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Welcome to CFO Insights, a bi-weekly thought leadership series from Deloitte, dedicated to addressing the issues that Chief Financial Officers (CFOs) and finance executives face today. CFO Insights provides an easily digestible and regular stream of perspectives on the challenges you are confronted with. See below our Global CFO insights reports.
CFO Insights: How digital tools are helping unlock M&A value
Companies pursue mergers and acquisitions (M&A) as a way to drive value, but, for a variety of reasons, the end result may not always meet expectations. Given the expanding array of digital tools available to help address the M&A process, however, CFOs now have the opportunity to not only play a greater role in M&A strategy, but also guide such efforts toward success. In this issue of CFO Insights, we will discuss how an expanding array of digital tools may be leveraged at different stages of the mergers and acquisitions process. For more details, access the D.com page.
Execution risk: Stepping over 12 common hurdles
The risks are involved in many processes such as expanding globally or in changing your business model or even in getting projects that are off the rails back on track. Solutions may entail everything from reorganizing your own group to upgrading talent, structure, systems, and processes—possibly all at once. Little wonder that in our quarterly CFO Signals™ report, execution risk is routinely named a top internal risk.
Solving for execution risk begins by understanding its root causes. And based on our numerous CFO Transition LabTM sessions, we have identified several factors that leaders must be able to address to deliver successful change initiatives. In this issue of CFO Insights, we’ll outline the 12 main ones and make the case for why thoughtful consideration of these factors can help improve the odds of success.
Culture shift: Changing beliefs, behaviors, and outcomes
Organizational culture can be both a priority and a challenge. Many executives find it difficult to precisely articulate and deal with culture. Indeed, Deloitte’s Global Human Capital Trends 2016 report, based on a survey of more than 7,000 business and human resources leaders, found that 82 percent of respondents view “culture as a potential competitive advantage,” while only 28 percent believe they “understand their culture well,” and 19 percent believe their organization has the “right culture.”
Little wonder that not systematically understanding culture and addressing change when needed can undermine leadership success and corporate performance. In this issue of CFO Insights, we outline some straightforward ways in which executives in general and incoming executives, in particular, can diagnose the prevailing culture and, when needed, ways in which they can work across the C-suite to drive cultural change.
CFOs and the digital transformation of finance
Finance in a digital world: It’s crunch time!
From cloud computing and robotics to analytics, artificial intelligence and automation, a new class of digital disruptors is transforming how business gets done. Expect these disruptors to have a big impact on the future of finance organizations. But what exactly will their impact be? What is the future of finance in the face of these developments? Understand what’s in store and hear off-the-record perspectives from CFOs with the resources that follow.
Deloitte's original point of view, Crunch time: Finance in a digital world—based on extensive research with finance executives, including in-depth interviews with CFOs of global businesses—explores the various digital disruptors and may be the quickest way to understand what's in store for finance organizations as they hurtle toward the future. In the follow-up report, Crunch time, too: CFOs talk off the record about finance in a digital world, 30 CFOs share their unfiltered thoughts and experiences around a broader discussion of finance and what it means to make the digital journey.
Three ways to strengthen the CFO-CIO partnership
The importance of getting the CFO-CIO relationship right cannot be overemphasized. In this issue of CFO Insights, we discuss three actions critical to realizing a stronger CFO-CIO partnership.
With technology playing a larger role in driving company value and competitive advantage, it is more important than ever that CFOs collaborate closely and effectively with CIOs. Yet, in a poll taken during a recent Deloitte webcast, “Forging a New CFO-CIO Partnership—The rise of the Chief Integration Officer,” fewer than one-third of respondents said the CIO and CFO at their company share a strong partnership characterized by mutual understanding.
Despite the challenges, CFOs and CIOs can improve their ability to align IT investment with strategic growth plans and business performance if they strengthen their partnership. Moreover, many CFOs and CIOs understand the importance of getting this relationship right: for CFOs IT is often one of the largest budget items, and for CIOs, 22% report to their CFOs.
That partnership is particularly important now. In the Q1 2016 CFO Signals™ survey, many CFOs cited efforts to improve strategies for managing IT and for providing better data and insight into their top agenda items for 2016. They also indicated a broad range of tactical efforts to implement, upgrade, and consolidate financial systems. And in this issue of CFO Insights, we’ll discuss three actions critical to realizing a stronger CFO-CIO partnership: achieve mutual understanding, establish effective communications, and identify opportunities to collaborate on delivering value to the business.
The dangers of being too decisive
Many CFOs face external or self-imposed pressure to quickly reach a conclusion. However, prematurely focusing on execution can exacerbate decision-making biases and lead to excessive risk-taking. In this issue of CFO Insights, we discuss the different decision-making phases and offer suggestions for mitigating the pitfalls of execution-oriented mindsets.
As CFO, you confront multiple decisions every day. Some, such as fixing a meeting agenda, may border on the pedestrian. Others, like launching a new product, pursuing a merger, or filling critical personnel vacancies, can have a material impact on your company’s fortunes. Compounding the challenge, many CFOs face external or self-imposed pressure to quickly reach a conclusion.
And no wonder. We are inundated with breathless proclamations about the unprecedented pace of modern business and competitive intensity. The implication is that by waiting a week (a day, an hour) before choosing a course of action, an opportunity might be missed, to the perpetual detriment of the fence-sitter. Serious business writing touts the importance of “decisiveness” for effective leadership. Classes profess to make you decisive, for both personal and professional gain. And we are told that “indecisive” is among the worst epithets that can be levied against an executive.
However, a rich body of research in social psychology and behavioral economics suggests that decisiveness is not an unequivocal good. Studies on “mindset” reveal that, when contemplating an important decision, prematurely focusing on execution can exacerbate decision-making biases and lead to excessive risk-taking. In this issue of CFO Insights, we will discuss the different decision-making phases and offer suggestions for mitigating the pitfalls of execution-oriented mindsets.
What it takes to be an advantaged acquirer
Last year was one for the M&A record books and while M&A may not continue at this record pace, the trend seems far from abating. In this issue of CFO Insights, we will examine the common mistakes that happen in merger waves and outline ways that CFOs can potentially avoid them by becoming advantaged acquirers.
As of the end of 2015, some $3.8 trillion had been spent on mergers and acquisitions—the highest amount ever—according to data compiled by Bloomberg, and while M&A may not continue at this record pace, the trend seems far from abating. Many companies, in fact, intend to continue coupling in 2016 for numerous strategic reasons, including expanding in existing markets and scale efficiencies, reports the most recent CFO Signals™ survey.
Still, this type of volume indicates that we may be in a “merger wave”—concentrations of accelerating M&A activity—possibly the sixth so far in the last century. And while time will tell if we have crested it or not, this type of heated pace can produce mistakes, such as deals that don’t achieve the anticipated benefits or fit strategically with the acquirer. Moreover, premiums acquirers agree to pay over the target’s pre-bid share price tend to escalate as competition intensifies.
Amid such deal exuberance, it may behoove CFOs to not only become an acquirer, but to become an advantaged acquirer. After all, several factors that have been driving M&A for the last few years—low interest rates, accessible and inexpensive financing, healthy balance sheets, and an economy that’s growing at less than 4%—remain intact. To win in this environment may involve something more: a set of detailed action steps that helps companies identify strategic deals instead of simply reacting to the spate of available deals and auctions. In this issue of CFO Insights, we will examine the common mistakes that happen in merger waves and outline ways that CFOs can potentially avoid them by becoming advantaged acquirers.
Facing (and embracing) strategic risks
Executives, including CFOs, are finding that by focusing on strategic risks, they are better equipped to identify what could undermine their future business, adapt to new challenges, and take advantage of emerging opportunities.
Risk management has undergone a refocusing in recent years, in an attempt to make its techniques and processes more adaptable to shifts in business and the economy, and more responsive to the demands of C-suite executives. And those same executives, including CFOs, are finding that by focusing on strategic risks, they are better equipped to identify what could undermine their future business, adapt to new challenges, and take advantage of emerging opportunities.
What exactly are strategic risks? In short, they are the risks that threaten to disrupt the assumptions at the core of an organization’s strategy. Think everything from black swans to political upheavals and financial crises, as well as new technologies that can render a business model obsolete. When asked to name specific risks that will impact their business strategy over the next three years, C-level executives surveyed by Forbes Insights on behalf of Deloitte Touche Tohmatsu Limited (DTTL) ranked pace of innovation (30 percent) and increased regulation (30 percent) as the main ones, but many reported not fully applying their risk sensing capabilities to strategic risks (see, “Risk sensing underutilized for strategic threats”).
Often hard to spot and manage, strategic risks typically do not respond to traditional risk management approaches, such as hedging or mitigation. Since such risks can also point to an organization’s next opportunity that forces executives to make a choice: “Are we going to try to resist this, avoid it, and push it off if possible? Or are we going to embrace it as an indicator of where the market is going and where our next big opportunity may be?”
Diagnosing your team—and curing its ills
As CFO, you are critically dependent on your leadership team to successfully execute your vision. But just as ineffective individuals drain your time, an ineffective leadership team can diminish your standing in your company. In this issue of CFO Insights, we offer a simple and practical framework to diagnose how your team works, framing a few focusing questions and assessing key team attributes.
As CFO, you are critically dependent on your leadership team to successfully execute your vision. But just as ineffective individuals drain your time, an ineffective leadership team can diminish your standing in your company.
Still, executives often have a fuzzy definition of what a team means to them. For some, it’s like a relay team—with high-end runners who deliver the best possible performance in their leg and cleanly hand off the baton to the next participant. Others want a team that is more like a basketball team—where people play their positions but also mutually adjust to changing situations on the court. Sometimes the team must operate in both ways: a relay team for structured situations, a basketball team for unstructured ones.
In this issue of CFO Insights, we will offer a simple and practical framework to diagnose how your team works, framing a few focusing questions and assessing key team attributes. Building on the work of Richard Beckhard, a founder of the field of organization development, and the more recent work of Alex (Sandy) Pentland at the Massachusetts Institute of Technology (MIT), the framework lays out six key areas in which to assess a team: brand, shared goals, clear roles and responsibilities, clear processes, interpersonal relationships, and the communication dimensions of energy, engagement, and exploration. For those familiar with the literature, we have added brand and communications to augment the Goals, Roles, Process, and Interpersonal Relations (GRPI) model credited to Richard Beckhard.
Creating an effective communications program
When taking on a new role, it is important as CFO to quickly establish or elevate your communications program. After all, you may be inheriting hundreds or even thousands of staffers across the globe to whom you may need to communicate a renewed mission, strategy, or brand objectives. Furthermore, there may be numerous other stakeholders outside of your company with whom you have to communicate (for example, investors, bankers, customers, and so on). A transition is a good time to step back and create a proactive communications program to help you achieve your objectives. First impressions matter.
While many finance chiefs in our CFO Transition Lab recognize the importance of communications, few have access to sufficient communications support. And when communications support is available, it lacks a systematic approach and varies in quality. Given the complexity of modern multinational organizations, the number of stakeholders a CFO should connect with, and the competition for attention, it is essential to execute a disciplined communications program to get critical messages to specific stakeholders without being drowned out by the noise or lost in translation.
In this issue of CFO Insights, we will introduce a simple model to help finance chiefs create and execute a disciplined communications program that aligns to their core objectives.
Compliance risks: What you don’t contain can hurt you
As global regulations proliferate and stakeholder expectations increase, organizations are exposed to a greater degree of compliance risk than ever before. Compliance risk is the threat posed to a company's financial, organizational, or reputational standing resulting from violations of laws, regulations, codes of conduct, or organizational standards of practice.
To understand their risk exposure, many organizations may need to improve their risk assessment process to fully incorporate compliance risk exposure. The case for conducting robust compliance risk assessments can be made given today’s business complexity. Nevertheless, according to a survey conducted jointly by Deloitte & Touche LLP and Compliance Week, 40% of companies do not perform an annual compliance risk assessment.
In this issue of CFO Insights, we’ll discuss how CFOs can work with their Chief Compliance Officers to understand the full spectrum of compliance risks lurking in each part of the organization. In addition, we will discuss ways to assess which risks have the greatest potential for legal, financial, operational, or reputational damage and considerations for allocating limited resources to mitigate those risks.
Capitalizing on the promise—and the power—of the Internet of Things
For CFOs, understanding the Internet of Things (IoT) and developing a point of view regarding its potential ramifications is essential. In this issue of CFO Insights, we will examine how the IoT can influence business models both in terms of cost saving and asset efficiency and in driving top-line growth.
Over the last 20 years, the Internet has been nothing short of transformative. And judging by the numbers, the Internet of Things (IoT)—a suite of technologies and processes that allows data to be tracked, analyzed, shared, and acted upon through ubiquitous connectivity—may have the same impact in half that time. Consider the following:
· Estimates are that there will be 25 billion embedded devices and intelligent systems by 2020.1
· Some 44 trillion GBs of data will be emitted from those devices.2
· On a global basis, the IoT will enable some 4.4 billion people to be connected.3
· Overall, the global IoT market is expected to reach $4.3 trillion by 2024.4
How did this happen? In short, the IoT evolution has been driven by a variety of developments across technology platforms. Consider the falling costs of computing power and data storage as well as the emergence of the cloud and advances in analytics, and you can see how sensors can now be placed on almost any device. Marry that with bandwidth, ubiquity, and mobility, and you have all of the ingredients of an ecosystem with endless commercial applications.
Moreover, the speed with which this ecosystem has evolved has allowed scalability and a rapidly rising interest in harnessing the power of the IoT. The result is that almost every company, regardless of sector, needs to think about the potential applications of the IoT—from cost avoidance to supply-chain efficiency to fundamental disruptions of business models. And for C-suite executives, and CFOs in particular, understanding the IoT and developing a point of view regarding its potential ramifications is essential.
In this issue of CFO Insights, we will examine how the IoT can influence business models both in terms of cost saving and asset efficiency and in driving top-line growth. In addition, we will address the components of an effective IoT strategy and the metrics needed to truly embrace how the IoT is attracting and engaging customers.
What audit committees want from CFOs?
Since 2010, Deloitte’s CFO Program has delivered more than 700 CFO Transition Lab sessions—one-day workshops that help finance chiefs onboard into their new role. In preparation for these sessions, we have interviewed hundreds of audit committee chairs and members across 20 countries. This edition of CFO Insights synthesizes key lessons learned from those interviews in terms of what audit committees generally want from their CFOs.
1. “No surprises”: One of the most common phrases we hear from audit chairs is, “I want no surprises.” While surprises are generally inevitable in the course of business, audit chairs and committees want the CFO to manage the avoidable issues and inform them in a timely way when the unexpected occurs.
2. Strong partnering with the CEO and other leaders: Audit committees and the overall board want to see a CFO who effectively partners with the CEO and other key business leaders. The partnership with the CEO is the most important of these relationships. Although some CEOs and boards prefer their CFO to focus on the traditional roles of operator and steward, many look for support from the finance chief as a strategist and catalyst
3. Confidence in finance organization talent: As the workhorse for creating accurate and timely financial reports, the broader finance organization is of interest to audit committees. They want to know that the organization is stable and supports and complements the skills of the CFO.
4. Command of key accounting, finance, and business issues: These days, CFOs are often appointed with finance or operating business backgrounds versus accounting backgrounds. Yet, to truly own their CFO role, these appointees need to master the key technical accounting, financial reporting, tax compliance and planning, control environment, finance, or treasury issues pertinent to their companies.
Unlocking the secrets of employee engagement
After decades of corporate discourse about the war for talent, it appears that the battle is over, and talent has won. Employees today tend to have increased bargaining power, the job market is highly transparent, and attracting top-skilled workers is a highly competitive activity. Many companies are now investing in analytics tools to help figure out why people leave, and the topics of purpose, engagement, and culture seem to weigh on the minds of business leaders everywhere.
Recent research conducted by Bersin by Deloitte suggests that the issues of “retention and engagement” have risen to the number-two spot in the minds of many business leaders, second only to the challenge of building global leadership.
In short, in many cases, the balance of power has shifted from employer to employee, pushing business leaders to learn how to build an organization that engages employees as sensitive, passionate, creative contributors. The shift taking place is moving from improving employee engagement to a focus on building an irresistible organization. In this issue of CFO Insights, we’ll discuss how the traditional employee-work contract has changed and why companies should embrace the shift needed to become irresistible.
Talent dilemmas: What should you do?
Among the hardest decisions CFOs face are those pertaining to people. While there are no simple answers to talent dilemmas, identifying and understanding critical trade-offs and having processes to address them may lead to better resolutions. In this issue of CFO Insights, we discuss three talent situations that can disrupt your team and offer approaches to consider.
Pass over or pass on?
Time and again, new executives tell us that their biggest regret in their first year on the job was moving too slowly on talent issues. And longer-term finance chiefs know that not having the right people in the right seats may compromise the execution of their vision. The key to dealing with a passed-over individual is to have clarity on possible solutions. Those solutions should be mutually advantageous (that is, you get to develop a more effective team member and the passed-over candidate has an opportunity for career growth). When this isn’t feasible, you may want to undertake a strategy for an orderly knowledge transfer.
Rescue me…or not
A critical role of every executive is to develop his or her team. But watch out for the rescue fantasy. CFOs sometimes fall victim to the “rescue fantasy,” where a lot of time is spent trying to save certain staff members, only to find it was better to replace them. A rescue effort with a direct report should generally maintain an established timeline that helps resolve the situation. In addition, using third-party resources such as external coaches, training programs, and external networks to help individuals develop the skills they lack can give you leverage in rescue efforts.
Let it go, let it go
Given the ever-increasing demands on finance and market trends regarding talent, there are times when you need to shake up your team to either fill a gap or meet new responsibilities. But making internal changes, particularly promotions, comes with a downside: internally promoted executives often make choices that can constrain their time and compromise their credibility. How? They continue to do their old job for so long that it gets in the way of addressing the new job. Beware of the newly promoted executive continuing to do his or her old job in addition to the new one. Allowing the executive to effectively move forward in a new role may require extensive delegation of the prior role across your team, the use of interim staff, and an honest assessment of the inherited team’s ability to deliver on the future agenda.
Should FX swings affect incentive compensation?
The recent strengthening of the US dollar has caused a significant impact on corporate earnings at many US-based companies with significant foreign operations. The magnitude of the change also caught a lot of companies by surprise. Moreover, because these currency fluctuations were not fully anticipated in the budgeting or incentive-plan goal-setting process, the treatment of foreign exchange (FX) in calculating incentives became a boardroom topic.
Most companies decided not to make major changes to their incentive calculations. In the most recent CFO SignalsTM survey, 70 percent of CFOs agreed that the issue was relevant for their companies, but more than three-quarters of those did not plan to make adjustments.1 Instead, the prevailing sentiment was to keep the fates of shareholders and executives closely aligned.
But the question remains: Should unanticipated FX swings affect incentive compensation? Shareholders are obviously interested in a resolution, since investors want to see a stronger correlation between compensation and company performance. Boards also want to ensure alignment of incentives and shareholder returns and make sure executives are properly motivated and rewarded for decisions within their control. In this issue of CFO Insights, we will look at the different views on the issue of addressing the FX impact on incentive compensation and discuss how CFOs can contribute to the fairness debate.
Working with government - at every level
Whether they want to or not, CFOs routinely interact with government on the local, state, and federal levels. After all, their companies have to pay taxes, comply with ever-changing regulations, and be in tune with public policies that impact their organizations. But actually working with government to affect change for your company or industry is far from routine. It demands solid relationships, political astuteness, and the ability to be heard.
Gaining those attributes is no easy task. But given mounting regulation—something CFOs routinely name as a worrisome risk in Deloitte’s CFO Signals™ surveys—and the need to manage political risk, it behooves CFOs and their companies to make the time investment. Some already have. In fact, in the Q1 2013 CFO Signals report, about 40 percent of finance chiefs reported initiating or ratcheting up their public-policy advocacy efforts in response to the prevailing economic policy activity (see, “How companies are addressing public policy activity”).
Government affairs may require any CFO’s attention at some point. And in this issue of CFO Insights, we’ll discuss four principles of interacting with government and outline barriers and possibilities on both the federal and state level to affect change.
Six steps to transforming tax
In response to accelerated globalization, some leading companies have made a fundamental shift in the way they operate tax departments, transforming the tax function into a strategic business partner across the enterprise. In this issue of CFO Insights, we’ll outline the steps for such a successful tax transformation and examine how it may expand the function’s responsibilities.
As globalization accelerates, tax issues often become more complex and relevant to an organization’s business strategies. At the same time, companies face demands by tax authorities for more information faster—demands that are only going to increase (see, “BEPS: What to expect next”). They also face a growing number of IT challenges as commercial tax applications evolve to satisfy regulatory mandates.
In response, some leading companies have made a fundamental shift in the way they operate tax departments, transforming the tax function into a strategic business partner across the enterprise. And given that the implications of tax affect the financial and strategic decisions of many organizations, such tax-transformation activities typically are closely aligned with business strategy.
In fact, when participants on a 2014 Deloitte webcast (The Transformation of Tax: Something Big is Happening Here, July 2014) were asked, “What is the biggest advantage to transforming the corporate tax department?” 26 percent of the 2,182 respondents indicated “having an enhanced ability to reach strategic and financial goals.” Another 24 percent reported “enhanced business partnering across the organization,” such as greater alignment between the tax and finance functions, and 22 percent cited “sustainability and efficiency of the tax function through cost savings.”
For CFOs, tax transformations may seem a natural evolution. After all, many finance executives have gone through a finance function transformation and are experiencing the benefits of that strategic change. Not surprisingly, they are increasingly expecting the tax department to undertake a similar process and produce concrete results, such as completing the tax close faster. In this issue of CFO Insights, we’ll outline the steps for such a successful tax transformation and examine how it may expand the function’s responsibilities.
Four faces of the CFO Framework
Today, the role of the chief financial officer (CFO) is under greater scrutiny, internally and externally. CFOs face never ending pressure to cut costs, grow revenue, and ensure control. Economic uncertainty, increased regulatory requirements, financial restatements, and increased investor scrutiny have forced them into the spotlight. Given these factors, CFO turnover is on the rise.
Today’s CFOs are expected to play four diverse and challenging roles. The two traditional roles are steward, preserving the assets of the organization by minimizing risk and getting the books right, and operator, running a tight finance operation that is efficient and effective. It’s increasingly important for CFOs to be strategists, helping to shape overall strategy and direction, and catalysts, instilling a financial approach and mind set throughout the organization to help other parts of the business perform better.
These varied roles make a CFO’s job more complex than ever.
Steward: CFOs work to protect the vital assets of the company, ensure compliance with financial regulations, close the books correctly, and communicate value and risk issues to investors and boards.
Operator: CFOs have to operate an efficient and effective finance organization providing a variety of services to the business such as financial planning and analysis, treasury, tax, and other finance operations.
Strategist: CFOs take a seat at the strategy planning table and help influence the future direction of the company. They are vital in providing financial leadership and aligning business and finance strategy to grow the business. In addition to M&A and capital market financing strategies, they can play an integral role in supporting other long-term investments of the company.
Catalyst: CFOs can stimulate and drive the timely execution of change in the finance function or the enterprise. Using the power of their purse strings, they can selectively drive business improvement initiatives such as improved enterprise cost reduction, procurement, pricing execution, and other process improvements and innovations that add value to the company.
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CFO Signals™: 2015 Q1 Continued optimism despite rising, broad-based volatility
While expectations for important metrics such as revenue and capital spending growth did slide, this quarter’s findings suggest CFOs’ confidence has not really wavered. Last quarter’s survey suggested large-company CFOs believed the US economy was finally on a strong growth path. Despite voicing concerns about the durability of the global economic recovery and geopolitical disruptors, their tenor entering 2015 clearly reflected rising optimism and confidence.
Since then, the US economy has strengthened. But with the economic struggles of Europe and China intensified, will CFOs’ optimism decline?
Are your conversations strategic?
Increasingly, many CFOs strive to be seen as strategic. But what does that mean in practice—specifically in the critical conversations needed to move your company forward?
Such conversations happen in organizations all the time—in every economic environment. Making these decisions effectively, however, isn’t particularly suited for today’s frequently over-structured meeting formats. Instead, it involves a more thoughtful approach with the right input, players, and environment: in other words, a strategic conversation.
In this issue of CFO Insights, we discuss the what, when, why, and how of having strategic conversations and outline some leading practices for making the resulting decisions stick.
Activist shareholders: How will you respond?
If it seems that activist investors have had a more visible and powerful presence over the last few years, it’s because they have. For CFOs, this new dynamic between public companies and shareholders presents an evolution in corporate governance that may need to be addressed.
According to the results of the Q1 2015 CFO SignalsTM survey, just under three-quarters of public company CFOs say they have experienced some form of shareholder activism. Moreover, about half say they have made at least one major business change specifically because of shareholder activism.
In this issue of CFO Insights, we’ll discuss how CFOs can identify and address company financial issues that could attract activist attention; why a more proactive engagement with the investment community is needed long before an activist campaign begins; and what some of the key components of a playbook are for responding to an activist campaign.
Better break-ups: The art of the divestiture
In their continuing efforts to unlock greater shareholder value from portfolio realignment, CFOs are increasingly turning to spin-offs, which create new public companies out of existing business units. In this issue of CFO Insights, we look at four lessons to consider when separating an entity and keys to helping companies get it right the first time.
Better break-ups: The art of the divestiture
In their continuing efforts to unlock greater shareholder value from portfolio realignment, CFOs are increasingly turning to spin-offs, which create new public companies out of existing business units. The number of spin-offs hit a 10-year high with 60 completed in 2014, according to Spin-Off Research, and at least 46 more had been announced for 2015 by the end of its first quarter.
Driving the trend are several factors, including the need to gain greater synergies and shareholder pressure. In fact, about 15 percent of finance chiefs said they were considering some form of divestiture in response to activist investors in the first-quarter 2015 CFO Signals survey. While such trends tend to follow cycles—the last spin-off boom was in 1999 and 2000—they can create considerable value. The Claymore Beacon Spin-Off ETF Index, which is based on the performance of recent spin-offs, has outperformed standard market indexes since 2012.
To share in that potential upside, companies typically have three choices: spin off the business entirely, pursue a partial spin-off (that is, an equity carve-out), whereby the parent company only floats a portion of the business on the public market, or sell a portion of the business. Given the significant financial, accounting, tax, and IT implications of each, it’s no surprise that CFOs tend to be at the helm of preparations. And while the transactions may be logical in concept, they are rarely easy in execution. No two are the same, and with each one, CFOs and their teams face a host of tasks, such as defining precisely which businesses and assets to sell or spin off, creating financial statements for the resulting entity, and mapping a quick, yet effective separation plan.
In this issue of CFO Insights, we look at four lessons to consider when separating an entity and keys to helping companies get it right the first time.
1. Don’t worry about the end at the beginning
2. Don’t go too fast
3. Be as transparent as possible with employees
4. Guard against the distraction factor
Unmasking insider threats
As workplaces become more complex and insider threats become more difficult to detect, a program to mitigate those threats can bolster deterrence by providing an early-detection and response mechanism. In this issue of CFO Insights, we’ll outline actions to consider when designing, building, and implementing a formal insider-threat mitigation program.
As workplaces become more complex and insider threats become more difficult to detect, a program to mitigate those threats, which include fraud, espionage, workplace violence, information technology (IT) sabotage, intellectual property, and research-and-development theft, can bolster deterrence by providing an early-detection and response mechanism. Moreover, by viewing insider-threat mitigation more broadly than as a cybersecurity challenge, CFOs—working with their CIOs—can help assure the business, protect employees, and safeguard critical data, systems, and facilities.
The goal of insider-threat mitigation is to detect anomalies as early as possible and investigate leads before assets, data, or personnel are compromised. Staying in front of an insider’s exploitative tactics, however, requires quick responses, real-time data feeds, and the analysis of behavioral indicators. And in this issue of CFO Insights, we’ll outline actions to consider when designing, building, and implementing a formal insider-threat mitigation program.
- Define potential insider threats: An insider can be an employee, contractor, or vendor who commits a malicious, complacent, or ignorant act using their trusted and verified access. Still, few organizations have a specific internal working definition, as security and IT budgets have historically prioritized external threats. Defining potential insider threats for the organization is a critical first step to formulating a program, and will inform the size, structure, scope, and phasing plan for the program, aligned to business risk priorities.
- Define the organization’s risk appetite: Define the critical assets that must be protected—whether they are facilities, source code, or customer information—and the organization’s tolerance for loss or damage in those areas. Identify key threats and vulnerabilities in the business and in the way business is conducted. Tailor the development of the program to address these specific needs and threat types, and take into account the organization’s unique culture.
- Leverage a broad set of stakeholders: An insider-threat mitigation program should have one owner but a broad set of invested stakeholders, as well as leadership support. Consider establishing a cross-disciplinary insider-threat working group that can serve as change agents and ensure the proper level of buy-in across departments and stakeholders. The working group should assist in addressing common concerns (for example, privacy and legal) and support the development of messaging to executives, managers, and the broader employee population.
- Take a people-centric approach: The insider-threat challenge is not a purely technical one, but rather a people-centric problem that requires a broad and people-centric solution. Organizations should avoid the common pitfall of focusing on a technical solution as the silver bullet. An insider-threat mitigation program should include critical business processes, such as segregation of duties for critical functions, technical and nontechnical controls, organizational change-management components, and security training programs.
- Trust but verify: Establish routine and random reviews of privileged functions, which are commonly done to identify insider threats across a broad spectrum of areas in a variety of industries. Organizations should trust their workforce, but balance that trust with verification to avoid the creation of unfettered access and single points of failure. Reviews are particularly essential in areas that are defined as critical.
- Look for precursors: Case studies analyzed by Carnegie Mellon University’s Computer Emergency Response Team program have shown that insider threats are seldom impulsive acts. Instead, insiders move on a continuum from the idea of committing an insider act to the actual act itself. During this process, the individual often displays observable behaviors that can serve as risk indicators for early detection, such as requesting undue access or violating policies, for instance (see sidebar, “Who is an insider threat?”). According to the Federal Bureau of Investigation’s Insider Threat Program, detection of insider threats should use behavioral-based techniques, looking at how people operate on the system and off the network, and then build baselines in order to identify anomalies.
- Connect the dots: By correlating precursors or potential risk indicators captured in virtual and non-virtual arenas, organizations can gain insights into micro and macro trends regarding the high-risk behaviors exhibited across the organization. Using an advanced analytics platform that correlates outputs from a variety of tools can be helpful, and the output can, in turn, be used to identify insider-threat leads for investigative purposes. Analytics can also shed new light on processes and policies that are either missing or could be improved upon.
- Stay a step ahead: Insiders’ methods, tactics, and attempts to cover their tracks will constantly evolve, which means that the insider-threat program and the precursors that it analyzes should continually evolve as well. A feedback mechanism that includes an analysis of ongoing and historical cases and investigations can help organizations adapt their insider-threat programs to address new threats.
- Set behavioral expectations: Define the behavioral expectations of the workforce through clear and consistently enforced policies that define acceptable behavior and communicate consequences for violating policies. Policy areas might include social media, reporting incidents, and bring-your-own-device, for example.
- Provide customized training: One size does not fit all. Customize training based on the physical and network access levels, privilege rights, and job responsibilities. Train the workforce to the specific insider-threat risks, challenges, and responsibilities for each position.
Shared Services: Creating a Working Model For Emerging Markets
For decades, significant labor savings, process standardization, and improved controls have been achieved by centralizing transactional finance activities. And for the most part, locating shared service centers in developed markets has made sense both logistically and from a risk perspective.
With more and more business emanating from emerging markets, however, companies are increasingly asking if—and how—they can extend their shared services footprint further into Latin America, Eastern Europe, Asia, Africa, and the Middle East.
In this issue of CFO Insights, we discuss how finance can support the growth of shared services in what traditionally have been considered risky markets, what the roadmap entails, and whether the benefits are worth the journey.
Energy & Water: A Market Reality Check
While the U.S. is currently enjoying a renaissance in energy, the time to take advantage of the implied domestic supply security is now. Because of the size of the reserves and a relatively flat domestic demand profile, the supply situation in the U.S. can be expected to remain favorable over most investment-planning horizons.
No matter your industry, your business prospects depend in some way on energy. And while the energy landscape in the United States has changed dramatically over the last decade, now is not the time to be complacent about energy usage or costs.
For CFOs, now may be the time to take stock of your energy portfolio, rebalancing and derisking it for the future. Why? The favorable energy supply and price environment enjoyed currently in the U.S.—like all competitive advantages—will likely erode as domestic and global markets adjust to new energy supply and demand realities.
In this issue of CFO Insights, we make some key observations related to the energy and water markets and discuss why CFOs should take advantage of an energy future that has been largely reshaped over the last few years.
Effective Investor Relations (IR): Lessons From the Trenches
Public companies are engaging with shareholders in dramatically different ways these days, and demands from stakeholders are high. Meanwhile, regulatory scrutiny has intensified, as has shareholder activism. Against that backdrop, investor relations (IR) departments must continually strive to serve the interests of their organizations, as well as shareholders.
But what does it take to have a truly effective investor relations (IR) team, and how can it provide value to CFOs and management, as well as investors? To answer those questions, we’ve asked five leaders of large-company IR departments to share their views on some of the most difficult aspects of IR.
In this issue of CFO Insights, those leaders discuss IR excellence in the following areas: working with the C-suite, addressing “value gaps” between management and analysts, communicating strategic changes, disclosing bad news, and dealing with activist shareholders.
CFO Signals™: 2014 Q4
Despite global concerns, strong optimism heading into 2015
Despite lingering concerns about the potential frailty of the global economic recovery, growing worries about geopolitical disruptors, and uncertainty in the aftermath of US mid-term elections, the tenor of CFOs this quarter is clearly one of rising optimism and confidence.
Last quarter, CFOs’ sentiment built on positive momentum that had emerged in the second quarter of this year. And their much-improved year-over-year performance expectations made a compelling case for sustained economic acceleration going forward.
Since then, further strengthening of economic indicators suggests the US economy is finally on a strong, self-sustaining growth path. But are large-company CFOs buying it?
The strategist CFO: Four orientations for engaging in the strategy process
Based on practice observations, discussions with numerous CFOs, and knowledge gained from more than 500 Deloitte CFO Transition Lab™ sessions, we have framed the four orientations of a strategist CFO model to help guide better alignment between CFOs’ actions and CEO and board expectations. Beyond the well-established four faces of the CFO as operator, steward, catalyst, and strategist, the orientations bring greater clarity to the strategist role and the capacity of an organization to reorient and execute a new strategy.
In this issue of CFO Insights, we outline the orientations and examine how each is a choice regarding the scope of a CFO’s role and means of involvement in the strategy process.
The cash paradox: How cash levels can affect corporate behavior
During the financial crisis, many CFOs served their companies well with financial prudence and by stockpiling cash. Now that many companies are refocused on growth, market commentators frequently cite these record cash figures as a key indicator that capital expenditure (capex) and M&A activities will increase and accelerate expansion. But the truth of the matter is far more nuanced.
According to a recent analysis by Deloitte LLP, (see “The Cash Paradox: How Record Cash Reserves Are Influencing Corporate Behavior”), there is an uneven distribution of cash levels. “Large cash-holding” companies tend to be more conservative in their spending habits compared with their “small cash-holding” counterparts, which have been spending more aggressively in the pursuit of growth and appear to be reaping the benefits.
While it is important to note that the terms “large” or “small” cash-holding companies do not imply they are also large or small by market capitalization, there are lessons in the research for companies of all sizes. And in this issue of CFO Insights, we discuss the findings and their potential implications for corporate cash strategies.
The value shift: Why CFOs should lead the charge in the digital age
One glance at any business publication will show that digital business models are increasingly in vogue. Uber, Airbnb, DropBox, and WhatsApp are just a few of the more recent examples of this rapidly growing $10 billion digital start-up trend. CFOs of established firms are taking notice that going digital creates value.
Research by OpenMatters with input from Deloitte & Touche LLP, examining 40 years of data from the Standard & Poor’s 500, finds that investors assign higher valuations to organizations that embrace emerging technologies to create digital networks. This change is part of a broader trend of corporate value shifts from the predominance of tangible assets, including plant, property, equipment and financial assets, to value from intangible assets.
In this issue of CFO Insights, as digital technologies increasingly disrupt age-old sources of value, we look at how CFOs can tap into this value shift through business model innovation.
2014 Q3 Global CFO Signals
What a difference a quarter can make. Three months ago, many finance chiefs seemed to be uniting in their shared optimism. In the Q3 edition of Global CFO Signals, uncertainty is on the rise in several of the 15 surveys featured, and geopolitical risks are giving companies pause. “From a CFO’s perspective, such geopolitical uncertainties weigh on growth and investment prospects, particularly in Europe, which is in danger of falling into recession again,” notes Ira Kalish, Chief Global Economist for Deloitte. Still, there is plenty of positive news to report.
The twin currents of patent law change and accelerating technological transformation and disruption have made it essential for business leaders to master the dimensions of IP management through a contemporary lens.
Why it’s important for companies to create a unified strategy across three workplace elements and how CFOs can foster the practices that achieve it.
Explore the building blocks of a world-class program that not only protects an organization from internal and external threats, but also enhances its brand and strengthens its relationships with multiple stakeholders.
2014 Q2 Global CFO Signals
Wanted: Political and regulatory clarity
Little wonder that in many of the 11 country reports in this edition of Global CFO Signals, finance chiefs are reporting sustained optimism, a healthy risk appetite, and expansionary tactics.
“From a CFO’s perspective, conditions have been consistently favorable in many of the countries reporting, with the U.S. being the sweet spot,” notes Ira Kalish, Chief Global Economist for Deloitte. Understandably, he adds, “businesses have been looking at the positives and taking advantage while they can.”
Cybersecurity: Five essential truths
Given the costs and the increasingly malicious nature of cyber attacks, CFOs are understandably focused on identifying potential cyber risks and planning their corporate responses.
Time: Protecting your irrecoverable asset
Screening, scheduling, routinizing, and delegating are some of the ways new finance chiefs can protect their time and focus on the truly important items.
What's keeping CFOs up in 2014?
While the economic landscape may be (thankfully) tamer, the pressures on finance chiefs and their companies to perform continue to mount.
Making working capital work
For CFOs charged with growth and determined to steer strategy, there may be no better place to look for cash than in working capital improvements.
Financial statements: Framing your judgement calls
Equipped with a formal framework, finance chiefs can help avoid once-in-a-lifetime events that could sideline a company or cost heavily in terms of time, reputation, and at worst, regulatory scrutiny, fines, and restricted access to capital.
2014 Q1 Global CFO Signals
Signs of a sustainable recovery?
Those are some of the takeaways from the 15 country reports in this edition of Global CFO Signals. Little wonder that finance executives worldwide are reporting sustained – and in some cases, increasing – optimism.
“Many of the factors that previously drove uncertainty— such as the budget issues in the U.S. and the eurozone crisis—are all gone for now,” notes Ira Kalish, Chief Global Economist for Deloitte. “And many of the current drivers—such as the Russian situation—just do not have the same economic impact.”
Why globalization demands (C)hief (F)rontier (O)fficers
The CFO’s training is highly relevant to the new era of globalization, and finance’s increasingly global lens enables the function to structure and execute good deals across borders and mitigate enterprisewide risks.
Can internal audit be a command center for risk?
Armed with senior management's support, internal audit can leverage technology and data to better partner with finance – and contemporize its governance role to one that identifies and tackles the risks most relevant to the organization.
Realigning your portfolio for growth
By approaching the realignment process holistically and rigorously, companies can create a portfolio that delivers sustainable growth, and better utilizes future investments.
So you want to be a corporate director…
There’s no one way to go about a board candidacy, recruitment and preparation. It takes time – often up to two to three years – and a targeted plan.
Evaluating IT: A CFO's perspective
Having both a common language and robust governance in place can lay the groundwork for assessing current and future IT architectures.