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Jason Karaian
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Acknowledgements viii
Introduction ix
1 Origins: from the back office to the front line 1
2 Role: ensuring control, driving strategy 13
3 Responsibilities: internal affairs 30
4 Relationships: colleagues and partners, friends and foes 62
5 Prospects: a world of possibilities 89
Cash is king
Years ago, when new writers joined the staff of CFO magazine – as
the author of this book once did – they were given a dog-eared memo
about how to write for the publication. It included a flippant, but
accurate, summary of the roots of the CFO role:
In the beginning, there was cash. Soon, an owner put the cash to
work and sought a return. Eventually, keeping tabs on the money
seemed like a good idea but the owner had other priorities, namely,
finding more ways to make money. Someone was needed to make
sure that the owner received his or her due while paying attention to
other matters, and the finance profession was born. Since that time,
companies have centralised and decentralised, merged and splurged,
but fundamentals remain the same. Hence, the finance exec’s hoary
dictum: “Show me the money, because I must show it to the owner.”
Throughout this book, chief financial officer, or CFO, is used to identify the
most senior executive with responsibility for a company’s finance function. In
the UK, this person is often called the finance director, which in other countries
sometimes confusingly applies to more junior financial staff. In continental
Europe and Japan, the top finance role often carries a generic title like senior
vice-president, executive vice-president or member of the management board.
Other regional variations abound. Whatever the case, the CFO is almost always
a member of the executive committee, if not the full board of directors.
Rise of conglomerates
Armed with new analytical tools, finance chiefs came into their own
in the 1950s and 1960s, when the fashion for sprawling conglomerates
reached its peak. Stricter anti-monopoly regulations, particularly in the
United States, discouraged concentration in a single industry; growth-
minded managers were thus encouraged to expand into unrelated
areas in search of profits. Financial criteria served as the benchmark by
which business units – regardless of their unique characteristics and
circumstances – were measured, since top executives could not claim
to have experience in all of the areas in which these groups operated.
As Neil Fligstein, a sociologist at the University of California, Berkeley,
explains in his book The Transformation of Corporate Control:
Marketmakers
As the nascent market for high-yield debt – otherwise known as
“junk” bonds – boomed in the 1980s, companies took advantage
of this new source of finance to load up on leverage. The internal
capital markets of cash-rich conglomerates – where losses at one unit
could be funded with the profits from another – made way for deeper
pools of funds financed by external investors. This left less room for
slack; meeting interest payments created a new urgency for CFOs to
monitor the financial health of their firms more closely.
At the same time, the greater availability of debt encouraged a
new breed of investor to take aim at the conglomerates hobbled by
difficult economic conditions. Private equity firms raised mountains
of debt to seize control of companies they considered undervalued.
Adjusted for inflation, the leveraged buy-out of RJR Nabisco by KKR in
1989, worth $31 billion at the time, remains the largest private equity
deal in history.
The tide was turning against the conglomerate model, with notions
of “core competence” ascendant. To this end, private equity-owned
companies ruthlessly cut costs, divested assets and streamlined
50
48
46
44
42
40
38
36
34
2000 01 02 03 04 05 06 07 08 09 10 11 12 13
Called to account
The CFO’s influence as an active operator rather than a passive adviser
was demonstrated, rather unfortunately, by a series of scandals in
the early 2000s. The authority of the CFO came to the attention of
the general public when a number of them were caught inflating
revenues, hiding losses and otherwise abusing their authority. Falling
stockmarkets in the wake of the dotcom bust exposed the wrongdoing,
which in most cases was motivated by the need to meet aggressive
targets pledged by the executives to investors.
Among the most notable companies to fall from grace were
Enron, WorldCom and Tyco in the United2001 States,2003
and Ahold
2005 and
2007 2009 2011 20
Opportunity in adversity
The global financial crisis of 2008 thrust CFOs into the spotlight once
again. In the West, the severity of the downturn was surpassed only
by the Great Depression, when the remit of finance chiefs was much
narrower. In recent years, CFOs have scrambled to move cash to safe
havens lest it get trapped in a collapsing bank; undoing some of the
fiendishly complex derivatives and other financial “innovations”
peddled by banks before the crash also took concerted efforts. With
credit scarce and expensive, the watchword remains flexibility, with
companies cutting costs and conserving – some would say hoarding
– cash.
In the beleaguered European telecoms industry, for example, “flat
is the new up”, according to Timotheus Höttges, CFO of Deutsche
Telekom (and CEO from January 2014). Defending the company’s
existing operations – “strengthening our strengths”, as Höttges
describes it – takes precedence over growth in new markets, however
enticing the prospects. In the current environment, “we cannot
allocate our resources all over the place,” he says.
At the banks at the centre of the crisis, the influence of the CFO
was also prominent. David Viniar, who spent 13 years as finance
chief at Goldman Sachs before his retirement in 2013, is credited
with a 2006 push to back out of investments in subprime mortgage-
linked securities, limiting the damage his bank suffered when the
bottom fell out of the market a few years later. Contrast this with
Douglas Braunstein, CFO of rival JPMorgan from 2010 to 2013, on
whose watch traders saddled the bank with a $6 billion loss. An
internal investigation found weak controls partly to blame, chiding
Braunstein’s finance team for taking “too narrow a view of their