Sections 1
- The role of the CFO in the strategic process, generating and prioritising strategic ideas and strategy implementation.
Only if he is allowed to, conversations with Chairman/CEO and FD take place on a daily basis at the sharp end, more cerebral thought happens outside of ‘Strategy meetings’ or ‘away days’
. Lot depends on the closeness of the tripartite relationship and the profile of the Finance Director/Finance function in the business.
Some CEOs see the FD as the smiling assassin, others see the FD as a key business partner and has a degree of autonomy over it’s remit. It is all down to how the CEO views the FD and the FD’s own comfort/ability in acting the role of pantomime villain or strategic partner.
Takes a resource based view of the firm and adds that perspective in decision making , should work closely with HR personnel to actually ascertain capabilities of key personnel and their ability to think strategically and understand/lead the business in that direction.
Needs to have a joined up approach with Risk , but not at to the extent that Risk aversion is higher up the agenda than is necessary and disproportionate effort expended into managing remote risk.
Should not use the excuse of managing risk at the expense of decision making- Risk paralysis becomes contagious then at all levels, especially where there are heavy political undercurrents and possibly power struggles between the CEO and the FD. FD preaching inertia or inaction until more data is found that justifies a change in direction. Have to learn to develop strategy with less than perfect information.
This is also about the ability of the CFO to gather the right data aka business intelligence and managing the wealth of data available AKA a reliable, timely and accurate MIS
Section 2
- Expectations of the CFO from other executives when it comes to strategy
Should work closely with colleagues at all levels, this comes from the ‘ business partner’ school of thought.
S/He should be capable of raising awareness of bottlenecks/obstacles at operational level that get in the way of implementing the strategy, overcoming these hurdles and easing capacity restrictions.
Depending on the agenda, the skill of the CFO/FD is to garner data and support to either rationalise the current strategy ( as opposed to post hoc rationalising) and align the resources to it, or synthesise data and resources to change to a different strategy e.g go from one state to another .
Four strategic states
1 an emergent strategy ( making it up as you go along) -bit seat of pants
2 a market moving strategy ( think Apple and IPads -this is the product you need)
3 a reactive strategy- how fast can we move if we want to and what are our ( pre planned?) reactions? (Usually called a Risk mitigation strategy)
4 an inertial strategy in that we simply sit out any economic storm and cut costs as a first response rather than increase revenue. Only going back in the water when it is safe to do so ( Highly Risk averse strategy)- This is the one most FDs are comfortable with.
It really depends on how much thinking time the FD has ( or indeed his own ability to think because the CEO may just want a bookkeeper and not a ‘strategic thinker’ – see section 1 above
probably needs to have a peripatetic mindset, or actively look to hold court periodically to assess progress/measure or change milestones. .
needs to have collaborative working with IT/HR/Marketing etc.
Creating capacity which also includes capital investment ( especially IT)
perhaps also greater external focus with stakeholders and use of open book/cloud based technology to have clear supply chain information and verify big data .
Section3
- The realities of strategy development in organisations
Functions of
- Leadership capabilities
- Resources of the firm
- a ‘Strategic culture’
- the general economic environment
- the decision making processes
- the Stakeholder Map- Porters five forces.
in short . what are the key drivers for change and the question of whose money is it you are playing with? Stakeholder v Agency theory
Section 4
The value of strategic frameworks and tools
It depends on size and complexity of the organisation. Complex organisations with lots of revenue streams find it difficult to keep all plates spinning as a result of spreading risk and traditionally having alternative sources of income where one fails..Compare this with one source of income only and the different Risk scenarios attached to each circumstance.
Also size is important. Does the CEO/Board actually know what is happening in the trenches?
Depends how the CEO/organisation learns, some CEOs are highly ‘model’ literate, others prefer to work on a blank piece of paper and make it up as you go along. The CFO would prefer some form of battle line or plan, some CEOs don’t recognise borders.
In a borderless strategy CFOs get uncomfortable because they don’t always understand the message and have to revert back to the Board very often for guidance which is frustrating for both the CFO and the Board. This is where CFOs lose their way ( and job) because they cannot work in a vacuum which is antithetical to their training and the expectation that goes with the role of being a ‘safe pair of hands’
Section 5
- Tips for CFOs who want to improve their contribution to strategy
Depends on capability of CFO
Communicative/ engage/ assimilate and decide… but only if you are able to or allowed to
read the Politics and the prevailing winds. Question of Power and influence.
build Trust with the CEO ( see Section 6)
Section 6
- A philosophical approach to Strategy
I think the important point for CFOs is to understand that organisation strategy has a Social Contract perspective ( what we might call ‘buy in’) and it’s roots may even go back as far as a basic philosophy. People move away from pain and try and attain pleasure.
Strategists therefore want to avoid losses, eliminate risk and move towards sustainable businesses
Some philosophical business leaders have taken this literally and act in such
a way that businesses take risk and loss aversion to extremes and therefore would want to attain profits at all costs- the extreme shareholder value model, even at the expense of longer term investment and sustainable business models.
This position of short term shareholder value underpinned many strategies for a considerable period of time and sustainability has only recently been seen as a longer term goal.
This elimination of corporate pain has seen the worst excesses of corporate behaviour and led to some high profile business collapses, notably Enron and WorldCom simply
because the logical opposite of avoidance of corporate pain is to achieve profit at any cost.
Stakeholders, principally shareholders, do not wish to live in fear and look to Strategies that make them feel safe via dividends. Thus avoiding the pain of personal investment loss .For this to happen there has to have some form of control and command structure.
Essentially individuals or groups of individuals renounce their rights to the CEO. This is the basis of Stewardship and Agency theory . The CFO is instrumental in this philosophy
Some philosophers (Hobbes in particular) propose different leadership models in
Social Contract theory.
Whatever type of leader is guiding a business, there is usually a common goal or direction which is set out and leaders become results driven. Usually supported by the reporting of these results by the CFO
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This is where it gets is even more philosophical because of corporate will and power
.
CEOs display power to create a force and manage a collective will for profit (pleasure)
What gets results is power and will. This is a bit circular because leaders display
power to create will and force and delivering results reinforces their power base.
Having a Management Information system which reinforces this will is seen as a key requisite to the implementation of Strategy, the role of the CFO is therefore pivotal. .
Power, coupled with command and control structures is the manifestation of collective will of the CEO who is given responsibility by followers (shareholders, stakeholders etc.) on three possible
terms
1 unconditional trust
2 conditional trust with strict rules
3 conditional trust with principles of discretionary latitude to vary the rules.
The leader has the right to assert influence on culture or the way things are done.
However the important point is that the will of the stakeholders is vested in the CEO who is trusted.
CEOs who ignore this transference of will and disregard stakeholders do so at their own peril. That is why businesses fail because the efforts of the leader, the collective will and devolution of power to one person become mismatched.
A CFO has a key role in propagating the legitimacy of the CEO, making sure there are accountable measurements which confirm the strategic direction of the business and that the collective will has a feedback mechanism that moderates the worst excesses and comes to a ‘balanced view’.
This is not a particularly comfortable place for any CFO and the good ones understand these inherent tensions.
