Explained: The roles and responsibilities of a finance director

A finance director is, first and foremost, a full board member and subject to the duties and responsibilities that fall on board members.

These are defined in the UK Companies Act as: ‘To act within powers; to promote the success of the company and act in good faith; to exercise independent judgement; to exercise reasonable care skill and diligence; to avoid conflicts of interest (current and probable); not to accept benefits from third parties; and to declare personal interests in proposed transactions.’

In addition, the finance director has more direct responsibility for a number of variables which are based on their particular expertise. In the USA (if subject to the Sarbanes Oxley legislation) FDs have very specific duties, that include testifying on a quarterly basis about the integrity of processes and financial statements. In effect, the FD has been elevated to co-pilot status.

Crafting the finance strategy in line with the corporate strategy is one key element of that position. The finance strategy should follow the corporate strategy and not the other way around. This would include linking strategic objectives with the promotion of shareholder value. For example, full understanding of the financial impact of the strategic objectives should be fully understood by all board members.

This means clarity on costs and cost allocation, margin decisions, profit objectives, product and customer profitability.

The financial stewardship of the business will be driven by the FD to ensure that the right objectives are agreed in the first place, that proper controls are put in place, that allocation of spending discretions are done responsibly and that there is diligent record-keeping.

The board needs to be presented with an intelligent dashboard for performance evaluation that includes both financial and non-financial metrics and should not be subjected to the FD’s fatal attraction to spreadsheets.

Key Performance Indicators need to be aligned to Key/Critical Success Factors to ensure a proper monitoring of strategic objectives. It is incumbent on the FD to present papers in a timely and accurate manner, but also in a form that is easily understood by all board members.

Finance structure

Inevitably a business will need finance to carry on, to grow, to acquire and to invest in capital expenditure and the FD will be at the forefront of these financing discussions.

It will be about raising the right amount of finance, planning far in advance so that there are no surprises, managing the costs of these options, and at all times retaining the flexibility to have sufficient room to cope with unexpected developments.

If the company is listed, there will be another range of expectations on the FD, who will need to be active in managing the fraternity of investors and will need to observe the numerous rules and regulations that come with being a listed entity. The dividend policy should be sensible and balance the expectations of the owners with the financing requirements of the business.

Aligned to the above will be the management and cash-flow planning to ensure that enough cash is always available to keep the business going.

Tax planning:  ingenious or bad practice?

While the FD and fellow board members will always seek to minimise the tax liability, in recent times many tax practices have been described as aggressive and in some cases, have been deeply unpopular. This has sometimes led to customer backlash and businesses need to be wary of upsetting key stakeholders in a bid to boost profitability.

As well as all the responsibilities already covered, there are other demands placed on the FD. All financial policies and tactics need to be aligned to the company’s values and ethics.

Other responsibilities

The FD will also need to bring an additional dimension to board discussions. The board will expect the FD to test the financial impact of proposed strategic objectives, validate the authenticity of forecasts, clarify the full impact of cost savings and monetise the benefits of advertising.

During uncertain or difficult times, it will be incumbent on the FD to respond swiftly and provide sound financial advice to steer the business through it. This includes injecting financial reality to over-optimistic plans, and be able to recognise early signs of potential financial difficulty and warn the board and making the board fully aware of the real worst case scenario and the business’s ability to continue trading.

People skills are core to the role of the FD, and FDs will need to constantly hone their soft skills so they can be valuable business partners, as the days of simple number crunching are left behind.

FDs also need to be confident in their decisions and in leading, as they will be expected to assume strong leadership positions during an acquisition or proposed acquisition

They will also assisting board colleagues in monetising risk variables and risk impact, ensure that proper stress-testing takes place, and help the board to understand and manage the real financial and value drivers of the business

Often, directors do not have a high understanding of the numbers. It is because of this that FDs needs to assume a different type of leadership and become coach, mentor and adviser to assist fellow directors.

The FDs office should be a safe place to call upon and they should be able to explain difficult concepts in an easy to understand manner and be continually developing this.

Jean Pousson is course leader for the Institute of Directors’ Finance for Non-Financial Directors course.