The CFO and the Fortunes of the 21st Century
(3BL Media/Justmeans) - “We are running this planet in a very illogical way – we are on a collision course with a set of global shifts that very few companies understand and very few are managing effectively” - Gil Friend.
Friend, the CEO of Natural Logic, noted that those who are ready for these shifts will make the great fortunes of the 21st century. He spoke at Sustainability Applied 2013, hosted by the Bloom Centre for Sustainability in Mississauga, ON earlier this month, and moderated a panel, ‘CFOs as Sustainability Leaders’ at the event.
Panelist Cathy Cobey, Assurance Market Leader, Ernst & Young LLP, sees a real shift in the role of the CFO over the past 20 years from back-room accountant to strategic organizational leader. Bloom quotes former Pritzker CFO Kevin Lynch who describes the CFO as someone who touches more parts of an organization than any other executive, while ‘managing investments, expenses, returns and risks.’
But the roadblock, as Cobey noted, is the constraint CFOs feel by current accounting rules and ways of representing organizational value. While financial statements represent only 20% of the value of an organization, in her practice she sees few CFOs yet innovating in ways to better account to investors for that value.
Ultimately, Cobey says, companies will ‘run two sets of books,’ and the second set of books will become the more valuable in describing the future worth of an organization.
To run that second view, what is required is less quarterly focus and more real-time metrics that also project a long-term view. “We need to blend structured data with some indicators that help companies be ‘feed forward’ and understand where they are going,” said panelist Jean Letourneau, President and CEO, Strategic Breakthrough Value Creation Group Inc. They don’t have to be perfect, according the Cobey and Letourneau. It’s not about being overly obsessed with getting the non-financial numbers exactly right, but providing future focused strategic guidance and trending information.
Shifting to that future focus is easier said than done, given the fact that the current financial statement structure does not provide any ‘speculative’ content. “That mindset has to change. The future orientated information is what is important – it’s translating your historical performance into how I value myself in the future,” says Cobey. The increasing granularity of accounting practices over the past 20 years has missed the forest for the trees, in her view. The more forward-looking leaders are making decisions by gut, according to Friend, and then supporting that with data.
That shift to focusing on value creation can come from collaboration between the CFO and the sustainability team, says Cobey. While the sustainability group may point to millions of dollars in savings made in eco-efficiencies, the CFO, with sustainability hat on, may come back to say, ‘let’s work together to find areas in which to save billions.’ The CFO has the ability to look wider and more strategically at business-wide risks, where the sustainability team may be in the micro-zone of reducing water use or waste, for example. And the CFO can push sustainability oriented organizations to “play for financial gain,” according to Cobey—and make sustainability a revenue centre on the books.
Speaking to Gil Friend after the event, he indicated he sees three linchpins to shifting the overall picture: “Terrific success stories of companies making tonnes of money [on sustainability advancements], a variety of attempts to get the pricing right, and a growing sequence of disasters.”
Companies often report that investors are not yet coming to them in large numbers with sustainability concerns. But, as Bob Willard noted at the Sustainability Applied event, access to capital is going to become a major future issue for those lagging. CFOs will touch on all of the these factors, so it will be interesting to see if a panel on this same subject in three to five years will get a solid turnout of forward looking financial leaders, including local CFOs who can comment on local practices.