Rise of the strategic FD

FINANCE directors have long been the chief executive in waiting but the recession has seen an explosion in the number of business leaders with a financial background. Indeed, two thirds of newly appointed FTSE 100 CEOs have a financial background, and in total close to 50% have reached that position via the FD career route compared to just over 30% just three years ago, according to new research from Robert Half.

FDs are seen more frequently as the favoured candidate for the chief executive’s job; recent research indicates that two thirds of newly appointed FTSE 100 CEOs have a financial background, and in total close to 50% have reached that position through that career route compared to just over 30% just three years ago.

While the economy is still in recovery mode where revenue growth needs to be generated by new product development and capturing new markets, the question is why are company boards turning to the finance function for their corporate leadership?

Regulatory changes over the past decade have had a significant influence on the role of the FD.

Today there is a lot more attention focused on protecting investors. And with the requirements of sub-standard governance increasingly being tackled through legislation, the attention of FDs has been diverted towards more strategic concerns.

Those candidates that have a breadth of experience are strongly placed to step up to the plate which makes them strong candidateswhen boards turn their attention to CEO succession.

FDs are now more and more frequently at the table with the leaders of businesses, developing strategies and offering expertise on risk management and cost issues.

At the same time, the responsibilities of an FD have become far more diverse – from including staying abreast of emerging issues such as outsourcing and electronic commerce to as well as managing everyday financial activities and implementing a long-term fiscal strategy.

Today, as the economy stumbles into a slow recovery, operational, strategic and international skills remain a priority, with enterprise risk management now increasingly important. Managing the process is largely a responsibility of the FD and gives him or her giving a company-wide and integrated perspective that is essential.

The most successful FDs and the ones who are most likely to become CEOs, are those who embrace the wider strategic remit that is increasingly expected of them. They are involved in pricing and product development and are central arbiters for investments, capital allocation and the protection of shareholders.

The real value of the ‘Strategic FD’s’ lies in skill at balancing the need for short-term financial performance without sacrificing long-term value comes to the fore. The economic downturn was so severe, there has been a greater need for large-scale restructuring and a difficult balance between short and long-term priorities. The role of the ‘Strategic FD’ in finding this balance is fundamental.

On one hand the FD has to terminate unprofitable activities, ensure efficiencies are made, and execute cost-cutting measures effectively. Simultaneously, he or she has to ensure there is sufficient liquidity to invest, innovate and ensure the business maintains a competitive position.

The most important strategic role of the FD is to understand what drives the value in his or her business, whether it’s the power of brands in an FMCG company or new product development. The ‘Strategic FD’ should assess how restructuring or cost-saving measures impact these value drivers, both in the short and long-term, in order to take actions that minimise the impact on them. This understanding of what drives value is just as important in times of recovery and growth as it is in recession.

The ‘Strategic FD’ should also assess the costs and benefits of research and development projects, and whether they . An assessment of whether they drive long-term value and fit the company strategy and objectives should be made, in order to ensure funds are allocated to the most appropriate projects.

The ‘Strategic FD’ has an important role to play in finding finance to fund critical innovation projects. He or she should take a leading role in encouraging investment in these projects from investors and shareholders, and indeed, a leading role alongside the CEO in generating and maintaining shareholder trust in general.

The ‘Strategic FD’ should optimise working capital by divesting loss-making activities or those that don’t fit the company’s core strategy, but at the same time, he or she should be able to spot and grasp the opportunities that tough economic times can create. He or she will recognise the opportunities that arise from seeing competitors struggle, customers’ priorities change, and the possibility to improve processes during periods of restructuring.

The strategic and successful FD is significantly more proactive than five years ago. He or she needs to not only look after the numbers, but understand the issues behind them. It is this understanding of what drives value for a business in the long as well as the short-term and the ability to allocate resources accordingly, that makes the ‘Strategic FD’ so vital.

The best FDs have always possessed analytical skills but now they have been exposed to and had to respond to a wider range of business challenges and our experience at Korn/Ferry Whitehead Mann tells us that those FDs who possess learning agility, the ability to bring previous learning and experience to bear in ‘new’ situations, are the ones best equipped to take on the top job.

Ben Jones is head of the financial Officer Practice, EMEA at Korn/Ferry Whitehead Mann