The CFO: from controller to global strategic partner.

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

What began as The Controllers Institute of America 75 years ago has evolved from a small group of 30 individuals to a group of many thousands; from controllers to senior financial executives and CFOs; and from a local to a global organization, Financial Executives International (FEI). Concurrently, the role of finance and the senior financial executive has also changed significantly. One need only note the name change of the organization to discover that!

The senior financial executive's narrow "accounting and control" function has expanded to one of a financial strategist and business advisor. Today's CFOs are expected to be extraordinarily broad-gauged, ranging from technical experts to strategic activists, acting in close alignment with their CEOs and boards of directors to satisfy the demands of a set of stakeholders that includes customers, employees, suppliers, communities and regulators, as well as shareholders. The journey has neither been a straight line nor constant. Some key underlying drivers of the change that has transpired in the financial executive role follow.

1930s to Post World War II

In the early 1930s, the U.S. economy was in the midst of the Great Depression. Major industries of that era--steel and other basic materials, railroads, automobiles and textiles--were running at low levels of capacity utilization, forcing firms to cut dividends and driving others to bankruptcy. The focus of the most senior finance executive, the controller, was on basic accounting and internal control of scarce funds.

Audited financial statements and external financial reporting were not required until January 1933, when the New York Stock Exchange (NYSE) initiated the requirement for audited financial statements of listed companies. That May, the Securities Act of 1933 was passed, requiring full disclosure to investors and prohibiting fraud in connection with the sale of securities.

One of the earliest contributions to accounting and control emanated in 1912 from E.I. du Pont de Nemours and Co., the "DuPont System of Return on Investment (ROI)," created by Donaldson Brown, who, in 1921, moved to General Motors Corp. as vice president of finance after DuPont had taken a large financial position in GM. He brought with him the ROI System that related profit margin to capital turnover.

At that time, the U.S. automotive market was divided--50-55 percent GM, 25-30 percent Ford and 10-15 percent Chrysler--and market leader GM used its ROI system to be the industry price-setter and set its prices based on its own costs, investments and volume projections to achieve a "desired" long-term ROI, thought to be 30 percent before taxes. Its ROI system eventually spread beyond the automotive industry, as the concept of relating profits to investment levels became generally accepted.

During the World War II years, U.S. manufacturing capacity was redirected toward the war effort, building ships, aircraft, tanks and other vehicles, and providing munitions and supplies to the Allied troops. When the war ended, the return to peacetime production and the release of pent-up demand resulted in rapid industrial growth. Returning troops, completing educations, starting families and moving to the suburbs, created new demands for home construction, highways, automobiles and other products including television sets. At the same time, the Marshall Plan in Europe and the U.S. occupation of Japan created demand for importing U.S. products, sowing the seeds for renewed global economic activity.

The 1950s

General Electric Co. (GE) had reached a size that prompted it to reconsider how it was organized, and it moved to a new "decentralized" structure. Its unique approach to decentralization created a set of divisions and operating departments below them, each with its own general manager responsible for his unit (all managers were then men). GE established a "measurement project"--including market share, productivity, product development, personnel development, community relations and financial performance--based on "residual income," to determine how to evaluate each unit. Residual income was defined as net operating profit after taxes (NOPAT) minus a "capital charge" based on the capital assigned to the unit multiplied by GE's weighted average cost of capital. Twenty years later, the measure became known as "economic value added," or EVA.

By the late 50s, senior financial executives were responsible for the accounting and control of their companies or, in the decentralized model, operating departments. Economic conditions were generally good, and competition was not a terribly critical issue. Banks and large financial institutions were the primary sources of capital, if needed. The utilization of capital was measured by ROI or, in the case of GE, also by residual income. Planning was relatively short-term and tactical.

The concept of "net present value of future cash flows" was in its infancy, particularly in industries with large investments and long payback periods, such as the oil companies. The first sets of "present value tables" were calculated by hand. The computer workhorse at the time--the IBM 1401--running company specific programs in batch processes in air-conditioned computer rooms, pales to today's laptops, with far more capacity and options. Companies had to report their financial...