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The Essential CFO

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Founded in 1807, John Wiley & Sons is the oldest independent publishing com-pany in the United States. With offices in North America, Europe, Asia, and Australia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Corporate F&A series provides information, tools, and insights to corporate professionals responsible for issues affecting the profitability of their company, from accounting and finance to internal controls and performance management.

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The Essential CFOA Corporate

Finance Playbook

BRUCE NOLOP

John Wiley & Sons, Inc.

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Copyright © 2012 by Bruce Nolop. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

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Library of Congress Cataloging-in-Publication Data:

Nolop, Bruce, 1950– The essential CFO: a corporate finance playbook/Bruce Nolop. pages cm.—(Wiley corporate F&A) Includes index. ISBN 978-1-118-17304-6 (pbk.); ISBN 978-1-118-22689-6 (ebk); ISBN 978-1-118-24003-8 (ebk); ISBN 978-1-118-26463-8 (ebk) 1. Chief financial officers. 2. Corporations—Finance—Management. I. Title. HG4027.35.N65 2012 658.15—dc23 2011048566

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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To my mother, Barbara Sandager Nolop

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vii

Contents

Introduction xv

PART I: STRATEGY

Chapter 1: Articulating a Strategic Plan 3

Business Objectives 4Strategic Themes 5Long-Term Financial Model 7Total Shareholder Return 10Capital Allocation Strategies 14Acquisition Strategies 15Target Shareholders 17Elevator Pitch 20Plan Revisions 21

Chapter 2: Communicating and Achieving Alignment 23

Consistency and Transparency 24Incentive Compensation Programs 25Investor Alignment 28Analyst Relations 29Investor Presentations 31Company Website 35Social Media 36Media Relations 37Potential Media Pitfalls 38Coordinating Communications 39Interview Formats 39Media Training 40Note 42

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viii ◾ Contents

Chapter 3: Assessing Enterprise Risks 43

Enterprise Risk Management 43Implementation of ERM 44Risk Identifi cation 45Risk Quantifi cation 46Major Exposures 47Mitigation Strategies 50Rewarded versus Unrewarded Risks 51Governance of ERM 52CFO’s Role in ERM 54

PART II: CAPITAL ALLOCATIONS

Chapter 4: Estimating the Cost of Capital 59

WACC Formula 59Hurdle Rates 63Risk Premiums 63Acquisition Cost of Capital 65

Chapter 5: Prioritizing Capital Investments 67

Cash Flow Projections 67Investment Budget 68Evaluating Projects 71Categorizing Projects 74Monitoring Projects 75Pension Fund Contributions 77

Chapter 6: Considering Dividends and Repurchases 79

Dividend Policy Alternatives 80Dividend Policy Considerations 82Special Dividends 85Dividend Declarations 85Repurchase Considerations 86Open Market Programs 90Tender Offers 92Retaining Strategic Cash 92Cash Investment Policies 95

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Contents ◾ ix

PART III: MERGERS AND ACQUISITIONS

Chapter 7: Identifying Acquisition Candidates 99

Rationale for Acquisitions 99Adjacent Spaces 100Portfolio Approach 101Business Sponsor 101Patience and Flexibility 102Strategic Purpose 102Types of Acquisitions 103Note 107

Chapter 8: Evaluating Acquisition Candidates 109

Valuation Methodologies 109Standalone and Synergy Values 112Pro Forma Analyses 113Acquirer’s Stock Valuation 116Risk Considerations 116

Chapter 9: Executing a Merger or Acquisition 119

Due Diligence 119Business Plan 123Financial Projections 124Financing Plan 126Price Negotiations 128Contract Terms 129Acquisition Integration 132Note 134

Chapter 10: Executing Divestitures and Spinoffs 135

Divestiture Evaluations 135Hiring Investment Bankers 136Auction or Negotiated 137Stock or Assets 139Financing Conditions 139Management Participation 140Tax-Free Spinoffs 141Split-Ups 142Equity Carve-Outs 143

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x ◾ Contents

Chapter 11: Responding to Takeover Offers 145

Governance Policies 145Reviewing an Offer 146Conducting a Sale Process 148Activist Shareholders 149Going Private Transactions 149

PART IV: FUNDING

Chapter 12: Establishing Capital Structure Objectives 153

Leverage Targets 153Leverage Criteria 155Rating Agencies 157Ratings Categories 158Rating Agency Dialogues 160Ratings Criteria 161Informing Investors 162Note 163

Chapter 13: Developing Financing Strategies 165

Financing Principles 165Debt Financing 167Equity Financing 171Off Balance Sheet Financing 174Debt Covenants 177Debt Refi nancings 179Debt for Equity Swaps 180Bankruptcy 182

Chapter 14: Ensuring Short-Term Liquidity 185

Bank Lines 185Cash Planning 187Contingency Planning 187Liquidity Ratios 189Working Capital Strategies 189Trapped Cash 191

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Contents ◾ xi

Chapter 15: Obtaining Long-Term Financing 193

Venture Capital 193Private Equity 194Initial Public Offering 195Subsequent Equity Offerings 198Term Loans 200Syndicated Bank Loans 200Investment Grade Securities 200High Yield Securities 201Strategic Alliances 202Note 203

PART V: PERFORMANCE

Chapter 16: Driving Business Performance 207

Organic Revenue Growth 207Cost Reduction Strategies 211Fixed versus Variable Costs 219Note 219

Chapter 17: Providing Planning and Analysis 221

Budgets 221Forecasts 225Cash Flows 226Performance Metrics 228Business Unit Metrics 231Performance Reports 232Business Analysis 233

Chapter 18: Managing Financial Risks and Taxes 235

Insurance 235Interest Rates 238Currencies 239Commodities 241Infl ation 242Pension Fund 243Tax Planning 244

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xii ◾ Contents

PART VI: ACCOUNTING AND CONTROLS

Chapter 19: Establishing Accounting Processes 251

Financial Reporting 251SEC Filings 255External Auditors 259Audit Committee 259Note 260

Chapter 20: Communicating Financial Results 261

Earnings Call 261Non-GAAP Measures 266Earnings Guidance 267Note 271

Chapter 21: Implementing Sarbanes-Oxley 273

Overview of Provisions 273Auditor Independence 274Certifi cation of Financials 275Assessment of Internal Controls 276

Chapter 22: Reinforcing Compliance and Controls 281

Control Environment 282Auditor and Board Support 283Foreign Corrupt Practices Act 285Fraud Prevention 287Whistleblowers 287Cost of Compliance 288Note 289

PART VII: LEADERSHIP

Chapter 23: Achieving Finance Transformation 293

Organizational Structure 293Technology Systems 298Process Reengineering 301Outsourcing Advantages 303Outsourcing Implementation 305Analysis versus Data 308

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Contents ◾ xiii

Chapter 24: Developing Financial Talent 311

Recruitment Strategies 312Development Objectives 316Development Tools 320Diversity 325Future Requirements 325Note 326

About the Author 327

Acknowledgments 329

Index 331

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xv

Introduction

THE ROLE OF THE CHIEF FINANCIAL OFFICER (CFO) has evolved at a breathtaking pace in the twenty-fi rst century. As the last century came to a close, fi nancial engineering was in vogue and the recent win-

ners of CFO magazine’s prestigious “Excellence in Finance” awards—along with glowingly positive stories—included Scott Sullivan of WorldCom, Andrew Fastow of Enron, and Mark Swartz of Tyco International. This proved embar-rassing when all three of these award winners were later indicted for their malfeasance.

EVOLVING JOB DESCRIPTION

Not surprisingly, it wasn’t too long before the era of the “Financial Engineer” CFO gave way to the “Trusted” CFO. Since then, we have seen a further evolu-tion in CFO fashions from “Trusted” to “Super Accountant” to “Risk Manager” and, most recently, to “Strategic Partner” in the attributes that are most in demand by recruiters. As expressed by one recruiter, “With the accounting and controls side of the house now in order, a new CFO profi le has emerged: a strategic, operationally oriented fi nance executive who can serve as the busi-ness partner to the CEO.”1

To a large extent, the evolution of the CFO position has been fueled by external events such as the Enron and other corporate scandals; the passage of the Sarbanes-Oxley legislation; the introduction of the Fair Disclosure rule; the advent of enterprise risk management; the proliferation of new account-ing standards; and, most notably, the widespread fallout from the fi nancial meltdown and credit crisis that exploded on the scene in 2008. Furthermore, companies have experienced new demands arising from enlivened regulatory authorities and from activist shareholders, including the escalating infl uence of hedge funds and private equity investors.

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xvi ◾ Introduction

STRATEGIC CFO

Without question, the CFO position has expanded dramatically in its breadth, complexity, and criticality. In a word, CFOs have indeed become more strategic,refl ecting enhanced opportunities to impact a company’s program for deliver-ing shareholder value.

In 2005, CFO Research Services prepared a report in collaboration with Booz Allen Hamilton entitled “The Activist CFO—Alignment with Strategy, Not Just with the Business.” In a prescient conclusion, the report noted the following:

And as CEOs are challenged by the external market and their boards of directors, they increasingly need a trusted adviser to help develop and execute corporate strategy. Thus CFOs are poised to take on an expanded and increasingly activist role within their companies. As part of this activist role, CFOs are increasingly aligning their function not just with the business but with the company’s overall strategy. And by doing so, they are not just supporting the business with information and analyses, but also ensuring that the entire enterprise delivers on its commitments.2

This report also classifi ed activist CFOs within four groups:

1. “Growth navigators: CFOs who work closely with CEOs to map out an aggres-sive course to profi table growth through acquisition or organic channels.”

2. “Execution maestros: CFOs who focus on operational excellence and instill in their companies a value discipline that enables them to do more with less.”

3. “Turnaround surgeons: CFOs who step in under close scrutiny to make diffi cult decisions that others often will not make—with the goal of restor-ing ailing companies to fi nancial health.”

4. “Business model transformers: CFOs who identify opportunities for stra-tegic innovation and take advantage of them by recasting their companies’ business models and organizations.”3

More recently, CFO Research Services published another report in col-laboration with KPMG entitled “A New Role for New Times” that largely reaffi rmed the trends that it outlined in its earlier study. The 2011 report con-cluded that “The fi nance function has come to contribute more substantively to developing and executing business strategy at a great many companies in recent years.”4

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Introduction ◾ xvii

And the focus on strategy was further highlighted in 2011 when The Wall Street Journal convened the inaugural annual meeting of its “CFO Network.” The large company CFOs who attended this conference ranked “Become a Strategic CFO” as their top priority.5

Undoubtedly, these shorthand descriptions of the CFO position can be mis-leading in their overemphasis of certain aspects of the job. However, they do highlight the seemingly inexorable trend toward a CFO who is more integral to shaping and executing a company’s strategic and business priorities.

EXPANDED ROLES

It’s also indisputable that the CFO’s roles are expanding: as new responsibilities are added, the previous responsibilities don’t go away. And the CFO usually is expected to take on these additional duties while continuously reducing the fi nance organization’s headcount and cost structure.

Deloitte addressed the challenges for CFOs in managing their expand-ing scope of responsibilities in a posting on its CFO Learning Center website. It described the “four faces” of a CFO’s time allocation—Strategist, Catalyst, Steward, and Operator—and compared the desired allocation—as indicated by a survey among CFOs—with the amount of time that actually is allocated to each of these four roles. Deloitte concluded that “while CFOs desire to spend 60 percent of their time as a Strategist or Catalyst, in reality they average only 42 percent of their time in these roles.”6

As indicated by Deloitte’s analysis, while being a Strategist or Catalyst may be their preferred vehicles for adding value, CFOs nevertheless must be continu-ously focused on all of the other responsibilities that come with the job. It’s analogous to a fi gure skater who executes a triple axel to compete for a gold medal, but who must also spend countless hours in perfecting the less glamor-ous compulsories that constitute much of the judges’ scoring.

CFOs must focus on several things at once and respond appropriately to the priorities of the moment. In the real world, it’s hard to perform as a Strate-gic CFO in the face of an accounting restatement, a controls breakdown, or a liquidity crisis. In addition, their emphasis will refl ect the talents of their team, since no CFO can do everything alone and the team inevitably will comprise complementary strengths and weaknesses.

Finally, it’s worth emphasizing that the CFO’s roles are still evolving. For exam-ple, CFOs have been taking a more prominent role with the fi nancial media, help-ing to satisfy the insatiable appetite of broadcasters and websites for 24/7 content.

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xviii ◾ Introductionxviii ◾ Introduction

Although it’s unlikely that the job will evolve into the “Telegenic” CFO, it does seem inevitable that media relations will become a growing priority for the future.

ABOUT THIS BOOK

This book is organized around the seven essential roles of the modern CFO—the core responsibilities that, to a greater or lesser degree, are likely to be part of every CFO’s job description. These roles encompass responsibilities for strategy, capital allocations, mergers and acquisitions, funding, performance, account-ing and controls, and leadership.

Although not intended to be a “day in the life” of the CFO position, this book highlights the breadth of responsibilities and discusses some of the strategies, techniques, and best practices that CFOs employ in addressing their expanding roles. It provides a framework—a corporate fi nance playbook—for organizing and executing their game plan.

This playbook explicitly recognizes that there are no cookie-cutter answers and that the optimal game plan inevitably will refl ect the specifi c facts and circumstances of the particular CFO and company involved. Nevertheless, systematically reviewing their contemporary roles and responsibilities should be a benefi cial exercise for both new and experienced CFOs. More important, this playbook can be an invaluable tool for all fi nance professionals and busi-ness students who aspire to fi nancial leadership—highlighting the spectrum of skills that will be required for their long-term advancement.

At the same time, it should prove useful to accountants, attorneys, bank-ers, brokers, consultants, technology vendors, and anyone else who offers prod-ucts and services to CFOs and their fi nancial organizations. In fact, it’s hoped that it can benefi t anyone who is interested in learning more about business and fi nance from the CFO’s vantage point.

This book is divided into seven parts and twenty-four chapters. Summary overviews are provided below.

Strategy

Part One describes the CFO’s role in defi ning and communicating the compa-ny’s strategic plan—achieving alignment around business and fi nancial objec-tives that are designed to produce total shareholder return. It also discusses how the CFO focuses on enterprise risks, which goes hand in glove with the development of the strategic plan.

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Introduction ◾ xix Introduction ◾ xix

Articulating a Strategic Plan

Chapter 1 discusses the process of developing a strategic plan. It argues that this plan should guide all of the company’s business and financial strategies and form the basis for the company’s communications with investors and other stakehold-ers. The plan should incorporate business objectives, strategic themes, financial objectives, and acquisition strategies—all with target shareholders in mind.

This chapter also describes the creation of a long-term financial model—translating the strategic plan into a financial framework and confirming that the strategies will, in fact, create shareholder value. This value creation is encapsulated in the company’s goal for delivering total shareholder return, which reflects a combination of share price appreciation and dividend yield.

Communicating and Achieving Alignment

Chapter 2 provides an overview of the CFO’s role in communicating the stra-tegic plan, stressing the need for consistency and transparency in achieving seamless alignment among both internal and external stakeholders. It argues that CFOs should provide input to the design of incentive compensation pro-grams, which can reinforce the strategic plan’s objectives.

This chapter also describes the CFO’s mission in communicating the com-pany’s story to investors and the media, arguing that this has become a higher priority due to investor appetite for more information and the burgeoning of media outlets. It stresses that the CFO should help to frame the message points and coordinate consistent messaging throughout the various communication channels.

Assessing Enterprise Risks

Chapter 3 addresses the CFO’s role in assessing enterprise risks. It describes the implementation of an enterprise risk management program and highlights the unique perspectives that CFOs can bring to the program.

This chapter also highlights some of the risk areas that have become more salient in the current environment. It argues that CFOs should seek to maxi-mize the benefits from “rewarded” risks, while protecting the company from “unrewarded” risks.

Capital Allocations

Part Two reviews the CFO’s role in allocating capital, which is critical to the implementation of the strategic plan. This requires dexterous navigation

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xx ◾ Introductionxx ◾ Introduction

among competing priorities, including investment projects, acquisitions, divi-dends, and share repurchases.

Estimating the Cost of Capital

Chapter 4 describes the process of estimating a company’s cost of capital, including the determination of “betas” and the other variables used in the capi-tal asset pricing model. It also discusses the potential use of a “hurdle rate,” including the possibility of adding a fudge factor or varying risk premiums.

This chapter advocates that CFOs should use a consistent cost of capital to evaluate all of the company’s investment projects and acquisitions—without adding a fudge factor or risk premiums—and should emphasize subjective judg-ments in comparing the alternatives.

Prioritizing Capital Investments

Chapter 5 focuses on the prioritization of capital investments, describing the iterative process for establishing a capital investment budget and allocating this budget among potential projects. It reviews the evaluation criteria and empha-sizes that the investment priorities should reflect a number of factors besides net present values, including both financial and non-financial considerations.

This chapter also highlights the CFO’s role in monitoring projects after they are approved, including the value to be harvested from “real options” and the information to be gleaned about the credibility of project sponsors and the company’s track record by type of project.

Considering Dividends and Repurchases

Chapter 6 focuses on returning cash to shareholders through either dividends or share repurchases. It discusses the pros and cons of alternative dividend poli-cies and reviews the tradeoffs between paying dividends versus repurchasing shares, as well as the methods for implementing a share repurchase program.

This chapter also discusses the possibility of retaining “strategic” cash. It cites the potential benefits from greater financial flexibility—while highlight-ing the potentially negative reactions from shareholders—and stresses adher-ence to approved investment policies.

Mergers and Acquisitions

Part Three outlines the creation of value through mergers and acquisitions, which can be quicker, cheaper, and less risky alternatives to purely organic

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Introduction ◾ xxi Introduction ◾ xxi

growth. It also describes the CFO’s role in executing divestitures and spinoffs and potentially responding to a takeover offer or other strategic proposal.

Identifying Acquisition Candidates

Chapter 7 discusses the identification of acquisition candidates, high-lighting the ways that CFOs can increase the odds of a successful transaction—including sticking to adjacent spaces, taking a portfolio approach, exercising patience and f lexibility, and requiring a business sponsor who is personally accountable for the transaction. It also describes the importance of clearly identifying the strategic purpose for an acqui-sition, drawing distinctions among consolidation, bolt-on, platform, and transformative transactions.

This chapter argues that CFOs should facilitate—but not drive—the trans-actions and that the acquisitions should be motivated primarily by strategic rather than financial considerations.

Evaluating Acquisition Candidates

Chapter 8 describes the criteria for evaluating an acquisition candidate, includ-ing valuation methodologies—such as discounted cash flows, comparable companies, precedent transactions, leveraged buyout, and premiums paid analyses—as well as pro forma financial analyses. Other criteria include the impact on the company’s stock price and whether the proposed transaction will exacerbate or mitigate enterprise risks.

This chapter advocates determining both the target’s standalone value and the net value of synergies and then calculating how much of the value created is retained by the acquirer.

Executing a Merger or Acquisition

Chapter 9 reviews the CFO’s role in executing a merger or acquisition, includ-ing conducting due diligence; preparing a business plan; determining pricing parameters; arranging acquisition financing; and negotiating contract terms. It also describes the integration of an acquisition, including monitoring of results against the business plan.

This chapter describes the CFO’s role in determining the deal terms and stresses that, to avoid overpaying, the acquirer should not be too anxious to do a deal or too fixated on a particular target.

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xxii ◾ Introductionxxii ◾ Introduction

Executing Divestitures and Spinoffs

Chapter 10 outlines the reasons for pursuing a divestiture and then reviews the process for executing the transaction, including the decisions whether to hire an investment banker, conduct an auction or a negotiated transaction, and structure it as a stock or asset deal. It also discusses the possibility of a tax-free spinoff (including a “Morris Trust” variation) as well as “split-up” and “equity carve-out” alternatives.

This chapter argues that CFOs can add considerable value by regularly pruning a company’s business portfolio and through their quality of execution in a divestiture or spinoff scenario.

Responding to Takeover Offers

Chapter 11 discusses the CFO’s role in a company’s response to a takeover offer, including the preparation of financial projections and coordination of external advisors. It also describes the expanded responsibilities if the board of directors decides to pursue a sale transaction.

This chapter emphasizes that CFOs should be fully prepared in advance of a potential proposal, including understanding the company’s governance provisions, maintaining an up-to-date long-term financial model, and con-tinuously reviewing possible strategic or financial actions to add shareholder value.

Funding

Part Four reviews the CFO’s role as the primary architect and manager of the capital structure, including establishing capital structure objectives; develop-ing financing strategies; analyzing financing alternatives; and obtaining short-term and long-term financing.

Establishing Capital Structure Objectives

Chapter 12 describes the criteria for setting capital structure targets, includ-ing the ratio of debt to market capitalization and other leverage ratios used by analysts in the company’s industry or contained in its debt covenants.

This chapter also describes the implications of obtaining alternative debt ratings from the major rating agencies, especially the distinction between investment grade and speculative debt. It discusses the criteria used by the rating agencies and stresses that CFOs should maintain an active dialogue with the agencies.

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Introduction ◾ xxiii Introduction ◾ xxiii

Developing Financing Strategies

Chapter 13 discusses the CFO’s role in determining the financing mix in the company’s capital structure. It advocates core financing principles—keep it simple, preserve flexibility, continue to evolve, and react opportunistically—and describes debt and equity financing alternatives, as well as off balance sheet financing.

This chapter also describes debt maturity objectives, fixed versus float-ing rate debt tradeoffs, financing in a foreign currency, maintenance and incurrence debt covenants, debt refinancings, debt for equity exchanges, and bankruptcy.

Ensuring Short-Term Liquidity

Chapter 14 highlights the CFO’s responsibility for ensuring adequate liquidity. This involves cultivating banking relationships, establishing revolving credit lines and other sources of short-term financing, instituting rigorous cash plan-ning processes, and developing contingency plans for unanticipated liquidity needs.

This chapter also describes the CFO’s role in working capital manage-ment, including regularly monitoring liquidity ratios and actively managing accounts receivable, accounts payable, inventory, and cash to enhance cash flow from operations.

Obtaining Long-Term Financing

Chapter 15 reviews the potential sources of long-term financing, including ven-ture capital, private equity, initial public offerings, subsequent equity issuances (secondary, follow-on, and ATM offerings), bank term loans, syndicated bank loans, investment grade securities, high yield securities, and strategic alliances.

This chapter discusses the pros and cons of each of the alternatives and argues that CFOs should strive to strike the right balance between cost and flexibility.

Performance

Part Five describes the transition of CFOs from serving as scorekeepers to becoming players who help to deliver business and financial results. This includes generating organic revenue growth; reducing the cost structure; using budgets, forecasts, and metrics to drive performance; and managing financial risks and taxes.

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xxiv ◾ Introductionxxiv ◾ Introduction

Driving Business Performance

Chapter 16 reviews the CFO’s role in producing organic revenue growth and managing the cost structure. It argues that CFOs should partner with the busi-ness leaders and share ownership for achieving the company’s performance targets. This includes adopting a mindset for encouraging growth and taking an active interest in customer relationships.

This chapter also describes the numerous tools that CFOs can use to reduce costs, ranging from short-term contingent actions to long-term reengineering of functions and processes. It advocates attacking company-wide cost catego-ries and adopting fixed versus variable cost strategies that complement the strategic plan objectives.

Providing Planning and Analysis

Chapter 17 highlights the ability of CFOs to drive results through their lead-ership of the budgeting and forecasting processes and the establishment of performance metrics, including non-financial measures that are enablers of the strategic plan. It also describes the processes for preparing budgets and forecasts and the systems for measuring business unit performance.

This chapter advocates a focus on cash as well as accounting results— including regular cash flow forecasts—and argues for fewer and simpler perfor-mance metrics, with a bias toward actionable items rather than voluminous details.

Managing Financial Risks and Taxes

Chapter 18 focuses on the risk management activities that are directly man-aged by the CFO, including the development and administration of cost-effec-tive insurance programs. It also discusses strategies for managing interest rate, currency, commodity, inflation, and pension fund risks.

This chapter discusses the CFO’s oversight of the tax planning functions, emphasizing the establishment of clear management objectives—such as avoiding excessive risk, reducing complexity, performing holistic analyses, and ensuring compliance—as well as a focus on potential areas of opportunity—such as net operating losses, transfer pricing, and special credits.

Accounting and Controls

Part Six discusses the establishment of accounting and control processes and the ways that CFOs are responding to the challenges arising from additional

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Introduction ◾ xxv Introduction ◾ xxv

regulations and new accounting pronouncements. It also describes the CFO’s leadership role in preparing for an earnings announcement.

Establishing Accounting Processes

Chapter 19 reviews the CFO’s need for robust financial reporting processes—producing financial statements that are timely and accurate and that effectively communicate the company’s results. It discusses the factors that can affect the accounting environment, including automation, technology tools, documenta-tion, various checks and balances, and the overriding importance of having good people.

This chapter also describes recent trends in Securities and Exchange Com-mission (SEC) filings and argues for active coordination with the external audi-tors and the audit committee.

Communicating Financial Results

Chapter 20 discusses the preparations for quarterly and annual earnings announcements. It emphasizes a rigorous focus on identifying business and financial issues; crystallizing the company’s response to these issues; and ensur-ing alignment in communications with investors, the media, and all stakehold-ers, especially employees. It also argues for transparent communications.

This chapter also addresses two topics that are top-of-mind among CFOs: the use of non-generally accepted accounting principles (GAAP) measures and whether to provide earnings guidance.

Implementing Sarbanes-Oxley

Chapter 21 discusses the procedures adopted by CFOs in their implementation of Sarbanes-Oxley. It enumerates the main provisions of the act and focuses spe-cifically on three provisions: requiring auditor independence; certifying finan-cial statements; and testing the adequacy of financial controls, including the identification of deficiencies, significant deficiencies, and material weaknesses.

This chapter also describes the CFO’s challenge in reaping benefits from the Sarbanes-Oxley requirements, while at the same time minimizing bureaucracy and incremental costs.

Reinforcing Compliance and Controls

Chapter 22 describes the CFO’s role in reinforcing compliance and controls. It describes proven management practices—such as establishing a strong tone

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xxvi ◾ Introductionxxvi ◾ Introduction

at the top, promulgating a code of conduct, and adopting a zero tolerance standard—and argues that the company’s internal and external auditors as well as its audit committee can be powerful allies in this effort.

This chapter also describes the new Dodd-Frank whistleblower awards and the need for companies to focus on their internal whistleblower processes. It argues that given the explosion of regulations, CFOs should seek to reduce the company’s cost of compliance by consolidating activities and streamlining processes.

Leadership

Part Seven discusses the CFO’s role as leader of the financial organization. This includes fostering effective communications throughout an organization that is becoming more complex and increasingly global; driving effectiveness and efficiencies as a continuing priority; and developing a talent base to meet the challenges of the current environment, as well as the anticipated requirements for the next phases of the company’s evolution and growth.

Achieving Finance Transformation

Chapter 23 describes the CFO’s overarching objective of achieving “finance transformation.” This usually is a shorthand term used by CFOs to encompass their goals of revising the organizational structure, implementing new tech-nology systems, reengineering processes, utilizing outsourcing arrangements, and emphasizing analysis over data.

This chapter argues that the transformation should be implemented incre-mentally and that its success requires strong support from the top and supe-rior project management skills. The benefits—which can include enhanced effectiveness, greater efficiencies, and strengthened controls—can more than justify the disruptions and risks that inevitably come with major changes in the organizational structure and transactional capabilities.

Developing Financial Talent

Chapter 24 discusses the CFO’s role in developing finance professionals, start-ing with strategies for recruiting talent through either entry level or lateral positions. It then discusses development objectives—emphasizing expertise, experience, and leadership skills—and reviews the panoply of programs and tools that CFOs are using to achieve these development objectives.

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Introduction ◾ xxviiIntroduction ◾ xxvii

This chapter argues that CFOs should demonstrate visible leadership in crafting creative programs for winning the fi erce and escalating competition for fi nancial talent. It concludes with some observations concerning the quali-ties and skills that will be required among the fi nancial leaders of the future.

NOTES

1. Heid, Michele, “What’s expected now of CFOs?” (March 1, 2010, www.heidrick.com/blogs).

2. CFO Research Services in collaboration with Booz Allen Hamilton, “The Activ-ist CFO-Alignment with Strategy, Not Just with the Business” (April 2005, CFO Publishing Corp.), p. 3.

3. Ibid., pp. 5–6. 4. CFO Research Services in collaboration with KPMG, “A New Role for New

Times—Opportunities and Obstacles for the Expanding Finance Function” (March 2011, CFO Publishing Corp.), p. 5.

5. The Wall Street Journal (June 27, 2011): C6. The top fi ve priorities were (1) Become a strategic CFO; (2) Drive value through capital allocation; (3) Develop a fi nancial leadership pipeline; (4) View cash as a strategic tool; and (5) Provide short-term and long-term balance.

6. Deloitte, “CFO insights: Crossing the chasm: From operator to strategist” www.deloitte.com/us/cfo center (2011, Deloitte Development Center).

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