What's in a name: CFO or CVO?

Finance has always played a pivotal role in measuring and managing the health of business. This dates to ancient civilizations when accounting was introduced to keep record of goods received and traded. Yes, track inventory and calculate profit. The finance landscape evolved with globalization, new businesses emerging, technological advancement and increased regulation.

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Having had the privilege to serve as CFO across diverse businesses and cultures, in both public and private settings, I saw different facets of finance. Recent reading about the Chief Value Officer (CVO) inspired me to start sharing insights on how finance leaders can drive their business value impact beyond being the finance custodian.

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Let's explore five areas reshaping the finance role in our rapidly changing landscape: ?? ?

1.???? Redefine the delivery of timely, accurate and relevant financial information.

2.???? Go beyond the numbers to create true future value.

3.???? Be prepared that automatization will change the finance office as it did factories in the 70s.

4.???? Rethink Enterprise Risk Management as new risks and opportunities unfold.

5.???? Prepare for the evolving expectations of a multi-stakeholder economy.

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1.???? Redefine the delivery of timely, accurate and relevant financial information. Technology continues to progress and recently, the move has accelerated. From the introduction of desktop computers, ERP systems, automated payments to data science, artificial intelligence, including ChatGPT and new digital solutions. These technologies keep enabling for faster information and improve analytical capabilities. At the same time, we still use batch reporting because we only provide the financials after we close the books. From monthly results, quarterly reviews to annual financial statements. All issued at the end of the process, with the time lag of the financial close.

The question is: Will the next generation of CEOs demand faster information as they have grown up with an "immediate and instant" mindset? Young people entering the workforce never received a printed monthly bank statement. They only know about instant and digital access to their financials, news, or any other information for that matter. Monthly batch reporting will have less -or no- meaning to them. For CFOs to get ready for this next generation of leaders, a comprehensive understanding and adoption of innovative technology will be a must. And learn to provide more "instant" financial information in a self-service way to match the new mindset of leaders. Instant information is not it though. New technology, including generative AI, increases the ability to access more data and creates new ways to analyze data to steer the business. As it allows to analyze unstructured data faster and with better accuracy. Breaking down data by customer, store, product, or even individual lines. We can get instant cross-dimensional analysis of geographies by product, trend by customer etc. Technology enables to break-down the average to a new level and add different insights -instantly- to identify specific business improvements at the level where they really matter. Coupled with the ability to add non-financial data into the analysis you can create a whole new level of insights to improve value. Creating targeted actions which people can relate to and act upon.

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This will impact the way business reviews are managed. Too often, today presentations are too aggregated, with people playing the average to have leadership hear what they want them to hear (versus what you really need to know!). They tend to be long as we go through all the slides and analysis presented.

Like going to a doctor and you need to see all the x-rays and tests before getting the prescription. ?With technology, CFOs have a unique opportunity to behave like doctors and create in depth business and organizational health assessments. Such new approaches will have to be more dynamic and targeted (and people will better relate to such insights because it applies to them versus the average results of all people). Timely will also include self-service and digital portals. Generative AI will bring self-service to a new level. This will further drive empowerment and ownership as people can self-diagnose and improve their results.

2.???? Go beyond the numbers to create true future value. Finance started with accounting to calculate the results. Financial value will always be expressed in a number. A lot is written about the impact of using different valuation approaches. Is NPV better than ROI, pay-back or IRR? How to discount future results and calculate a terminal value? All relevant to calculate the right valuation number but the real question lays in assessing whether the numbers behind the calculation are the right one. Asking "how financial results are delivered" or "what's behind the number". This is the quality of earnings question. How thick is the ice below the water which we cannot see. Was the margin delivered at the expense of sales growth or did growth come at a lower margin? How does cashflow compare to profit and if it lags why? Was capital expenditure above or below depreciation? And how much was invested in R&D or the future? We can add more of such questions to show the importance of going beyond the financials. These questions are all about finding out whether the right decisions and investments are being made to sustain the growth and stay relevant in an ever-changing market. For example, store appearance (outdated or new and ready for the next generation of customers), state of factories (ready for e-car or still producing fax machines), IT technology (adoption of cloud, cyber, AI, digital solutions) and the state of the R&D portfolio. Therefore, it is imperative for finance people to go to the store, factory, shared service center, visit suppliers and meet customers. The numbers in the spreadsheet simply don’t tell the full story. Never forget that the P/L actually stands for People and Leadership. So, we finance leaders must see, smell, taste, feel and touch the business to value the financials. One cannot stress the importance of this enough to the next generation of finance leaders. Do not be fooled by your busy schedule of making power point and excel presentations. The answers are not in your spreadsheet. Spreadsheets add up numbers but will not tell you whether the numbers are adding, or creating, value. Personally, I am grateful for the many brand managers, plant managers and salespeople who took me on the road and made me sell or work in the factory. Even ChatGPT will not be able to do this.

This skill of "going beyond the numbers" will become even more relevant as business is becoming more transformative and disruptive. The average life span of a company in the S&P 500 is less than 18 years today versus over 60 a generation ago. Funny enough, the average S&P 500 P/E ratio stands at 23 times earnings. So, more than the average life span of the S&P 500 index (pay 23 times earnings for a set of companies with an average life span of 18 years). It reiterates the importance of looking beyond today's financials to assess the true valuation. And confirms the need to build even more transformative business agendas. Answering how the business will transform to stay relevant in a more disruptive world.

We already talked about creating new analysis which go deeper and further (including adding non-financial data). Have you thought about adding non-financial KPIs to your financial updates to provide the lead, or predictive, indicators of future value creation.

So, the KPIs that predict the future financials. Customer satisfaction, employee engagement, product quality, store refurbishment, innovation, adoption of new technology, product quality, digital sales, ESG criteria (covered in point 5) are just examples. Do you have such predictive KPIs identified for your business? And do you present the financials together with them. Showing how the business performs with today's financials and transforms to shape tomorrow's value with the predictive value KPIs ("Perform today and transform to tomorrow"). ?It also emphasizes the importance of finance leadership in strategic planning. This is where we can make a real difference. As mentioned, a strategic plan needs to: 1. Address how to keep performing, 2. Where the business needs to transform to stay relevant including the relevant innovation. One could debate to even separate transform and innovate as both are crucial to stay relevant in a more disruptive world. Remember the disclaimer: past performance is no guarantee for future results. Together with new technology, finance has a real opportunity to create more impactful strategic plans. And don’t forget to leave your desk ones in a while to go beyond the numbers. ?

3.???? Be prepared that automatization will change the finance office as it did factories in the 70s.

Cars became much more reliable with robots and technology. Our financial reporting factory still feels more like the car factory of the 70s. Too much paper, disconnected systems, rekeying data still happening too many times and different complex processes and reiterations. We need the 3 lines of defense to secure "total quality": the 1st line to produce, a 2nd line to validate and internal audit, the 3rd, to oversee it. We don’t even talk about -the cost for- the external auditor to double check it all again. Like in the old days of manufacturing, many people checking to secure quality versus an approach of "first time right". ?It is worth to read about the management theory of Joseph Juran, who moved to Japan in 1954, or study LEAN management. It fundamentally changed manufacturing and can be successfully applied to modernize our finance factory. With automatization and AI coming to our office, we can move to the "first time right" approach like in manufacturing with no human error. Enabling faster delivery of better information, eliminating -unnecessary- checks and delivering a step change improvement in transactional processes such as invoice passing, payment processing and expense accounting. This opens the door for a much improved (and wanted) finance client satisfaction with business partners. Data science is another area with many practical applications. Upskilling our accountants to work with data science experts to optimize and automate processes. It can also be used to check large complex data fast to enable automated controls. Eliminating the need for manual spot checks. For example, at one company, we used data science to implement lease accounting (thousands of contracts around the globe in different languages). It was implemented in matter of weeks. ?

In all of this we should not forget that new technology will have a profound impact on the finance workforce. Processes will be automated like in manufacturing. New tasks will emerge and reskilling our people will be critical to prepare them for the new jobs that will emerge. We need to bring our people from the "back office" to new "front office" roles and become more commercial. ?

4.???? Rethink Enterprise Risk Management as new risks and opportunities unfold.

We saw the world changing over the last 30 years. Mortgage rates were over 10% in 1990, "developing markets" are now 40% of the global economy and today we wear our clothes maybe 7 times before tossing them. Companies like Amazon, Apple, BYD, Google, Meta, Hello Fresh, Tesla and Zara became new global players.

We probably don’t know what the next 30 years will bring. ERM, or Enterprise Risk Management, is designed to prepare our business for future risks and opportunities.

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The area of risk management has become more prominent since the mid-1990s creating new tasks for finance. Many institutions issue yearly lists of material risks to be prepared for.

Honestly, ERM, or risk management, has been a more challenging area for me. On one hand, we spent a lot of time on identifying the risk areas. Some events identified created work and the risk never appeared or had no material impact. Who remembers the Millennium bug problem. Other events did occur and were not on our ERM list, such as the 2009 financial crisis and COVID. Sometimes I wonder whether we would be better of accepting that we don’t have predictive wisdom ("we are not Harry Potter"). Maybe we are better off to start preparing when they do happen like we did with COVID.

One other challenge I see is that for the risk areas which are more obvious, as they are happening, like misinformation, climate change, armed conflicts, or erosion of social cohesion it has not always been easy to translate them into tangible actions as their impact can be too abstract or remote. So, it became hard to engage the organization to really work on them.

Don’t get me wrong, I get the importance of risk management. Better to drive a car with seat belts and ABS brakes when traffic is getting busier and less predictable. Therefore, important that we draw the right lessons and rethink our risk management as the world will continue to provide new challenges. ? First, we have to give it to the right people with a true meaning. ERM should not be organized as a "side job" lower in the organization with the risk that it becomes a checklist exercise. It must be an integral part of running the business. Embedded in the strategic planning, business reviews with clear decisions and relevant actions. So, part of running the business and not a separate ERM exercise. Yes, not just the tone at the top but true ownership at the top. In the end the objective of ERM is to build a stronger, more resilient business. ?

Dealing with the risks of new technology is another ERM area to explore. Misinformation can hit our business any moment just like cyber-attacks became a new reality. Creating the actions and keeping them both concrete and manageable will be harder than identifying the risk area.

Learning from the 2009 financial crisis and COVID, the agility to adjust to unexpected new realities is a relevant skill to muscle. Having a crisis response team in charge who acts when it happens (no hypothetical scenarios yet a team prepared to act in a real crisis). ?"Solve the shit when it happens" and "don’t worry about the issues that could happen" as a business leader once framed it to me.

Finally, develop a clear list of risk KPIs the business always needs adhere to. Think of minimum cash levels (and where to keep), concentration limits not to cross, debt maturities, people retention, system KPIs, back up technologies and reputation risk KPIs (areas to never to be in the news for). ?This way you can stay focused when there is a risk crisis without distraction.

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5.???? Prepare for the evolving expectations of a multi-stakeholder economy. Thinking multi-stakeholder is not new. Employees, customers, governments, communities, and investors were always relevant, yet are becoming more vocal and demanding. Businesses are also, more and more, realizing that sustained growth needs all key stakeholders. The evolving ESG frameworks support this journey as they identify and measure the material stakeholder topics. Business leaders already have made many ESG promises to align with the global goals and the 2030 agenda for sustainability. While 2030 looks far away, stakeholders expect results and will hold business accountable. Do you have the plan to deliver on your business ESG promises (which are commitments).

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ESG regulation is also catching up rapidly creating new expectations. Are you up to speed with all the requirements of CSRD, SFRD, AIFMD, ISSB, the climate benchmark directive and the new taxonomy to name a few. Yes, we need to study and master these new acronyms as they spell out the new ESG 'accounting' rules and disclosure requirements. Measuring the ESG footprint alongside the financials is becoming a new reality. Therefore, finance needs to own ESG like the P/L.

Today, ESG is not part of the P/L tomorrow ESG will be an extension to the financials. That’s why shareholders also start to ask the ESG question because they know it will impact tomorrow's valuation. ?

Therefore, there is a new role for ESG finance:

·?????? ESG commitments have been made: do you have the plan to deliver?

·?????? Do you have the metric in place for all material ESG topics and regulations?

·?????? Assurance of required ESG disclosure: timely, accurate and relevant?

·?????? Are the cost and investments to deliver the ESG plan clear?

·?????? Multi stakeholder communication: what is your role?

·?????? Do you believe and advocate the value of a multi-stakeholder approach?

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In summary, the five areas are there to stimulate us to reshape our finance role. Feel free to add or adopt. Now, what's in a name: CFO or CVO? ?We remain CFO with the F for finance yet understand that our role goes beyond collecting today's financials. Shaping future value and create stronger, resilient future proof businesses is what really matters. And we should never forget our people and prepare them for the changes as technology will fundamentally change the finance office. Let stakeholders and business partners recognize us for our role as value creators (the CVO role). We don’t need to change our name yet know what our brand stands for: shapers of future value.

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January 31st, 2024

?Hans Ploos van Amstel