EY - The Master CFO Series: What lies beneath?

High Performing CFO

The role of the CFO

The Master CFO Series - What lies beneath?

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“I make sure that the local business leaders are all thinking about the long-term, as well as near-term, growth. There’s a real danger of throwing money at emerging markets and wanting to invest in everything.”
- Deirdre Mahlan, CFO of Diageo

The CFO is uniquely tasked with finding a delicate balance between the accelerator and the brake. Their role is to develop and enable the growth plans of the business, while also ensuring that these plans are grounded in sound financial criteria.

In our previous study, The DNA of the CFO*, we described the CFO as having a “unique optic” – a particularly broad perspective over the entire business, which makes them uniquely positioned to drive, enable and evaluate rapid-growth market investments.

Yet, in the same report, we also described them as being the objective “conscience” of the business. So while they are singularly placed to play an active role in rapid-growth market entry, they also have a responsibility to temper the push to be in these markets at any cost.

My primary role is to make sure that the business considers all aspects of the investment,” says Deirdre Mahlan, CFO of Diageo, a consumer drinks business headquartered in the UK. “As well as being part of the initial decision over whether or not we should enter a market, I also make sure that the local business leaders are all thinking about the long-term, as well as near-term, growth. There’s a real danger of throwing money at emerging markets and wanting to invest in everything.

This balancing act is further complicated when managing a global investment portfolio. The skills and judgment required in rapid-growth market entry is different to those deployed in mature markets.

In Western countries, the focus of the CFO has been on cost reduction,” says Christian Mertin of EY’s Advisory Practice in India. “In markets like India, on the other hand, the challenge is how to manage growth that might be in excess of 20% a year. That requires a different set of skills entirely and means that CFOs need to think carefully about the team they build around them to deal with that growth.”

The CFOs we surveyed vary in the extent of their involvement in rapid-growth market investments. Around one-third say that they are in charge of all key aspects of market entry strategy, which unsurprisingly rises to nearly two-thirds for Group CFO respondents.

A slightly higher proportion of 39% say that they primarily provide a supporting and advisory role. One quarter of respondents play a more traditional finance role, and only get involved in the more technical aspects of the investment, such as due diligence and valuation.

The influence of the CFO is clearly felt at all stages of the process. However, their involvement does tend to diminish toward the post-execution stage. While 29% say that they play a leading role at the pre-entry stage, only 20% say that they do so during post-execution (see chart 2).

Chart 2: At what stage(s) do you play a role in your organization’s strategy for entering rapid-growth markets?
EY - At what stage(s) do you play a role in your organization’s strategy for entering rapid-growth markets?

One reasonable explanation for this is that the majority of CFOs are most actively involved in the earlier stages when their advisory and analytical input is required to bring discipline to the evaluation of the investment opportunity. They then delegate to team members during the execution and integration stages, retaining an oversight role.

While good delegation is an essential capability for today’s CFO, a number of the leading CFOs we interviewed stressed the need for CFOs to play an active role at every stage in the investment.

The CFO needs to be involved right from the concept stage through to finalization,” says Paul O’Flaherty, CFO of Eskom, a utilities company based in South Africa. “Yes, you can delegate but you need to have the dashboards in place so that as you move along the investment process you are constantly back checking to make sure you are getting the return you expected.

Pinak Maitra, CFO of the Kipco Group, a diversified holding company based in Kuwait, goes further. “When you enter these growth markets, the opportunity is an obvious fact, so don’t spend time analyzing that. Instead, focus your attention on the execution because that is where the challenges lie.

As investors chase a limited supply of targets in a market where they need presence to fulfill their growth ambitions, there may be increased pressure on the CFO to be actively involved in the integration stage of the investment. Where investors are competing on price to acquire assets, and the gap between valuation and price widens, there will be more of a need to integrate these assets as quickly and effectively as possible to remain competitive.

* The DNA of the CFO: A study of what makes a chief financial officer, EY, 2010.