Ask half a dozen finance directors what distinguishes an outstanding FD from a mediocre one and you will receive as many different answers.
The FD of a leading FT-SE 100 company recently likened a good FD to an airport hub. Sitting at the heart of the organisation, the FD must be at the centre of information flow in all directions. Another compared a good FD to a mid-field general: capable of steering troops on all sides towards a common target.
But one thing their answers will have in common is the conviction that a successful FD must add value far beyond making sure the numbers add up.
Just as the job of FD has broadened over the past two decades, so have the yardsticks by which they are measured. Where once FDs would be judged solely on their ability to manage the accounts, they must now also show strong skills in areas such as leadership, communication and strategic planning.
“The role of the FD has changed dramatically,” says Brian Walsh, finance director of TI Group. “We saw the change in the 80s when the concept of creating value really took hold. Suddenly there was a lot of acquisition activity and the FD began to have a major say in what the company and its board should be doing to ward off predators and get the share price higher.”
Walsh believes FDs have a responsibility to create value within their companies, not just carry out the simple recording and monitoring job that characterised the role of the FD in the past. Personality and experience are important factors, but most of the essential skills for an FD can be learned, he says. “What counts is that the finance director is seen to have an active involvement in how the business is run.” It is also important for an FD to understand the risks and the opportunities facing the company.
“There must be an ability to focus not just on accounting but on analysing and presenting views in a way that will get results,” Walsh says. “The FD must think in terms of cash as well as book-keeping, and have the trust and confidence of people throughout both the organisation and the City.”
Mike Pack, finance director of British Shoe Corporation, a division of retailing giant Sears, doesn’t subscribe to the view that the FD’s role has changed beyond recognition. “I don’t think it is really possible to say that ten years ago FDs did this, now they are doing something entirely different. Having said that, there are plenty of FDs who would say they don’t agree that their role should stretch beyond the task of controlling the books. That is certainly the old school approach.”
Pack offers a long list of qualities which he considers necessary in any good FD, including the ability to stay firmly in touch with the marketplace, to communicate well and to lead by example. He believes it is vital the FD provides a control and reporting framework which is viewed as “liberating rather than stifling” by others in the organisation. “When FDs set rules, regulations and policies they should try not to make people feel they are not allowed to do anything,” he says.
“The real knack of financial control is to create a framework which people in the business can understand and accept, and which they feel will help them manage the business better and allow them to do what they want. I’m not saying it is easy to get that sort of control mechanism in place, but it is important nonetheless.”
Of even greater importance, according to Pack, is the FD’s ability to develop a close working relationship with the chief executive. “The relationship with the chief executive is absolutely critical,” he says. “If I had to choose one criteria above all others it would be this one. So often I have seen what damage it can cause if they don’t have a good relationship.
Mixed messages are sent out to investors and there is a genuine danger of making incorrect decisions.”
Ian Tegner, non-executive chairman of Crest Packaging and a former finance director of Midland Bank, agrees. He says a good FD should look on the top three people in the company – chairman, chief executive and FD – as a “rounded whole”. The top three have to be able to complement each other’s strengths and compensate for weaknesses. While allowing full rein to the strengths of the chief executive, good FDs have to have the flexibility to form part of a co-operative team.
As well as cultivating a close working relationship with top management, many believe it is becoming increasingly necessary that FDs establish good lines of communication between their office and the rest of the organisation.
“One would have to place special emphasis on management ability,” says Tegner, “and that doesn’t mean just the ability to manage the finance team. The FD has to have a solid understanding of the management process and philosophy throughout the company.”
Although many may consider people management a basic skill, Tegner insists FDs tend to be extremely bad at it. “To my mind, one of the greatest weaknesses in the general finance training is the lack of concentration on people skills,” he says.
During his stints as president of the Scots ICA and chairman of the 100 Group of FDs, Tegner sought to push the concept that social psychology should be “a fundamental part of the training of an accountant or FD”.
A psychology enthusiast, Tegner has “taken a lot of trouble to understand more about human behaviour and motivation – part of that is learning the art of how to listen. If I have been successful in my career then I would say that is one of the reasons why.”
But communicating well within an organisation is only half the equation.
Very few FDs would underestimate the importance of getting the right message across to shareholders, bankers, investment analysts, fund managers and the City generally. Brian Birkenhead, the incumbent chairman of the 100 Group and the former group FD of National Power, says the expectation on the FD to become the external image of the company is one of the most important of the recent changes to the FD’s role.
“We have seen a trend in recent years for very much closer contact between companies, and their equity and debt investors,” says Birkenhead. “There is now an expectation for investors to be absorbed into the thinking of the company on a much closer basis.”
Another reason why nurturing good relationships with the City has become routine for finance directors is the increased role FDs play in strategic planning, says Birkenhead. “There is clearly a need for the chief financial officer to have excellent technical skills not only in the traditional areas of accounting and treasury management but also increasingly in things like long-term strategic development. This is especially the case in areas which involve growth step-change, such as growth by acquisition or restructuring through divestment. The FD plays a particularly crucial role in these major transactions.”
To fulfil this role, finance directors require strong presentation skills and a good understanding of how the City works. The general consensus is that this is an area where many FDs could do a lot better. As a former corporate finance adviser, Bardon Group finance director Will McGrath has been on both sides of the relationship between FD and the City.
“I have to admit that a lot of FDs are not very good front men, their communication skills are generally not that brilliant,” he comments. “The FD, more than most other positions in a company, has to communicate effectively in every direction: from the top down within their company as well as externally to providers of capital.
“When dealing with the City, they have to convince everyone they know what they’re talking about.” Richard Gillingwater, head of European corporate finance at BZW, is in constant contact with FDs .”There can be no question that finance directors must have good communication skills. It is increasingly important in dealing with City investors,” he says. “But for some reason most FDs come heavily unstuck when they have to talk to someone in the City. It’s not simply a question of presentation style but their feel, comfort and ease of dealing with investors, bankers and the City.”
Gillingwater’s idea of a good FD is someone with a strong strategic grasp of their business. “A lot of it is about letting your strategic understanding feed into decisions on finance. It is becoming pretty important for FDs to really understand the plethora of financing techniques available to the company. Too often we see FDs are uncomfortable with new financing techniques or more micro measures such as managing treasury operations.
That’s a considerable weakness in a lot of FDs.”
In terms of accounting, Gillingwater says the City is more impressed by FDs who are seen to be running a tight ship than those who put too much emphasis on the practical presentation of the accounts.
“But I would rate financial control as the third or fourth most important aspect of the FD’s role, but too many see it as their top priority.” Gillingwater adds that accounting purists don’t always make the best finance directors.
“Some of the better FDs don’t necessarily have an accounting background,” he says. “Probably we should not have the preponderance of FDs who are purely accountants.”
Even so, numeracy remains an important quality in any FD. “You have to take it as read that a good FD is really on top of the numbers,” says Will McGrath. “But an outstanding FD will have more to offer than the simple ability to make the numbers add up.”
Tony Collyer, newly appointed finance director of fashion retailer New Look, says a good FD is one who can show a practical understanding of what the numbers mean and then be able to communicate that to less numerate colleagues. “Finance directors must have a strong commercial sense,” he says. “They need to be able to apply their financial knowledge to all other areas of the business. They have to anticipate the needs of others and have a real sense of vision.”
Collyer admits that to do all these things, an FD will need to be able to get to grips with the finer details of corporate finances, yet at the same time be in the position to stand back and take an overall view of the company. “This is where so many FDs fall down. They do one thing or the other but they are not always able to combine both skills,” Collyer says.
“There is definitely a need for a much higher level of commercial awareness in the role of the FD,” agrees Tegner. But the extent to which such skills will be utilised depends very much on the company and the way in which its management team regards the role of the FD, he adds.
Finance directors of privately-owned companies should be prepared to share their board’s entrepreneurial approach, says Peter Charles, executive vice president, finance and administration, of film distribution company United International Pictures. While the finance director should generally “err on the downside” when considering opportunities and risks, the FD of a private company will ideally exert a slightly restraining influence rather an overly cautious or stifling one, he says.
But for all the additional skills expected of an FD, Charles believes most FDs are not well-rounded enough to take on the chief executive role.
“My personal view is that companies should not be run by finance people,” he says. “A lot of companies over-promote the FD to CEO and while in some cases they make the transition successfully, it tends to be the exception rather than the rule.”
Perhaps the best test of an FD’s abilities is the performance of the company. No matter how charismatic or communicative, no matter how good the grasp of sophisticated financial instruments, an FDs will be judged, more often than not, on the success of his company, argues Brian Birkenhead.
Where companies are successful, the finance director should be acknowledged and credited with that.
Financial Director of the Year Award
Financial Director of the Year Award: Sponsored by the Chartered Institute of Management Accountants. This award is conferred for professional excellence in financial management, and is open to entrants from any sector of industry, commerce or public life. Our judges will be looking for evidence of substantial financial achievement, for example, directing significant improvements in operational efficiency or quality of service. Please quantify the contribution. In addition, in the course of their achievements, the winner will be expected to have displayed the qualities of enterprise, integrity, imagination and leadership. Entries are welcome from organisations or directly from the individual finance director.
Entrants’ submissions should set out clearly, in no more than 1,500 words, how they meet these criteria, and why they believe they deserve to win.
For a free entry pack, contact marketing manager Sue Burnell now, at 32-34 Broadwick Street, London W1A 2HG or phone her on 0171 316 9638.