Consulting » Insight Interview – Is Scott free?

Managing Microsoft’s finances is a complex affair. The software giant had revenues of $37bn in 2004, has a market capitalisation close to $300bn and has nearly 60,000 employees around the world. To add to the complexity, Microsoft recently split itself into seven semi-autonomous divisions, each with their own P&L and CFO.

The company is also due to file its Sarbanes-Oxley accreditation on 30 June this year, which is involving massive investment in internal controls and systems. It seems to have been under perpetual scrutiny from regulators and the press, fighting ongoing antitrust cases on both sides of the Atlantic. And, to top it all, John Connors, Microsoft’s chief financial officer of five years, announced his retirement in January 2005.

The question of who will succeed Connors is still open. The search for a replacement involves internal and external candidates but, as Microsoft has traditionally hired internally for senior positions, the smart money may well be on John Connor’s current number two, corporate controller Scott Di Valerio, who spoke exclusively to Financial Director in February.

While Di Valerio is understandably reticent to talk about the possibility of becoming one of the most powerful CFOs in the world, he isn’t averse to the idea either. “Well, you know, I certainly would (take the job) if it were offered,” he says.

Di Valerio joined Microsoft in 2003 from Disney, where he was corporate controller responsible for consolidating financial systems across the group’s business divisions – something that Microsoft has been trying to emulate by using SAP and its own SharePoint technology. “We had a centralised finance function (at Microsoft),” Di Valerio says. “But we were beginning to establish the seven business groups to distribute some of the work and process and finance responsibilities, so I was able to use my experience from Disney. I think that was one of the things that interested John and the company.”

Di Valerio has been instrumental in shaping the way the individual chief financial officers of the Microsoft business divisions report into corporate headquarters in Redmond, and how all the data collected is consolidated and turned into meaningful, strategic information for chief executive Steve Ballmer and the management team.

His experience in systems and processes has been especially useful given the massive impact that Sarbanes-Oxley section 404 on internal controls has had on Microsoft’s financial reporting. “The whole 404 process is a bit expensive and, in its first year, there’s always a lot of angst about it. But I think it’s a great opportunity to see where you can improve business processes and it’s really going to allow us to be better at what we do,” he says. “I think shareholders value companies that have a good control structure and systems that help validate financial information. So, whilst it is not at the forefront of shareholders’ minds that it (Sarbanes-Oxley) creates shareholder value, I think an overall strong control system does.”

While much of Di Valerio’s time has been spent on financial reporting, he says Connors has been at pains to involve him in the more strategic areas of finance, such as external communications. “From an overall finance perspective, John drives the vision and strategy,” Di Valerio says. “One of the great things about John is that he does a lot of work with the external financial and industry analysts but shares that responsibility with myself and the business group CFOs.”

Dealing with external stakeholders is something the next Microsoft CFO will have to do aplenty. Until recently, Microsoft relied upon a rising share price to create shareholder value. When Connors became CFO in 2000, Microsoft shares were trading at $50, but as its share price has steadily declined and stagnated at about $25 in the past two years, the company came under pressure from the markets to give some of its cash surplus back to shareholders.

Connors’ legacy is that he oversaw Microsoft’s $32bn special dividend – the largest in corporate history – in December 2004. The next CFO may come under pressure to return additional cash to shareholders or spend the money on acquisitions to prove the company hasn’t run out of ideas.

“I think it (the dividend) was just good balance sheet management. We focus on return for shareholders,” says Di Valerio. “The analysts on every call would ask, ‘What are you going to do with your cash’?”

Di Valerio won’t comment on future dividend policy, or on how the Microsoft finance team will look after John’s departure. But he said it will be business as usual until a new CFO comes in. “The finance team is continuing to work without changes to our goals or structure since John retired, and I don’t expect there will be change until the new CFO is hired. It’s an important role and Microsoft is going through its process to determine who the next CFO will be. We’ll see how it plays out.”