Can we take a step back and start from the actual finance function itself and the core responsibilities of that function within an organization?

One of the things I like about the function is that it is very diverse. The core responsibility and at the heart of it, the finance function is about numbers. That means the finance function has to produce both statutory accounting numbers, you need to make sure the accounting is right. It has to provide other management information to help direct the company. It is responsible for external reporting to investors and other stakeholders in the company. That's the core. What's really important in finance is making sure you have the team and capacity to deliver those numbers. That's at the heart of it.

Then more broadly, using those numbers to help understand and manage the business leads you into a number of other responsibilities. And I think the core of the CFO role is to be a strategic partner to the CEO and to the board in understanding the business, help direct it, understand what the capital market pressures are, and reflect those back into financial policy and the strategy of the company.

How would you split those two responsibilities between the CEO and the board? Do you see them as separate?

Well, they can be. Certainly, in the UK, where generally the CEO and CFO are the two executive directors, there's a very explicit expectation that the CFO will certainly act as an advisor and strategic partner to the CEO, but also has a responsibility - I always think of it as church and state - to report independently to the board. So the board, the audit committee of the board, and indeed regulators put particular obligations on the CFO about the integrity of the external reporting, and in the case of the board, to make sure that they understand anything in the business that may not be going as is being presented in the board.

Ideally, if there are differences between the CEO and the CFO, they are worked out outside the boardroom and the team presents a unified front following the CEO's lead. In instances where there's a divergence between the CEO's view of the business and what the CFO perceives to be going on, then you communicate usually through the audit committee, or in extreme cases to the regulator, about trends or facts about the business that aren't otherwise known.

Is the CFO completely independent of the CEO in the responsibility around the accounts and the quality of that to the board and the audit committee?

No, it’s overlapping. For one thing, a CFO reports to the CEO, so the CEO is the CFO's boss. But as I said, there's this unusual situation in which you both work for and your appraisal and so forth are done by the CEO, but there is this additional responsibility. It's only rarely that it ever becomes an issue. There's enormous power in the reporting function that may not require a direct confrontation with a CEO.

Ideally, you work together in a close partnership and share perceptions of the business. Whenever my perception diverged from that of my CEO, obviously my focus is to try to present my view and either convince the CEO that I'm right or accept that I'm not right. In other words, it should be evidence analysis-based and in partnership. I've been lucky enough to work only with CEO’s who are highly ethical to the extent possible, given public market pressures, and didn't care about how things are reported but obviously cared that they were reported appropriately and in a positive way, but never pushed for any accounting reporting or like that I would have thought inappropriate as a CFO.

A lot of this is hypothetical. You hope that there is never a divergence and that whatever debate happens takes place outside the boardroom. If at some point those diverge, then obviously there's going to be a problem in the relationship between the CEO and the CFO. There is a very healthy tension between the two.

But let's say that the CEO is pushing the envelope in terms of the accounts and the reporting and the CFO goes to the board and the audit committee. Does the CEO have influence over the committee and board? I mean excluding those instances where you have Zuckerberg or Adam Neumann and they have super voting stock. More broadly, how much influence does the CEO have over the committee?

Obviously, they would have a lot, and that I think has led to a number of real accesses in companies like that. When I think about the CFO role, I worked in one company where the CEO had voting control of the company. That's the case with the Spanish gaming company. In UBM, it was a broadly held public company with all of the disciplines that you would expect around a UK plc. A substantial one is about FTSE 125 when it was acquired by Informa.

I would say in a well-run public company, there shouldn't be much debate. If the CFO can't convince the CEO and other colleagues of his or her view, then that's something I would take on board as CFO. By the way, it was a big and complex business with lots of work, so there was room for debate. But I guess what I'm trying to say is I was never confronted with a situation in which I had to go to the board. What I did occasionally do is use the power of reporting to raise consciousness about an issue in the minds of the board in a way that was neutral and benign, but to begin themes about how reporting can be improved, or where there might be issues, for example, in the quality of the control environment of the company, meaning the quality of the accounting function. You can do a lot without confronting.

Most good CEO’s will recognize the extraordinary value of a strong CFO who understands the business and shares the same goals, which are ultimately to grow the business, grow the profits and the stock price. Generally, CFO and CEO compensation, at least in the UK, run very parallel - same objectives generally, a small part of bonus which is subjective and personal.

When looking at CFO turnover in public companies, when you see a lot of CFO’s either leaving or getting fired or just a lot of turnover, how would you look at that from the outside as an investor, for example?

I guess the first thing I'd say is that board turnover has become more rapid in recent years. I think companies are much more conscious of refreshing the skills of the board and I think there's more turnover in the board and particularly in the chairman of boards. That's part of why I think there is more turnover in CEO’s and CFO’s. Generally speaking, in CFO turnover, you do read about cases where CFO has failed to give proper guidance or something else has gone wrong in the company or falls out and the CFO gets fired. But generally speaking, a lot of the turnover is simply new CEO comes in and they want their own team. So that leads to a lot of the turnover. By the way, some CFO turnover is because they're promoted to CEO when the CEO steps out. Again, I think that's part of a general trend towards more turnover.

The other thing to keep in mind is they're great jobs, they're fun, but the day-to-day life of a corporate CFO, particularly a large publicly traded, complicated company is very intense. One of the things I've said occasionally, and I don't think it's unfair, is the CEO by definition is able to set much of his or her own objectives, rhythm, and what they decide to focus on and what not to focus on. The CFO has to attend to the process, systems, the reporting obligations I mentioned earlier. All of that means a routine which is demanding. I think several years in one of those jobs is enough.

Because of the responsibilities in control, financial planning and also the capital markets demands you have, would you say CFO role is more structured than a CEO role?

Yes, I'd say so. The responsibility is to make sure that every accounting close takes place or at least to make sure you've got the right team to get that done. There's a budgeting cycle that usually the CEO takes place in, but it's run by the finance function. There's the board reporting cycle, so most companies have 10 or 12 board meetings a year and the CFO tends to be one of the biggest producers of content to the board. Then there is public reporting, the two full closes a year. And following each of those, a round of meetings with investors. The investors want to see the CEO alone in some instances, the CFO alone in other instances, or they want to see both of you together to see how you interact. That just creates a heavy load of routine.

Many CFOs are also responsible for financial and other business processes. Some CFOs are responsible for the IT function and a group CIO reports to them. Again, it's a fun and diverse job but there are many administrative responsibilities or administrative extra responsibilities that happen on a timetable and simply must be done on time. Otherwise, you will be turned over.

In your experience, what are some of the techniques that you've used or have come across that gets the CEO-CFO relationship off to a good start?" Let's say that you join a company tomorrow, what are some of the things that you'd have in mind that would be the first that you'd do with a CEO?

I think broadly speaking, my principle in taking on any new responsibility is to listen a lot and speak little for a period of time. Because you may come into the job with external or public information that leads to questions and views. But I try to reserve judgment until I've thoroughly understood how a business works. Working with the CEO in a well-run company will involve onboarding so that you meet everybody in all your direct reports in the finance function, obviously, but then all of the business leadership, the executive committee, and their direct reports. By the way, meet customers, go to whatever it is, whatever service or product is being produced, understand it, see how it's done and get a sense of how people in the business view it. I think that's a multi-month process. It's a cliché, but I always say, two ears, one mouth, and try to stick to that for a long period of time.

I think one of the things a good CFO does, particularly if they change companies or even industries, is to be culturally sensitive and to understand that whether or not a business’ practices, systems and so forth are optimized, there's still a reason for them. And there are a lot of people who have invested in them, in the sense of worked on them, and think they're good. Understanding that first and then being able to move diplomatically to where you think the finance function needs to be. That's part one.

As you're coming on board the company, part two is understanding what the mission of the company is and understanding what the CEO thinks the mission of the CFO is. Again, that can vary. That can be "our accounting is messed up, and we need to clean up the accounting function", or it could be "we're doing a massive program of M&A and we're going to need capital markets access and the integration of M&A" or it could be "we need a systems overhaul and we need you to lead to the installation of a new ERP or other major systems within the company."

Listen, understand the environment. Next, understand what the mission is, make sure there's consensus around that, develop that as you build your knowledge and your hypotheses about the company. Then finally start to develop data because I think it comes back to the numbers. Well-run companies are managed on the basis of data. That should fuel every decision and every view of the company. So as you gather that, then you can further build your hypothesis and start to enter a dialogue of "we're here and this is where we want to go strategically and this is the mission of the finance function, and here's how I plan to get there. Here's what I need in terms of being able to hire my team. Here's what I need from the business. Here's where I think we could do better in budgeting." Whatever it happens to be, begin to focus on those.

To me, the key of it all is to remain open, take in information, take in data and then start to act or at least to convince others that you will act in a way that benefits the company.

What about communication with the CEO? Is there a certain structure you put in place?

It depends very much on the relationship between the two. When I first joined UBM, one of the reasons that they recruited an American is that more than half of the revenue generated was in the United States. Their thought was that it might be beneficial to have me, the CFO, based back in the US after a period of understanding the company.

Within a year, I concluded that that wasn't the right way to go because the CEO in this case, David Levin and I had a really close relationship. We sat in offices right across from one another. That close, daily or even hourly relationship led to a very strong partnership between the two of us, which would have been much harder to attain if I hadn't been there. Also the aspects of board meetings, investor meetings, and everything else would have just been tough from the other side of the Atlantic.

In other situations, yes, there has to be frequent contact. It can be set up as a weekly or bi-monthly meeting to cover anything that is routine. Also, in the case of UBM, we had an executive committee which met monthly. So, at the very least, that would be an opportunity to meet with not only the CEO but the group as a whole to make sure that any themes or issues you want to pursue across the company is talked about. So yes, there has to be a system, which is very particular to each executive style, and at the end of the day has to be driven mostly by the CEO style. If the CEO is relatively informal, wants daily contact, and to have a sounding board very nearby, then that's the way you'll run it. If the CEO is more distant or less accepting, then I think you have to push for regular meetings whose frequency will depend on how urgent the issues you're dealing with are.

Having said all that, finally, there's so much that the CEO and the CFO have to do together. In a good company they should want to be doing things together like reviewing budgets, preparing for board meetings, preparing for investor meetings. All of that means that you will have frequent contact and work together even if the CEO is relatively distant or wants a more formal relationship.

Could you please explain the dynamics between the CEO, the CFO, and the board and the role that each of those play in an organization?

I can speak of my own experience, but it varies a lot. CFO’s are expected by the board to stand up to the CEO - and again, I'm talking about best practice - to challenge where necessary and to report to the board on issues where, there may be a difference of view or difference of opinion. In particular, if there's some sort of fraud or issue that the CEO doesn't want to have discussed at the board level. Or other issues. They can be as broad as “we haven't communicated a strategy properly to the company as a whole and that's creating motivational issues.” Whatever you see as an issue.

Having said that, the board has invested in the CEO and the CEO is clearly the boss in the business. And the CFO report to the CEO first. So, it's a subtle relationship where you need to show unity but also independence. I think the way that played out for me is that I would have frequent meetings with the chairman and the chairman of the audit committee which were independent of the CEO.

The audit committee, in particular, is a forum where the CFO can present information that may be distinct from what the CEO projects. For example, I was very concerned about IT security, so I prompted the audit committee to ask me about IT security. That led to a series of conversations and initiatives that dramatically improved IT security. That was one of a number of issues. Again, it wasn't a big difference of opinion, but at the same time, the CEO and his direct reports, who are business leaders, all wanted to make their budgets so we can make our bonuses. And the CFO has to take a longer-term view and say, "Yes, but we're exposed to significant risk." So how do you find a way to communicate that stuff? Ideally, it isn't confrontational.

It varies a lot. I know companies where the CEO gets 95% of the board time and support and the CFO gets 5%. I've been very lucky to work in companies where my voice as the CFO was very carefully listened to on the board and respected by everyone around the table.

To go back to that point, you mentioned the CEO and his staff wanted to make a budget and therefore didn't want to spend on IT security, for example. You, on the other hand, were a bit worried about the long-term sustainability of that security and therefore you, as a CFO, had a chance to voice your opinion directly and independently to the audit committees who would then force the CEO to revisit. Is that how it worked?

"Forced" is a strong word. Reporting on IT security requires a more regular discussion of what IT security standards should be. By the way, when I was in that position, cybersecurity had not taken on the prominence it has today and so it was harder to come up with a standard to which UBM should adhere. Again, I'm perfectly prepared to confront when necessary. I think it's generally better in an organization if you can find ways to convince as opposed to confront. That's a case where I used the audit committee as a neutral means to get out the information about where we stood on cybersecurity and to make sure the audit committee was conscious of where that was and what priority it should take in the audit committee's agenda of risk management. The audit committee chair was eager to follow up on that.

How does that work then with the CEO? Can the audit committee make that final in terms of "we want to see a report on this"? How does the CEO and audit committee relationship work?

Again, it varies a lot. Under one chairman, neither the chairman nor the CEO attended audit committee meetings. Under the second chairman I worked with at UBM, she and the CEO often attended the meetings. There are no secrets here. It's just a matter of using whatever resource you have to get to a consensus between the board and the executive about what needs to be done.

Do you think the best practice, in your opinion, would be for the chairman to join those meetings with the CFO and the audit committee?

I think it probably is. The reason I hesitate when I answer that is that, I'm also not an audit committee chair. Part of the reason that audit committees exist and the other committees of the board exist is because they need to do work. It’s best practice for anyone on the board that has an interest to attend the audit committee meeting unless it cuts into their capacity to do the other work they're responsible for. In the case of an audit chairman, that's quite a lot of work. In the case of a remuneration committee chair, again, there's a fair amount to do.

Going back to the principle of church and state, personally, I think it is very desirable for the CFO to have a direct and close relationship with the chairman of the audit committee. But whether other members of the board attend the audit committee meetings or not doesn't necessarily have any impact on that relationship, because there's a lot that is done outside of the audit committee and in preparation for the audit committee.

How have you seen the dynamics between the board and executives change in the last decade or so?

I think boards are getting more conscious of the fact that their obligation is to help set the strategy, agree on objectives with the executive, serve as a sounding board but not to execute, and that the executive's responsibility is to deliver. Clearly, when the executive doesn't deliver or is dissatisfied, then its responsibility is also to make the changes necessary. So, at the end of the day, the board has to decide if the CEO or CFO or any other senior executive isn't performing and to take action on that.

But boards are increasingly focused on strategy and risk management. But the definition of risk management is also broadening dramatically. For example, one of the big themes at the moment is culture. So, you'll find boards are more interested in what data is coming out of company surveys and what other indications there are of the company culture. They are making sure that the company has an appropriate policy on harassment of any kind in the workplace, because those are increasingly big risks.

I think the balance of a good board is between agreeing on the strategy, understanding how performance plays out relative to that strategy and adjusting as necessary, evaluating the executive, and then managing risk. In a public company, that's particularly important - making sure that risks that can be managed are managed and the shareholders agree what risk level is being taken in the company or what risk level is appropriate from the view of the company.

Just thinking of some of the recent examples like WeWork or even Tesla, for example, where you have a CEO that has substantial power in the business. Does the CEO design and build the board or how does the board kind of regulate the business in the face of a very powerful CEO?

It's very tough in these situations where the CEO is a founder and has one way or another created huge value. I think Tesla and WeWork are good examples. Uber is another case study. I think the message from all of those is that it's just hard if someone owns the bulk of a company, and in these cases has probably put together the board. Checking their powers is difficult, but I think we're also seeing that you have to do it.

My guess is that after WeWork, SoftBank, etc., that you will see investors pushing much harder to make sure that they have control of the board notwithstanding a very powerful CEO. Because the risk is just too high if you don't have that. In the case of WeWork, it’s just extraordinary what happened. With Adam Neumann enriching himself ultimately at the expense of balance sheet of the company, and that contributed enormously to the failure of the IPO.

Let's say that we're looking at a typical public company and the board of that business. What are some of the structures that you'd put in place or would like to see in place?

I think it's much easier in a public company. By the way, there's a very important difference between the US board and executive organization and that in the UK. In the UK, it is generally the case that the CFO is a board member. In the United States, it is rarely the case that the CFO is a board member. But on the other hand, in the US, the CFO has stronger and more explicit responsibilities to regulators. That's how I think the power of the function is maintained in the US.

This is part of what has bluntly, in my view, gone wrong in US management. We're having these very innovative people come up with companies; they’re not necessarily mature, they're not necessarily accustomed to thinking about public shareholders. In many cases now, the vast liquidity of venture capitals and private equities mean that these individuals can get funding for a long time without having to put a board in place, like the kind you would expect in a well-run public company. I think that is one of the negative aspects of the growth of private capital particularly in the US, but worldwide.

I had a traditional business education many years ago now, but I continue to believe that public ownership and public reporting is the best way to run a corporation because it requires better governance and more transparency. If I had my way in the world, it would be much, much harder for the Uber’s, WeWork’s, and Facebooks of the world to raise so much capital before they become public, thereby putting the founder executive in positions of enormous power. Frankly, if you're a CFO in one of those companies, if you're lucky, you will have an impact, but the CEO will rarely back down in the face of a CFO disagreement.

So if you have a founder of a company that's still CEO of a public company, it's very difficult for the CFO to have an impact or be truly independent, since the CEO has so much ownership over the business?

Let's say you're the SEC or you're regulating these private companies. Would you push them to stricter reporting requirements when they get to a certain size in the private market?

Yes, but one of the reasons that companies prosper in the private markets is that the public markets have become so obsessed with short term profitability. It is very rare when a CEO can run a company well and stand up to that desire for ever-increasing quarterly EPS. One of the notable standouts is Jeff Bezos who is prepared to invest in the business at the expense of short-term profitability because he's focused on long term value. By the way, he is a very traditional finance guy in the sense that people use DCF as the principal means valuing an initiative or a company. But again, that willingness to step up and say, "We're investing in business, it will slow down revenue and profit growth or may enhance revenue but negatively impact profit" is rare.

The benefit of private ownership, quite apart from new ventures which aren't ready to be public, is that some initiatives that require greater investment are harder when you're public. To me, I guess, if you were to require much more reporting of private companies, then you'd have to maintain the long-term investor mindset that is typical in both venture and private.

I think we've seen, especially in the last five years, CFO’s becoming more strategic, where they have more responsibility to provide strategic guidance and help the CEO, rather than being purely responsible for the accounting function. Do you think that's the best step for someone in the finance function to transition towards being a CEO?

Absolutely. Again, particularly in the UK system, when things work well, the two are in very close partnership. And that's why you see so many CFO stepping up to become CEOs of companies. Not every CFO can do that. Some companies are at a stage where the accounting is the most important thing that's required and then there are some companies where accounting is pretty routine, but you need to change the strategic direction. But yes, I think for a CFO role to be fulfilling and to be a growth opportunity, it requires that strategic partnership with the CEO, meaning a deep understanding of the company’s strategy and having influence in the direction of the company. This puts the CFO in a very good position, not only to help the CEO and the company deliver but also to learn the skills that are necessary to run the company.

We haven't touched much on the capital markets' responsibility. How do you see that has changed in the last 10 years? I know you mentioned that investors are very short term focused, unfortunately, but how would you advise CFO’s to deal with that pressure?

One, first of all, always understand the business and be able to discuss it in broad terms. Not just number terms, but be able to explain the drivers of the business. I had one CEO that never did investor relations meeting. The best practice I think is for the CFO and CEO to be able to finish each other's sentences or alternate the same sentences in giving an investor presentation. That's point one. Make sure you have a deep understanding of the business, which is consistent with the CEO, and make sure you have the capacity to explain it to outsiders.

Once you've got that, then presenting the aspects of the business that are important to a given group of stakeholders. And I say that because it could be talking to senior bank debt providers, you could be talking to the bond market, you could be talking to the rating agencies, you could be talking to the equity capital markets and your existing investors. Each of those has a particular set of needs. Clearly, lenders want to make sure that debt capacity is strong. Equity holders want to make sure that growth is going to be good. So, although all of those conversations have to dovetail, there's a bit of a different emphasis to each of them. So, I think it's two things: understand the company but then understand your audience.

How do you balance giving investors what they want to know and hear i.e. EPS, free cash flow, whether it's net debt, whatever it may be, versus not giving them too much information and providing hard targets that can put the business under more pressure?

Actually, for EPS, you obviously have to report. I think what you're talking about is guidance - to what extent you give forward-looking guidance. I'm a big believer in the theory that you should not give guidance. But the reality is most companies are brave enough to do that or they lose that discipline or they lose that view when times get tough. When you're growing and you're able to meet, say, a comment like "We expect growth to be in the range of 7% to 10%", and that's how the business grows over time and your margins are pretty constant, then not giving guidance might actually work.

When times get tough, or when companies are complicated and transitioning, managements tend to give more and more information. By the way, I guess there are two things I'm not talking about. One is forward-looking guidance. But then that also relates to how much information you provide unrelating to finance, so what other KPIs you report externally. I think there should be some operational KPIs. When things go badly, i.e. if you're hitting recession or a downturn, or one of your businesses is doing poorly or is going through a transition, again, management start to explain more, and they give more data. And sometimes it's actually hard to go back from that and say, "I provided you this additional detail during a time when it was particularly relevant. I'm not going to provide it anymore because analysts always want more information."

So you have to be careful about what you decide to disclose at those tough times because invariably, the more you disclose, the more hampered you are, the more questions you have to answer, and the less people will focus on the long term. Implicitly what I'm saying is some key KPIs are temporarily very important, some are strategic and fundamental to the business. Those are the ones you want to report. The other ones that may be temporary such as the turnaround of a given division or the underlying demand for a particular part of the business that's been struggling.

One last question is what would be a couple of key best practices of communicating with investors and what are the lessons that you've learned over the years in your interactions?

I think transparency and commitment to high standards, both of data and ethics, are really important. And I think investors see that. I guess the things I've learned are - and it's a truism, everybody knows this - you should always surprise on the upside. When things go badly, you should be quick to report them and very sensitive to the fact that analysts may have taken a position and say that a strong buy under stock, or investors have obviously been caught out. So, report as quickly as you can when you have bad news. Frankly, try never to have bad news if you can possibly avoid it. Make sure that whatever happens is in the range of possibilities that you communicate.

Bob, it's definitely a very encompassing role to a certain extent, but is there anything else to the CFO today or somebody wants to be a CFO? Any specific characteristics that you would look for if you are hiring a CFO to take over from your vision, for example?

I would insist on intellectual capacity, a real strategic understanding of business generally and the industry that you're working in particular, absolute depth of knowledge in at least two of the three major areas of finance. That is to say, accounting, management information, and strategy. You've got to be really good at least two of those because then you can always learn and add the other.

People leadership is important. People think about the numbers, finance functions tend to be big and you got to manage that. Then you have to get the story out to everyone in the company. So, you need someone who is a good communicator and likes to communicate. Then finally underlying all of this, the essential quality is integrity. Because, again, the CFO ultimately has to have responsibility for the integrity of the information being given to the markets and the board and other stakeholders.

Great. Bob, thank you very much for your time today.

Relationship between the CFO and CEO

What are the core responsibilities of a CFO versus CEO?

What is the role of the audit committee in a public company and what is the relationship with the CFO?

What are the key factors CFOs should consider when first communicating with the CEO?

If you join a company as CFO where the CEO has supervoting stock or majority ownership, what are some of the ways you can bring up any potential concerns you may have around strategy or processes within the business?

Relationship between the CFO and CEO

Former CFO, UBM and Vice Chairman of the Board, eDreams

inpractise.com/articles/cfo-responsibilities

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Executive Bio

Robert Gray

Former CFO, UBM and Vice Chairman of the Board, eDreams

Interview Transcript

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Relationship between the CFO and CEO(October 28, 2019)

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