Solving today's corporate financial problems: worry works. (Strategy).

Looking for a way to solve today's corporate financial problems? In an opposite spin to Mad magazine's Alfred E. Neuman's what-me-worry attitude, try this technique: Start worrying.

"Worry works," says Harvard Business School Professor Richard M. Ruback. Well, it works, he adds, with this caveat: "The trick is to figure out how to worry constructively." The reason is quite simple: "While you're worrying about something, you're thinking about what to do. You are really just developing an action plan, so that when the situation you have been worrying about occurs, you're ready with a plan and more able to make rational decisions.

"If it's a brand new situation that you've never worried about--and you don't have an action plan--you may be unprepared to make an important decision."

Ruback, the Willard Prescott Smith Professor of Corporate Finance, will lead the HBS/FEI Executive Program for Chief Financial Officers from March 16 to 20, 2003 at the Harvard Business School in Boston, which is accepting only a limited number of participants. The program, in its seventh year, will take the classic Harvard case study method a significant step further. For the first time, this year, the program will combine solving actual problems that participants submit, as well as adding a systematic approach to problem solving.

"We all think that we are more rational than we are, and so, when approaching problems, we bring our own biases," says Ruback. As a result, he says, the solutions don't always make sense. Yet, he indicates there are timeless and well-developed approaches for building a framework to solve problems that can be applied to business problems.

One such model Ruback applies is from the work of mathematician G. Polya, author of the 1945 book, How To Solve It: A New Aspect of Mathematical Method (Princeton University Press, now in its second edition). Polva's plan details four stages for problem solving: 1) understanding the problem; 2) devising a plan; 3) carrying out the plan; and 4) looking back -- to check the solution.

Ruback contends that the formula can be applied to solving all sorts of problems. For example, a CFO can apply the method for measuring what training and skills he or she lacks. CFOs, he says, are like everyone else: They do their jobs; and most do their jobs pretty well. But, all of us can do our jobs better.

"Much of what you learned in business school was how to solve a well-defined problem -- how to calculate a present value, how to compute an option value. That's step three, executing -- or carrying out the plan. It didn't involve understanding the problem or planning the solution (steps one and two).

"The more challenging part of problem solving is understanding the problem and planning the solution," says Ruback. "That's what takes skill and experience." And, while it's important to get step three done right, it's also very important to get steps one and two done well. Ruback thinks the case method used in the Harvard MBA program gets the participants to begin to focus on those steps. So, while it's the Harvard method in general, the HBS/FEI program will take it further.

This, Ruback says, is the real job of the senior-level financial executive, moving from solving problems to zeroing in on learning how to define the problem and how to understand it. "That's where senior-level executives can contribute the most value." In fact, as an assignment, he advises watching the movie Apollo 13, to see some good examples of how decisions are made systematically, and how carefully the crew follows a process.

Worries Aplenty 

"It's the things in life that you don't worry about that hurt the most," Ruback argues. And today's financial executives have plenty to worry about, besides the normal pressures of their job of managing their firms' assets. Today, it's a host of things: the turbulent economy, the demise of investor confidence, more pressure to personally verify financial statements combined with expanding regulations, the appropriateness of corporate ethics and compensation incentives. Staying with Ruback's thinking -- on "plan-ahead-worrying" -- this becomes a 24-hour job itself. Yet, he's optimistic; he even finds it fun!

The finance function, Ruback opines, has always been professional, and it's becoming more professional, requiring a more-involved CFO. A finance chief does more things than ever before -- risk management, evaluation, transactions and generally takes a more active approach, both in corporate strategy and corporate finance. "That makes the CFO job more difficult than it was, and, well, a lot more fun."

Depends on your definition of fun.

"It's good to live in interesting times," says Ruback. He describes the scene: With the market down, it's much harder to raise capital. Finding opportunities to create value may be easier, but convincing the market that those opportunities are really "there" is much harder. The political environment -- scrutiny from regulators and lawmakers -- is very different than it was just a year ago. "Both the financial and political climates keep changing," he says, "and that volatility makes the CFO's problems even harder to solve."

Basically, CFOs have one overriding goal, Ruback argues: creating value while avoiding mistakes. This goal hasn't changed, but the specifics have. Avoiding mistakes these days is focused on reporting and accounting issues, and enhancing value is focused on searching out the opportunities in a down market.

He notes: "If you look at the business headlines in the past few months, virtually all of those companies had real problems with their core business; it's not just the accounting issues. If the CFOs of those companies were doing their jobs well to begin with, the pressure surrounding the accounting wouldn't be there."

He cites Enron as an example of how bad performance seems to lead to aggressive accounting. "Enron extended its core business to places where its business model didn't work quite so well, and the drive to make those extended businesses profitable led to some of the accounting issues," says Ruback. We don't know the real story yet, he adds. "It'll be years of sifting through the case before we know what really happened."

Asked about the CFO role having morphed from a gatekeeper into more of a strategist role, Ruback says: "CFOs are deeply involved with corporate strategy and thinking about value -- what drives value and what creates value. I believe that role needs to stay there. If the CFO isn't paying attention to the basic business model and finding ways to create value, the 'gatekeeper' approach will at best guard what is there." The key, he says, "is to find and enhance value creation and opportunities. If the value is there, the pressure to do it with smoke and mirrors gets greatly relieved."

One of today's biggest corporate finance problems is how to restore investor confidence. On this, Ruback says, "It's relatively simple, but I don't think it's easy to do." He offers some insights: "The senior management team -- including the CFO -- needs to develop knowledge of what it is about the business that creates value. Develop those business ideas with clear, simple notions of what the value drivers are for the business. Figure out what is it about the business model that allows you to create value, and then explain that to the marketplace."

The more people understand about the drivers of value, he explains, the easier it is to win back confidence. The harder it is to explain a business, the more you have to rely on external measures of value -- like financial statements. And the more complicated the business, the more those financial statements are less than clear.

"So, [it's about] having a simple business strategy, with simple, clear explanations for the value drivers," says Ruback. "That is the path. It's not two or 20 things, it's one thing: it's about creating value in the business."

RELATED ARTICLES: Problem Solving Framework

Step: 1 Understanding the Problem

What is the unknown?

What are the data?

What is the condition?

Step 2: Devising a Plan

Find the connection between the data and the unknown.

Step 3: Carrying Out the Plan

Activate the solution.

Check each step.

Can you prove that it is correct?

Step 5: Looking Back

Examine the solution obtained.

Can you check the result?

Can you use the result or method for some other problem?

Source: How To Solve it, G. Polya, Princeton, University Press, Second Edition [C] renewed 1985.

Richard S. Ruback is the Willard Prescott Smith Professor of Corporate Finance at the Harvard Business School. His research is focused in applied corporate finance, especially on corporate-control transactions and valuation. He teaches in the first year of the MBA program. For information about the HBS/FEI Executive Program for CFOs, March 16-20, 2003, contact the FEI Conference Department at [e-mail], www.fei.org/events/conferences.