Visionary CFOs: who are they, and how can you become one?
It's a relatively new concept for the top financial slot. Indeed, Jim McTaggert, chairman of Connecticut-based Marakon Associates, an exclusive little strategic consulting firm whose influence is far out of proportion to its size, says the typical CFO is anything but a person of vision.
"Often, the CFO is an Old Joe from a Big Five accounting firm. Old Joe sits on a narrow functional silo and very competently makes sure the audits are done, the taxes minimized, the company gets the best rates when it has to borrow. If you have a meeting of top executives to discuss major issues that affect the value of the firm, this person is either not invited, or if invited, doesn't sit as a full partner. Old Joe checks the numbers, but Old Joe isn't sitting at that table expressing a view." Of course, Old Joe is no dummy. He or she is very intelligent, understands the core financial issues of the day and how they affect the company, is a good administrator, even a reasonably good executive. In fact, Old Joe is only one card short of a full deck.
The vision card admits the few who hold it into the aristocracy of financial management, a thin upper crust of chief financial officers whose job title could as easily have an "E" instead of an "F" in the middle.
"Old Joe" is a numbers guy and a damn good one. Period. The "visionary" CFOs know the numbers cold, but they don't just focus on the numbers. They have an uncommon breadth of understanding, an ability to see what the numbers add up to in the real world. So the visionary CFO often becomes the fulcrum that braces and directs the many levers it takes to move a corporation in a new strategic direction: the board, the staff, the line executives, the investment bankers, the consultants and others. The visionary CFO is the central point at which all information about the company must converge, so sound measurement and disciplined controllership must anchor the "vision" to give it strength. But an open mind gives it flexibility.
The four CFOs profiled here have what it takes. We identified them through an informal poll that included financial executives and reliable sources in the consulting, finance and human resources industries. Space permitting, we might have profiled as many as a dozen, more, but our objective here is not to provide an exhaustive survey of the best CFOs - only to illustrate through a few outstanding examples the characteristics of this rare breed, the visionary CFO.
HEIDI KUNZ ITT INDUSTRIES, INC.
"I never planned my career," Heidi Kunz said, disarmingly. "Things just came along." They sure did. Things like the undergraduate degree in Russian from Georgetown University, the MBA from Columbia, the fast track that took her from entry-level grunt to vice president and treasurer of General Motors in just 15 years. She left GM in 1995, a year after her promotion to VP, to join ITT Industries, Inc. Among the things that came along then were the CFO job, a multibillion-dollar divestiture, a line business to run, and in October 1998, promotion to executive vice president.
"Well," she modestly concedes, "life isn't entirely an accident, I guess."
People who have worked with Kunz describe her as open, engaging, personable, curious, straightforward, very determined to get to the point, and so self-confident that she doesn't even try to look omniscient in front of other people at a meeting. Marakon's McTaggert is still surprised by the ease with which she says, "I'm not sure I understand. Could you back up and go over that again?" Run-of-the-mill CFOs, it seems, would rather drive aimlessly on than stop and ask for directions. Not Kunz. It's true that she emphasizes listening, building relationships and other elements of what some consider a feminist approach to business management. But those elements of executive style turn up in the work of all "visionary" CFOs, men and women alike. In fact, they are the very attributes that separate the "visionaries" from the "Old Joe's."
"I consider myself a very straight person," she says. "I try not to be harshly blunt, but I think there's rarely a mixed message between me and the people I'm speaking with." She has always worked hard to include in her perspective the motivations and priorities of line managers, and her one regret about her own career is that she didn't get line experience earlier on, because "It's important to understand the other side of things. As much as I try to be in tune with it and listen and appreciate it, living it is different."
But even the most understanding CFO has to stand for something herself. In Kunz's case, that something is shareholder value.
"Sometimes the business can live in its own world and forget who owns it and what the real obligations are. I think a business certainly needs to make customers and employees happy and have good relationships with suppliers, but the constituency missing in that list is the shareholder. In order for the company to be successful, the shareholders' priorities must be understood down the line."
In other words, the CFO is an outsider's insider. Playing the position well means keeping line management aware of what providers of capital expect from the company, and defending shareholder value aggressively. That awareness is important in any publicly held company, but ITT Industries needed it more urgently than most when Kunz joined the organization.
"ITT Industries was created by the split up of ITT," she explains. "It's important and interesting to note that we'd never worked together as a company toward a single objective. My perception is that the businesses ran very independently. The planning process was broken. So value-based management is very important for the company, not only to define our objectives in commonly understood terms, but also to define the process by which we can discover and deliver value. When you're driven by economic value creation, it forces you to look at your current position in a very grounded way, not optimistically, but to look at alternative approaches to enhancing value and select the best on the basis of the assessment of the value it can create. It puts rigor and discipline into your thinking."
When Kunz came aboard, ITT industries had a grab-bag portfolio of businesses that included semiconductors, automotive parts, lighting and oceanside real estate in Florida, among other flea-market collectibles. "We still have a lot of this junk," she says. "Spending time on that kind of activity is not what we should be doing." Kunz evaluated the businesses through the lens of shareholder value creation, and took on the job of divesting all but a few pieces of ITT Industries' automotive business.
Why divest? "A conglomerate is attractive as an investment when it delivers predictable earnings-per-share growth, and that's very difficult to do when the portfolio is unbalanced or too deeply cyclical." Yet ITT's cyclical, capital-intensive automotive business, the lowest P/E business in the portfolio, contributed nearly two-thirds of the conglomerate's revenues. So from a shareholder-value perspective, the decision to sell was clearly right.
Kunz disposed most of the multibillion-dollar automotive portfolio this year. Thanks to an overheated M&A market, she sold the businesses for great prices. The company kept only a handful of specialized automotive units with extraordinarily good growth prospects. CFO Kunz now runs them. So at last she's getting the line experience she needs in order to take the next step up the ladder. "I want not only to be the best CFO I can be, but also to be the contender for the CEO job," she says.
DENNIS DAMMERMAN GENERAL ELECTRIC CO.
[As this article goes to press, Dennis Dammerman has just been named vice chairman of the board and executive officer of General Electric, and a member of the Corporate Executive Office. He also has been appointed chairman and CEO of General Electric Capital Services, the financial subsidiary that contributes 40 percent of GE's revenue.
As vice chairman of GE, Dammerman will continue to work closely with CEO Jack Welch and other members of the executive office in running the entire General Electric company. In his role as chairman and CEO of GE Capital Services, the 53-year-old Dammerman will also be riding herd on a diverse portfolio of financial businesses including credit cards, large-scale project finance and leasing. Financial Executive congratulates him on the move and takes this opportunity to say we told you so - the man's a visionary.]
"I tell the young people coming up in our ranks that you get a pat on the back and maybe some incentive for being a good member of the team - but you get fired for being a poor controller," Dennis Dammerman declares dryly.
Dammerman had his already-high consciousness of the importance of control raised a few notches more when fate dropped him into the middle of the Kidder Peabody scandal in 1994. He must have felt like the broom and shovel man behind an intestinally challenged elephant. Dammerman had to figure out what to do with an $80-billion-in-assets Wall Street business tainted with allegations of falsified trades and cover-ups by higher-ups. "It was like our worst nightmare coming true," he recalls with an audible shudder. "The only role model was the liquidation of Drexel, and that was not an appealing one."
The lesson: Never let any function become so dominant that controllers are afraid to say 'no'. "The fixed income piece of Kidder made more money alone than all the rest of Kidder added up together, so the organization handled fixed income with loving care. In fact, to say they lived in fear that something would go wrong with fixed income is not an exaggeration. So if some poor controller wanted to make an issue of something, it was tough. Nine out of 10 times, if not 99 out of 100 times, the controller was going to lose."
Saying no is always a ticklish part of the job. One of the best reasons for pushing the envelope of the finance function is that a good relationship with the line allows the CFO to be seen as a problem solver rather than a barrier builder. "It's the up front involvement that's the key," Dammerman says. "To those people who say, they didn't invite me to the meeting, how could 1 get involved - I say that everybody is so busy these days that if you add value, people are always going to invite you to the meetings."
Knowledge, the saying goes, is power, and their position at the center of the information grid empowers CFOs to drive change. For example, Dammerman tells the story of GE's much-praised Quick Response initiative. Several years ago, the appliance business found itself in a paradoxical situation. Inventories were going up, yet the unit kept running low on stock. "The problem wasn't that we didn't have enough inventory, but rather that we had the wrong inventory. The forecasts used for production planning were 90 to 120 days old. The only way to solve the problem was to reduce the time between forecast and shipment. Because the finance function was the first to recognize the problem, the CFO of the appliance division ended up driving the Quick Response initiative, which eventually spread throughout the whole company."
* We asked Dammerman to tell us what he thought is the biggest challenge that all financial executives will face in the next few years - the issue that ought to be on every financial executive's agenda. "Flexibility, not getting locked into any hard and firm position, is the key to success in the global environment," he answered. "You have to plan and think ahead and position yourself, but the real key is to anticipate change, recognize it, think of it as opportunity, and be quick to assess the risks that accompany it." No one expected what happened in Asia last year, and it's not through happening yet. Currency depreciation has cut Korean wage rates to half of their levels a year ago, and there's a global capacity glut in a long list of industries. A market has disappeared, in the short term, but savvy corporate investors have a once-in-a-lifetime chance to position themselves globally for the long term.
On a more positive note, no one anticipated the incredible boom in U.S. power demand that boosted the market from four gigawatts last year to 31 gigawatts this year, tripling GE's U.S. power generation orders, Dammerman says. "Last year, we were scratching our heads wondering where growth was going to come from in that business. Things change fast, so you'd better be fast to change," he concludes.
JAMES CHESTNUT COCA-COLA COMPANY
James E. Chestnut moved into the CFO's job at the Coca-Cola Company in 1994, following his predecessor, Doug Ivester, who stepped up to CEO. That fact alone almost tells the whole story of what it means to be the CFO at Coke.
Chestnut is far too skilled at corporate diplomacy to speculate openly about the road ahead, deftly deferring the obvious question with the shocked protest, "I never expected to get to this level!" But his career shows evidence of careful grooming.
Breadth of scope is the first filter through which a CFO must pass on the way to the top tier of the profession, and it's a filter that Scottish-born Chestnut glides right through. He joined Coke 26 years ago, in London, and the company began to stretch him immediately. He served a tour in every finance post in the office before being shipped off to South Africa in the early 1980s on an assignment that was, as he says, unusual for a finance person.
"As part of the broader strategic thinking on the skills we needed to develop in the company, I was sent to South Africa, the only country where we had any major interest in bottling, to learn the business. The assignment was to cover everything, so I spent time going with salesmen to visit customers, working on the line in production, even riding around on trucks," he recalls. Coke's subsequent bottling strategy has been both praised and blamed. Praised, because it allows Coke to function almost as a vertically integrated company without actually sinking capital in low-return bottling and distribution networks; blamed, because cannily timed sales of equity interests in bottlers have now and then given the bottom line a helpful boost. Like it or not, though, no one suggests that Coke's meticulously planned relationship with its bottlers is anything less than astute.
Chestnut handled that assignment so well that the company rewarded him with a transfer to the Philippines, during the last years of the Marcos regime, the financial heart of darkness. "It was a deliberate move on the part of the powers that be to give me broader experience and more responsibility," he says forgivingly. "The thing I'm grateful for is that I've worked for some fantastic bosses." Then he returned to Atlanta to get a bit more treasury experience before crossing the international date line again to spend almost five years as CFO of Coke Japan. He returned to the United States and served nine months as controller, and took the CFO title in July, 1994.
Coke's CFO is responsible for information systems, one of the company's most important capabilities. "We've been investing heavily in information for many years," Chestnut says. "One of the great strengths of our company is that we are plan-driven. Our planning process is key to everything we do. On a monthly basis, we have revised budgets coming in from every business in almost 200 companies in the world."
Among his current priorities is Project Infinity, an ambitious scheme to bring together financial, sales, human resources and other business data flows in a single, fully integrated information system built on a backbone of SAP software. Consumer information systems, also part of his mandate, are no less comprehensive.
The objective and the unifying theme of the Coca-Cola Company is shareholder value. Coca-Cola was far ahead of the curve in looking at its business from the perspective of the shareholder, an initiative pioneered by long-time CEO Roberto C. Goizueta in the early 1980s.
"A lot of businesses in those days didn't cover their cost of capital, and the focus on value creation helped management to understand what businesses we should shed," Chestnut explains. By the late eighties or early nineties, that job was done, but the idea that any business or project must create value above its cost of capital is now so deeply ingrained in the company's culture that it shapes everyday behavior.
"Anyone in the organization could talk about what value means and their part in contributing to it," Chestnut avers. "You can use it as a tool to train people to really understand what drives value, so they can focus on those value drivers and ignore everything else. It takes economic profit down to the level of the individual, so there's a personal identification with value creation."
JUDY LEWENT MERCK & CO.
What list of visionaries is complete without perenially hailed CFO Judy Lewent? An MIT alum who came to Merck from Pfizer in 1980, Lewent wasted no time putting her stamp on the place. Her forte was and remains finding ways to apply financial engineering technology to business problems that no one ever thought of in financial terms before - thus her creed: "Knowledge is king."
Lewent joined Merck as director of acquisitions and capital analysis. Soon she was hard at work on a model for making R&D decisions. On the face of it, her job seemed to have nothing to do with R&D, but she saw that R&D isn't just a set of science problems - it's a strategic investment, perhaps the single most important a pharmaceutical company makes.
So she built a sort of option-pricing model to evaluate the risk and return of each research project and quantify the decision of whether or not the projects made financial sense. She called it the Research Planning Model. If scientists resented the intrusion on their turf, they were nonetheless impressed with the intellectual firepower Lewent brought to the process.
She hadn't gone to MIT for nothing. Her Research Planning Model used a Monte Carlo simulation to randomly and repeatedly select data points and calculate the range of outcomes for "pessimistic," "expected" and "optimistic" scenarios. The data set includes everything that might influence a project's risk or payoff: economic factors like interest rates, exchange rates, inflation; the science itself; the capital investment required to do the project; the cost of making and selling the product if one is discovered, and the expected revenues.
Merck began to use Lewent's Research Planning Model in 1983. If she had done nothing more, she would have done a lot. But she was just getting started.
The year Lewent joined Merck, the Misery Index put Ronald Reagan in the White House. In an attempt to wring inflation out of the economy, Fed Chairman Paul Volcker converted to Milton Friedman's monetarist creed and pushed interest rates up. Investors saw a bonanza in those high rates, so demand for dollars soared, bidding up the currency's price.
By 1983, American corporations were reeling, battered by foreign competition. Whole industries were being wiped out. People were beginning to talk about a Rust Belt in what had been the Steel Belt.
Caterpillar had to worry about the dollar because as the dollar got strong, Komatsu's tractors got cheaper in dollar terms. Ford and General Motors had to worry about Toyota for the same reason. Merck didn't have a big Japanese competitor, but almost 40 percent of the company's revenues came from Europe. As the dollar got stronger, the pounds, marks, lira and francs bought fewer dollars and Merck's earnings took a hit. That much was plain from the annual reports.
Asked to look into a hedging program, Lewent found that Merck did what most companies do when earnings turn down - make cuts. In Merck's case, the biggest targets for cuts were the R&D and capital budgets. Cutting these when the dollar got strong meant gambling the company's future on the vicissitudes of the currency market. No one would argue that this is a good idea. But it's the kind of thing that's not obvious at all until someone with extraordinary vision points it out.
There are several ways to deal with the problem. One is to do nothing - simply explain to analysts and investors that the company will occasionally suffer serious temporary setbacks because of currency market events. Some CFOs have opted for this course, betting that in the long run currency ups and downs will cancel each other out. In the long run, though, some companies are dead, done in by competitors who played a currency card to their own advantage.
At the other extreme, some CFOs lock in the dollar value of every foreign sale with forward contracts. This guarantees that the company will be able to count on a certain sum of dollars, but it is inflexible, and means that the company cannot benefit when the currency markets move in its favor.
Lewent picked a middle path. "We have accepted it as the natural state of business that our P&L is subject to currency fluctuations and dampened the volatility through hedging," she says. She and her team calculate an acceptable level of risk that the company is willing to assume, and hedge away the excess with options. The hedging decision process begins with a series of mathematical analyses of Merck's future sales and cash flows over a three- to five-year horizon. "Then we layer in different hedging strategies," she explains. "We layer in all kinds of option vehicles, whether rollover or annual hedges or hedges going out multiple years, and calculate what the distribution of cash flows looks like after each of these scenarios."
Many CFOs shy away from options, which can look expensive because of the up-front premium cost. Mathematically, though, an option can be a zero cost hedge, because if priced correctly, the option premium will exactly equal the expected cash flow. Lewent says that Merck sticks to "plain vanilla" options, but that's modesty talking. Her idea of plain vanilla includes complicated multi-currency basket options whose price depends on volatilities and correlations of all the currencies in the basket, and other financial engineering inventions that look plain only to quants comfortable with long equations full of Greek letters. But Lewent's team of quants can hold its own against the best on Wall Street.
"You need people who really understand every item and nuance of every derivative price and product offered to you by financial institutions," she says. "Once you have that and understand your own analysis, you can benefit from a lot of the expertise that financial institutions have to offer."
RELATED ARTICLE: Can You Become Far-Sighted?
While contemporary CFOs increasingly are asked to be conjurers, seers and wizards, the tools they need to peer into the business future have come a long way since Merlin's day.
"The CFO of the 21st century needs to be not only a business partner but more of a visionary and assist in the strategic plan of his or her company. More and more, CEOs rely on their CFOs to work with them on that particular area." So says J. Rucker McCarty, partner-in-charge of the CFO practice at Heidrick & Struggles. "Today's CFO has to plan where the organization might or should go as opposed to the CFO of the past, who reported what happened in the past. And to be strategic, you have to have vision."
Does that mean you need ESP and a bunch of arcane apparatus? Not really. "Some people have a knack for being able to determine what the next wave might be. There could be an element of luck, too," McCarty says. "But vision is also a skill, because these people are also well informed. They understand the competitive nature of their business and the next areas the company may need to enter."
As a skill, then, McCarty thinks vision can be developed. "I'm a big believer that you can get better at anything but need some innate ability," he says. "It's like being a golfer. Will I win the Master's? No. But I can get to be a lot better golfer than I am now. Some golfers start late in life, practice hard and get to be good." Start by reading: "studies of companies, positions they've been in and what they've done to break out of the mold." Then think, hard. "Ask yourself what the factors are that would make a difference in going forward. Walk through the various effects a transaction or move would make."
Of Telescopes and Ouija Boards
How far into the future should a CFO look?. McCarty thinks the boundaries of the typical three- or five-year strategic plan are fine. "if you look too far into the future, you could get tripped up by the present - things change so fast," he says. "A good CFO would make sure Y2K is a non-event, then look toward the first couple of years into the millenium. You may have the grandest plans for 15 years out, but things you never thought of might crop up. So don't look too far - but if you do, consider a lot of different scenarios."
Periodically revisiting the vision is a good idea, too. McCarty thinks the minimum is yearly but notes some CFOs consult their internal Ouija boards quarterly. "You've got to be adaptable," he notes. "Not everyone is right about everything. There are a lot of people who have good gut feelings. CFOs are uniquely postured because more and more understand their business. If they're truly visionary, that allows them to identify trends or ways the company should position itself."
And if the vision turns out to be a mirage or a mistake? "An effective leader realizes early on a vision may not be right and alters the course of where the company might be headed," he says. "You don't want to go too far down the road and have a disaster on your hands - you'd lose the trust and faith of both the people following you and the investor community. A good leader will hit more homeruns than strikes. But if anybody knew all of what the future holds, he'd be infallible - not in business, but probably just investing in the stock market."
While generating and shaping a vision is difficult, imparting it may be even trickier - McCarty says it takes "a very special talent." The person who does so, he says, "has to be charismatic and have communication skills to sell that vision to the CEO and others in the company. The company as a whole has to embrace the vision; it's not always easy getting people aboard the train." That's why, he adds, "More and more CFOs are being selected for their ability to communicate both internally and externally. It's an important skill set companies look for."
And what does McCarty's crystal ball behold for CFOs themselves? "A lot of CFOs in the next millenium will have the opportunity to move into the CEO ranks," he says. "That will have a lot to do with having vision and with the fact that they understand why things affect various segments of the business. More CFOs are tied to strategic planning and to their CEOs. That makes them logical successors." - C.L.G.
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|Title Annotation:||chief financial officers|
|Author:||Millman, Gregory J.|
|Article Type:||Cover Story|
|Date:||Jan 1, 1999|
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