Why Governance is the New Black for CFOs

By in Opinion

Being popular or trendy is not what people expect of CFOs. Being serious, conservative, forward-looking and considered … now that’s the role of the CFO isn’t it?

Well of course it is, but a CFO can be much more than the expectations placed on them and let’s consider for a minute the current issues which CFOs might be contemplating:

The perfect storm of financial scandals; erosion of the public trust adversely impacting the social licence of businesses to operate; increased regulatory compliance stemming from the Hayne Financial Services Royal Commission and a global economy mirrored in trade wars; Brexit, uncertainty and fluctuating currency movements converging to create an unstable environment for businesses to operate in.

Technology innovation; blockchain; cyber security; cloud accounting; anti-money laundering (AML); ERP and developments in payment systems, including crypto currencies, are also impacting the scope of CFO activities and no doubt their ability to forecast how best to navigate the future financial outcomes of business operations.

If this all seems somewhat overwhelming for you, consider that Governance is the “New Black” for CFOs and provides a way forward to the myriad of competing threats and obstacles faced by CFOs.

The ASX Corporate Governance Council says that corporate governance is “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations”. It encompasses the mechanisms by which companies, and those in control, are held to account. The extent to which the CFO addresses corporate governance will vary between organisations, however, the CFO clearly has a key role to play in governance and this was amplified by the adverse findings of the Prudential Inquiry into the Commonwealth Bank of Australia and the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Consider the key recommendations of the Hayne Commission and the role of the CFO:

  • Increased focus on high quality oversight and governance by the board
  • Culture: embedding the “Should we?” question into all key decision-making processes
  • Greater implementation of risk management practices and its role in the organisation to be elevated
  • Cultural change to support enhanced risk identification and remediation
  • Accountability should be clarified and linked to (variable) remuneration

Surely the CFO is the ideal person to address these types of recommendations and create positive change in organisations. These are governance concerns and yet they could fall firmly within the scope of CFO activities.

While the Board has a clear role to set the “tone at the top” on culture, it’s the executive management team which defines and implements culture on a practical basis; CFOs can choose to lead on an ethical basis which is accountable, transparent and progressive. On a more practical level, they can assert influence on risk committees, in financial reporting (internal and external) and with people operationally within the organisation.

While traditionally a CFO may consider their role to be the financial management and information for management decision making, the focus that CFOs should be adopting now is on governance and how this impacts their organisation.

ASIC’s Corporate Governance Taskforce has recently released its first report which focuses on director and officer oversight of non-financial risks following the Taskforce’s study of Australia’s largest ASX-listed financial services companies. The Taskforce was established to “conduct targeted reviews into corporate governance practices of large listed entities to gain an insight on actual governance practices.” In its first year, the Taskforce has focused its attentions on director and officer oversight and management of non-financial risk. The Report sets out a series of questions for boards to consider when framing their oversight of non-financial risks.

The Taskforce adopted a definition of non-financial risk used by APRA in its inquiry into CBA, which includes operational risk, compliance risk and conduct risk and the Report identifies that, although these risks are termed ‘non-financial’, their mismanagement has the potential to cause significant financial losses for companies, as was seen in the fallout from the Hayne Commission.

The Taskforce’s view is that the companies and boards they observed need to “significantly improve” their current non-financial risk oversight practices. A central theme of the Report is the expectation of active engagement, or “active stewardship”, by directors in their oversight of non-financial risk. This requires a more inquisitive approach as well as holding management to account, rather than merely expressing disappointment, where management is acting outside of acceptable risk parameters.

Increasingly, CFOs will need to maintain a wider focus on governance issues because they will have a direct impact on financial performance and market capitalisation.

Moreover, for CFOs who are ambitious and seek to progress their careers, having operational and governance experience will become a prerequisite to career advancement into COO, CEO and Director roles.

A recent example of such advancement was the appointment of Robert Swan, the former CFO at eBay and Intel being internally promoted to CEO of Intel and Australian CA Robert Scott, only the 8th CEO appointed to the role of CEO at Wesfarmers, the largest Australian company by revenue.

Consumers, employees, shareholders and governments will continue to strengthen their belief around the social licence to operate, so having the appropriate governance in place and operating effectively will be a key requirement for organisations to manage their performance and success upon. Relying upon successful financial performance will not be sufficient to safeguard Directors and senior management as we have witnessed at recent public enquiries in Australia. Active management of operations and associated inherent and control risks from key management personnel will receive much greater focus; accordingly, CFOs will need to be forward-thinking in their approach and management of governance. Delegating responsibilities will be key for CFOs to manage their responsibilities because there is certainly not enough time in the day to achieve the normal scope of CFO engagement responsibilities and tasks and the added pressure of increased governance over operational and risk areas.

The spotlight in on Australian corporations to address their non-financial risks to minimise the potential adverse impact they may have upon financial management of corporations. CFOs have a unique opportunity to effect positive change in their organisations by actively engaging in governance and operational aspects by taking a more holistic approach to their role. The ‘New Black’ is indeed governance, but will CFOs take up the challenge?

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