Ken Lever knows a thing or two about the shift in priorities for a finance leader. In a 36-year career spanning senior accounting and executive roles in a throng of plcs – many of which were a turnaround job comprising integrating purchased businesses, restructuring and managing change – Lever has had to contend with everything the job can throw at him. Throw in a bunch of heavy-hitting non-executive and external roles including audit committee chair at Wolsey, Vega and iSoft, seats on the large business advisory board at HM Revenue & Customs, the financial reporting committee for the Hundred Group of FDs and the Accounting Standards board, and a candidate ripe for a chairman role sits before you.
Which makes his most recent appointment as CFO for FTSE-250 business process outsourcing advisory Xchanging a little curious. Why has he chosen to remain in the finance job? Interviewed at this year’s Financial Director Summit the same day his appointment at Xchanging was announced to the markets, Lever simply says that the CFO gig has morphed into something significantly different to his first role as FD with then-publicly listed retail food conglomerate Corton Beach in 1987 – which culminated in his becoming its group managing director four years later.
That FDs are no longer simply scorekeepers and now hold influential, visible strategic positions is well documented. But, Lever says, their priorities have changed to such an extent that being a qualified accountant is no longer a prerequisite for the job – something that would have been inconceivable when he left Arthur Anderson in the late 1970s for the business world.
“Being a qualified accountant can actually be an impediment to being a chief financial officer,” Lever tells Financial Director. “People that succeed in life are only as good as the people around them. If you have expertise and support, particularly in areas around compliance, then I don’t think a CFO has to be a qualified accountant.”
Understanding the economics
While he accepts that you need someone in the FD role that has come from a financial discipline, it is equally important to have someone that understands the economics of what drives value through an organisation – something he says is a particular preoccupation of his.
“People frequently don’t fully understand what drives value,” Lever says. “There can be confusion between accounting metrics and value metrics. People who have an overly technical accounting background can lose sight of the things that are important in business to drive value over time.”
The finance function’s priorities now lie more heavily in developing the strategic direction of the company and articulating the broader role finance leaders can play in driving that strategy forward.
In many instances the FD can serve as a reality check on the wild ambitions of a chief executive, and the finance function should be in a position to outline its own vision of the company’s strategic objective. But Lever still warns against the finance function pushing too far beyond its classical remit.
“I am in favour of pushing [the finance function] out as far as possible, but FDs don’t have a God-given right,” he says. “People think finance has the agenda for change, but you can have only one CEO. Finance has an important role to work with the general manager, to make sure they have the right information to make the right decision to generate returns over time.”
Although the finance function’s priorities have shifted during Lever’s career, some principles remain from his time at previous companies. Lever remains an arch critic of managing for earnings growth and a well-versed proponent of managing for value.
According to Lever, the key role of the FD is to be in a position to make sure everyone in the business understands the importance of creating value over time and to ensure the processes are in place to influence management to look at the right things – and make the right decisions.
“The centre of my agenda is to get businesses to focus on the things that create value and not to get bogged down on accounting issues,” he says. “A business must create value over time and to improve intrinsic value.”
That can only be achieved by maintaining a sustainable cashflow. To create value there also has to be an understanding of cashflow generation. All too often, Lever adds, there is a preoccupation with financial metrics that have nothing to do with cashflow generation. For instance, Lever believes that in the US, there is a propensity for companies to focus on earnings metrics over cashflow.
“A lot of businesses see cash as an afterthought. There is a tendency to get sidetracked by accounting metrics,” he says. “What you measure is what you get. If you focus on the wrong metrics, you won’t get the delivery of the value you want.”
For an agenda of value creation to spread throughout an organisation and to become embedded within a company’s processes, Lever believes it essential that the FD takes the time to get involved with those employees working at the coalface and not just sell their proposition to management.
“It is important the finance group understands that the guys running business are the ones who are influencing cashflow,” he says. “They are the people involved day-to-day interfacing with third parties. Only by educating them on value creation will they have role in that process.”
Lever’s outgoing role as CFO for private equity-owned Swiss semiconductor manufacturer Numonyx and FTSE-100 engineering giant Tomkins – acquired by a Canadian consortium in August – required very different sets of priorities in his quest to dig up the intrinsic, long-term value of each business.
Firstly, and naturally, the finance function within each had a different size and focus reflecting the size of the business: Tomkins was a business of 35,000 people across 130 countries, publicly-listed with revenues of $6bn (£3.8bn) and a jewel in the crown of British business, while Numonyx, a joint venture created by bolting bits of Intel, ST Microelectronics and a private equity firm together, employed 7,000 people and brought in revenues of $2.25bn – two very different propositions. And Lever tailored his approach to generating value not only to size, but to the stage in the company’s life and that of the stage the prevailing economic cycle was at.
The global recession bites
When Lever joined Numonyx in 2008, it was still in gestation. His mandate was to drive cost out of the business, integrate Intel and ST, “reconfigure” the organisation and make it profitable for a planned listing at the end of 2010. Those plans were thrown into disarray not that long afterwards with the advent of a global recession.
“In the first quarter of 2009 our revenue was 50 percent of what it was in the first quarter of 2008,” he recalls. “We had to take dramatic action to drive costs out of the business.”
Fortuitously, his experience in almost a decade with Tomkins stood him in good stead to manage the situation. On joining in 1999, Tomkins was in disarray: recently kicked out of the FTSE-100, it had fallen on its sword. A strategy of boosting earnings growth through acquisition, he says, eventually saw it weighed down by the number of diverse businesses it swallowed, earning the now-infamous label of being a “guns to buns” business.
“Tomkins was a high dividend player where there wasn’t a large movement in the share price,” Lever says. “At Numonyx there was a very different agenda. Within the business we were used to seeing the selling price of semiconductors reduce by 20 percent. You have to drive costs out of the business to protect the margin.”
Now, at Xchanging, there will be more different requirements. Lever says the business needed to import experience to help with its development as a listed company – it has been criticised for its approach to accounting, something Lever is well placed to address – and to make sure its strategic focus is where it needs to be. Certainly, business process outsourcing is growing in popularity as FDs look for more ways to cut the cost of operating.
In his various incarnations throughout his career his strategy may have altered, but Lever’s priority has always been the same. “In each case I have tried to instil a value agenda irrespective of size,” he says.