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CFO 'must-have' skills: risk / compliance / strategy; Whether you're a CFO now or aspire to be one, you need to make certain you've got your skills "down pat" in three key areas. Then you can navigate market changes and embrace governance to improve stockholder value.

Globalization has prompted many corporations to significantly expand beyond their borders, opening themselves up to a myriad of unknown risks. To succeed in this environment, companies must learn to leverage compliance, risk management and strategy against longstanding financial metrics such as cash flow, return on investment, economic profit and shareholder return.


Thus, in this new business climate, leaders of multinational corporations are consumed with managing far-flung operations that can be affected by a number of economic, political and environmental factors. So, how do today's leaders manage these new risks, and their inherent challenges, while generating value for shareholders?

The first part of this answer lies with CFOs and their ability to lead the organization's risk-management efforts with an eye toward programs that involve the entire enterprise. In doing so, CFOs can help companies gain an unexpected benefit from their efforts to comply with new regulatory requirements, such as Sarbanes-Oxley in the U.S.

Indeed, for most companies, the work to achieve compliance has provided CFOs and other company executives with a wealth of information about the inner workings of their organization's internal controls and financial operations.

The second part is found in the CFO's skill in coupling risk management with more effective strategic planning. Of the many methods employed by organizations, scenario planning has proven to be one of the more successful means of providing executives with a realistic idea of what may lie ahead. These efforts demand the unrelenting commitment from management and the board of directors, efforts that the CFO can help to guide. They must identify their company's tolerance for risk and drive compliance to be an everyday event within their organizations, since strong stewardship can directly affect the company's ability to generate long-term financial value.

The following discusses how CFOs can help their companies navigate market changes and embrace governance to improve stockholder value by mastering three areas: emerging risk, regulatory compliance and strategic planning.

Emerging Risk

As companies seek to reap the benefits of free trade and expand to new markets, they are encountering new kinds of strategic and financial risks. In addition to the traditional economic uncertainties encountered in the course of doing business, many organizations face implications related to political upheavals, currency volatility and other variables.

Geopolitical instability, for instance, has increased oil price shocks and elevated the cost of doing business for fuel-dependent industries, such as airlines and plastics. Rising interest rates in the developed world, the large trade imbalance in the U.S., the resetting of China's currency and other related economic factors have put pressure on CFOs to find appropriate mechanisms to balance their risk exposure. Companies with global ambitions quickly learn that financial derivatives are one tool, but not all risks can be traded and not all are insurable.

Consequently, CFOs need to utilize a risk-management methodology that encompasses new areas beyond the traditional finance discipline. Considering the price of failure--reduced market confidence, investor confidence and business performance--it is imperative that they address these risks.

Key to any risk-management program is the question of just how much risk a company is willing to take. CFOs should be asking: "What is my organization's risk tolerance?"


As with any such measure, the right balance must be struck. Just as individuals have differing levels of risk tolerance, so do corporations and industries. A startup may have a larger appetite for risk than a publicly-listed company, and the high-tech sector probably more than financial services. The CFO must effectively weigh risk strategy and the need for compliance, and adjust accordingly.

Additionally, CFOs have a duty to help their boards, management and employees understand their company's specific risk appetite and tolerance boundaries. For example, does a recommended strategy create undue geographical concentration for the business? If so, how can that risk be transferred or mitigated? Can it be diversified, hedged, sold, insured against? What is the optimal risk treatment?

Ultimately, the board determines where in the value chain risk should be tolerated or reduced, but the CFO should play a key role in mapping the course for the board.

Regulatory Compliance

In the midst of trying to negotiate the intricacies and unknowns of new markets over the last several years, multinational companies have witnessed a nearly unprecedented level of new regulations. The passage of Sarbanes-Oxley in the U.S., Basel II and the impact of the new International Financial Reporting Standards (IFRS) has dramatically changed the way public companies approach compliance.

However, meeting these new regulations--in particular Sarbanes-Oxley's Section 404 on internal controls--can provide organizations with a foundation for executives to build further improvements into both their internal controls and business processes. In this case, it is the CFO who can help management understand the best way to integrate risk management across the organization and transform processes.

Through CFOs' efforts in helping their organizations comply with new measures, leaders have come to understand the nature of their controls, processes and systems; where they are located; and by whom they are performed. For most companies, this information did not exist in one place before the Sarbanes-Oxley mandate.

These insights about the business, which lie within the responsibility of the CFO's organization, can lead to important business changes. Put another way, information on the organization's controls portfolio provides leaders with a new lens through which they can evaluate their businesses. As a business lens, controls can become an important means of identifying new opportunities to manage risk, improve business performance and add value, in both current and future initiatives.

KPMG's experience shows that extracting value from the compliance process is a multi-faceted endeavor. As organizations mature in their ability to inculcate ongoing compliances, they typically progress through four stages of development:

In the fragmented state, compliance is siloed and project-driven. The effort to achieve compliance during this state requires considerable coordination to connect disparate efforts throughout the enterprise.

With experience, the compliance effort evolves to a functional state that is program-driven. Here, accountability is assigned to a centralized compliance function that coordinates work streams across the enterprise.

From there, compliance can be elevated into an integrated state. At this point, the business starts to drive compliance. The organization ties programs to processes, giving business owners, rather than the compliance function, the opportunity to share oversight responsibility.

Over time, led by and owned by the business, compliance becomes an embedded state. It is enmeshed in the organization's culture. Accountability is shared by individuals and imbued in their day-to-day actions. In this stage of maturity, companies become the most disciplined and responsive to change. Governing change with respect to compliance thus becomes not a once-a-year event, but an everyday event.

Strategic Planning

The ability to steer a business intelligently through an ever-changing future ranks high on an executive's wish list. In addition to the information gleaned from regulatory compliance, multinational companies can also gain an advantage in managing the risks associated with global expansion through more effective strategic planning.

Most narrowly, some companies consider the financial plan to be the strategic plan. Thus, at many companies, the CFO is the company's de facto strategic planner. But, with the many new variables engendered by globalization, using the the financial plan as the strategic plan is becoming woefully inadequate. Since CFOs are already responsible for gauging future financial events, they are uniquely qualified to encourage the board and management to adopt more helpful ways of understanding what important global developments may affect the business.

Of all the strategic planning methods available, the art of scenario planning is considered among the most intensive and effective. Scenario planning helps organizations learn about the future by studying and understanding the major driving forces shaping it. It is a formal methodology with roots in military intelligence and decades of practical business application now behind it.

Effective scenario planners know their job is not to come up with the best scenario, but rather foster the best decision-making. The intent is not to predict the future, but to offer participants the opportunity to make more informed choices, based on a deep understanding about the nature and shape of future business conditions.

Scenario planning uses a team approach to identify those trends that seem most probable and those factors that seem most assured, and then brainstorming as a group to deepen the range of possibilities and shed light on the impact these driving forces might have on the business. Scoping, researching and, ultimately, prioritizing the list of uncertainties is the rigorous and intensive next step in the process.

Once the key drivers are identified, scenarios are defined and stories are written. The ones that emerge might take known certainties about today--population or climate-change data, for example--and blend them with predictable uncertainties about tomorrow, such as renewable energy reaching a critical mass or the impact of a more deadly avian flu pandemic. These resulting stories are used for their intrinsic ability to illuminate possibilities that more formal planning methods may obscure.

CFO Key Role: Overseeing Change

Today's CFOs recognize the importance of actively working with management and directors through participation in strategy review, their need to challenge assumptions, ask critical questions and guard against unwanted exposure. They, along with all employees, must work together to create a strategically adaptable organization that responds quickly to changing market opportunities. That future is most successfully reached when their commitment, communication and conviction come together under the mantle of leadership.

Governing change involves linking the optimization of compliance, risk and strategy into the day-to-day operations. This can only be done with top-level support and commitment. Board members, senior executives and CFOs are the governors of their corporations. They are responsible for overseeing the strategic direction of the business, ensuring appropriate accountability and, above all, for providing superb stewardship.

As financial stewards, CFOs should know that their imprint shapes organizational ethics, compliance and governance, and helps set the tone at the top. Their ability to effectively manage compliance issues can directly impact an organization's ability to borrow money, attract and retain key resources and partners, and, ultimately, the premium investors will pay for a company's shares.

Operating in the global marketplace, with its labyrinthine laws on the macro level and myriad internal policies on the micro business-unit level, requires time and mastery on the part of the organization. Codes of conduct, control standards and policies may be etched, but global implementation of those standards takes time. Clearly, as governance reform spreads to Europe and other parts of the world, CFOs will be increasingly critical in helping their companies understand these policies, spurring greater harmonization of control standards and financial reporting.

Mary Pat McCarthy is a Partner with KPMG LLP and co-author of Designed to Win: Strategies for Building a Thriving Global Business. She can be reached at or 816.802.5300.


* In today's global environment, CFOs have the ability to lead their organization's risk-management efforts with an eye toward programs that involve the entire enterprise. Doing so can help gain unexpected benefits.

* CFOs need to utilize a risk-management methodology that encompasses new areas beyond the traditional finance discipline.

* Extracting value from compliance is multi-faceted, and organizations progress through four states: fragmented, functional, integrated and embedded.

* Companies often consider the financial plan the strategic plan, with the CFO the de facto strategic planner.
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Title Annotation:strategy
Author:McCarthy, Mary Pat
Publication:Financial Executive
Geographic Code:1USA
Date:Oct 1, 2006
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