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Boosting CFOs through play?

Article published in ” Finance et Gestion ” N°395, January-February 2022.

How does training allow CFOs to increase their capacities and their impact?

Like a futuristic comic book hero, does the augmented CFO have bionic eyes to calculate without an Excel spreadsheet? And is the augmented CFO a three-armed goddess with an exo-armor to go into battle?

As a CFO in major international energy and industrial groups (Suez, Rio Tinto Alcan, Solvay…) for some twenty years, I have seen how the job has evolved. Formerly specialists in figures and compliance, CFOs have become business partners in every corporate initiative: growth, internationalization, mergers and acquisitions, transformation, crises and restructuring. In addition to being a business partner, I have always enjoyed talking to sales people on the ground, spending time in production facilities with plant managers, answering their questions, explaining EBITDA and ROCE, and taking great pleasure in demystifying finance. Training non-financial people in finance is a real opportunity.

Now an educational entrepreneur and professor of finance at HEC, I meet students, large and small companies, and academics: what advice to give CFOs of the 21st century?

From static reporting to predictive analysis

Your company is equipped with a powerful ERP. You went through the ordeal of deploying it. Almost all the company’s processes are finally managed, with a few micro-exceptions that sometimes irritate you, but do not pose a major problem. In addition to the hyper-structured data from your ERP, you also have access to less structured information from RFID chips, financial transactions, social networks…

What to do with the tons of data collected, monthly reports, variance analysis and beautiful price and volume variance graphs? How can we use Big Data for predictive analysis to better target customers, forecast demand more accurately, anticipate stock shortages that are currently weighing on the supply chain, better detect bad payers and make cash flow forecasts more reliable?

Intelligent tools are fine, but teams need to take ownership of them. The training of these management controllers and accountants, who are always closing or forecasting, is essential. They are often the ones who turn off the office lights in the evening: they are the last to leave and since Covid and teleworking, only their children know that they spend more than ten hours a day in front of their computer.

Training gives them time to breathe and take a step back; it sometimes even contributes to their loyalty. They can finally get their heads out of the water and identify the truly strategic, business-critical issues on which they need to focus their efforts. After a thorough training, they will come back to you with a proposal to modernize this old reporting system without predictive indicators, to complete it, or even more audaciously, to replace it with an OKR (“Objectives & Key Results”) tracking system.

Reach out to your non-finance colleagues

Too often I’ve seen finance teams in their bubble, interacting very little with their operational colleagues. Yet the key business decisions are made by the operational people. A sales team is so afraid of losing volume that it no longer fights to maintain prices, even though its products and services are in many ways better than those of the competition. A plant manager can no longer bring the paint shop up to standard, and is wondering whether to outsource it. The head of the services BU has plans to recruit specialized experts to respond to specific situations, but hasn’t considered how many days per year these experts will be billed to customers.

What are CFOs doing to help them? What if they showed them that finance is not just accounting or reporting that only looks at the past.

Using business games and simulations, I went to meet my operational colleagues. Around a board, with tokens to move and cards, both in physical and virtual environments, conversations take place and minds open up. People have fun, they get involved and they learn. No need to spend time away from home for a long training program: in just two days, I was able to make them understand in a very concrete way the difference between profit and cash, to give them new analytical tools and, above all, a fresh, more global view of the company’s performance.

The cost of a two-day training course is very modest compared to what is at stake. I remember this former colleague who was responsible for a business worth more than €100 million. Using the analogy of a pizza stand, he finally understood that it was better to increase the price by 10% and sell 10% less quantity, than the opposite. He was only thinking about his top line, without taking into account variable costs.

By meeting with their non-financial colleagues, CFOs can increase their influence in the company and their impact on performance.

Integrating the price of carbon into investment decisions

Finally, let’s come to the subject that drives me the most – non-financial performance. It is no longer possible to think about EBITDA, ROCE, ROI, without taking into account the company’s carbon footprint. For example, if you have two factories that are not operating at full capacity, is it worth consolidating manufacturing on one site only?

CFOs can no longer be satisfied with a cost analysis and social impact assessment when the process consumes a lot of electricity. Especially if one of the two sites is located in a country where electricity is mainly produced with nuclear energy, and the other with coal. This brings us back to the second scope of the carbon footprint report. How can this non-financial dimension be taken into account in the evaluation of alternatives? More and more large companies are introducing a carbon transfer price into their decision-making process – the so-called “shadow price” which ranges from €30 to €100/tonne of CO2.

The Conferences of the Parties (COP), which bring together the 197 signatory countries of the United Nations Framework Convention on Climate Change (UNFCCC), have taken place every year since 1994. Some of them have made great progress, such as Kyoto in 1997 and Paris in 2015. The IPCC reports on climate and IPBES reports on biodiversity have warned that global limits are being exceeded and that the effects are irreversible.

The consequences of global warming and biodiversity loss will be felt well beyond the usual time horizon of political and economic decision makers, which is three to ten years: how can we encourage them to act? According to Marc Carney, former Governor of the Bank of England, this is a “tragedy of the horizon”, echoing the “tragedy of the commons” pointed out in 1968 by the biologist Garrett Hardin.

The ESG regulatory tsunami

The financial sector is called upon to finance decarbonization and develop green finance. The inclusion of non-financial or ESG (Environment, Social, Governance) criteria in the performance of companies is a real regulatory tsunami.

CSR reporting became mandatory in France 20 years ago for companies listed on the stock exchange. Its requirements have gradually been strengthened to comply with the 2014 European directive on non-financial reporting. It now applies to all companies with more than 500 employees (listed and unlisted), which represents about 4,000 companies in France.

Financial actors are getting more and more involved… and terminology is changing! CSR reporting is now referred to as non-financial or ESG reporting – another acronym for the Non Financial Performance Statement, which must be audited and published on the company’s website. This strategic steering tool covers four areas: social, environmental, anti-corruption and human rights.

Every company uses its own indicators, which makes it difficult to make comparisons. So, to strengthen the financial transparency expected by stakeholders, and in the wake of the TFCD (Task Force on Climate Disclosure) – a climate working group emanating from the G20 – the EU is revising its 2014 directive. Renamed CSRD (Corporate Sustainability Reporting Directive), this directive will be in force for all European companies with more than 250 employees or €40 million in sales (i.e. 50,000 companies in Europe) as of 2023. And the EFRAG (European Financial Reporting Advisory Group) is going to release the standardization of indicators.

With so many acronyms, it’s hard not to get dizzy. And there is a lot of money at stake: Ursula von der Leyen, President of the European Commission, has announced €1,000 billion in private and public funding for the European Green Deal.

To spice things up, the European taxonomy is coming. This classification of activities according to their environmental and social sustainability will guide capital flows. Companies will have to isolate the “sustainable” part of their turnover, but also of their Capex and Opex. This obligation applies to the 2021 accounts of companies for the climate component. These reporting requirements, and the standardization of green labels that will accompany them, will surely limit the “greenwashing” that is still too frequent.

So CFOs, are you ready to go even further? Business games may help you one day. In the meantime, pair up with your CSR colleague: this is where investors are waiting for you.

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