead so that they start the budgeting process hand in hand. That enables both sides to see how resources align with the long- and short-term strategies as they make long-term resource allocations, evaluate critical decisions, and challenge the business case.

Working together, finance chiefs and business unit leaders can complement each other, helping the CEO, the board, and the rest of the executive team face the challenges of creating growth over the long-term.

The writer is a staff member