When FDE launched 15 years ago, finance professionals were slowly becoming the lynchpins of the corporate environment. Nigel Ash has been with FDE since the start. He looks back at 15 years of change and examines the role's future.
When Finance Director Europe published its first edition 15 years ago, it was already clear that the corporate finance function was changing. However, what may not have been fully appreciated back then was the full extent of that change and the sheer range of new responsibilities that the finance director would be obliged to handle at the start of the new century.
The original corporate finance professional, the bookkeeper, was required simply to keep the score in the accounts department. A company’s broker organised share or bond issuance and the chairmen or members of the board organised loans, generally from banks. And the bookkeeper counted.
The chairman’s office often kept the cheque book for big ticket items and after confirming with accounts that the funds were there, signed one of those big, old flashy corporate cheques with a flourish. And the bookkeeper counted.
‘LET ACCOUNTS DEAL WITH IT’
What made the bookkeeper count in an entirely different way was the emergence of the financial markets. By 1992, the euromarkets were well-established and plain vanillas were few and far between. Swaps were still relatively innovative, but many types of complex derivatives were emerging from the febrile brows of investment bankers. This is what foxed the chairman’s office. If it was all mathematics here and spreads there, the original lords of finance around the chairman or, indeed, the increasingly powerful and ‘sexy’ job of the CEO, abrogated their control, and the only option was to ‘let accounts deal with it’.
Accounts had the background to handle the increasingly sophisticated proposals brought by the investment bankers. And what they did not know, they very quickly learned. So now there were not merely accounts to control and books to keep.
An often intricate mesh of corporate debt constituting bank money, medium and long-term bond issuance and short-term commercial papers had to be directed by the finance function.
There were also credit ratings agencies to be worried about, whose analysts were the first the finance function learned to sweet talk. Accounts had become important. Moreover, here for the first time, in the form of the finance director, was someone who could accurately tell the board the cost of funding and produce a once unimaginably accurate figure for returns on investment.
Such insights of course were unlikely to stay within mahogany boardroom walls. The asset-stripping surge of the 1980s was based on a more penetrating analysis of financial realities than the target companies themselves had constructed. The finance directors of asset-stripping businesses demonstrated, in sometimes astonishing ways, just what hidden values were concealed within assets that had long been overlooked.
This new predatory environment gave two further significant boosts to the finance function. First, it unleashed a long overdue dispassionate review of what companies owned and why. Second, the finance director was charged with exploring ways to defend a company from the hostile attentions of an asset stripper. This did not simply mean giving the sales proceeds of superfluous assets back to shareholders, but also more elaborate constructions, such as poison pill defences.
WHERE THE SMART MONEY GOES
It is hard to pinpoint when the emergence of the title of ‘chief financial officer’ occurred. It demonstrates that the finance function had grown to such an extent that a paramount chief was necessary to work over the various roles, not least that of treasury, whose job was both to implement deals and monitor and protect the changing value of corporate assets. Perhaps it was a catch-up with the emergence of the chief executive officer title.
The divergence between the chairman and CEO role was key in the late 1980s and early 1990s, but so too was the growth of the CFO. The CEO, by taking on operational strategy, often walked into the limelight and became the public face of the company with big talk and big plans. The smart analysts, however, kept their eyes on the money, which was always where the CFO was sitting.
The key non-consumer clickable tab on any corporate website quickly became ‘investor relations’. Whatever vision statement from the CEO or tree-hugging environmental policy is set out elsewhere on the site, investor relations always leads straight into the finance function.
It could hardly go anywhere else. While the CEO may claim corporate strategy as being his pay grade alone, the modern truth is that if strategy becomes too long-term, investors are not interested. They home in first and foremost on the quarterly figures, market statements and the short-term financial health of a business. This information comes only from the finance function.
The rise of the ‘CFO’ moniker makes clear that companies now have two chiefs, whose roles, while distinct, are closely intertwined. The CFO remains answerable to the CEO, but he is also answerable to the markets.
INCREASINGLY RISKY BUSINESS
In the 15 years since FDE first hit the desks of Europe’s most influential FDs, a series of scandals has brought substantially greater focus on corporate governance and financial regulation. Because the buck now stops at the CFO’s desk, the job has become complex, high pressure and risky. In the US, pioneer of all good and bad business processes, there is evidence that the average tenure for CFOs has dropped to just 30 months. Only a quarter of finance directors have been in their jobs for more than five years.
CFOs seem doomed to suffer work-life imbalances with a clear trend towards spending ever more hours in the office. The flow of regulatory deadlines is as demanding as market relations. Indeed, as one CFO warned recently, with businesses now reporting monthly to regulators, quarterly reporting to the markets will be undermined. His view was that long-term strategies were hard enough to sustain within existing three-month reporting periods without businesses moving towards monthly figures.
The pressure on CFOs only looks set to increase in the next year or two. In the long boom, the imperatives were to get the best cost of funds, execute regulatory requirements efficiently, oversee proper internal governance, manage, protect or enhance the value of cash flows and convince markets spoilt for choice that here was another business worthy of their financial support.
The rules are now clearly changing. Managing in a recession requires the switch to a different financial skill set, which many current CFOs may hardly ever have practised and which nobody has ever worked within an environment of such extensive regulatory oversight.
Short-term accounting fixes that might have worked 15 years ago are no longer permissible. Some CFOs are going to be working hard on investor relations as the rules require them to reveal difficult figures. If the markets are not convinced, CFOs will be carrying the can, maybe even to a greater degree than the once almightily CEO, clear evidence of how the role has grown in the lifetime of this magazine.
TO THE NEXT 15 YEARS
Those original accounts department managers who found themselves renamed finance directors and thrust into the corporate frontline are probably now all comfortably retired on final salary pension schemes. They were not generally as well paid as their successors today, but then they almost certainly did not have to work half as hard.
This is the reverse of the job of financial journalist. Twenty years ago, he or she was extremely well paid because most reporters could not think of anything more boring than capital markets. But journalism is highly competitive. The good money in finance drew in many more writers, with the result that lineage rates have actually shrunk in real value over the last 15 years. Meanwhile, the average salary of the head of a finance function and most of his or her senior officers has grown considerably.
In the early days, financial hacks on every corporate and capital market publication in reality knew little of the markets. They had to work hard to find out. The secret of any specialist journalism is to first research and work out the right questions, then find some market participant who can give good answers.
Over the years, FDE journalists have benefited from some of the most outstanding minds in the European finance function. That they seem to have done a good job of passing on the fruits of those interviews in engaging and informative articles is evidenced by the continuing growth and strength of FDE. We hope we may long continue to get it right.