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A modern CFO’s role in bringing Corporate Makeover

Economic uncertainty, tighter regulations and greater investor scrutiny have put the CFOs in the spotlight today. The historical ‘bean counter’ accounting function, CFOs previously had, is history. They are now becoming bean growers, playing a critical role in giving organizations a  direction, while also acting as catalysts instilling a financial mindset throughout the business units.

Here are the important roles that the CFOs are playing in the business world:

Strategic Leadership

In the popular management book – Good to Great, author Jim Collins underscores the need to understand the brutal facts confronting an organization if it is to be successful. CFO with his or her numerical prowess brings in hard data and empirical mindset to the table. Analysis of statistics relating to market trends, competitive position and supplier’s finances amongst others facilitates strategic planning.

While CFOs are already financial leaders, the modern ones are expanding their role by lending their support in forecasting trends and by building strategic capabilities.

Risk management

Companies are today exposed to a complex array of risks and uncertainties than ever before. Emerging technologies such as Blockchain, the Internet of Things, Artificial Intelligence and then cybersecurity threats and data privacy concerns to grapple with on the technology front.

Often, businesses have more data than they perceive. For instance, if it needs to evaluate the risk of hiring a supplier, specialized data sources do allow checking its credit quality and financial situation which in turn facilitate their onboarding. Similarly, due diligence helps evaluate the creditworthiness of customers. CFOs with their financial prowess are best placed to analyze all such critical data (internal as well as external) and turn it into insights for risk mitigation and monitoring.

Financial strategy and control

CFOs also play a vital role in establishing a clear financial baseline for business transformations to happen. At the simpler level, last year’s financials become the baseline for making forecasts and allocating budgets. But business is much more complicated and therefore the need to adjust data with necessary one-time events or market aberrations. For instance, forecasting a sales target without reflecting on the decline in market prices and demand as compared to a year before could result in unrealistically set transformation targets.

Organizational initiatives like reducing costs also need a balance between control and empowerment. Too much of financial control, for instance, by drastically reducing the threshold for purchase approval, could hurt productivity and employee morale. CFO plays a vital part here by resorting to fine balancing.

Value creation

In the traditional business setting, the CEO champions organizational transformation while the COO assumes operational control and individual business heads take the lead for their own performance. CFO in turn is left on the sidelines providing auditing and transactional support.

The new-age CFO today however becomes an important line of defense in a high-pressure transformation environment.            For instance, overemphasis on accounting quarterly profits in a high-pressure work environment could result in a negative effect on cash flow. CFO being numerically savvy can raise the flag, while also highlighting if incremental profit has come on the back of a drop in credit quality. By comparing the creditworthiness of customers as well as that of its competitors, one gets an insight into it, which in turn could avoid probable NPA and losses in the long run.

Similarly, by setting formal budget commitments, CFOs can facilitate organizational transformation and ensure turnaround initiatives actually get to the bottom line.

Takeaway

Modern CFOs go beyond the usual financial responsibilities by playing a larger role in organizational transformation. By bringing hard data and empirical mindset to the table, they are assisting strategic planning.

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Important Roles of Independent Director in the Boardroom

Independent Directors’ (ID) act as a mentor, coach and guide to a company. With their knowledge, experience and skill, they guide the Board in risk management while also striving to improve corporate credibility and accountability. Through their presence in various corporate committees, amongst other things, they also ensure good corporate conduct and governance practices.

Let’s understand the main roles of an ID in an Indian context:

  1. Hold ethical standards of integrity and probity

While the management conducts its operations, the independent directors focus on stewardship and oversight. The evolution of corporate scandals in India (Satyam, for instance) and elsewhere in the world have resulted in the mandatory appointment of IDs in the company’s board.

The business disruption caused by the pandemic has further underscored the need to be vigilant and strengthen governance frameworks. An October 2021 Deloitte report titled ‘Corporate fraud and misconduct: Role of independent directors’ finds that 63 percent of IDs surveyed expect the current business environment induced by the pandemic to spur fraud over the next two years. Large-scale remote working and cash flow crunch acting as the main triggers for frauds. Good governance is easily among the top priorities of ID today.

  1. Objective evaluation of the performance of the board and management

The fact that the directors are independent also implies that unwittingly they have limited information about the company and industry. That’s where the quality of the flow of information becomes critical.

The directors are usually provided with materials to equip them to effectively deal with various agendas. For instance, quarterly financial information could be supplemented with budgets, management forecasts and analyst expectations to give a holistic financial perspective to IDs.

However, in order to truly provide an objective view, such information needs to be supplemented by market intelligence. ID need to undertake their own due diligence, to learn about the company from the public record. It will help in a better way of scrutinizing, monitoring and evaluating management’s performance vis-à-vis its agreed goal and objectives. An informed director is the first step to becoming a useful director who could exercise business judgment and common sense.

  1. Safeguard the interests of all stakeholders, particularly the minority shareholders

Safeguarding the interest of all stakeholders – promoters, investors, employees and customers – and especially that of minority shareholders and balancing the conflicting interest among them are two key responsibilities of IDs. A true litmus test of the above criteria is how their decisions enhance the sustainability of the company.

We are increasingly living in a VUCA world – Volatility, Uncertainty, Complexity and Ambiguity – thanks to new laws, policies and new kinds of businesses. Having adequate knowledge about the company and the external environment in which it operates could prove to be a game-changer.

  1. Play a vital role in Risk Management

IDs cannot and ideally should not be involved in actual day-to-day risk management. Instead, through their risk oversight role, they should satisfy themselves that the risk management policies and procedures designed and implemented by the company’s senior executives and risk managers are consistent with the company’s strategy and risk appetite. And that the systems of risk management are robust and defensible.

Moreover, ensure necessary steps are being taken to foster an enterprise-wide culture that supports risk awareness and behaviours that are consistent with the risk management strategy.

It often calls for checking on the integrity of financial information and assessing the quality, quantity and timeliness of the flow of information between the management and the board.

Takeaway

While management’s job is to operate business, the independent directors are the roving ambassadors of the company. They focus on stewardship and oversight with the help of appropriate, useful and timely information that often might not flow from the company.