Playing Queens: The CFO and CIO

In the fourth post of their 7-part series, John Elkington and Charmian Love look at how CFOs are coping with the new wild cards dealt by environmental, social and governance challenges.

Fan your cards and it's nice to see Queens, which rank third in the poker deck, after Aces and Kings. For us, the Queens in today's C-Suites are the CFOs, or Chief Financial Officers, sometimes supported by Chief Investment Officers (CIOs) and Chief Accounting Officers (CAOs).

Think about the suits used in playing cards and it's tempting to see these people as preferring to play hard-edged, financially focused 'Diamond' cards, leaving others to play 'Spades' (building the business), 'Clubs' (new partnerships) or 'Hearts' (the spectrum ranging from citizenship to sustainability-focused strategy). What the future will require, however, is leaders who can operate seamlessly across all these domains.

Ask who is most instrumental in helping CEOs and Boards make high-impact decisions these days—the choices and tradeoffs that build or destroy enterprise value—and the answer, more often than not, is the CFO. According to IBM's 2010 Global CFO Study, based on input from more than 1,900 CFOs and senior finance leaders worldwide, the demands on CFOs are growing fast and now extend well beyond traditional financial control and supervision. The best of these people now combine two key capabilities: finance efficiency and business insight.

But, sadly, they're not always best placed for the second challenge. Often obsessed with the day-to-day, quarter-to-quarter challenges of keeping the business on the rails and investors happy, CFOs have been among the least engaged C-Suite members as the citizenship and wider sustainability agendas expanded, especially in publicly traded companies. And that's a problem: Unless they can be engaged, in the core of what they do, much of what CEOs and other leaders promise in public will die a death. Great CEOs need great CFOs.

Even at the best of times, it's hard not to feel sorry for CFOs, caught between the proverbial rock of CEO enthusiasms and the hard place of financial market judgments. In the teeth of a global downturn, they deserve even more respect. But, in the past, most CFOs have been a real pain, routinely shooting down CEOs and other C-Suite colleagues who wanted to engage the sustainability agenda. If you cut your teeth on Milton Friedman's view of the responsibilities of business, pretty much all this sustainability stuff is a drag on short-term value creation.

CFOs will be skeptical of the findings of consultants like McKinsey, even when their surveys find that "more than 50 percent of executives consider sustainability—the management of environmental, social, and governance issues—'very' or 'extremely' important in a wide range of areas, including new-product development, reputation building, and overall corporate strategy." Many CFOs, indeed, may take perverse comfort that only "around 30 percent of executives say their companies actively seek opportunities to invest in sustainability or embed it in their business practices".

Now, as market expectations shift, CFOs must work on providing that wider insight—and experiment with switching from 'here's why we can't' to 'here are ways we might be able to do this'. At a recent earnings press conference, Paul Achleitner, CFO at German financial giant Allianz, spotlighted the company's successful and highly innovative new employee engagement program, SOPEX, which partners Allianz operational experts with social enterprises in Europe and Singapore.

Poll CFOs and other senior executives and it's clear that the landscape is shifting. A study of 175 CFOs and other senior executives conducted in 2008 by CFO Research with global commercial real estate and money management firm Jones Lang LaSalle, found that more than half believed their companies are "very likely" or "somewhat likely" to increase revenue, cut operating costs, improve investor returns and shareholder value, and improve employee retention through sustainability programs. The most often cited benefits were reduced risk ("very" or "somewhat" likely to produce benefits at 78 percent of companies), enhanced brand and reputation (77 percent), customer retention (72 percent), and improved employee health and productivity (68 percent).

The top objectives in corporate sustainability were regulatory compliance (ranked as a high priority for 61 percent and a mid-level priority for 26 percent of respondents), improving energy efficiency and reducing greenhouse gas emissions (a high priority for 47 percent, mid-level for 32 percent), and reducing the environmental impact of operations (45 percent and 32 percent). These objectives are dynamic, and likely to become more so, underscoring the need for future CFOs to engage proactively.

The greatest barriers include the inability to measure the effects of sustainability on shareholder value (ranked among the top three challenges by 46 percent of respondents), inability to document the effects on financial performance (37 percent), and a lack of standard decision-making frameworks that consider environmental factors (36 percent). Perhaps surprisingly, the least significant challenge was organizational resistance, ranked among the top three barriers by just 20 percent of respondents.

As for the future CFO agenda, the heat is being turned up. On January 27, 2010, for example, the Securities and Exchange Commission (SEC) instructed publicly held companies to "consider the effects of global warming and efforts to curb climate change when disclosing business risks to investors." Analysts see the new guidance as a milestone in the definition of fiduciary reporting for CFOs. Now they are required to take the initiative in identifying, analyzing and reporting on the risks that climate change may impose upon the company's investors.

More positively, at least for CFOs wanting more to do, there is a building shift towards much greater integration of environmental, social and governance reporting with companies' financial reports and accounts. The language varies, with some folk talking about integrated reporting, while others prefer combined or connected reporting, but the implication is the same. As business has to monitor, assess and report on a wider range of risks and opportunities, more of this is going to cascade to CFOs, ready or not.

Series: John Elkington on the New C-Suite

John Elkington is co-founder and executive chairman of Volans Ventures and co-founder and director SustainAbility. His most recent book was The Power of Unreasonable People: How Social Entrepreneurs Create Markets That Change the World (Harvard Business School Press, 2008). Charmian Love is Chief Executive of Volans.

Add New Comment

0 Comments