CFO's Role in a Downturn

by Sanjeev Agrawal, Apr 24 2009 These are the times that are mentioned in books, practised in theory but difficult to predict in terms of timing and intensity of the challenge. It is a massive reality now but it was not too long ago that any mention of economic indicators at today's levels would have had no buyers.

At the end of last year, most countries experienced the sharpest falls in business and consumer confidence since the Great Depression. This financial crisis is unprecedented and as a result, both the global economic environment and assumptions are changing fast. There is now a common acceptance of the intensity as well as long-term nature of this crisis. And governments and businesses have reacted with changes in their priorities and strategies. Constant assessment of the environment and being vigilant and nimble in response are more important than ever. It is also important for corporates to have a clear strategy that provides a framework for drawing up action plans for dealing with different scenarios.

Against this backdrop, the role of the chief financial officer in an organisation takes on critical importance.

Traditionally, a chief financial officer (CFO) is the 'conscience' of the organisation, responsible for preserving and growing shareholder value. So has the role changed in the current situation? Well, the fundamentals of the role are very much the same and in fact apply even more strongly now. Yet this current economic situation demands a different focus from the CFO.

Before the start of this crisis, the world economy was experiencing a long and strong run of several years of growth. Opportunities were multiplying by day and asset valuations were sky rocketing. CFOs were focused on making sure that they identify, evaluate and tap all opportunities to expand and grow. Relationships with bankers were focused on financing growth and managing the growing complexity of cross border businesses. It's a different world and the focus has changed - there is now a shift to preserving value. CFOs are busy identifying and exercising levers to manage cost, implementing alternative business structures and ensuring liquidity and managing capital ratios.

Relationships with banks are somewhat different as well. Many banks are distracted by their internal challenges. Some banks are reviewing their business strategies in terms of international spread and scale. Liquidity is not easy to come by and has become more expensive. Capital markets are not exactly vibrant. It is therefore important for CFOs to understand which banks continue to remain strategically focused on their markets. It is time for CFOs to deepen relationships with their banking partners of choice as the chances of a new relationship getting started and bringing it to a desired level quickly would be quite low.

Risk Management
As the markets are very volatile it is even more important to profile the cash flows as well as interest rate and currency mismatches in detail and work out action plans to mitigate the risk. Mitigation of risk (not the upside) should be the primary driver of such action plans. On the other hand, with steep movements in interest rates and risk premia, opportunities to review capital composition for the purpose of identifying restructuring and buyback possibilities and reducing the cost of capital might exist.

Every crisis brings its own opportunities. CFOs need to keep a close watch on that. Mindset barriers to change is now perhaps lower than ever and CFOs need to leverage that. One has to find time from immediate 'fire fighting' to evaluate opportunities such as organisational restructuring, asset buyouts, and mergers and acquisitions. A CFO needs to make sure that the current crisis does not result in years lost. While looking for opportunities, it is best we adhere to the golden rule of 'everything that is cheaper than yesterday and is available today for the first time is not necessarily value accretive'.

These take on an even greater importance given the current economic climate. CFOs need to ensure controls are not compromised and relaxed in the process of managing the short-term crisis. Greater transparency in reporting, messaging and dialogue is essential. And the interpretation of accounting standards, rules and policies should remain objective and consistent.

Finally, CFOs need to play a leading role in making sure that the long-term strategy of the organisation does not get derailed by immediate challenges. The need to balance the short-term 'must do's' and long-term 'stay on the path' could not have been stronger. In summary, this current crisis will bring out winners and losers. A lot will depend on the role CFOs play in 'shepherding' their organisations. While the core role of a CFO does not change with the crisis, the balance in the focus does. Short-term goals are likely to take on precedence in this current market but the final winners would be those who ensure that strategic focus remains central to all plans and who capitalise on opportunities that may emerge.

Sanjeev Agrawal is the chief financial officer, Singapore and South-east Asia, Standard Chartered Bank