The seven hats of the FD (Third part)

In times of trouble, people seek refuge in cold hard facts. If the wheels are coming off, you want to know that a real expert – a disciplined, experienced, knowledgeable manager – is at the controls. Just ask the people of Italy and other European states currently run by teams of technocrats.

That means a finance director (FD) has to be capable, and brave, enough to step into difficult situations calmly and decisively. Richard Pennycook, CFO of FTSE 100 supermarket chain Morrisons, explained the storyteller hat in December’s issue. But as a seasoned turnaround FD, he’s also clear that finance leadership is crucial to rescuing tough situations. In other words, the FD has to be able to provide a rescue service.

“In a turnaround, it can be more complicated because you don’t always have all the facts to hand,” he says. “In a steady-state business, each audience expects you to be able to articulate exactly what’s happening. In a rescue situation, without all the answers, you simply have to be as open and honest as possible. You can’t shy away from difficult messages.”

And it’s not just during extreme situations, such as the one faced by Andrew Lewis when he was drafted in as a rescue service FD to turn round Avon Rubber’s £4.3m loss in 2008. As Stuart Bridges, CFO at insurer Hiscox, puts it, “A large part of any senior job is being a firefighter. You’re there to prevent things going wrong and to do something about it if they do. You have to be sure the ship’s heading in the right direction.”

Steering the ship in the right direction? That brings us to the final hat: muse. Finance is not always seen as a creative role, but it has at its fingertips the analysis and insight to make a huge difference to the way a business is run. That’s evident in the contribution many FDs make to strategy.

But there’s also a more fundamental shift going on. Our muse Siva Shankar, former corporate finance director at real estate giant SEGRO, calls it a shift from accountants who are good business people to business people who understand finance.

It’s a change that’s been noticed from the other side of the fence. BSkyB director of marketing strategy Danny Russell says, “Sky does have a very involved finance function. They’re often driving initiatives, not just evaluating them. It’s a very accountable company and finance colleagues here are very adept when it comes to discussing marketing.”

These two hats round out our tour of the role of FD. But it’s important to bear in mind two things. Colin Bramall, CFO of James Hull Associates, says there are other non-financial roles – perhaps subsets of one or more of the hats – that FDs need to play. “One hat I often wear in private equity roles, for example, is that of salesman,” he says. “Private equity investors only get involved when there’s a clear path to exit, so from day one you’re looking to present the business in the best possible way.” It’s a refinement of our storyteller hat – but an important one nonetheless.

Bramall also points to something every FD we’ve interviewed for this series has stressed from the outset. “There’s a bit of all the hats in every FD. Often the weighting we apply to particular roles will depend on circumstances,” he says. “And the roles intertwine – for example, that of magistrate leading into that of muse.”

With the support of an effective finance team – a great financial controller, in particular, to free them from the day-to-day requirement to deliver timely, accurate and pertinent numbers – any FD can live all these roles. But the one defining attribute for a modern FD has to be flexibility. The ideal is an open-minded finance leader, willing to apply their analytical mind and decisiveness to almost any situation – and able to wear as many hats as required.

• STORYTELLER - Creator of a coherent narrative for internal and external audiences.
• CO-PILOT - Partner to the CEO with a complementary skill set.
• MAGISTRATE - Arbiter of disputes and enforcer of the law.
• CONSIGLIERE - Trusted counsel offering advice at the highest level.
• ENGINEER - Master of processes and systems, architect of business models.
• RESCUE SERVICE - Identifier of problems and presenter of solutions.
• MUSE - Promoter of fresh thinking and value-enhancing decisions.

The FD’s policing role has always been important. But the job is no longer just about enforcing discipline and saying no. They must take their cues from all the emergency services, taking control of situations and delivering solutions to seemingly intractable problems.

Most of the seven hats derive from the fact that the FD sees deep into any organisation at a highly granular level of detail. That depth of understanding is rarely more important than when a business is in trouble.

Avon Rubber’s Andrew Lewis took up his post at the 116-year-old £100m quoted company soon after the collapse of Lehman Brothers, at a time when the business was hitting a dangerously low point. “The September 2008 group results were going to show a big loss and our banking facilities were due to expire in the November,” he explains.

What followed was a textbook turnaround. Lewis and the board built fresh relationships with the group’s banks, addressed working capital issues, restructured the balance sheet and redesigned the company strategy. Painful decisions about costs were balanced with new investment in sales and production capacity.

The turnaround momentum has continued – and Lewis was named Young FD of the Year at the 2011 FDs’ Excellence Awards, in association with ICAEW.

He says finance has a unique role in that kind of emergency. “You tend to be able to see the burning platform more clearly than most. The analytical side of your training and temperament enables you to work through the problems and come to the right conclusions. Then you need to be able to explain the problem to other stakeholders,” he says.

There’s a good reason why FDs tend to be alert to emergencies. “Financial problems are usually just the culmination of issues elsewhere in the business,” says Lewis. “When a business is struggling you have to tackle the right areas. You can’t take a scattergun approach, you can’t try to tackle everything at once. That means getting to the heart of the matter.

”It also means the FD can’t just fix the finances. (As James Hill Associates’ Colin Bramall pointed out in relation to the magistrate role in our last issue, “People expect the FD to be able to pull a few rabbits out of the hat when things get tight – and usually we can.”) Like an emergency responder, it’s not just a question of giving medical help. You have to find the victim, put out the fire, secure the scene and then save lives.

Even with that requirement to take a holistic approach, speed is of the essence. “In many turnaround situations, the solutions are quite obvious,” says Lewis. “But the process of internal debate about the best course of action drags on. Finding the perfect solution might take you a year. That’s no good – aim for the 90% solution delivered immediately, and the result will almost always be better.”

That echoes Hiscox CFO Stuart Bridges’ point about the consigliere role (also in last month’s issue): a good FD must be able to convince and cajole using their gut instinct as well as have a great feel for the available data.

A good emergency responder must also exude authority, adds Lewis. “However difficult the decisions, however fast you act, you also need to be open and communicate well with people, take tough decisions but keep people in the loop. Employees fear uncertainty more than almost anything else.”

The final aspect of the rescue service hat is to have an eye on the long game – no matter how extreme the situation or intractable the problem. “Having that clear long-term goal and being able to show how today’s decisions are helping lay solid foundations is crucial,” Lewis says. “You need to be able to do that internally and keep shareholders in the loop. When you’re going to them every six months, you can show how well you’re delivering against the plan.

“Having had to get my hands dirty at the outset, I feel I know much more about the moving parts of the business than if the big jobs at the beginning had been squaring away the accounts and worrying about the annual report,” Lewis adds. A reminder that sometimes even the best FDs benefit from being forced to wear the hats that don’t look so comfortable.

Creativity isn’t the first word that springs to mind when you think about the FD. But for many, inspiring people both within their teams and around the business to innovate and explore is a fundamental part of the role.

Inevitably there are times when some of the seven hats are more important than others. But it would be wrong to assume that tough times mean an FD can ignore the ones with less emphasis on discipline. “One of the principal strengths of a business in an economic environment like this is the ability to flex,” says former SEGRO FD Siva Shankar. “The CFO ought to be able to help the business achieve this.”

His own take on the role of the FD – and the finance function – is that it should be focused on enabling and driving change. “Finance has linkages into so many different parts of the business,” says Shankar. “It also has access to large volumes of data and broad commercial knowledge. So you can come up with the kind of insights that open up the minds of other people. You can trigger out-of-the-box thinking.”

That means this role complements the consigliere hat, which is all about being a trusted sounding board. But it takes the idea a stage further.

“I was talking to a head of risk recently who was wondering how they put processes in place to catch black swan events that could floor the company,” says Shankar, referring to trader-turned-writer Nassim Nicholas Taleb’s term for unexpected catastrophes.

“But who’s keeping their eye on the white swans?” adds Shankar. “Who’s monitoring the big opportunities? If you miss them, it won’t affect the company now. But in 10 years’ time, it could mean a major loss in competitiveness. The CFO has to be alive to positive risks.” He’s quick to point out that no FD can ever forget the bottom line – and in many corporations over the past decade, problems have perhaps been caused by finance leaders who have done just that.

“If you don’t have the foundations, you’d be applying creative analytics to unreliable data – and you’d come up with insights that are wrong,” Shankar points out. “That loses you credibility. You need to get the foundations sorted. Ideally, you’d have someone working for you whose role is to be on top of that while you move over to spending 80% of your job being a strategist, a catalyst, a facilitator.”

And, of course, one way to develop a financial controller or analyst team like that is to play the muse within your own function. Shankar has a couple of techniques to make this happen. “Part of our weekly finance session was externalisation,” he says. “I gave an article to every member of the team on economics, sector-specific developments, strategy, HR, marketing – anything really. Their job was to digest it, then hold the floor for three minutes – although it could turn into a longer Q&A session – and synthesise what they read for the rest of the team. Initially I was worried people would look at this as a chore. But they were hungry to develop new ideas they could infuse into their work.”

Shankar says his team found their own roles much more exciting and meaningful when the company, and their actions, were placed into the context of the wider world. That’s critical if your smartest people are going to remain engaged.

“I also find that these fresh, outside ideas trigger much more left-field thinking in the team. That just wouldn’t percolate through in an insulated environment. That’s the thing in corporate cultures: people need to have more courage to say the things that might seem stupid.”

Perhaps this sounds like a counter-intuitive thing for a finance leader to say. But as they become finance-enabled business people, rather than business-oriented accountants, it’s their ability to be that kind of muse that enables them to add value both inside and outside the finance function.

• The seven hats of the FD (third part)
  Finance & Management Magazine, Issue 196, February 2012

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