ASSESSING THE CFO

A FRAMEWORK FOR HIRING THE RIGHT CFO FOR YOUR COMPANY

ANOTHER FIRST CLASS ASSESSMENT GUIDE

BROUGHT TO YOU BY

THE PHILLIPS GROUP

LONDON TORONTO DUBAI

ASSESSING THE CFO

Focus AreaAssessment Subsections
LeadershipOrganizational Fit Sense of Self Leadership & Management Vision Industry Expertise Intellectual Curiosity Results Orientation
Financial StrategyFinancial Strategy & Business Planning Resource Allocation M&A, Capital Markets Financial Strategy Financing Analysis Media Management
AccountingTreasury & Liquidity Costs Controls Accounting Risk Tax Reporting

TABLE OF CONTENTS

INTRODUCTION

LEADERSHIP 6 – 29

Organizational Fit 6 -7

Sense of Self 8 – 11

Leadership & Management 12- 22

Vision 23 – 24

Industry Expertise 25

Intellectual Curiosity 26 – 27

Results Orientation 28 – 29

FINANCIAL STRATEGY 30 – 45

Financial Strategy & Business Planning 31 – 36

Resource Allocation 37 – 39

M&A, Capital Markets 39 – 40

Financing 41 – 42

Analysis 42 – 43

Media Management 44 – 45

ACCOUNTING 46 – 59

Treasury & Liquidity 46 – 50

Costs 50 – 52

Controls 52 – 54

Risk 54 – 56

Tax 57

Reporting 58 – 59

SUMMARY 60

Appendix 1 – The CFO Assessment Guide?

ASSESSING THE CFO

This guide is designed for Chairman, CEOs or business heads, who are tasked with hiring a Chief Financial Officer. It is also great tool to assist a current CFO in preparation for a new job. In addition, it is also a great tool for an aspiring CFO to use as a career development guide, as it lists the most relevant skills a great CFO requires in today’s market place.

The CFO must be a visionary, and a strategic partner to the CEO, Chairman and Board. While they can be rooted in the realm of accounting with a mandate to preserve the financial strength of the company and ensure the organization’s liquidity and cash flow; they must also be value creators with the proven ability to accelerate growth. Your CFO must be instrumental in assisting the CEO and Chairman in identifying new growth opportunities and maximizing the company’s growth rate.

This means being able to identify underperforming departments or businesses which are non-core to the organizational strategy and earmarking them for outsourcing or divestment, being instrumental in the investment of resources in new projects, R&D, technology, business lines and new services. As well as ensuring the most efficient allocation of resources across the group.

As markets are now plagued by challenger brands and disruptive technologies, companies must be more strategic about how they manage their resources and how they invest surplus cash. To survive the CEO needs a dynamic CFO who is able to identify new revenue opportunities and help steer the business into the most profitable business lines possible. This assessment guide is designed to help you make the best hiring decision possible. It looks at 19 areas which touch on three main areas; Leadership, Financial Strategy, and Accounting. In the leadership area we look at the following areas:

Assessing for leadership is a sensitive topic as the world is filled with a litany of theories and competency models for effective leaders. Many of which contradict each other. Our leadership philosophy is based on thousands of CEO placements and interviews starting from our founding in 1984. At the crux of our leadership assessment is identity. The leader must influence as well as be influenced by the identity of the group. That is the leader must be representative of the organization’s identity if she or he is to lead the group. Great leaders define the identity of the group, as Einstein defines physics, Mohammed Ali defines boxing, Warren Buffet defines investing, Steve Jobs defines technology, and so on.

Identity is the central theme to effective leadership and your selection process should start with who is your candidate? Who do they see themselves as and who do they want to become? Asking this simple two questions can save you millions of dollars as when you understand who your candidate is and who they want to become you be able to accurately predict how long they will stay with your company. You need your CFO to stay at least eight years to maximize your return on investment. That is two strategic cycles minimum.

Your ability to assess the retention of your candidate rests with Organization Fit and Sense of Self. In essence, does the organization’s values and culture fit the values and culture of the candidate. Does the vision of the company match the vision of the candidate? This is a third question which will also save you millions of dollars. If the company’s long-term view is to have 80% of its revenue generated in Africa and the candidate wants to live in Switzerland in ten years, you have a major issue. A successful hire is made when the vision of the company and the vision of the candidate match.

Vision is one of the most basic tools a leader can use to align the team and generate engagement from the staff. If the candidate’s personal and professional vision do not match the long-term vision of the business you will have a retention issue in the long run. In addition, this type of CFO will never be able to engender commitment to the organizational vision, as he or she will not be committed to it in the first place. It is here we fail before we have even started. Do not let this happen and be sure to assess for Organizational Fit and Sense of Self.

The strategic cycle in this sense is the time it takes to take an innovative idea from concept through business planning, launch, and profitable results. One strategic cycle is seen as four to five years. Your CFO should help you champion at least two strategic cycles.

ORGANIZATIONAL FIT

Organizational fit is a very bespoke element of a selection process. Every organization is different. One of my clients is committed to donating 25% of their net profits to charity, and another one would lay-off 3% of their staff to ensure they meet their annual net profit targets. These are two different ends of the spectrum. Each has its own culture and value system which the leadership team must espouse in order to effectively lead. In this instance I will provide a set of questions for a family office.

A family office has the unique element of having several generations of family members on its board or influencing it. In addition, they may be more sentimental about their businesses and staff than publicly listed financial institutions for example. To be candid the company which was giving 25% of its net profit to charity was a family business and the company which laid off 3% of its staff to meet its annual net profit targets was a publicly listed financial institution. Both are effective, but both have very different organizational culture. Below are some questions to ask to assess the cultural fit for a family office.

This is only a sample and the key take away is a selection of questions must be created that echo the company’s culture, values, and ethos. What does the organization value? Do they value mentorship and leadership development, then ask the candidate when they have excelled in these areas. If it is hard-nosed bottom line results, ask the candidate if they ever had to fire their best friend or someone who was close to them as a result of nonperformance. Do not underestimate the power of fit. Most companies hire on technical skills and then fire on fit. Remember if you fire your CFO before they have completed four years in the job, you are losing a tremendous amount of value.

SENSE OF SELF

The candidates sense of self is at the core of all of her or his actions. Before any action can materialize in the world, it must first be a thought. Your thoughts exist in your subconscious and conscious mind and are created in the context of who you believe you are. Your sense of self is the basis of all your interactions in life. Nothing can be more important than a person’s sense of self. An assessment which ignores this element will be ineffective.

For example, if you are hiring a CFO they should see themselves as a top performing CFO. I once had a CFO selection process in which the CFO wanted to be an entrepreneur and in fact did not see themselves as a CFO. Although they were working as a CFO for one of the largest groups in the region and were highly qualified. Guess where that CFO is today? They are running their own business and have left the CFO role for good. Any company that hired this CFO would be battered by the value destruction that comes when the CFO leaves the business.

The CFO’s sense of self and sense of identity are critical to their long-term success in the role. Does the CFO see themselves as part of the industry? For example, if you are doing a search for the CFO of a retail business the CFO should see themselves as retail executive and be committed to contributing to the retail narrative of the country over the next ten years. That is vastly different than the CFO who sees themselves as an entrepreneur and is biding their time until they have enough cash to open their own restaurant.

It is paramount to understand who the CFO see’s themselves as and where do they want to be in 10 years from now. Many candidates when asked will reveal that they have little to no long-term commitment to their industry. These candidates must be disqualified, otherwise you will be re-filling the CFO position in less than 2 years. Here are some initial questions to test for sense of self.

I start this part of the assessment to look at the candidate’s childhood. Here is where the sense of self is developed and also innocently expressed. Many candidates feel that what they did 20 years ago is not relevant. When questioned on what happened to them in grade school, they may become agitated and say “What does this have to do with anything?”, or others may play along and divulge swaths of information feeling that it has little or no bearing on their ability to get the job.

In high school I want to see if the candidate saw themselves as a leader, if they were results driven, if they had a desire for impact. Were they pushing themselves to influence their surroundings and taking initiatives to create change, or were they in they riding in the backseat on the road of life, and following the pedestrian masses as they were corralled into one university program or another?

If you want your CFO to take initiative, to be innovative, to be a strong leader, then we must see these traits being exhibited by the candidate early on in their career. Not just in their last leadership job. The earlier we see leadership behavior exhibited in the candidate’s life, the higher the statistically probability that the candidate will exhibit these behaviors when you hire them.

Next ask them to describe themselves. Are they confident in who they are? Do they know their strengths and weaknesses? Do they see themselves as a leader? Do they see themselves as results driven, innovative, analytical? Are they describing themselves as we would like to describe our preferred CFO?

The following questions deal with who they want to become. Do they have a strong vision of themselves and does that vision match the vision of the organization? Or do they flounder on the question and make up an answer on the spot? One way to test if the question has been pondered before is the two questions that come after the vision questions.

A candidate who has a clear vision and has a commitment to achieving the vision will have thought clearly about what capabilities they need to develop and what changes they need to make in order to achieve the vision. An underperformer will not be so self-critical or forward looking to have a road map for their personal development. This section alone will most often be enough to separate the slacker 9 to 5, weekend warrior, from the driven top performer.

Finally, I close this section with a discussion on salary. The salary discussion does not have to be in this section, but it has taken place. The fit comes into play as if the candidate wants to be a billionaire in ten years then this job is not for them. The candidates long term salary expectations should be in line with the career path being offered.

The candidate with a strong sense of self will have a clear idea of their market value. They will have a clear perspective on what they should be earning now and what they should be earning in the future. In addition, the candidate should have a high self-esteem and self-confidence and be able to manage a stressful salary discussion with finesse and ease.

In closing these few questions will not allow you to have an exact view of the candidate’s sense of self but it will give you an idea of where they are. A successful hire is made when the organization’s values and identity contribute to the candidates’ sense of values and identity. The new job should not be about what the candidate is getting, but more about who the candidate is becoming. In simple English you want to hire people who want to work for you because of who they will become, not what they will get from you. To do this you need to understand their sense of self.

LEADERSHIP & MANAGEMENT /15

Leadership starts with values, ethics, identity and culture. These intangible elements of leadership which are quintessential to successfully lead a team. These intangible elements will be discussed elsewhere and not covered in this section. In first instance you will want to check if the CFO has the tangible elements to lead. That is do they know what to do tactically to align a team and drive them to peak performance? This is what we will focus on in this section, specifically does the CFO know what infrastructure to create around leading a large team?

The CFO will be required to lead the finance department across multiple geographies as well as lead divisional CFOs (Country Finance Managers or similar titles) for each region. In addition, the CFO will be a key member of the senior leadership team for the company. This section is out of 15 points and for a candidate to score perfectly they must demonstrate mastery of seven areas listed below.

The 7 key areas to assess a leader’s capabilities are as follows;

  1. The ability to set long term clear goals                                                                                                 /2
  2. The ability to articulate the common goal of the team                                                                  /2
  3. The ability to develop an agreed upon process for achieving the goal                                     /2
  4. The ability to measure and monitor the groups progress towards achieving the goal       /2
  5. The ability to create mutual accountability with the team                                                           /2
  6. The ability to take advantage of strengths and weaknesses                                                        /2
  7. Seek & Seed leaders at all levels in the organization                                                                      /2

Over all leadership ability                                                                                                                                   /1

Total:                                                                                                                                                                                 /15

Generic warm up questions for this section:

Some CFO’s do not see the CFO role as a leadership position. Some CFOs see their job as doing whatever the CEO and Chairman request. Thus, start your leadership assessment with the simple question, is the CFO a leader? If she or he says no, disqualify him or her and move on. Most candidates will not be able to answer the question “What is the purpose of leadership?”. There is no right or wrong answer, but in our experience the best answer is “the purpose of leadership is to create more leaders?” Finally experienced CFOs will have a philosophy or governing approach to how they will develop and build their finance teams. A CFO who is a strong leader will enjoy this section and will deliver well-structured answers off the top of their head as they would have thought about this topic before. CFOs who are not leaders will struggle and will fumble through impromptu answers they create on the fly.

THE ABILITY TO SET LONG TERM CLEAR GOALS /2

From a young age the candidate should be setting long term goals for themselves. Whether this is in student associations, school work, sports teams and in the least which university they attend. The ability to set and achieve long term goals should be evident in the personal life of the candidate. As the candidate matures they will demonstrate the ability to set long term goals in a professional

group setting.

Top performers will have 10-year, 5-year, 3-year, and goals for almost every time frame. If your candidate is unable to set long term goals just end the assessment, they must be disqualified. They have failed on the most basic of levels. As the candidate matures into a CFO they will be required to set the objectives and long-term goals of the finance department as well as the company. An experienced CFO will excel in this area.

Initially start with how they set goals in their early development and then progress to how they set goals as a CFO. Candidates who do not set a vision for their departments are not leading effectively.

THE ABILITY TO ARTICULATE THE GOALS OF THE TEAM EFFECTIVELY /2

This section tests the ability of the CFO to create an ownership culture in her or his department. Are they able to get the team to internalize and take ownership of the goals and targets? The leader must articulate the common goal of the team. This is vastly different from communicating the common goal to the team. If the CFO or team leader communicates her or his goals, it will always be just that, her or his goals and not the teams. The key in this section is the CFO’s ability to get the common goal to be internalized and owned by the group. To do that they need to feel it is theirs.

The leader must get the team to articulate the goal from their own perspective, the goal must have alignment with their own personal vision as well as the company’s vision. This is not about telling the team what to achieve but rather making them share what they want to achieve and what it means to them. An effective Chief Financial Officer is also a Chief Meaning Officer and is able to harness a team’s sense of why. The team must be excited by the finance department’s goals on a personal level before they can be excited about them on a professional level.

If your team has no value for creating a best in class finance department or perhaps they have personal values which are in contrast to the organizational goals, then the CFO has the wrong team in place. The CFO must remove these people or make them shift their beliefs. The most effective leaders know that they must change the employee’s mind before they change the employee’s behavior. In contrast people who are passionate about the finance department goal’s will be engaged and proactive in doing whatever is necessary to achieve the goal.

I once had a CFO of a bank in which his head of accounts payable believed that conventional banking was evil and not a benefit to society. As she felt the values of the banking system were inconsistent with her personal values she would never be the right fit for the bank. Despite that she could articulate the finance department’s goals and the specific goals for her function. In this case the CFO had to address the personal value system and beliefs of the staff before she can address their professional value system, beliefs, goals, mission, strategy and vision. The CFO must get their team to commit their sense of self to the finance department and the organization.

  1. Describe a time you set medium and long-term goals with your department? How did you approach this task? Who did you include in the process?
  2. Once your long-term goals are set, how do you communicate them to the team? How do you ensure the message you are sending them is the message that is being received?
  3. Describe a time you noticed the message you were trying to communicate to the team was not understood clearly? What did you do to rectify the situation?
  4. Describe a time you realized the front-line staff did not believe in the strategy of the company? What did you do?
  5. Describe a structure you created to allow front line staff to provide information about the business to you directly?
  6. Describe a time you let the finance department have input into the long-term goals of the department? How was this input facilitated and encouraged? How did this bottom up process affect the outcome?
  7. Describe a time you got the team to set the goals and vision for the department?

The best CFOs know that the team has to have input into setting their goals and objectives. Their job is to articulate the vision of the department, not dictate the vision to the department. Very few CFOs will understand this point and do not disqualify a candidate who fails this section as 99% of CFOs will fail this section. Very few managers miss the point that message being sent to the team is irrelevant. The message that is being received is more important. More important still are which messages are being owned by the staff. For example; a smoker may receive the message that smoking is bad for your health, but he did not internalize or take ownership of the message. The key to peak performance is getting the team to take ownership of organizational objectives and goals.

THE ABILITY TO DEVELOP AN AGREED UPON PROCESS FOR ACHIEVING THE GOAL /2

This is about aligning the leadership, team, front line staff, all employees, on the process to achieve the goal. The leader must articulate the teams vision, goal as well as the process to achieve it. The leader must ensure they are aligned on how they will achieve the goal, now just what the goal is. In simple English great leaders get commitment to the process through which the goal will be achieved.

SUCCESS METRICS /2

As the cliches go, You can’t change what you can’t see, and what can’t be measured can’t be managed. The CFO must be a master of implementing performance metrics across the group.

CREATING MUTUALLY ACCOUNTABLE GOALS THAT CASCADE ACROSS ORGANIZATIONAL BOUNDARIES /2

The CFO must work to eliminate organizational inertia and align divisions, departments and business units in different countries under a set of common goals and performance metrics. The senior leader will ensure that goals, KPIs and measurement systems erode departmental silos and do not enforce them. Manufacturing, R&D, Sales and Marketing must share the accountability for profits in a top performing organization. Smart CFOs know a company can be its own worst enemy and works to eliminate internal friction and in-fighting.

UNDERSTANDING STRENGTHS AND WEAKNESSES OF INDIVIDUALS, TEAMS AND ORGANIZATIONS /2

The CFO will have the analytical skills and foresight to understand which skills to outsource, and which to nurture in house. They will work with the CEO to define, acquire, and cultivate the key capabilities the organization needs to excel at to be competitive; while at the same time working to remove weaknesses.

SEEK AND SEED LEADERSHIP AT ALL LEVELS IN THE ORGANIZATION /2

The CFO is part of the executive leadership team of the company and is responsible to acquire, identify, nurture and develop the next generation of leaders for the group. Having a strong executive bench of capable and committed leaders is the foundation stone of organizational growth.

To recap the 7 key areas to assess a leader’s team building capabilities are as follows;

  1. The ability to set long term clear goals                                                                                                 /2
  2. The ability to articulate the common goal of the team                                                                  /2
  3. The ability to develop an agreed upon process for achieving the goal                                     /2
  4. The ability to measure and monitor the groups progress towards achieving the goal       /2
  5. The ability to create mutual accountability with the team                                                           /2
  6. The ability to take advantage of strengths and weaknesses                                                        /2
  7. Seek & Seed leaders at all levels in the organization                                                                      /2

Over all leadership ability                                                                                                                                          /2

Total                                                                                                                                                                                  /15

VISION

The CFO must be able to compliment the vision of the Chairman and CEO. The preferred candidate will have a penetrating view of the industry and what the future of the organization will look like. To test for vision, we will look at four items in this section;

Initially the candidate must be able to create a vision for themselves. That is personally who will they become, and professionally who will they become. If they cannot make a vision for themselves, they will not be able to create a vision for the company. The final two parts of vision are creating a vision for the department and company, and finally having a penetrating vision of the industry. That is where will this company and this industry be in ten years. This is the job of leadership and the CFO must be able to effectively participate in the future vision of the company.

Questions

Vision and direction is at the core of leadership. The CFO must be able to give direction to the finance department. In addition, they will be a value added voice to the larger vision of the company. Make sure your CFO candidate demonstrates a history of creating a vision for themselves, their professional development, their department and company, as well as ensuring they have a vision for where their industry is going.

INDUSTRY EXPERTISE

While many people will make the case that the CFO can be industry agnostic, I will argue that to drive peak performance the CFO must have deep industry experience. In today’s environment business is more about managing risk than identifying opportunity. Anyone can do an analysis and identify where the opportunities are. Very few people can have the foresight to predict the black swan events which are around the corner or key risks the company will have to stomach to survive the coming economic cycle. This comes with experience and deep industry knowledge. Preference should be given to CFOs with relevant industry experience.

The third point tests a CFOs deep knowledge of the industry. For example; at a retail business the CFO discovered that the percentage of customer visits to purchases was 33%. Basically one in three people who entered the store bought something. Increasing the customer visits to purchases by 1% would increase global sales by $45 million USD. So, the CFO knew that a key behavior to focus on is how effective the retails sales staff is at converting a customer visit to a sale. A CFO who is not from the retail industry will not be able to give such a detailed answer to the question “What are the key behaviors a company in your industry has to excel at to be in the top 5%?”.

Getting a CFO with deep industry experience means that they will come to the table with a deep understanding of which focal points the leadership team should consider to drive peak performance, in addition to what are the risks in the business and how to mitigate them.

INTELLECTUAL CURIOSITY

The top performing CFO is always interested in learning how to get better. They are reading the latest books and industry publications, attending the latest trade shows, and interacting with other top performers of the industry. They know who the top CFOs in the industry are in their region and have met with them and discussed what is required to be great in the profession. Additionally, they will have written white papers or contributed to articles or even books about the profession and how to excel in it.

Test for a candidate’s intellectual curiosity by asking them questions such as “what are the current trends affecting finance departments in the world today?” or “what will the finance department of the future look like in five years from now?” If they start to act like it is the first time they are thinking about it, you have a B player on your hands at best. If the candidate gets excited and starts citing different theories, papers, books, annual reports and other data points to support different perspectives on where the industry is going you most likely have a top performing CFO on your hands. Other questions which can help unearth this trait is “what are you reading now?”, top CFOs will be reading books related to their profession. They will have an insatiable intellectual curiosity for their profession and will chase knowledge regarding their profession with a zeal reserved for passionate fanatics.

Questions for Intellectual Curiosity;

  1. What are the current trends in your industry?
  2. What will the industry look like in five years?
  3. How will the finance function in companies change in the next five years?
  4. How will your organizational structure change over the next five years?
  5. Where will you find the biggest efficiency gains in the next five years? (Do not let the candidate get away with saying technology changes. They must be specific.)
  6. What are you reading now? What are the three best selling CFO books on the market today?
  7. What are three technologies which will revolutionize your department?
  8. If you could change two things about your current department that would allow you to be more effective at your job what would they be?
  9. Who are the top CFOs in your industry? Who is the best CFO in the world?
  10. Finally ask yourself “did the candidate at the end of the interview ask insightful thought provoking questions about the company the role and the industry?”. Intellectually curious candidates ask insightful questions.

If you could only choose one trait to test for, intellectual curiosity would definitely be a top choice. Only top performers possess this insatiable appetite for new knowledge about their profession. The top performer does not walk on a career path, they are on a journey of discovery and with ever page they turn the take a step further into the future of the industry. In contrast underperformers are denizens of the past, for every living on what has already been done.

RESULTS ORIENTATION

Every member of your senior leadership team must be infused with an unstoppable competitive spirit. They must catapult themselves forward with a carnal affinity for the searing fires of global competition. Action oriented and underpinned by an unwavering ability to deliver results under all conditions. The desire to create impact and deliver results must course through the veins of your chosen CFO.

At the crux of leadership and executive performance is results. To get a strong understanding of a candidate’s results orientation we ask the following questions;

Candidates who are results driven will give their answers in numbers. They will say things such as we increased net profit by 7% in a quarter, or globally we ranked number 6 by volume of sales, or the new technology platform reduced our OpEx by 18% year on year. Be sure the candidate is able to give you specific answers with clearly stated results. Underperformers will be nebulous in their statements and say things like “we significantly increased revenue”. Well how much did you increase revenue by, and they answer “well I don’t have the exact number”. If a senior executive does not know their numbers disqualify them.

FINANCIAL STRATEGY

At the core of any great strategy is finance. When IBM divested their PC computer business to Lenovo it was largely driven by the CFO. It was a non-core business that was eating billions of dollars of capital and cash every quarter. Not to mention it had been in the red for many years. On Lenovo’s side the decision to buy was also largely driven by the CFO, as could the company absorb the costs, manage the losses and have enough additional capital to invest in turning the business around. Today, Lenovo is the number one player globally in the PC business, so the answer was correctly answered by the CFO, yes they could absorb the losses and turn the business around; and yes on IBMs side their business was much better off without the PC business as well.

Your CFO must be proactive and be able to provide strategic options for growth. Analytical and driven the CFO will identify the true cost of funds for each department and business line, and work with the board to eliminate loss making entities. They will maximize shareholder value creation with short term and long term financial strategies. To test for Financial Strategy, we look at the following areas;

FINANCIAL STRATEGY & BUSINESS PLANNING

Candidates who score high on this criterion will be able to describe an approach to the fulfillment of the vision, strategy and mission, which delivers a sustained competitive advantage for the company. Strategy takes place in all areas of an executive’s career and those executives who advance to the top are the ones who are using winning strategies. In the case of the entry level account manager, his or her vision could be to be the number one Account Manager in the country, and his or her strategy may be to create distribution channels his competitors do not have access to. In this instance an executive does not have to wait until they are leading a large team to exercise their strategic skills. Continuous improvement and competitive strategies can be developed at all levels in the organization.

In essence, life is about strategy and anyone who is interested in being competitive should have numerous examples of creating and executing strategy. Candidates who complain that they are not in a strategic role should be eliminated immediately for as I just argued you don’t need to be in a strategic role to act and think strategically.

Strategy is omnipotent for the CFO as finance threads every department and every area of the business. Finance affects every employee, for example in the least in the form of compensation and benefits which can often be the largest component of the cost position of a business. In its more implicit form it is embedded in every business activity as controls or can be as complex as sophisticated derivative hedging strategies used to minimize the company’s risk exposure to currencies or interest rates. It can also be as straight forward as analyzing the companies return on assets and working to improve its ratio on this metric. Financial Strategy is the bedrock of any top performing CFO and a critical pillar of any competitive business.

ROA, ROI, WC, IRR, DEBT & EQUITY AND RELATED /2

ELIMINATION /2

CAPEX & OPEX /2

BUSINESS PLANNING /2

VALUE CREATION / 1

GENERIC STRATEGY SKILLS /1

A quick recap of Financial Strategy & Business Planning

ROA, ROI, WC, IRR, Debt & Equity and Related                                   /2

Elimination                                                                                                        /2

CapEx & OpEx                                                                                                  /2

Business Planning                                                                                          /2

Value Creation                                                                                                /1

Generic Strategy Skills                                                                                  /1

TOTAL                                                                                                                 /10

RESOURCE ALLOCATION

Investing retained earnings effectively requires decision making rigor of an expert CFO. Current growth opportunities, future expansion prospects, research & development, upgrading current facilities, pension fund investments, paying dividends to shareholders, special projects, etc, the list of investment needs is never ending and the winning CFO knows how to strike a balance between current and future needs.

As the gate keeper to the company’s annual budget and guardian of its liquidity, the ability to expertly allocate financial resources is the touchstone of financial acumen.

The CFOs ability to account for the different levels of risk in each CapEx opportunity is a differentiating factor between good CFOs and great CFOs. This simple question “How do you account for the different levels of risk present in each business unit when evaluating CapEx investments?” can tell you a lot about the quality of the CapEx analysis your CFO is doing. For example, if you have a commodity business like a steel mill. They have five mills each in different locations. Three of the mills need CapEx investment to stay relevant, and you only have enough to invest in one. Each mill has a different risk profile. How did the CFO account for the difference risk profiles in her or his assessment?

If your CFO is going to deal with difficult CapEx and OpEx decisions frequently, it is prudent to go through this section with them.

M&A & CAPITAL MARKETS

M&A can be a growth catalyst when it is done right, while at the same time can also be the death nail for a company if it is done incorrectly. Your CFO must be the pillar of your evaluation process and if inorganic growth is a corner stone of your expansion strategy, then your assessment program must test for his skill. Your preferred candidate must have commanding knowledge in this area.

FINANCING

The CFO will be able to create the right mix of debt to equity in the business. They will be proficient in securing different types of funding for the business to fuel projects which enhance shareholder value. They will understand how to achieve lower financing costs for the business and will come up with innovate ways for the company to have more cash and access to cheaper sources of funding. They will be competent enough to set the capital structure of the group and of each subsidiary. This includes complex stakeholder arrangements which entail different levels of equity and shareholder rights; as well as complex debt instruments. This could include items such as convertible securities, loans with debt to equity conversion clauses, creating SPV credit enhancers, or other structures.

At the bedrock of this section is the CFOs ability to access the lowest possible rates for debt and equity for the company. Often that requires an innovative approach to structuring a deal, and it will always require the CFO to have a deep and commanding knowledge of corporate finance.

ANALYSIS

The CFO will have a deep understanding of accounting and will use their commanding knowledge in this area to provide a deep analysis of organizational performance, competitive intelligence, industry and macro-economic insight, as well as data acquisition and processing. In this area the CFO should demonstrate deep insight into human behavior and what are the key behaviors required by the staff to deliver success. The CFO should work to measure and monitor these key behaviors.

The CFO must champion the collection, analysis and reporting on all financial data for the company. They should be brimming with insights on the running of the business as well as with the customer.

MEDIA MANAGEMENT /10

The CFO can be required to be the voice of the organization. Especially in a publicly listed organization as she or he acts as the spokesperson for the company and releases the financials to analysts and shareholders. The timing of the release of the numbers, and which information is released, can be quite a strategic exercise.

The CFO can be required to do town hall calls as often as once a quarter and in a time of crisis may become a focal point for reporters. This is more pronounced in publicly listed companies, however the CFO of a private company will still be required to make compelling presentations to the board, staff and investors. The best way to test for this skill is to have the CFO make a presentation as part of the selection process. Below are some questions to ask in this area.

ACCOUNTING

One of the mainstay functions of the CFO is to ensure the financial data is veritable and accurate so the leadership team can improve the quality of their decision making. They are also the guardians of the company’s liquidity and cash flow. This all rests on the ability of the finance department to accurate measure, monitor and predict the financial performance of the company. Core areas we look at in this section of the assessment are:

In this section we look at the CFO’s ability to maintain the company’s capital and safe guard its ability to meet its obligations. The CFO will champion the company’s liquidity & funding Needs, Working Capital, Cash Flow Management & Budgeting, Currency Risk and any other risk related to its ability to meet its daily financial obligations. We break each section down in the following sets of questions.

LIQUIDITY /3

WORKING CAPITAL /3

(De-centralized model increases banking costs. A centralized model reduces banking fees, increases liquidity management effectiveness, provides better visibility into funding needs, and improves control over payment timing)

CASH FORECASTING, CASH FLOW MANAGEMENT AND BUDGETING /3

CURRENCY RISK /1

A recap of the sections in Treasury & Liquidity are below;

Liquidity                                                                                                             /3

Working Capital                                                                                              /3

Cash Forecasting, Cash Flow Management and Budgeting            /3

Currency Risk                                                                                                   /1

Total                                                                                                                    10

COSTS

One of the Key Performance Indicators for your CFO must be their ability to reduce costs. Companywide cost reduction programs must be led by the CFO. Astute CFOs know where to trim costs without sacrificing quality. The customer value proposition must be clearly understood to allow the company to reduce costs while increasing value.

A great example of this in play are the numerous sushi restaurants which have conveyer belts with boats of sushi on them. Waiters are not needed as customers serve themselves. The value to the customer has increased as they can eat immediately, and the cost to the restaurant has reduced as the establishment can employ less staff.

Increasing efficiency and driving down costs is the focus of any company which aims to be competitive. Technology has delivered the biggest efficiency gains in recorded history and the CFO of tomorrow will have to be tech savvy. Being up to date with the latest IT approaches that can deliver value for a company is a must. CFOs today must embrace technology and become innovative agents of change. The CFO must be capable of reducing costs while maintaining customer acquisition and retention rates. Your chosen CFO must have the full gamut of skills to effectively reduce costs.

Questions focused on a CFOs ability to deliver cost reductions and increase efficiency are below:

A good CFO will have lead numerous efficiency and cost reduction programs. They will understand now only how to drive down costs but how to drive down costs while increasing value to the customer.

CONTROLS

One of the paramount functions of the CFO is to develop and nurture an effective set of controls for the business. He or she will examine each process in the business that involves financial transactions to see where there is a risk of loss and then install controls to reduce the company’s exposure to the identified risk.

Controls also increase the quality of financial data that is being relayed back to the CXO team, from which critical business decisions will be made. While every company will want to operate in a zero-risk environment, the catch is controls can be very costly. A risk free operating platform is often too expensive to be competitive, thus a certain level of risk is always present in the company and the savvy CFO knows exactly how much risk is acceptable.

Candidates who score highest on this criterion will have creative problem solving skills and will understand human psychology. The best CFOs use controls to drive human behavior. They will be able to create controls that drive the right behaviors to drive the organization to peak performance.

(Candidates with a commanding knowledge of controls will gravitate to reengineering legacy control systems when they take on a new CFO position, while CFOs with an elementary understanding of the subject matter will be “gun shy” to change traditional control set ups. If a company takes a drastic change in strategy, a change should be echoed in its control systems. For example, if the new CEO wants to empower front line staff, then controls need to be relaxed allowing entry level staff to provide discounts to disgruntled customers at the till and so on.)

RISK

Risk can be defined as any event that threatens the achievement of the businesses objectives as defined by its vision and strategy. The Chief Financial Officer must not only be aware of all past risks to the business but should be proactively seeking the probability that new unknown risk events may occur. Traditionally companies buttress their risk policies with layers and layers of preventive actions aimed at dealing with risk events which have already occurred. The greatest risks are the ones which have not occurred yet and are completely unknown at this moment.

In today’s environment, most companies will have a Chief Risk Officer but even so the CFO should be heavily involved in risk assessment in the business and have a deep understanding of risk management.

The first two questions of the risk section can tell you the level of their risk competency. A seasoned risk professional will usually define a risk as any even which threatens or inhibits a company to achieve its objectives, while someone who is inexperienced in the area of risk management will stumble to define it, as they have never really tried to define a risk. That will be telltale that they have never really worked to define their companies risk appetite.

The second question, “What is your risk philosophy?”, will also witness the CFO with deep risk experience immediately explain in detail their risk philosophy; as they would have explained to their CEO, and Board, many times. They would have thought about it and created it. The CFO with little risk experience will fumble around to create an answer on the spot. They may even try to mask their inexperience with some trendy buzz words.

Another simple question to which CFOs who are inexperienced with risk will succumb is “What are the three biggest risks to your company and how are you mitigating them?”. A CFO who is risk aware will have pondered the biggest risks to the business and would have worked to either take those risks off the balance sheet or institutionalize process to mitigate them. The CFO who is unaware will begin to create the answer on the spot.

How proficient you need your CFO to be on risk is dependent on your business and your organization structure. Do you have a Chief Risk Officer and a fully functioning risk department? If yes, then perhaps you have some buffer for a CFO who is not risk focused. If no, perhaps you should be more prudent on this section.

TAX

The CFO should work to minimize the companies tax exposure. The CFO can do this in a variety of ways such as accelerating deductions, tax credits, reducing non-tax deductible expenses, increasing tax deferrals, or obtaining tax exempt income. Depending on your business model you may want your candidate to be versed in European, Asian, American or other markets. In this example we will look at the MENA Region as well as in Europe.

REPORTING

The CFO’s job is not about the numbers as much as it is about the story the numbers tell. Today the ability to provide real time reports which provide insight into the business and allow executive leadership to make expedient decisions. The modern CFO should deliver a real time MIS to the management team that provides accurate data on the key indicators for the business.

In many instances, this information can be accessed through a secure portal anywhere in the world. In a best case scenario, the CEO should be able to tell where every department is on a daily basis, and in a worst case scenario the CFO should provide weekly data on the key performance indicators for the business.

This is the last section in the accounting section of the assessment guide. In essence the CFO should have a passion for measuring, monitoring and predicting organizational performance. She or he should have the ability to capture and analyze large amounts of data and provide an insightful narrative to where the numbers are going to the CEO and executive leadership team.

SUMMARY

This assessment is meant to provide a framework to help executive leaders make better selections of their Chief Financial Officer. The framework has three focus areas and 19 subsections. The focus areas are Leadership, Financial Strategy and Accounting. The focus areas and the 19 subsections are listed below.

Focus AreaAssessment Subsections
LeadershipOrganizational Fit Sense of Self Leadership & Management Vision Industry Expertise Intellectual Curiosity Results Orientation
Financial StrategyFinancial Strategy & Business Planning Resource Allocation M&A, Capital Markets Financial Strategy Financing Analysis Media Management
AccountingTreasury & Liquidity Costs Controls Accounting Risk Tax Reporting

This is just a framework and every CFO role will need its own custom made assessment program that is based on the vision, strategy and mission of the company. No two CFO roles are alike. Some include IT, and HR, others are more akin to investment bankers than accountants, the profession has an eclectic mix of talent in the role and the vision of the Board and CEO will dictate what type of CFO you need. I hope this framework helps you make better hiring decisions. In the appendix you will find an assessment guide that you can use when interview your CFOs.

If you have any questions or would like some help with your CFO succession

planning, please contact me directly on +971 50 940 7537.

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