Becoming a strategic CFO.

• Author: Howell, Robert A.
• Position: Chief financial officer

The notion that chief financial officers should add to their traditional roles of compliance, reporting and control and become business partners and strategists has been around for some time. Certainly some CFOs have moved in that direction and have been rewarded for it, including succeeding to the CEO seat. Many, however, have not.

Part of the reason could be that many CFOs feel more comfortable working in the areas of compliance, reporting and control--the areas with which they are most familiar.

Others just can't find the time to take on additional activities with which they are less familiar. And some just don't know what k means to be a strategic CFO or how to get there.

It's an issue that is clearly on the minds of CFOs in all industries. When more than 60 large-company finance chiefs gathered in Washington, D.C., last June to network and discuss the state of their profession, participants were asked to propose, and then rank, priorities for business and government. The CFOs attending The Wail Street Journal's program divided into five breakout groups to consider the priorities related to managing in uncertainty, managing cash dealing with conflicts between reporting lines, preparing for growth and next steps in their career path for CFOs.

Of the 19 recommendations for action presented by the group, four of the top five dealt with making the CFOs "more strategic." The top priority was to "become a strategic CFO." The rest of the top five were:

* develop a financial leadership pipeline;

* drive value through capital allocation;

* view cash as a strategic tool; and

* provide short-and long-term balance.

What Is a 'Strategic' CFO?

Becoming a strategic CFO necessitates almost a complete about-face--thinking forward instead of looking backward, focusing on the nonfinancial rather than financial elements of critical decisions and with an external rather than internal orientation.

Focusing Forward Rather than Backward.

The penultimate responsibility of every CFO is to drive the underlying "intrinsic value" of the firm. The intrinsic value of a firm very simply is--as Warren E. Buffett so cieariy states each year in Berkshire Hathaway Inc.'s annual report - the net present value of the future cash flows, which may be taken out of the firm.

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The networking session last spring clearly recognized the importance of this responsibility when the participants stated their second highest priority: 'The CFG must drive firm value by focusing more explicitly on free cash flow generation and reallocation rather than on income and earnings per share."

That means finding ways to increase future cash flows, realizing them earlier and appropriately reducing the discount rate applied to the future cash flows. The CFO must be committed to focusing on improving future cash flows rather than looking backward and tallying historical results.

Nonfinancial Rather Shan Financial Elements of Decisions. Every business decision has nonfinancial as well as financial elements and implications. Is it better for the company to grow organically or by acquisition? Which product lines have the best short-and long-run competitive advantage? Similarly, with markets and customers? Should the firm outsource or own its productive capacity? What is the best way to develop the workforce? What about financial leverage? Should the firm return capital to the shareholders, and how?

CFOs must also understand the nonfinancial aspects of the myriad decisions confronting the firm, as they do the financial aspects. If he or she only brings financial skills primarily to a decision, that CFO is only bringing half the required understanding and will continue to be relegated to second-class participant.

External Rather Than Internal Orientation. Finally, CFOs have to become comfortable with, and understand very well, a number of external relationships and other factors than is typically the case today. It is virtually impossible to make sound decisions without really knowing about markets and customers, suppliers and, especially, competitors.

Customers drive firms' "top lines," margins, profits and cash flows. Competitors' actions can get in the way and even destroy a firm's ability to create value. Understanding how suppliers and the whole supply chain can help, and hurt, the firm by their actions is also essential.

Although a business operates within an...