80 years and counting: the changing role of financial management.

• Author: Howell, Robert A.

SINCE FEI'S FOUNDING 80 YEARS AGO AS THE Controllers Institute of America, financial management has changed dramatically, driven, in great part, by events and changes external to the association. This author has been involved with finance for more than 50 of those years--and an FEI member since 1973--during which time many of the most dramatic changes have occurred.

The changes might be described from three perspectives: chronological, drivers and changing roles.

A Chronological Perspective

First, the changes can be measured chronologically, starting with the Securities Acts of 1933 and 1934 on the requirements for accounting practices and audited financial statements, the arrival of World War II and the pent-up demand it created throughout the 1950s and into the '60s.

The establishment of the Accounting Principles Board in the '50s and the Financial Accounting Standards Board in 1973, as well as the growth in size, product and market complexity and international expansion of the '60s and '70s.

In subsequent years, key events included the Japanese production model and its implications for global competition as well as the heightened emphasis on quality, response times, low inventories and low costs and investments (beginning in the United States in the `80s); the emphasis on business process redesign and finance function outsourcing in the 1990s and the dot.com bubble of the late-90s, accompanied by stock-based compensation driving aggressive earnings management practices including the creation of alternative pro forma earnings.

The early 2000s were marked by implosions of companies such as Enron Corp., WorldCom Inc., Adelphia Communications Corp. and Tyco International Ltd. The Sarbanes-Oxley Act of 2002 and its emphasis on compliance and internal controls followed, while the "easy money" policies of the Federal Reserve Bank, the encouragement of home ownership, the near absence of sound lending practices and the explosion of housing-related derivatives creating the housing bubble contributed to the financial crisis of the past several years.

The Driver Perspective

The changes might also be defined in terms of major drivers' impact on the needs and role of finance. The sheer size of most companies has grown significantly over the past 80 years. During the 1930s through the '50s, the corporate giants were AT&T Inc., Sears Roebuck & Co., General Motors Co., and U.S. Steel Corp.

Earlier, most companies were relatively small and local - the local grocer or mom and pop drugstore, the small manufacturing plant, the private trucking company. Wal-Mart Stores Inc., McDonald's Corp. and FedEx Corp. didn't exist. General Electric Co. was run centrally until the late '50s, when then-chairman and CEO Ralph J. Cordiner led the company through a process of decentralization.

CONGLOMERATES CREATED. The 1960's gave rise to the conglomerate--Litton Corp., Textron Inc., Gulf and Western Industries Inc., ITT Corp.--that resulted in large and very diverse collections of operating businesses, again raising issues of planning and performance measurement. Most of these companies used pooling of interest accounting--which was to come under attack and was later prohibited--for its implications on reported earnings.

Size clearly introduced challenges for the financial executive. It is one thing to just grow larger, but in many cases, size resulted in increased complexity in terms of businesses, products offered and markets served. AT&T was large, but its business was relatively the same across the markets it served at the time. GM had multiple lines of automobiles, but each was run very similarly. Because GM was the clear market leader of the 'Big Three' U.S. automakers at the time, it was able to absorb inefficiencies into its pricing.

The conglomerates, by definition, were diverse and certainly could not be run either centrally or in the same way. In the '50s...