The Role of a CFO: motivating people, managing assets and hedging risks

Hiring a CFO

The process of hiring a CFO is a significant undertaking for both the organization and the candidate. The company aims to find a qualified staff member who not only possesses the requisite skills and experience, but also aligns with its corporate culture. This alignment is particularly critical as the CFO substantially influences the internal service culture, encompassing areas such as HR and accounting documentation, payments, budgeting, financial analysis, automation, and more.

As an experienced financial leader seeking employment, it is imperative to pose direct, incisive questions regarding the company’s financial health and related processes during the job search. Before finalizing any employment decision, it’s essential to request key internal financial documents for personal analysis. Typically, these documents include:

1. Monthly financial reports used for operational decision-making by management.

2. An up-to-date financial model or the current one in use.

3. The latest set of documents submitted for regular board of directors meetings.

Understanding how significant decisions are made within the company is crucial. Clarifying which decisions are within the purview of the CEO and which involve the senior management team members, including the CFO, is vital. It’s also essential to delineate the responsibilities of other top managers: who falls under CEO-1, which decisions the leader makes independently, which ones are made jointly with the second-in-command or the CEO, and which ones are made jointly with the second-in-command or the CEO, and which decisions the CEO brings for discussion and voting among the top-management team.

In medium-sized and large privately-owned companies, decision-making mechanisms may lack structure and systemization, leading to interpretation challenges, decision delays, and personal risks for management personnel.

While the division of responsibilities between the company’s operational management and the board of directors is typically simpler and regulated by legislation, bylaws, and shareholder agreements, «gray areas» are still encountered here. The shareholders sometimes intentionally leave open issues in the internal decision-making process in order to retain additional leverage over the management. Having «gray areas» is not a problem, but it is crucial for senior management to understand where the boundary lies between their authority and the responsibilities of the board of directors and shareholders. They should also have a clear understanding of the segments within the «gray area».

Hence, during the hiring process, prospective financial directors should directly address pertinent issues with stakeholders. This includes inquiring about existing processes and procedures, decision-making approaches, documentation preparation, and the attitudes of leaders and the board of directors toward potential changes within the CFO’s domain.

Engaging in targeted discussions with stakeholders during the preliminary stages of collaboration allows decision-makers, such as the CEO, board of directors, and shareholders – those who ultimately make the decision to hire a financial director and interact with them – to understand and evaluate the motives and objectives of the potential CFO. This approach facilitates the selection of appropriate negotiation tactics and criteria for identifying suitable candidates.

It’s essential to acknowledge that hiring a leader entails a long-term commitment and, typically, no one is directly interested in deception. However, in practice, the opposite situation often arises: when choosing a partner for a long and fruitful collaboration, parties may, due to oversight or insufficient preliminary analysis, engage in self-deception. Correcting such mistakes can be arduous, time-consuming, and costly. With this groundwork laid, let’s proceed to discuss goal-setting and employee motivation.

Chapter 2

Motivation and Goal-Setting

Goals of the Finance Department

The cornerstone of any enterprise lies in meeting the demands of its clientele. Enterprises arise where needs are unmet and fade away when customers no longer require their offerings, often due to the emergence of alternatives or more efficient competitors. If a product becomes redundant or can be fulfilled without the enterprise’s involvement, customers will seek alternative solutions, potentially leading to the enterprise’s insolvency.

The principles guiding internal services within an organization should echo this viewpoint: it is imperative to continually identify and address customer pain points while striving to make this process as cost-effective as possible, all the while enhancing customer satisfaction. Anything extraneous, artificial or coerced will naturally diminish over time; hence, processes should align with the casual, day-to-day needs of the customer.

In the realm of finance, this entails bolstering decision-making, managing assets, reducing risks, and, importantly, financing the enterprise itself in a comprehensive sense. Adherence to tax authorities and other governmental structures is only fulfilled because it is an integral aspect of asset and risk management processes. Shareholders, encompassing equity, bond, and other debt or convertible securities holders, credit note holders, long-term investors, and creditors within project and syndicated financing, stand as some of the most critical clients for the finance department.

To fulfill the needs of both internal and external clients, finance professionals should configure processes within the enterprise to ensure the most seamless and predictable satisfaction of the demand for information and analytics, primarily catering to management and shareholders.

Therefore, when recruiting employees for the finance department, attention should be directed not only to their resumes and qualifications but also to their alignment with the enterprise’s values and operational methods within the finance department. While this may seem like common sense, these simple and straightforward aspects are often overlooked in practice. The ramifications of erroneous decisions and negligence can be detrimental to both the team and the reputation of the finance department within the enterprise.

As an illustration, one can look at a leading company in terms of sales volume and undeniable leadership in Russian product retail – «Vkusvill». Its founders and leaders have long championed a corporate policy of customer orientation and maximal reduction of bureaucracy internally and externally. Each employee in the company fulfills specific functions for a particular customer, often catering to several types of customers. The primary customer is the consumer – the visitor to the store or the «Vkusvill» website. Another equally important customer is the consumer of work or service within the company – the internal customer.

The consumer, also an external client of the retail network, supports the company through their visits or attention to the brand, the size of their shopping cart, and the amount spent within a specific period. Consequently, their actions may either bolster or diminish their usage of «Vkusvill» products or lead to their cessation. Similarly, an employee – the user of internal services – should have the option to choose between internal service providers and the possibility to replace them entirely with external, third-party services.

In line with this, «Vkusvill» has implemented not just «customercratic» practices, as its leaders term it, but has also duplicated all key functions, or service providers. This has been executed to ensure that internal customers always have options, and internal services thrive in an environment of motivational and healthy competition. Undoubtedly, such a model may not be suitable for every enterprise and sector, as some may lack the profit margins to sustain such initiatives, while others may require stringent control over specific internal processes, such as security. In varying corporate cultures, such practices may give rise to politics, intrigue, coalitions, gossip, and ultimately lead to a decline in service quality and process efficiency. However, embracing, testing, and selectively implementing the best corporate practices are pivotal for development, motivation, and long-term success for any team.

Employees in internal service departments should always remember that if they lose a significant portion of their clients, insolvency may be imminent, similar to conventional competition among enterprises in the market. Consequently, if an internal service employee fails to be customer-oriented and efficient, the corporate culture and business practices of the enterprise should allow for the possibility of revising their scope of work or even their termination. To a large extent, such corporate culture and the establishment of a corresponding environment, or conversely, the refusal to create a competitive finance department, populism, and the protection of unscrupulous employees, are the direct responsibility and indeed the choice of the financial leader.

The Structure of the CFO’s Establishment

In practice, the structure of a finance department hinges on the functions and responsibilities overseen by the financial manager within each specific company. These internal organizational setups vary significantly from one shareholder to another, resulting in diverse roles for financial directors across different companies that differ greatly in scope, depth, and quality.

The traditional duties and authorities of financial managers also vary markedly based on geographical factors, varying from country to country. I have had the opportunity to live and work in several countries for over ten years, both as a banking specialist and as the head of corporate client divisions in banks in Russia and Europe, as well as managing companies in various European countries and the UAE. Early in my career, I directly interacted with financial directors of my corporate clients, and later I held that position myself. This experience allows me to compare approaches in the regions in which have worked, collaborated closely, and built businesses.

In Russia, the role of the financial leader is quite broad, encompassing responsibilities ranging from accountant to financial director, including:

1. Chief Accountant with certain CFO responsibilities.

2. Head of the Finance Department, focusing on data analysis and planning (even without overseeing accounting and payments);

3. CFO, making decisions on a wide range of accounting and financial-economic tasks, either as a classic CFO or as a Deputy General Director for economics and finance;

4. Financial-Operational director with a broad spectrum of tasks, not limited to financial and accounting matters but also encompassing responsibilities for the operational and administrative service units of the company.

In the latter case, in addition to purely financial teams such as the finance department, treasury, and accounting, the senior manager’s responsibilities include various compositions of the operational responsibilities, like human resources (such as payroll and HR document flow support, rather than recruiting or assessments), business analysis, automation and support of corporate IT systems, legal services, compliance and internal controls, and the administrative and economic functions.

In Western Europe, a CFO typically possesses a significant accounting and tax background, resembling more of a chief accountant with financial management functions. Therefore, a common requirement for such positions in Europe is to have the CPA (Chartered Public Accountant) certification.

In the operations of a European company’s finance department, considerable attention is paid to credit analysis, working with accounts receivable and accounts payable, tax accounting, and reporting. Career advancement for financial professionals in European companies often involves area-specific study, spending several years in each function. They rarely have wide coverage of tasks and processes within the responsibility area of one specialist or department, but rather increasing expertise and close hands-on focusing on a specific field. Financial specialists in European companies frequently focus on a single area of responsibility throughout their entire careers, gradually increasing their salary due to indexing and gaining greater autonomy in decision-making (e.g., in determining the size and terms of limits for accounts receivable).

In the CIS (Commonwealth of Independent States, former Soviet countries) and EU (European Union) countries, the primary functionalities of the so-called «classic» CFO include:

1. Financial analysis and planning, including project analysis (“ad hoc” tasks as requested), financial modeling, and budgeting.

2. Accounting and tax planning.

3. Management accounting and reporting.

4. Process automation and BI-reporting, supervision of financial IT-systems.

5. Treasury management, including liquidity management, payment processing, and maintaining a payment calendar.

Corporate IT systems usually fall within the CFO’s area of responsibility, and therefore they play a crucial role in selecting and enhancing not only financial systems, but also overall management and automation systems (ERP), customer relationship automation systems (CRM), working closely with heads of production and leaders of commercial departments. The Chief Technology Officer (CTO) is responsible for system support, data storage, cybersecurity, user system support, maintenance of computer and office equipment, and access organization.

In North and South America, a CFO serves as a general manager with broad responsibilities, including investor relations, corporate governance, reporting, liquidity control, risk management, and authority in representing the company and signing documents. In the United States, functional department heads are often referred to as Vice Presidents.

Notably, in the United States, when a company goes public, the CEO and CFO bear full legal responsibility (up to criminal liability with sentences exceeding 20 years) for the organization’s activities and the information provided to investors. It is not the business development director or CTO, nor the Vice President for legal matters, but rather the financial leader, who is also the Vice President for finance. The CFO and the CEO share full personal responsibility for the company’s activities and accurate representation of its affairs in public documents. Consequently, the CFO is essentially the second most important leader in the organization, with the same level of responsibility to shareholders as the CEO.

In the Asia-Pacific region, the functionalities of financial directors vary from country to country. Historically, European, American, Chinese, and Japanese style of management and business culture have had varying degrees of influence on the development of general management principles, or approaches, in different countries.

No matter what area of responsibility you take on as a CFO, you need to structure responsibilities, authorities, and resources within the various department. Consider the workload of line managers: every manager should have some unallocated time, free from current operational tasks and requests, to invest in process improvement, mentoring their team, and professional self-development. Also, remember the golden rule of management: the optimal number of direct subordinates for any manager does not exceed seven people, though this may vary based on functionality and tasks. Some leaders require an expert team of two or three assistants for maximum efficiency, while others may need a team of five to seven people.

Flexible Management and Planning

The contemporary world is too dynamic for rigid long-term plans. If predicting events a month ahead is challenging, making year-long or multi-year strategies futile, if not counterproductive. You’ve probably heard something similar. Perhaps you are also an advocate of adaptable management and, consequently, flexible planning.

In a world where «black swans» have become increasingly common in recent years, accurately forecasting the future becomes exceedingly difficult, as does constructing reliable forecasts.

This holds true, but only to an extent. We are indeed navigating periods of economic and geopolitical instability, alongside technological advancements that were unimaginable fifty years ago, accompanied by the rapid accumulation of information and methods for its processing.

At this juncture, to avoid potential disasters, our new pilots must swiftly orient themselves in the turbulent environment with limited visibility. They need to grasp which data is essential at the present moment, swiftly filtering the incoming stream of information, utilizing only the necessary instruments without being distracted by secondary tasks and data. Additionally, they must analyze the situation, pinpoint its primary threat, and ascertain which tasks should be genuinely prioritized.

In this evolving world, planning, forecasting, budgeting, and laying the groundwork for the future remain imperative. Without a systematic approach, filtering information overload, determining priorities, setting objectives, and fostering motivation within the team is impossible to achieve. A rational, systematic approach to forecasting and planning is crucial for building and developing a business, as well as navigating the challenges of growth. That is precisely the financial leader’s mission.

Here, we embrace the concept of future planning, organizing team motivation around a healthy desire for accomplishments and self-improvement, innovating, and overcoming external and internal constraints.

This concept of self-motivation, organizational goal setting, flexible planning and budgeting is precisely what interests me, and I’m eager to share it with you. In the forthcoming chapters, we will explore fundamental principles, techniques, and mechanisms for preparing oneself, the organization, and its processes, alongside key stakeholders, for adaptable goal setting, planning, and budgeting.

Need for Self-Realization

Prior to any action, there lies the determination and establishment of goals, the selection of paths, and methods for achieving these aims. To effectively plan outcomes, establish goals for employees, and choose motivating tools for organizational leaders, it’s imperative to identify individual responses to questions like, «How do we establish and achieve goals?» and «What motivates us?».

For effective responses, it’s crucial to initially pinpoint deep-seated goals and motivators: what holds significance for the organization; why the company exists, what issues it addresses for customers; why employees come to work, what they aspire to (aside from financial rewards); what stakeholder groups exist within the company and how their goals intersect. Ultimately, the goal is to seamlessly integrate all motivators and goals into a unified goal tree for the organization.

In the era of rapid technological advancement and the creative economy, a company’s primary competitive advantage is its well-motivated, efficient, and loyal employees. In this context, «appropriate» motivation entails fostering an environment in the company that fosters creativity, self-expression, continuous self-development of employees and, consequently, the organization’s advancement. Such an environment is unattainable within the strict hierarchical corporate structure of large 20th-century companies.

Many leaders hold the belief that streamlining decision-making processes, eliminating intermediate management layers, incorporating elements of discussion into decision-making, abandoning strict dress codes, and transitioning to flexible working hours all dampen employee morale, undermine discipline in the team, and ultimately lead to reduced manageability, anarchy, and the organization’s downfall. In reality, these traditionalists primarily fear losing authority and diminishing their own significance within the company, and perhaps even losing their jobs.

In contemporary science, the prevailing view is that what drives us in work, business and creative endeavors is the desire for self-realization, predominantly fueled by our own attitudes and internal aspirations. We often do this subconsciously, striving to engage in activities that bring us satisfaction. If we don’t find satisfaction in our daily work and goal fulfillment, achieving high-quality results becomes not just challenging, but potentially highly detrimental to mental and physical well-being.

Drawing from my experience, studying management practices of successful companies, insights from international consultants and researchers in the field of management and motivation, all indications suggest that a modern organization striving to remain effective must align its strategy and goals with those of its employees. Only content employees who are in suitable roles and engage in fulfilling work every day will enable a company to develop rapidly and adapt flexibly to rapidly changing external factors and the competitive landscape. Initially, this may appear utopian, but it’s the only viable approach to building a successful long-term business.

Incidentally, parallels can be drawn here with family dynamics. In recent years, child-rearing methods in modern society have undergone a similar transition – from strict hierarchy and authoritarianism towards younger generations (and women, incidentally) and negative reinforcement and motivation techniques to a nurturing environment fostering personal experience and free exploration of the world, empathy, openness, and discussions on sensitive issues, as well as collective decision-making that impacts the everyday lives, existence, and destinies of offspring.

It’s crucial to underscore that our strategic orientation in life must align with the company and its values. If you favor traditional authoritarian-hierarchical approaches, the laid-back atmosphere of a youthful startup will seem frivolous and incongruent with your work values and you, in turn, will be detrimental to the team. Conversely, a democratic leader who embraces flexible management and planning approaches won’t fare well in a company with aggressive management practices. Such mismatches, akin to personal relationships, result in suffering for both parties.

There’s an approach that meets the demands of our time. It’s called Objectives and Key Results (OKR) – a goal-setting framework utilized for systematic execution of strategy, increasing motivation, and directing employees towards what’s most crucial and valuable for the company. OKR didn’t materialize out of thin air – it’s a contemporary iteration and successor of goal-setting systems from the past century like MBOs, SMART goals, BSCs, KPIs, but with a modern emphasis on people, decentralization, and adaptability.

The methodology was initially developed and implemented at Intel and later introduced by John Doerr to Google’s leadership in 1999, when Google was in its first year of operation and there were only 60 employees. As those Google employees migrated from one company to another, the OKR methodology gained traction and spread among technology corporations such as Oracle, Netscape, Amazon, Flipboard, Twitter, and Spotify. Now, even small (yet forward-thinking) companies and startups are integrating OKR into their management systems. The significant surge in the approach’s popularity was also bolstered by the renowned consultant Felipe Castro, the author of the book «The Beginner’s Guide to OKR».

In subsequent chapters, we will explore the practice of applying OKR with its primary techniques and approaches. I’ll delve into common mistakes made during its implementation. Furthermore, I’ll demonstrate how to implement goal-oriented management in the financial department and throughout the company, how to formulate individual goals and integrate them into the organization’s goal tree, and how to monitor progress and make adjustments. Ultimately, it’s imperative to connect individual goals, group plans, product metrics, development plans and budgeting into a cohesive system, facilitating long-term planning of quantitative and qualitative aspects, and the fulfillment of the company’s and its shareholders’ strategic objectives.