Professor Peter Goss unpacks the call for CFOs to adopt a strategic financial governance outlook.
By Peter Goss, corporate governance and forensic auditing professor at the University of Johannesburg.
The expectation that CFOs should apply themselves to value creation while operating at a strategic level is not new. This imperative is further emphasised in the IMA (Institute of Management Accountants) June 2020 paper titled CFO as Value Creator – Finance Function Leadership in the Integrated Enterprise, which affirmed 21st century views that the CFO’s role must now be strategic value creator as opposed to financial value protector.
The year 2008 made the imperative to protect and create sustainable long-term value, over and above financial value for shareholders, more pertinent for companies alongside capital market expectations of non-financial returns for multiple stakeholders.
The IFC (International Finance Corporation) 2015 paper, A Guide to Corporate Governance Practices in the European Union, and other literature identify some of the most material of these stakeholders as providers of capital, investors, employees, suppliers and government. The jury is still out on how measurable and sustainable value is created for society as a whole, and how companies can quantify their input and impact in the face of pressures to protect and build sustainable value for society.
There is little clarity given to CFOs who are located in developing or emerging economies like South Africa (currently more of an ailing economy) about exactly what to measure in relation to social value creation.
IFAC (International Federation of Accountants) gives some guidance in The CFO and Finance Function Role in Value Creation against the backdrop that CFOs are stuck in the paradigm of measuring performance in the form of monetary returns for shareholders. Value for stakeholders must consider the deployment of, and value generation benefits for, human resources assets and strategic business, government relationships, and regulatory and social partnerships.
This calls for CFOs to adopt a strategic financial governance outlook. Such an outlook must take into account an appreciation of stakeholder expectations, company core purpose, strategic priorities and the integrated deployment of resources.
On the score of integration, emphasis should be placed on effective financial governance structures such as a finance committee, board audit and risk committee(s), well-structured delegation of both strategic and operational authority for financial and non-financial commitments, the integrity of corporate reporting and the exercise of proper oversight over management information and external disclosures.
In particular, the CFO must have a handle on the strategic financial risks and share this insight with the board audit and risk committee(s) and with the board as a whole. This necessitates that the CFO must be an executive director sitting alongside the CEO on the board.
If corporate governance is the system deployed and directed by the board to build sustainable value for multiple stakeholders for the long term, then financial governance is the system by which an effective finance function – led by the CFO serving as the chief value officer (CVO) and member of the board – identifies, consolidates, analyses and measures, protects and grows value.
Financial governance requires the effective identification of strategic value creation opportunities and the identification of the risks that can impact on value. Drawing from IFAC and the financial governance imperative, going forward CFOs and the finance function must produce “dynamic active data” that empowers business decisions that create and preserve value.
The CFO’s extended financial governance priorities will have to include:
- Serving as a board member, thinking strategically about the big picture of long-term value creation for multiple stakeholders;
- Being vociferous about the imperative to pursue opportunities that build sustainable value for society too, while balancing this with strategic risk identification and mitigation interventions;
- Making sure that strategic direction and goal setting integrates traditional performance information complemented by well-researched insights into the value creation process;
- Identifying and working with key external stakeholders and internal partners to understand expectations and work towards alignment of metrics for performance and the main drivers and indicators of value creation;
- Making improvements to corporate disclosure, reporting structures and the corporate scorecard to incorporate metrics for long-term sustainable value; and
- Linking remuneration for performance and decisions to take corrective action in the face of non-performance or the erosion of prospective value to preset value creation goals, performance criteria and social impact metrics.
The above calls for the 21st century CFO to be more proactive in acquiring deeper insights into the effective and ethical leadership criteria expected for good corporate governance as viewed from both the position of the CFO as board member and as chief value officer. An understanding of macro-environmental forces with an eye on financial governance imperatives will be material in securing long-term sustainability for both the company and wider universe of stakeholders.
