Being a CFO and other topics

Not just finance, hobbies too ....

Category: CFO Page 4 of 5

Being a CFO. Some of my thoughts and observations after years of being a CFO

Work / Life Balance

By

On May 3, 2016

In CFO

I wish I had better news, but if you are wanting to be a CFO of any sort of larger company, it will be next to impossible to maintain any sort of reasonable work/life balance. It actually does get better in the sense that you have more control over your schedule and can plan around important family dates, but that really does not help as much as you would hope it would.

The primary accounting schedule that focuses on quarter ends is the same even as CFO. Your intensive work is delayed about a week from earlier in your career as you probably are not directly involved in the preparation of the first draft of the numbers, but once they are available you will be reviewing them and working on the earnings release. This also activates the forecast refresh cycle as you try and dial in the guidance you will release with the earnings release.

The quarter end crunch tends to be even more condensed because of prepping for the Board meeting. You will be a key presenter at the meeting and quite often you are explaining proposed company action with the need for aboard approval. As much as you may think that you are saving time by not preparing the raw numbers, reviewing them to ensure there are no errors and preparing the explanations and message is actually more time consuming and you also need the fairly final numbers before you can close it off which means you get even more crunched by any delays.

The quarterly reporting cycle in intense, but at least it happens with the same timing from year to year. If you are just having a normal year, the only other time pressure that will push your work over the top is travel. Very often you will fly on a weekend day so you can arrive on or before the Monday start of your work week. Phone calls and emails help, but you’ll be traveling to your major sites at least once a year to meet your staff there and do business reviews. You’ll also be traveling for investor relation events and non-deal roadshows. These are more instances where you will have an illusion of control over timing but actually less ability to control it than you would like.

You have to plan travel around your quarterly earnings releases and Board meetings, so the window is more condensed. Although you can pick and choose which IR events you attend, there will be major events that you really should be at with fixed dates so you do not have as much flexibility on them. Major overseas travel takes even more time on planes and causes jet lag issues as well. You are likely to be less effective in the first few days you are back and often that means going to bed earlier which takes away family time.

Again, this is somewhat manageable as you can usually control the dates of internal meetings and move them to a time that is more convenient for you. It still takes time for the travel and the follow-up, but if there is an important birthday or school event, you can plan around it.

The other time requirement is staff coaching and development. I personally never encourage too much socializing in the office and I think that professional relationships can be damaged if overdone, but you absolutely need to spend some time getting to know your staff. So even if you are home, you can be sure that there will be so,e evenings where you get home later because of this.

The real time devourers are M&A activity and capital market deals and other major financings. There is no escaping the central position for the CFO in those deals, and you have little control over when they happen. Capital market deals normally happen after you report and before it is too close to the next reporting period. So that spacing between the major reporting deadlines can be eaten up by a deal. If your company is active in the capital markets (one deal a year), then you can expect to lose a lot of personal time in one quarter. Again, you are not the junior associate lawyer, the manager at the auditor firm or the junior investment bankers that really get slammed with the detail work, but you will still be quite busy, as the documentation gets more final you will be the go to person for most final decisions and you’ll probably be running the deal. If the deal is a rated deal, then the rating companies are going to want to hear from the CFO and probably meet them in person. That means you.

Major financings like in the project world or bank debt also take a lot of the CFO’s time. They also tend to require more internal effort as the division of labor is quite different for those types of deals than one driven by an investment bank. So you are not quite so tied to the markets and probably do not have to do a deal roadshow but you will have to do a lot more review of the internal work performed.

The final and uncontrollable work demand that is likely to swing your balance quite a bit towards work is M&A activity. Even if you are the acquirer, you will not have that much control over when it starts and once the process is kicked off, you will likely be the center of it. You not only need to do due diligence, you probably will have to raise funds in a financing as well. So you will not only have to run the buying process, you will be running the funding process as well. M&A always has extra time pressure and you have to expect the unexpected. As a public company CFO you will be filing SEC documents as well if the purchase is large, so that is another task on your shoulder.

On top of all these additional activities, you will have your day job of leadership and managing the areas you are in charge of and where the company needs your attention.

You will not have good work life balance, but you need to manage it to make the most of the opportunities you do have. You need to be able to prioritize, schedule and take more add=vantage of the friend and family time you do have.

I have emphasized the importance of communication in many of my blog posts and it is even more important outside of work. You need to know what is coming up with your family and friends and you have to know what is important. When traveling, Facebook and similar social media (I recommend keeping a smaller and more personal friends list while serving as a CFO) can be used to keep up with the activities of your social circle and to let people know where you are and what is going on with you. It does sound a little sad, but you cannot spend as much time chit chatting to catch up, so social media can be helpful.

You also need to have frank conversations with your family about what is coming up or happening with work. They can also work with you to move around some activities so you can be there.

Finally, you will have to make a choice about some friends. You will only have so much time you can spend and you will be spending it a lot with your family. Maybe use this process to shed some friends that have turned out to be a negative source of energy for you. I also find that friends that also are as busy as you are more understanding.

As I said when I started, I wish I had better news, but you will struggle with this your whole career and you will not be alone.

Annual Reports – SEC filings

By

On April 26, 2016

In Accounting and Reporting, CFO

I started long enough ago that an annual report used to mean the nice marketing annual summary with pictures and a letter to the shareholder and the financials summarized with some graphs and commentary.  Very few companies do that anymore as the Internet allows for a much more direct and continuous medium for communication.  Today, the annual report means the SEC filing – the 10-K or the 20-F (for foreign private issuers).  I have prepared and filed both and there is not much difference between them.

The annual report as filed with the SEC has several main sections.  These are the business description, the risk factors, the management discussion and analysis and the financial statements themselves (which includes the auditor’s report).  As the CFO, you are the person most responsible for the accuracy of the annual report and when you sign and file it, you will be taking significant personal responsibility should it be wrong.  In a larger company you probably will not be preparing the bulk of the report yourself, but you will be reading every page and making changes where relevant.

As an individual shareholder, if you consider yourself to be a fundamental investor, you really should read the annual reports of the companies you invest in or want to invest in.  You don’t have to read every page in detail looking for errors like the CFO has to, but I recommend at least skimming through all the sections.  As I give advice throughout this blog entry to my fellow CFOs, I’ll also have an aside or two on how individual investors can use the information as well.

My first CFO advice is that there are no copyrights on other filings.  WWW.SEC.GOV has the filings from other companies, both in your industry and outside of it.  If you want to see how others word common accounting items or risk factors, you can find it there.  Do not be ashamed to steal shamelessly.  My second CFO advice is that the annual report is not just a required disclosure document, it is a marketing document as well.  It is your chance to clearly explain your strategy, what risks you face, and to clearly present your financial results and what information you think is needed.  You need to get the SEC and legal details right, but the annual report is going to be incorporated by reference into any capital market deal you do and will be read by the counterparts in any private deal you propose, so you might as well get it right.

A typical division of effort of the 4 sections is this:  1) Business section is senior management, investor relations and maybe the marketing department. 2) Risk factors is Legal with senior management review  and 3) and 4) MD&A and Financial statements are Finance, mainly the Controller.   You’ll be project managing the preparation and you’ll do the final quality control but you should have a fair amount of help on this.  In a smaller company you can expect to do a lot of this yourself, but this is a company filling and your boss and other senior management should help somewhat.  You should have prior year filings to act as the template for this year.  Even if this is your first annual report, you should have the S-1 from the IPO to be the starter for the annual report.

I came up to CFO from a Corporate Controller role, and I had previous experience at preparing the financial statement part of the annual report plus some experience in the business section in previous jobs.  So reviewing the report as CFO came naturally to me, but all CFOs should pay a lot of attention to the report.  It is easy to delegate the report down to your reporting staff and there are outside lawyers and accountants that review the report as well.  This makes it even easier to assume that all is well with the report.  However, the outside parties tend to be ignorant of the business conditions you are operating under and they will not necessarily have only your interest at heart when they word certain sections.  In particular they will be very conservative on sections like the liquidity section.  Make sure you are comfortable with the wording.

What I do when I review the annual report is sign and date the front page and then initial each page even if I make no other changes.  I handwrite edits unless they are long in which case I type up a rider.  Version control is important and I find that handwritten edits make it easier for my controller to maintain control of the master copy.  The signed report and initialed pages and handwritten comments are also good proof that the report was reviewed.  Some lawyers want all working copies to be destroyed after the annual report is filed, but I think they are good to keep in case there are questions later.

When I review all sections, I look for grammar and spacing or missing words mistakes.  Even with a lot of eyes looking at it, it is surprising what will slip through.  I try and read important sections backwards one by one as that helps isolate words and aids in proofreading.

I also review for meaning and to ensure the English is smooth and natural. Even in the USA, many people on your staff might speak English as a second language.  It is quite possible that people reading this blog speak English as a second language.  If you don’t consider yourself to be very strong, have a native speaker read the business section and see if they have any suggestions.  We circulate the business section within the different functional areas to see if they have any suggested changes.  Usually we get a good edit or two just by doing that.

The risk section is useful in two ways.  First is the ranking process.  You should have the most serious and relevant risks first in your list and they should be listed in descending order of importance.  The very act of ranking risks often leads to additional risks being identified and included.  The second value to the risk section as it gives you a list of threats that you need to ensure you have countermeasures to.  Look at the top risks that you and the management team think are the most serious and ask if you have any countermeasures in place.  If you cannot think of a credible solution to reduce or eliminate the main risks identified in your filing, then you have a critical issue that needs to be addressed by the management team.

As an individual investor, the business section can be interesting, but the descriptions tend to be somewhat top level.  You usually can find employment numbers, including by function and some geographic and segment information on their business, but I normally do not get all that much purely from the business section.  If you are brand new to the company or the industry it certainly helps.  One test that I do when looking at a new company is ask myself if I understand what they are selling and what their strategy and strengths are.  If I can’t articulate it after reading the business section then I need to test my assumption that I understand their business well enough to invest long term in them.

The risk factors are more interesting to me.  The can be boring legal boilerplate, but the order the company lists the risks and the way it is worded can provide valuable clues.  What is extra valuable are new risks added compared to the prior years and/or changes in risk order.  This is the section where management is trying to warn you about what might go wrong.  It is pretty much the only section where what might go wrong is discussed.  I find it valuable to weigh how likely the risks are and what a reasonably prepared management team can do to prevent the problems.  If the risk seems likely and there is not much that can be done about it, then I worry about investing.  I also try and think of what risks are not listed.  If I can come up with some that are reasonable and management does not address them in the risk factors, then I worry.

I find the MD&A section the least useful.  For years the SEC has tried to make it better, including insisting on more detail and better use of plain English, but almost all MD&A are a dry recitation of this year versus last year with one or two top level reasons given for the change.  The liquidity section can be interesting, and this is an area that I try and watch my outside service providers closely.  They like to make it sound conservative and more risky than it actually is.  I have worked at companies with large cash balances and virtually no conceivable liquidity risks and the auditors are still trying to change the language to something that implies that there are real risks of a crisis.  If you are working for a company that needs access to the debt market and the capital markets, then you don’t want an overly conservative section here.  Obviously you need to accurately portray your true situation, but the auditors stress test going concern assuming lots of bad things that are unlikely to happen occur, and then want to reflect those tests in the liquidity section.  Those risks belong in the risk section, not in MD&A.  The commercial paper market crashing like in 2008/2009 is a risk, not something that needs to be discussed in detail in the liquidity section, for example.

As an individual investor, I find MD&A to be dry and not that useful as well.  If I am trying to build a top level model, then sometimes I can find explanations of one time items to exclude, but normally I just skim read that area and check to see if there are any time bombs in the liquidity section.  I don’t find income statement models all that useful as an investor and tend to concentrate on the balance sheet and the cash flow statements anyways.

The last section is the financial statements and if there is any section that is the “CFO” section, this is it.  The three main areas here are the auditor’s report, the financial statement tables and the notes to the financial statements.  Sometimes Sarbanes-Oxley matters as well, but only if there are a failure.

The audit report is simple.  Either it is a standard report or there is a big issue.  If the auditors have to modify their report, then there is a problem.  If your auditors tell you that they have to modify their standard report, then you know you have a major problem.

The financial tables should be the same as and your earnings release, albeit more detailed.  They were already checked by the auditors before they were released.  It is not unknown to have something change but it is a little embarrassing.  It has never happened to me so I am not 100% sure what I would do if it did happen.  When I have seen it happen, it is either a subsequent event that accrues back to the already reported quarter or a balance sheet reclass from long term to short term.

The notes to the financial statements are where the real detail is.  You need to describe your main accounting policies and then give a fair amount of detail, including segment reporting, for the different balance sheet and income statement accounts.  The rules for segment reporting are straight forward, if management runs the business as different segments and uses internal reports that do it and the numbers are material, then you need to segment report.

I think the income tax note is the one that can cause the most issues, especially the disclosure on uncertain tax positions.  Make sure you have the right technical help here and try not to paint a target on your back with your disclosure.

As a CFO, this is just another technical section and I mainly worry about getting the accounting and disclosure right.  I do focus on the actual wording, but a lot can be found in other filings and is dictated by GAAP anyways.  As an individual investor, the notes are a goldmine of information.  All the detail that is glossed over in the earnings releases and calls is there.  If there is a “smoking gun”, the notes will have it.  Read that section very carefully.

As a closing note, I have written something 2-3 times a week for the past few months.  I had a few people message me and ask about last week.  One key skill in being a successful CFO is balance.  My youngest daughter was home from school last week and I spent it with her.  I should be on schedule again for a while at least.

A simple but career destroying problem

By

On April 12, 2016

In Accounting and Reporting, CFO, Finance

The number one fundamental error that causes material errors and misstatements in SEC reporting is spreadsheet errors. There are plenty of technical errors you can make and there always is the risk of management override and deliberate misstatement but the number one way is to shot yourself in the foot because you make a basic spreadsheet error.

Spreadsheets are used by all accountants, and it is impossible to operate without them. We all know that they cause problems, but we use them anyways because there is nothing better. Here are some recent examples of reporting errors (taken from the link below, I have not used the product they advertise and the cases cited are public and in other articles)

http://www.audinator.com/Horror_Stories.html

Fannie Mae makes billion dollar spreadsheet error overstating gains
Fannie Mae filed a Form 8-K/A with the SEC amending their third quarter press release to correct computational errors in that release. “There were honest mistakes made in a spreadsheet used in the implementation of a new accounting standard…which resulted in increases to unrealized gains on securities, accumulated other comprehensive income, and total shareholder equity (of $1.279 billion, $1.136 billion, and $1.136 billion, respectively)”

Share price drops by a third, CEO resigns due to spreadsheet error
UK support-services group Mouchel discovered an accounting error in one of its key spreadsheets that led to a £8.6m downgrade of its profits. The company pension-fund deficit had been wrongly valued as a result of the spreadsheet error.

Shares of RedEnvelope fall more than 25 percent due to spreadsheet error
The online retailer of specialty gifts drastically reduced its fourth-quarter outlook and said its chief financial officer will resign. “They were underestimating the cost of goods sold”, said Stanford Group analyst Rebecca Jones Kujawa. “It is likely CFO Eric Wong is being pushed out because of this error, which could demonstrate a material weakness in controls over financial reporting.” RedEnvelope spokeswoman Jordan Goldstein said the budgeting error was due to a mistake in one cell of a spreadsheet that threw off the entire cost forecast.

Kodak restates income downward by $11 million due to spreadsheet error
$11 million severance error traced to a faulty spreadsheet. Kodak spokesman Gerard Meuchner said “There were too many zeros added to the employee’s accrued severance.” Robert Brust, Kodak’s chief financial officer, called it “an internal control deficiency that constitutes a material weakness that impacted the accounting for restructurings.”

AstraZeneca forced to reiterate earnings forecast after spreadsheet error
Britain’s second largest drugmaker AstraZeneca scrambled to reaffirm earnings forecasts after an embarassing spreadsheet error left investor confidence sorely shaken. The behemoth drug manufacturer said the spreadsheet gaffe occurred during “a routine consensus collection process.”

I can also give a personal story about a spreadsheet error that certainly caused embarrassment and could have been worse. Earlier in my career, when I was Controller of a company, we were being bought by another company and we had bankers advising us. At the last minute, right before we filed our last 10Q as a public company, our lawyers decided we should disclose the banking fee we would be paying to our advisors. We had hired the bankers in the past for the same potential deal and the letter from the earlier, failed deal had been updated to a current date and signed again by our CEO without being reviewed.

The formula for payment was based on a certain definition of enterprise value and the fee jumped as each major valuation range was cleared. I built a quick spreadsheet model off of the balance sheet spreadsheet that had been checked by us and the auditors so I knew all the base numbers were right. I entered the formula for the fees, all in one cell instead of stacking the different ranges in a cell for each of them. The number that came out was in the low double digits of $ millions, and I thought it was high looking but the bank had been working a long time and had not been paid for any work yet on previous, failed deals, so I used that figure in the disclosure. My boss did take a quick look at the number, but no one checked my spreadsheet.

I had made a formula error. For the very last range, I was off one decimal place in the formula and the spreadsheet understated the amount due by 50%. The actual amount was a surprise to everyone and had the CEO actually done a calculation, he probably never would have signed the letter. It ended up being an issue for me because I stayed on and the acquiring company was concerned that the fee was being hidden on purpose. Once I showed them my error, I then ended up in the middle of a large investment bank’s M&A group fighting with their country office overseas that was being pressured over the fee. It eventually was resolved, but I didn’t get as smooth a start as I had hoped in my new role and it was a big distraction for a while.

After that narrow escape, I became much more careful about the base spreadsheets me and my team use in SEC reporting. Careful review for errors has caught several that would have ended up being material misstatements. Two common places where I have found errors is in the tax provision spreadsheet and the inter company accounts reconciliation spreadsheet. Both are updated quarterly, the number of rows often changes as items are added or subtracted and both have multiple people inputting data into them.

The first and still main formal study I know of on spreadsheet errors is by Raymond Panko of the University of Hawaii. I have provided a link this site below. The conclusion of his initial study was that spreadsheets are large and complicated and almost never follow a formal software development process designed to eliminate or reduce errors. Therefore it was not a matter of if there is an error, but how many.

His site lists the common errors he found in his study and how to find them. He also describes a standard development process designed to reduce errors and find any that are created. He also reviews the results of several studies that were done around 2004 after Sarbanes-Oxely became the new standard for companies to follow. Control over spreadsheets is a key internal control that all public companies need to address.

http://panko.shidler.hawaii.edu/SSR/

This problem is pretty well known and it is not hard to find newer articles on finding errors in spreadsheets. For example, this one: http://www.journalofaccountancy.com/issues/2015/nov/how-to-debug-excel-spreadsheets.html . Even with the recognition that there is a problem, CFOs are still losing their job because of simple spreadsheet errors leading to material reporting errors, misbid contracts, improper internal reporting and analysis and other embarrassing issues. It does not inspire Audit Committee confidence if you present to them and they find an error.

I suggest that you take a look at the Planko articles and do a little search for more articles on what can be done to reduce errors. Call a meeting with your staff and review this issue and discuss what they are doing to make sure they are getting their spreadsheets right. Hopefully they all know about the danger already and you already have a robust process. If not, get one in place ASAP. Even if you do, spot check a couple of the more complex spreadsheets they use and make sure you cannot find any errors.

An ounce of prevention now can save you from a $25M fine later after an error is found and you have to restate your results.

Going beyond the headlines

By

On April 5, 2016

In CFO, Finance, Investing

Every day, at the end of the day, there is a series of articles wrapping up the market. There always is some sort of facile explanation in the headline and then a few facts in the article around the headline. Every market day and usually a wrap up on the weekend. There normally are a couple of pithy comments and reference to some news item of the day. Typically there is a comment on the Fed, or the latest job news, of maybe a reference to Asian markets or some economic item in Europe.

There are similar news items on individual stocks, especially famous ones, just about every day as well. Some little news items is grabbed for Apple and attached to whatever the stock price movement is that day. Even for lesser followed stocks, when they do their earnings release any movement is attached to the market’s reaction to something in the release or a comparison to analyst expectations. Often there is a quote from the latest analyst report supporting the reasons cited for the stock move.

I can tell you, if you want to be a better individual investor, you need to learn to ignore such articles of reasoning. They tend to be very shallow and are written more to fill space than they are to offer any sort of thoughtful response to what actually has happened. Same thing for much of the instant analysis that is on the live financial news shows.

I am not saying that real news does not move stocks. If a company genuinely releases unexpected news, either good or bad, then the stock may immediately react. If there is a major geopolitical news item like a terrorist bombing in a financial or political center or some surprise currency move, then markets can and often will react and that news will be the cause of the reaction. However, news of that nature tends to be pretty rare and even rarer for an individual stock.

In my first substantial blog post for this site, I discussed my strategy of selling puts to generate income and profit. In that blog I listed several long tables of share prices that I suggested should be studied before deciding on a stock and committing to an investment. In my blogs on investor conferences and non-deal roadshows, I talked about the process the typical fund uses to decide to buy and sell and emphasized that the process tends to be slower without an immediate reaction causes by one conference meeting or visit in their office.

The same thing can be said about the analyst reports that appear right after an earnings call. Normally the analysts are rushing to get something written and they have call after call during earnings season. Their time with management is normally limited to. The questions you can hear on the call and about 15 minutes afterwards are all the time they normally get with the company and then they publish. Quite often what is written is a rewording of the press release with a highlight or two from the conference call. Earnings calls can be catalysts but they are more of a retail investor or a fast trading hedge fund play than the longer term investment trends that give stocks their underlying values.

If you want to learn about the market or a company, you need to do more than just read headlines or look for one answer to what something is happening. A good example is oil prices and energy stocks. There is a connection between the two, but small changes in oil prices that are within the range of normal expected volatility are almost for sure not causing the move in one particular stock or sector. An above average increase or drop is more likely a larger investor increasing a position or decreasing a position, and the chances that it happened that day because of the news item being identified is almost zero. A .5% move in Yen value is not going to change investment decisions on a company that gets some of their revenue from Japan.

This goes back to my advice to CFOs on doing the outlook section — you need to look past your spreadsheets and listen to the other functions and what they are telling you. When you are making long term capital commitments, you will a lot of simple answers to questions. These answers may sound right, but when making an investment decision you need to think a little more on it. Make sure that your question was really answered. Try and look at the question from a couple of more angles and ensure that you are making the right choice for your company.

Of course, most individual investors don’t have the training or the background to understand what is happening with the markets. From reading books like Flash Boys by Michael Lewis, even my understanding of the trading in the markets is somewhat shaken. With all the “Dark Pools” and algorithm based trading that is happening and the speed and velocity of dollars being committed, even the basic fundamental reasoning for stock valuation might be broken down. Individual stocks may get caught up in this trading and change pricing for no reason other than it was traded.

I try and keep my financing deals as simple as possible and avoid derivative collars or enhancements to them because even after I study carefully I cannot account for all of the factors that might move their deciding valuation factors more than expectations. If I cannot reasonably assess risk, then I do not commit. It is the same for me for investing decisions. If I do not understand and agree with how a stock is being valued, then I do not invest in it.

This blog entry is the reasoning I use when I encourage people that ask my advice on what to invest in to avoid individual stocks and buy low cost index funds. You have little chance of getting rich quickly but you’ll at least make the market average returns which are quite compelling. If you want to gamble with a stock, accept that you are doing no more than buying a lottery ticket or pulling a slot machine handle. Nothing wrong with dreaming, but recognize that you are dreaming. As a CFO, you need more than a dream. Lottery tickets are not a good strategy to make sure that you can meet payroll and pay suppliers.

I am not saying that you should not invest in individual stocks. With careful reasoning and some luck you do have a good chance of beating average returns. As a CFO you will be asked to greenlight new products or business areas. In the short run saying no is more safe but you may not have a long run if you say no to everything. Just make sure you understand the ways you can lose money on the deal and what you would do if that happened. If it does happen, you will at least have a plan. No different than if you were acting as CFO. You can take the risk and say yes to a new area of business or a new customer, but have a back-up plan you can execute on.

If you do want to invest in a particular stock, investing in something you know and maybe not in the industry you work in (to avoid concentration risk). Try and understand the product you like and other investing reasons for the company. Try and figure out who owns the company and why they would want to own it. A classic example of this for me is Hasbro. They own Wizards of the Coast and they own Magic the Gathering and Dungeons and Dragons. I play and like both games and think that Magic is important to Hasbro and I can at least tell if that game remains popular. They pay a dividend and raise it annually which I like. They have the rights to Star Wars for toys. They have been able to monetize their other properties in the form of movies that have done well at the box office. All were good reasons to buy. That stock is up almost 100% for me and continues to pay a good dividend. Every quarter there is a news article of two update based on the earnings release but because I keep track of the company, I know that the news articles are very superficial. I think I understand the main valuation drivers and what causes short term swings in value (short term is usually tied to movie releases).

Musashi tells you to study well. Not just your sword work and strategy, everything you do. Don’t be fooled by what is on the surface and easy explanations. Understand your decisions and make them as well as you can. People are depending on you.

Developing staff or fighting sharks with spoons

By

On March 29, 2016

In CFO

I had a request to do a blog entry on developing staff. I have done a few turnarounds in my career and one of the key success factors in that is getting more out of your existing staff. I have always thought that one of the most important roles you have as a CFO is making your staff better.

I have joked in the past that the best way to develop staff is to arm them with spoons and throw them into shark infested waters. Whoever survives is developed and those that kill a shark are your next leaders. That is tongue in cheek, but there is a kernel of truth in that. You cannot make your staff members better without them gaining experience in tough tasks and they cannot get that experience if you take all the tough tasks onto yourself.

The first principle for me in developing staff is that development is not training. Training is to add or polish skills. You need a skilled workforce but you should be hiring professionals with an advanced skill set already. If you inherit a team that lacks basic finance skills, you are so far behind that development is not going to work. You probably need to fire and hire in successive waves until the base skills are competitive.

I am not saying that your should not make training available for your staff. Your accountants need continuing education and to learn new accounting pronouncements that come out. Your analysts can also use additional systems training. But that is just making sure that they can get the floor level of their job done. Your accounting staff should not be making accounting mistakes and they should be up to date in their knowledge. If you actually have to make that training available vs. allowing them to get the training, then you already have an issue as good professionals keep themselves competitive and ready without being spoon-fed. Your role as CFO should be to support training and make sure time is allocated and approved for it, but you also need to police hiring and performance reviews to make sure you have the right skills in your group to begin with.

The second principle is one I learned from taking over finance departments that I had been told were bad and where I would need to fire and rehire a lot of people. You can do some selective changing, but when you are in a turn around and there is a crisis mode in place, you are not going to be able to replace staff and give the new staff the luxury of coming up to speed in any great numbers. It is also hard to attract people to weak companies that are struggling. What I discovered the first time I needed to work with an existing staff is that no one in that group woke up every morning and went into work with the intention of doing a bad job and adding no value. No one wants to mess up and be thought poorly of by their peers. When I invested in developing them, suddenly the “bad” staff I had inherited started performing and I had the advantage of all their experience as well.

The third and perhaps most important principle is that if you do not invest the time and effort into this, then it will fail. You need to lead by example. If you don’t, then no one will take it seriously and the development plan will die via inertia and lack of real commitment from the staff. Make sure you keep the time available for this. It is a manual and relationship based exercise, so you need time. I probably spend at least 5 hours a week, every week on this. Not in meetings dedicated to “development” or performance assessments or training but in time spent with your staff helping them over hurdles, encouraging them to take on more and new tasks and in praising their successes. Development is not via a stick, it is via a carrot and the support of you and the team. Give constructive feedback. As I discussed in my blog on corporate culture, always remember that they are people, and do not allow yourself or them to be put into a box and betray yourself or allow them to betray themselves when under pressure.

This is a very hard and necessary part of your staff’s development. They need you working to remove barriers and get them resources when they need it. You need to do this while allowing them to actually do the work. You have to invest upfront. For example, if you want one of your Vice Presidents to lead a large financing, you need him on your team on a previous financing learning the ropes and seeing what works and does not work. That is a learning stage of development, but it is not doing. No one learns enough from just reading a book or a blog. It can help give you a structure and keep you from making a few simple mistakes, but you only get the knowledge and confidence from doing a task. When your staff sees you making a genuine investment of your time and effort they will know that it is important to you.

Finally, put your staff in harms way working on projects that will make a difference and don’t kill them if they fail and give them all the credit when they succeed. They should be working on projects that make a difference in the execution of your company’s strategy. If they don’t succeed, there should be large enough stakes on the line that there are consequences for failure. This means that when they do succeed, there will be even more to celebrate. Make sure the project they are working on moves them out of their comfort zone. Make them sweat, even if it is just mental sweat. I will say it again, when they win, make sure they get the credit for it. Nothing steals the thunder from someone like their boss taking credit for their work.

Giving your staff credit for their work is more than just a pat on the back and a short speech in a staff meeting (or Board meeting). You should be promoting from within wherever possible and bending over backwards to give your staff a shot at internal promotions. My rule of thumb has always been that after 2 years in a position any of my staff can move, even if outside of Finance. You cannot freeze them in position and it is your responsibility as a senior leader to replace them if they do move. If your employees believe that they are liked and valued and get first shot at internal promotions, they will have higher morale and be happier even if they do not want the opportunity.

Don’t be afraid to rotate staff from an area of their speciality to an area they are not familiar with. You want your staff to be cross functional where possible, so give them that opportunity. There is no reason why someone with a strong accounting background cannot become an analyst or a Treasury manager. They can learn on the job and the more areas of finance they know, the more useful to you they are. Help them jump outside of Finance if they want to. You’ll only benefit over time by seeding other functions with people that understand the numbers and cash flow and investment returns spread across your company. Developing staff means not being selfish. Sometimes you don’t have what someone needs in your company and they’ll leave. Trust me, the good one that appreciate and realize that your focus on their development is important will be back at some point.

This is another soft area and needs stronger people skills than pure number skills. If you don’t have good skills there, then you can develop yourself. I am an introvert by nature, so the face to face time this requires is harder on me than others. I think there is huge payback from investing time in your staff and it is worth the additional discomfort for me. You cannot win battles and wars with poor troops, so developing what you have is the most cost efficient way to multiple victories.

I sometime get asked how do I get my staff to work such long hours and really push themselves. The only answer I can really give is that they know they matter to me. I show them that by giving them opportunity. The opportunity is always beyond their job description and it means they need to commit. All I do is help to ensure that when they succeed they get the fruits of their victory. Because I honestly believe that they will succeed, they believe too. The end result is that I have a stronger team and my staff is better and we win more often. Winning is the heart of strategy and wants makes a good company great. Develop your staff. Reward them. Become great.

The Fifth Discipline: The Art & Practice of The Learning Organization

Non-Deal Roadshows – what happens on them?

By

On March 22, 2016

In CFO, Investor Relations, Working With Investment Banks

Last week I covered investor conferences, this week I will discuss non-deal roadshows (NDR). In a typical company, NDR are the second highest source of in person meetings with investors (conferences tend to have the most meetings).

In many ways, NDR are very similar to investor conferences, they are another form of corporate access run by the banks that being management to meet with clients of the banks. Their difference is that the meetings are in the offices of the investors instead of at the conference site, but otherwise the meetings are similar in format to those at investor conferences. They are either questions and answers directed by the investor, a review of the standard investor relations presentation by the company or usually a combination of both. Regulation FD (fair disclosure) is still in full effect, so no material, non-public information can be discussed. You need to be extra cautious on any answers related to disclosure as you cannot confirm guidance as the SEC considers that as giving new guidance.

The main reason for doing a NDR is that it greatly increases the chances of you talking directly to portfolio managers or other key decision makers. These are the people that make the buy or sell call on your stock and they normally do not go to conferences on a regular basis. Normally they send their analysts to conferences. Another important advantage is that the larger firms with multiple funds often send multiple analysts or portfolio managers to your meetings where in a conference they normally only get one slot. So you directly access more decision makers at once. For the large companies, who and how many attend can be a good indication of how deep and broad the general interest at the firm is.

Logistics

Banks normally ask you to do a NDR for them. If there is significant demand, you may even get requests from banks that do not cover you. I recommend sticking to the banks that cover you as a courtesy and payback for the effort they make, but there might be a specific reason to use another bank. If no one has asked you and you want to do one, reach out to your covering analysts yourself or the investment banker that covers you.

Meetings are normally arranged by the sales force with the assistance of the analyst. If you remember from my blog on working with investment bankers, the sales force works for “the desk”, so your banker can help give a push inside the bank. So even if the analyst asked you to go out for them, there is no harm in mentioning it to your covering banker.

You can arrange your own meetings or suggest investors that you are targeting or that have requested a face-to-face meeting. The bank will want to limit the meetings to their clients and different banks have different tiers they service (large banks do not have many small clients while smaller banks will have more small clients). Even if you are suggesting a meeting, it is good practice to tell the investor to contact the bank and ask as well. The sales force may appreciate a chance to pitch to a client and start a relationship.

You are expected to make your own travel arrangements and pay your own hotel and meals expenses. The bank almost always provides local transportation at the city where the meetings are happening. Meetings are typically booked in 1.5 slots with 1 hour of meeting time and 30 minutes of travel time. In some cities the travel time is reduced and sometimes when there is big demand for meetings the meeting time gets crunched down to 45 minutes. Expect a long and tiring day, so try and get rest before the meetings. If demand is really large, expect a group lunch or dinner. Otherwise, make sure you eat.

Typical cities

This will vary, and I am writing as a USA-listed company CFO. I have lived in Asia, so I have more experience there, but not as much in Europe and none in the Middle East.

New York and Boston

These two have the most funds and have the most investment dollars available to invest in US companies. When you are offered an NDR, the analyst, who is at least partially paid based on trading volume run through his firm, will wants to do meetings in these two cities. I don’t mean this to be a travelogue, and I would assume that most people are familiar with the cities. NYC is bigger and even with the high density of funds, there can be lots of travel time from place to place. Very often you will get to a meeting faster if you walk. Traffic can a very, very bad. When the UN is opening a session or the President is visiting (or another major leader like the Pope), bad traffic can turn into a nightmare. Boston is a little easier to navigate as the central core where most of the funds are is smaller. There are several very large funds in Boston where you could draw a large crowd if they are interested.

There are a few pockets of investors outside in the greater NYC area, but normally the time it takes to get to New Jersey, Connecticut or Philadelphia is not worth it. NYC tends to have more hedge funds. Boston a bigger concentration of more traditional mutual funds. Both cities draw lots of management teams and the funds are not as excited about that as other cities are.

If you are traveling between the two cities, I suggest the Amtrak Express train. Much less affected by weather and the stations are right in the middle of where your meetings are. One major fund company is a cross the street from South Station in Boston.

Give yourself extra time, especially in NYC, to show ID to enter every building. Security can be tight. Make sure you bring picture ID.

London and Europe

This is probably the location with the largest concentration of investors. A few other cities like Zurich and Frankfurt have a good amount as well, but London is the biggest. My experience here is much more limited, but I have been to both conferences and NDR in London. Not too different than NYC where the concentration is good but traffic and the sheer size of the city means that getting from meeting to meeting can add delays. I was stuck behind the Queen in a horse drawn carriage once in London as some ceremony in the Parliament had her traveling and the traffic loop in from of Buckingham Palace is a main route to and from the City. You can end up with a few meetings pretty far apart and the Tube is the best bet to avoid traffic in that case.

Zurich, Geneva and Edinburgh are other cities that may be worth a visit. I have not been to Frankfurt or Paris but both have fund managers there as well. If you are already in Europe anyways, it may be worth an extra day or two to visit cities other than London.

Hong Kong

Like NYC, this is the city with the highest concentration of investors and probably the one where you are most likely to walk from meeting to meeting. The walking is through a maze of shopping malls, so a local guide is good. A lot of American and European funds have their Asian office here, so if there is an Asian connection to your company it is a good place to visit. Many hedge funds here that are either local money or branches of other Western hedge funds.

Singapore

I lived here for a few years and was CFO of a company listed in the USA but HQed here, so I did quite a few NDR there. You probably will not do too much walking here because of heat and humidity but the central core with most of the funds is not that large. For the most part, the funds here also have an Asian theme so not as much demand for pure American companies but if you have flown to Hong Kong it is not that far to Singapore. The sovereign wealth funds here can be good, long term shareholders if they are interested.

Smaller USA cities

One you get out of NYC and Boston, it does get harder to fill a whole day with meetings in most other cities. However, there are probably 10 other cities that have enough funds that a visit is worthwhile. One big benefit is that management teams do not travel to these cities anywhere near as often and you are much more likely to meet with a portfolio manager or other investment decision maker in a smaller city than a larger one. Smaller cities tend to have smaller accounts and make a good match for any smaller banks that cover you.

The meetings themselves

As always, I suggest that you do not go to the meetings alone. Running around NYC or other cities can be a logistical nightmare, and having a friendly person in the room with you can help protect you should strange trading happen while you are doing the NDR and people wonder what you said.

Your covering analyst will often go to meetings with you. They will write a report after the NDR, usually after giving their clients a couple of days to act themselves. This is a good chance to make sure they know you story better and can articulate the points you were making in the meetings. You also will get to spend more time and develop a better and more personal relationship with your analyst. I have never met one that was not overworked and understaffed, and spending 2-3 days with you on an NDR is a pretty big commitment. Understand that and try and return the favor, even if it is a few kind words about the analysts to the accounts they cover.

The other person that may attend your meetings in the sales person that covers the account. It might be tempting to think they are not as important as the covering analyst, but they are the ones with the day to day relationship with the people that may be buying and selling your stock. Many are very experienced and meet management teams all the time. Saying a thank you for their help and asking them what their clients are worried about might give you a good tip or two. I do know a good sales team makes a difference for your covering analyst and it doesn’t take much effort to show appreciation for the meetings you set up. If you ask in advance, the sales force will print your standard presentation out and make sure that their accounts have a copy. When they can’t attend the meeting, they might give you a copy to leave with their client.

Some accounts, especially in Boston, do not allow banks to attend unless on a deal roadshow.

The meetings with the investors themselves are quite different than at conferences, if only because they are in their office. You probably are meeting with some of the most senior people at the firms you are visiting, so listen to what questions they ask and ask a few questions back to them as well. I have always found the very big funds in Boston are the most courteous and respectful but they are also super professional. The notes from your meeting will go into a database and they keep track of what you say and what happens. The meetings are very much part of judging you as well as the company and the person that could be pulling the trigger on very big investments in you is asking you questions.

Like any marketing speech, you need three to five key points you want to leave at each meeting. Make sure you know what they are and deliver that message each time. You really only have time to do a few NDR a year at most, so make it count. Unlike investor conferences and talking to analysts, talking to portfolio managers at their offices can lead to quicker decisions.

Beating the Street

One Up On Wall Street: How To Use What You Already Know To Make Money In The Market

One Up On Wall Street: How To Use What You Already Know To Make Money In The Market

Investor Conferences

By

On March 15, 2016

In CFO, Investor Relations

A pretty standard press release from most public companies is an announcement that their executives will be attending a conference sponsored by a bank where they will be meeting investors. I’ll try and use this blog entry to describe what goes on at a typical conference and how to get your company invited to one. Unfortunately, these conferences tend to be invite only for the investors and they invite professional investors that manage money for mutual or hedge funds for the most part. There are conferences to meet angel investors or other forms of venture capital, but that is not what I’ll discuss here. Some conferences invite some private companies as well, but usually the presenting companies are all public companies.

You normally will want to go to a conference because it is a chance to directly talk to existing or potential investors. Almost every single potential investor will have evaluating management as one of their investment criteria and meeting in person is important. A non-deal roadshow is typically better because you meet more portfolio managers or other top decision makers, but conferences are an efficient way to meet many different investors all on the same day.

The first thing you need to do is get your company invited to the conference. These are run by the research division of the bank and legally they are separate from the investment bank services. So the banker you may have a relationship with can ask that you get invited but there is no guarantee (it almost always will be honored). If you are covered by the research group, you will almost automatically get invited to their relevant conferences. One service they offer to their customers is access to management and the conferences they run are very important to their marketing.

As coverage on your company grows, the number of invites to conferences also will grow. You will get invitations by banks that do not cover you. At a certain point, you will start to have to make choices about which conferences you will attend because you will get invited to more than makes sense, but that is a good problem to have. I tend to focus on and choose conferences held by the banks that cover my company to try and repay the resources they are spending on us, but you may also be building a relationship with a bank in the hope of getting coverage so that is just a rule of thumb.

Once you are invited, you need meetings. Normally, these are arranged by the sales force, sometimes with your analyst pushing. The investors that are attending have the list of attending companies and they normally request the companies they are most interested in. I generally try and be as efficient as possible and only sign up for one day if there are multiple days available. If demand is high, then you end up with some meetings of smaller investors that are 2 on 1 or 3 on 1. If demand is very high, the bank will ask for another day.

Conferences are a good opportunity for you to bring other staff along to learn something about investor relations. If your Controller has a goal to be more involved in IR, a conference can be good training. Since you are not doing a deal and because the meetings are a little more controlled and private, a conference is a good place to do some training and allow more staff to answer some questions. For local conferences, I have brought along the staff analyst who helped prepare the presentation. It is a good opportunity for them to see what questions you are asked and helps for the next version of your IR presentation.

I always try and have at least one other friendly person in the room with me. I do this for two reasons. The first is so that you have someone to help by giving you a break and answering a few questions or who can handle logistics like the presentation slot prep work. Although I have not actually had this happen, it is defensive as well. In case there is any doubt what was said in the meetings, you have another witness with you.

Conferences typically have two different ways of talking to investors. The first in private meetings, usually in one of the hotel rooms. They remove the bed and replace it with a small table and chairs. Most of your day will be sitting in that hotel room at the table talking. In a conference with normal demand, you will be answering questions from 8 AM to about 6 PM with the investors changing every 30 to 45 minutes. When I first started, it used to be common for management and investors to be constantly changing rooms and often dashing from floor to floor, but now the organizers tend to keep the companies in one room and the investors rotate.

I cannot emphasize it enough that you need to be prepared to be talking pretty much non-stop the entire day. Some meetings with just be you reviewing your standard presentation. Usually that is for investors that do not know your company or your sector very well. It can be a little frustrating to realize that you have potential investors in front of you that know little to nothing about you. You would think that they would do so,e homework before getting in front of a senior executive or that the covering analyst would have prepared them. However, many analysts use conferences to develop new ideas on companies or areas that they may become more interested in. Quite often they do not know your covering analyst as they have not really started to do any work yet. They have not done a lot of research on you yet either because they have not decided if you are worth it. So this initial meeting is your chance to make a good first impression. Of course, some people just randomly take a meeting to fill up their day and really should have done more work in advance, but you do want to talk to potential new investors so a few meetings like that can be good.

The other style of private meeting is just questions and answer. You never quite know what questions you’ll be asked and exactly what the topic will be. Time passes a lot quicker because you’re answering questions instead of doing your prepared pitch (which can get dry and boring if you do it often enough). You need to be careful when you answer questions because reg FD is in full effect – you cannot reveal any material, non-public information. You need to be particularly careful about guidance. You cannot reiterate guidance or change guidance. The SEC views both as new material, non-public information. Any past guidance needs to be treated as a historical fact, and you cannot express a current opinion on it.

The whole private meetings content is somewhat ironic. You are not supposed to reveal anything new that is material. You can give out some explanatory color around your public statements, but you need to be extra careful about what you say. That means in your scheduled meetings and in social events at the conference. Essentially the meetings should be about assessing management and filling in tiny holes in the public disclosure.

As an aside, it is not uncommon that someone does not show up for one of your meetings. Things happen and plans sometimes get changed. Let the event organizers know and ignore it. If there are a lot of cancellations maybe the demand was not too high and the sales staff tried to stuff a few meetings in but their clients changed their minds. Nothing you can do about it at the conference, so don’t let that effect your other meetings.

The other event that usually happens is some form of presentation. This is either you doing you pre made presentation or some form of fireside chat or panel in which the covering analyst asks you questions. If the conference offers the opportunity to webcast these, then take it. Each person at your individual meetings probably invests an order of magnitude more than any retail investor, but your retail investors are usually the largest investor, in aggregate. They are usually starved of any direct contact with management and the earnings call and anything you webcast from conferences is the only chance they will have to hear you speak.

No matter what, whether in one-on-one meetings or in the presentation, you need to have your key talking points decided before the conference even begins. Like a politician, not matter what the questions are, make sure that you deliver your message. This is an absolutely key feature of the conference. It is a chance to hammer home a specific message over and over.

When you are done, you might be thinking if what you just did will impact the stock price. There might actually be a big move around a conference but that is normally caused by groupthink of all the investors there. They tend to know each other and talk. If there is a good and positive vibe that comes from the conference they get excited. If they pick up a lot of negative body language from a lot of management teams they may get down on your sector or the market as a whole. Otherwise, as a general rule, you are talking to an analyst at the investor fund and they need to get back to the office and do a report to their boss, the portfolio manager. If they like you and convince their boss to invest it might be a week or two before any decision is made. If there is an immediate move in your stock at a conference you need to consider if you have out material non-public information.  If you did, involve your lawyer right away and there is a good chance that you need to put out a press release.

The final advice I would give is that other covering analysts often ask you to meet with their clients while you are in town, or even do an NDR and you should say no. As a general rule, it is considered to be impolite to book client facing activities around the conference. So meeting with the analyst themselves is ok, but if you do client meetings you will distract attention from the conference you are at. So unless there is a very compelling reason, politely decline client meetings except at the conference.

(picture taken at Dana Point, CA at the one conference a year with that type of scenery)

Working with investment bankers

By

On March 8, 2016

In CFO, Finance, Working With Investment Banks

If you have followed a normal career progression through finance to make it to CFO, you probably worked with investment bankers at least once along the way. It is possible you did not, maybe you are at a start-up that is just now successful enough to go public or do some form of pre-public fund raising and you are dealing with bankers for the first time. It is a fallacy to believe that working for a big company means you would have worked with investment bankers as you climbed the ladder as normally only the Treasury department and the CFO do that, division finance staff normally are not involved. Even if you are involved, it is as a data source, not negotiating the deal. Mid-sized companies tend not to have formal Treasury departments and are a lot more egalitarian, so a much better chance of gaining some experience.

This blog is about working with the bankers themselves. Each investment bank is different and has resources far beyond the bankers that directly cover you, but you will probably never see the rest of the bank, just the small staff that covers you and the few people within their bank that they introduce you too. I try not to be too caught up in the name of the bank they work for and focus more on what my coverage team can deliver. Obviously, there are different tiers of banks, but which ones want to serve you is already at least partially driven by your company size. There just is not enough business for larger investment banks to devote resources to smaller companies.

Investment banks and their bankers get a lot of negative press. The recent, Oscar nominated film “The Big Short” is a good example. They usually are a topic in just about every major political campaign, and populist anger is stirred up against them. The current hit musical “Hamilton” has some of the Founding Fathers attacking them as doing nothing but moving money around. At the end of this blog, I will link some books that are quite critical on bankers and their culture. I can tell you that I have worked with quite a few bankers over my career and I have cannot remember working with any that are like the tell all books I have read, but the banking culture certainly is a culture into and of themselves. I will also link a few more “studious” books as well, if only for balance.

Let’s start with describing the three types of bankers you are likely to work with. The first, and most important, in your coverage banker. The leader of that team is almost always a “managing director” and typically has a small team that works for them. The MD is usually an industry specialist but otherwise a generalist. The next type of banker that you are likely to meet is a product specialist. There are many different products that a bank can sell to the market or to you and the product specialist is the one that supports the MD in pitching the products. Examples are syndicated loans, hedging instruments, convertible bonds, asset backed securities. The bank probably has someone who specializes in that product. The final banker that you are likely to meet is someone from one of the “desks”. This may or may not be one of the specialists that came to sell a product to you, but the important ones you want to meet are the heads of the Equity Capital Markets desk or the Debt Capital Markets desk.

The “desks” are always a little hard to understand, but the easiest way to think of them is that they run the sales force that will be selling your instrument to investors and they are the ones that decide on how it will get allocated between the bank’s customers (not you in this case).

What is very important here is that your coverage banker must be experienced and have clout internally. If you do a deal run by that bank, you need to best and most experienced team executing the deal and the relationship that the coverage banker has with the desk is key. A good relationship can result in above average resources devoted to your deal. A bad relationship or lack of clout in their bank and you might get the the C team and so-so execution.

One question that I get from time to time is how do you even get covered by a bank or bankers so you can get access to them and their resources. I find that question a little strange because bankers survive on fee income. So if there is a way for them to earn a reasonable fee, you should be able to get the attention of a banker. The main way to meet a banker up front is through your lawyers, accountants or through your investors if you are VC funded. If you have a deal for them or a good possibility of a deal in the near future, you will get some attention at least. If you actually have a transaction like an IPO, you can do a “bake-off”, and get a few banks to compete for your business.

Choosing a banker

Let’s say you have had your bake-off, or you have met a few bankers and now you are trying to decide which one to go with. I’ll try and list out some of the things that I consider the most.

The first is that is this is not a smaller transaction, then you probably will have several different banks working on the deal. Whoever you choose as the lead banker (the bank on the left of the list of bankers on the front page of the offering document) will end up controlling the deal, so I generally try and focus the most on picking that one. As an aside, banks and their bankers are very competitive and expect to have several ridiculous conversations about position and typeface and variations of the title they are called. You will need to make it very clear that the banks are to work together well. Most are professional, but they also want to position themselves for the next deal and they are perfectly happy to throw their competition under a bus if given a chance.

I tend to look for experience, both in the bank and from the banker, trustworthiness, and strategic sense. All banks will have two different experience elements in their initial pitch books – league tables and deal tombstones. They will cut industry data in a way that shows that they are a leader, usually the leader in whatever deal they are trying to get onto (or your industry if an initial meeting). They will list out all the deals they were on, sometimes even if they had only very minor roles if they need to, but usually any deals they were some form of bookrunners.

I am a little cynical about league tables because the data chosen is cherry-picked to make the pitching bank look good, but they do have some reference value because if you have 3-4 banks come see you, you can compare the tables and see if there is a pattern as to who is number 2 or three in all of them. That is a good indication of who the leaders really are. Having a big market share and being a leader for a long time can be a good indication of how strong the bank is. And if the banker cannot make his bank look good, then you need to ask yourself how good a job they will do for you with investors.

The tombstones are much less useful. I normally look at the dates to make sure enough are recent, and I ask if the banker and his team personally worked on the deals presented. With typical turnover, anything more than several years old was likely done by a different team and different leaders at the bank.

The next criteria is trustworthiness. This may be surprising, but even with the books listed at the end and my cynicism about the process, I like my current bankers very much and I have had almost uniformly positive experiences with them. What I need to know is that are they there to help me as their priority or themselves or their bank and if they can keep details confidential. Both are easy to tell. Are they listening and advising or are they selling? Are they sharing details of competition that would make you uncomfortable if they shared the same about you?

One of the best ways to tell if you are a priority is coverage (visits, phone calls, emails) even when there is not a deal on the table. The next best indication is if they lend you resources, typically an associate or two to help in a project you are working on. Banks tend to have very good in house models for M&A, for example, or they may have very good knowledge and advice on what to use for standard valuation metrics.

The final part, their strategic ability, is the toughest to determine from just one meeting. Normally this comes out over time. I already have defined that the purpose of strategy is to win. If you find a banker that can help you win more often and by bigger margins, then you have found someone worth their fees. The first thing you need as a start is that they have to look at your business and start giving suggestions. Could be a suggestion on recapitalizing your company. Could be intel on what the competition is up to. Maybe how to reposition yourself with your investor base. The idea is some value added advice that. Comes from them and. shows their understanding of your business and how it is positioned in the marketplace. I have found that the average banker I work with to be quite smart, And the more experienced and business savvy ones can give you very good advice.

Fees

Fees are always negotiable to a certain point. If there is push back on banking fees, you can often tackle it another way via professional fees like the lawyers and accountants. Your lawyers and accountants can tell you what is usual and standard. Do not be afraid to push back here. There is a risk that if you push the fee too low the desk and sales people may not be too excited to sell your deal, but normally only the hugest deals get the very low fees. You can move part of the fee into a success or bonus fee payable at your discretion for over performance.

This isn’t an area to ignore as they can add up, but better performance can give you much better terms than expected and will save a lot more than a small fee reduction up front. Of course, the fee reduction is guaranteed and the extra performance is not, but you do want a motivated banking team.

Indicative Ranges

When a banker is pitching a deal to you, they can be a little too aggressive on the terms they say they can close a deal at. I have seen interest rates quoted well below the last few deals for similar companies quoted to me. Some think that once they have won your business and you are committed and on the road with them, they can always talk you up and blame market conditions. You are somewhat trapped and exposed once you start a deal process. This is where pushing the fee down and making some contingent on performance helps. If they start waffling on their indicative terms once you put some of their fees at risk, you know they are not as sure as they claim. You can always ask them what rate they would backstop the deal at or if they are willing to make it a bought deal and they take the risk or reward of the marketing. This is an area where getting several different banks pitching gives you a much better read on the market.

You need to trust your banker and believe that he is honest if you are going to be happy working with them. Their honesty about indicative ranges is a good touch point. No one can really guarantee what the market will be when the deal is launched, but over promising is dangerous to you. Someone that is not scared but who properly prepares you before a deal launches is very important. Fund raising is very much your responsibility as CFO and delivering a good deal reflects well on you. You need a banker that is a reliable team member.

A few final items

I have been out at events where several CFO’s are being taken to dinner. I find it quite questionable that some take the opportunity to order the most expensive bottle of wine. As much as you will see stories from the books I linked below about the excesses of Wall Street, the real crazy days are way behind us. You don’t want your banker to take advantage of you, so give him the same respect and courtesy. This may be someone you build up a relationship that spans years and maybe they are the one that give you the recommendation that gives you a board seat later in your career.

If you borrow staff and get additional support over time, remember that and try and steer business their way. If they do well, recommend them to other business contacts. They can be very helpful to you personally and can make a big difference in your career prospects, and it is much easier to work with people you respect. Don’t forget their lower level staff that work on your deals. Far too often the celebration at the end forgets your staff and the banking associates. Try to make sure that they get included. If not appropriate for the formal closing dinner, have the junior bankers take your junior staff out.

Finally, don’t get too caught up in the anti-banking media hype. There are plenty of good bankers out there that really care a out their clients. Be careful, remember that they are probably smarter than you with much more resources than you can bring to bear, but buil the right mutually beneficial relationship.

Books and Movies (I have read or seen these myself)

The Culture of Bankers

Liar’s Poker

Liar’s Poker (Norton Paperback)

Liar’s Poker (25th Anniversary Edition): Rising Through the Wreckage on Wall Street (25th Anniversary Edition) Kindle

The Big Short

The Big Short: Inside the Doomsday Machine

Bankers Behaving Badly

Straight to Hell

Straight to Hell: True Tales of Deviance, Debauchery, and Billion-Dollar Deals

Wolf of Wall Street

The Wolf of Wall Street

The Wolf of Wall Street (Blu-ray + DVD + Digital HD)

The Buy Side

The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess

The Industry

Too Big to Fail

Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System–and Themselves

The Bankers’ New Clothes

The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It

Corporate Culture – Hearts at War and Peace

By

On March 1, 2016

In CFO

If strategy, the subject of a previous blog, is what to do, culture is the wellspring of actually doing it. The energy and drive that the company needs to execute comes from the people there and the culture of the company greatly impacts what they do and how successful they will be.

Culture is just about as soft as you can get when you look at leadership. It is feelings and emotions and learned behaviors. Certainly some of it is mirroring the top leadership and how they act, but sometimes it is different. As soft as it is, it is absolutely crucial to making sure your company will succeed. Even with the best technology, the wrong culture can mean you don’t get the full benefit of it or you completely beat even your high expectations.

Here is a reasonable,definition of what corporate culture is from Investopedia:

Corporate culture refers to the beliefs and behaviors that determine how a company’s employees and management interact and handle outside business transactions. Often, corporate culture is implied, not expressly defined, and develops organically over time from the cumulative traits of the people the company hires. A company’s culture will be reflected in its dress code, business hours, office setup, employee benefits, turnover, hiring decisions, treatment of clients, client satisfaction and every other aspect of operations.

http://www.investopedia.com/terms/c/corporate-culture.asp

Cultures in companies evolve and change over time. The small team that was there at start-up probably had one culture t it might not be the right one 10 years later. A culture that works in one country may not work well in others. For example, some countries require some form of national service and at least all the men and sometimes the women as well have served in the military for a year or two when they were younger. There is a much higher chance that a more hierarchical culture is more natural. If you expand into or out of such a culture from a more free wheeling culture, you might run into clashes and resentment.

Although culture is not strategy, morale and people working together obviously is a key concern of strategists. In his Earth book of his The Book of Five Rings, Musashi says:

“The comparison with carpentry is a metaphor in reference to the notion of houses. We speak of houses of the nobility, houses of warriors, the Four houses [there are also four different schools of tea], ruin of houses, thriving of houses, the style of the house, the tradition of the house, and the name of the house. Since we refer to houses all the time, I have chosen the carpenter as a metaphor.”

In the examination of corporate culture and how it fits with strategy, you need to know what you have and what state it is in, you need to know what style of house you have and what the traditions are.

“The master carpenter should take into account the abilities and limitations of his men. Circulating among them, he can know their spirit and different levels of morale, encourage them when necessary, understand what can and cannot be realized, and thus ask nothing unreasonable. The principle of strategy is like this.”

As a member of the senior leadership team, you need to know what you have and what can and cannot be reliably done. If you do not understand the culture of what you are working with, you well thought out strategic moves can easily fall flat. You also cannot only rely on what you have done before, what others do, or what you prefer.

Finally Musashi makes clear that you should not rely on only one weapon but use whatever one is best. So you should be able to cope with whatever the culture is and get good results. If you need a more traditional culture on a job and you are in a “flat” culture, then build a more traditional team within your company.

I will make a broad and sweeping characterization of cultural types:

Hiring priority:

A) Team first – hire based on fit into existing staff without concentrating as much in experience or raw qualifications.
B) Skills first – hire experts based on skills and not so much focus on how they fit with the current team.

Organization structure:

A) Horizontal – very few or no layers. Most employees have immediate access to top leadership. Common in start-ups. Functional roles may be blurred somewhat.
B) Traditional – more defined hierarchy with clear roles and responsibilities, may not be many layers but they are there. Traditional functions exist.
And one final group

A) Transitional – a culture or company that is going through a large change. Maybe because of an M&A event or maybe a significant setback or success made the old mode less useful. Could even be a death of the founder or a handing from one generation to another, something as simple as a CEO change.

There is no obvious right culture or organization for every circumstance and every country you do business in. You can change the culture, but it is never a quick process. How to change a culture is a very demanding process. I will address that topic in a future blog, but you certainly need to create a transition culture before change can happen.

As much as I admire Musashi for his deep insight into strategy, if you approach the company culture looking for the right tool to apply, you are almost guaranteed to fail. The simple reason is that the culture is made up of people, not tools. From a top level strategic view point, the culture is a tool you are handed. In actual execution, you are dealing with people.

The Arbinger Institute has published two excellent books on effective interpersonal relationships. These are Leadership and Self Deception and The Anatomy of Peace. The foundation for both books is the work of philosopher Martin Buber. Buber identified two views you can have towards other people – I Thou and I It. One is seeing others as people and one is seeing people as objects. He actually does not say one is markedly better than the other, he more explores the way our thinking changes depending on how we view the others.  http://www.iep.utm.edu/buber/

The Arbinger Institute has developed the basic point that our thinking changes based on if we see people as people or objects into an entire program to improve interpersonal relationships. It applies just as much to the team first structure or the expertise first structure and they argue that if you want a truly effective and committed company culture, you need to insist that the culture is built on I Thou, not I It.

The heart of the books is the idea that once you view someone as an object, as I It, you commit an act of self betrayal and enter into a state where conflict is much more likely. Once you put yourself into that box, it is hard to get out and others are highly likely to react the same way. Your heart is at war. Not with others, with yourself. Since no one likes to think of themselves as a bad person, you start justifying your behavior. This pattern tends to lead to more conflict and there is so much investment in the conflict that the whole organization becomes frozen in it.

Is not unusual for a company to get stalled in cultural issues, and making sure you do not put yourself into a box (the books have different names for the different self justification archetypes we inflict on ourselves). As CFO, you do not have time to get mired into conflicts caused by the corporate culture, you need empowered teammates that feel that they have good prospects and a leader that sees them as people and not as a means to an end.

Of course, people need to do their jobs and you can have high expectations, but you need to act like a leader, and not allow yourself to work against your natural and best instincts. The culture usually is at least a partial mirror of the leadership and if you set and live the right example, you can influence the culture and that can result in better results over time.

When I first was exposed to the ideas in the books, I thought that it was saying to be soft and overly caring, but that is not the message at all. If you think of your staff as people, not objects, then you will want them to do well and have good careers. That could mean that they need to improve. There is nothing that says you cannot wage war with s heart at peace, just that the way you execute will be better.

This is something that I struggled a lot with earlier in my career because my people sense was off. I was too busy in my box thinking others were slow or incompetent or lazy or all the other labels that spring to mind when you try and justify your own bad behavior. I was lucky and had a few good mentors, but I also was in a larger company that had been around a long time. Many of my peers started in smaller companies and did not have that same opportunity.

So read your Musashi or whatever strategy wizard inspires you. Just don’t forget that you will quickly have to work with the messy people issues soon enough to get things done. Knowing yourself and acting well, staying out of the self betrayal box, keeping your heart at peace when working in teams, that is a skill that you can practice. As Musashi would say, this needs to be considered deeply.

There are a few other topics that I want to explore, such as how to write an earnings release beyond just the outlook section I already wrote about, but I will return to the question of corporate culture soon and in more detail. Toxic corporate cultures are all to prevalent and there is a lot of work here that needs to be done.

Books on avoiding self betrayal

The Anatomy of Peace

The Anatomy of Peace – kindle version

Leadership and Self Deception – getting out of the box

Leadership and Self Deception – getting out of the box kindle version

What does it mean to be a strategic CFO?

By

On February 23, 2016

In CFO

I think that the term I hear the most often when a recruiter calls me for a CFO opportunity is that their client is looking for a “strategic CFO”. I also see a lot of articles in Finance trade press on the importance of being strategic or on the new CFO that goes beyond the traditional roles of the CFO.
I’ll start by saying that many of the definitions used by those articles of a “traditional CFO” are quite narrow and probably apply to a Controller or Head of Accounting more than that of a typical CFO. I can forgive that, it makes for a more likely to be read article if you are claiming to provide some new insight, but I do find many of the articles to be shallow and they often do not seem to understand what a CFO has always done.

Quite often one of the main things claimed to be needed to be a strategic CFO is to be forward looking. That is probably the claim that puzzles me the most. Even basic accounting and reporting needs to be forward looking because the very basis of accounting for most companies, that they will continue as a going concern, requires forward thinking and analysis. Preparing budgets and forecasts is a core Finance skill. Some are better than others at building relationships outside of finance and get better insight, but that skill is a basic finance skill. Finance usually sits in the middle of the information flow for any company because Finance monitors cash flow, so building relationships is even easier. So I don’t think being forward looking alone makes a CFO strategic.

Other articles encourage CFOs to go beyond the traditional Finance work areas. This is also somewhat puzzling advice for a CFO because is seems to be part of their job to begin with. A CFO is a member of the senior leadership team and often one of the main outside and inside faces of management. Most of us have worked with a variety of functions as we moved up the ladder earlier in our career. A few of us even came over from other functions and hopped over to Finance.

With all of that good experience, trying to run other functions can be disruptive to the team. Everyone already has one clear boss, the CEO. They really do not need another boss. A good CFO will keep the company accountable to the goals everyone is shooting for, especially the financial goals, but be someone that enables success, not trying to run everything and make some sort of success themselves. You’re often in the role of risk control and doing reality checks if goals are being missed, so the CFO is often trying to overcome the bearer of bad news role that is natural to them.

This type of advice varies with the size of the company and what stage it is in, of course. In a smaller, earlier stage company, the CFO (if they are even called that) often have all of the admin functions under them. It is not uncommon for IT to report to the CFO as well. However, as a company grows and becomes more mature, you typically have several clearly defined functional heads. The CFO role usually gets more complicated as well, first with VC fund raising or with investor relations if the company is public. Treasury and fund raising consumes a lot of time as well. So there is limited usefulness in trying to do every function under the sun while CFO. A well structured expansion of roles can work well as part of career progression towards becoming CEO. I don’t think it is the best option when that is not the case and even when it is the intent, the CEO must back it and be clear about why it is happening.

That does not mean that the CFO cannot be deeply involved in areas outside of Finance. You can help the sales team close deals and reduce currency risk via hedging and ensure smooth revenue recognition by getting the contracts right day one. That only happens when you have a good working relationship with that team. You can help Purchasing in negotiating contracts with suppliers. CFOs make excellent bad cops and you might be able to bring financing contacts to the table that can ease the pain of pushing out terms. You are usually the natural ally for IT and the Legal department. Your COO will probably greatly appreciate any help you can give to drive down costs and help in choosing a location for a new plant. CFOs are often made the leaders of large, corporate-wide initiatives, so there is plenty of opportunity to lead teams with other functions under you.

All of these sorts of activities will make you a better CFO. You will make better informed decisions and your team will also make better informed decisions. Communication will increase and improve. You certainly will be much better regarded and that will make difficult tasks easier. So I suggest that you get out of your Finance department comfort zone and expand your horizons. When you complete that big, strategic M&A , you will be able to integrate and get synergies much easier because you work better with all your company’s functions.

I don’t think all of this will make you the “strategic” CFO your boss and the Board is looking for. You’re probably a pretty good CFO but somehow might be missing the “strategic” designation.

I think to have a proper understanding of what is meant by strategic, you need to go to the root of the word and then go from there. From what I can tell from some quick research, the use of the word strategy in a business context only became popular sometime in the 1960’s. Until then, it was meant only in the context of war. The root is a Greek word that means General or battle leadership.

Wikipedia has a good compilation of the meaning of strategy, from a pure definition standpoint to several noted military strategists and writers such as Carl von Clausewitz and B.H. Liddell Hart. The definitions can be boiled down to using all available and appropriate military resources to achieve political goals.

Sun Tzu said in The Art of War “If you know yourself and you know your enemy, you will not lose one fight in a hundred.”

I prefer Miyamoto Musashi’s discussion of strategy in his Book of Five Rings. His Earth Scroll (the first of his 5 scrolls) contains a long discussion on strategy. He even discusses strategy in business (in the 16th century, well before the 1960’s commonly described as the beginning of using strategy in business):

“In the way of business, there are cadences for making a fortune and cadences for losing it. In each way, there exist different cadences. You must discern well the cadences in conformity with which things prosper and those in conformity with which things decline.”

That is quite a profound statement by someone who was mainly known as a sword master. He tells his readers that a businessman needs to see the rhythm in their business and when you can prosper and when you would tend to decline. If you think about it, the CFO sits in the middle of everything as cash converts to reporting and is analyzed. That gives you the base for understanding the cadence of your business, but only by going outside your own department will you fully comprehend the cadence as numbers tend to lag reality. They are easier to see patterns in, but getting in front of the patterns normally comes from something more outward looking like Sales or Purchasing. So it is not being multi-disciplined or leading many departments that matters, it is understanding the rhythm of your business and when you need to act.

Musashi lists 9 things to keep in mind when trying to be strategic:

“
1. Think of that which is not evil.
2. Train in the way.
3. Take an interest in all the arts.
4. Know the way of all professions.
5. Know how to appreciate the advantages and disadvantages of each thing.
6. Learn to judge the quality of each thing.
7. Perceive and understand that which is not visible from the outside.
8. Be attentive even to minimal things.
9. Do not perform useless acts.”

I think these are all very valuable if you want to be a strategic CFO. He again stresses the need to keep a broad mind and not just learn sword fighting (finance in our context), not to do evil or useless things, and pay attention to details and learn to look beyond just the outside. I find the instructions to not think of evil things and not to perform useless tasks to be advice that all leaders should consider. Don’t step over the legal or moral line when plotting strategy of the consequences may derail all the company’s plans and you will put yourself and your career in jeopardy. Don’t do useless busywork, spend your time on actions that add value.

Musashi’s advice to learn the ways of other professions was meant more in the 4 professions framework he used (warrior, the peasant, the artisan, and the merchant) but in his own life he certainly farmed and mastered several arts himself. He was a big believer in doing instead of just reading or thinking about something, and he thought that the path to master the way of strategy was not just by becoming good at fighting with a sword. It was a primary activity, but not the only one. I first read his book when I was in my late teens when I first started sword fighting, and it is an excellent book to help make you better at that. However, once I finished school and started my career, I found his advice to be much broader than just sword fighting and he intended it to be broader.

In the context of a large company, Musashi gives good advice on strategy as well:

“Regarding grand strategy, you must be victorious through the quality of the people you employ, victorious through the way in which you utilize a great number of people, victorious by behaving correctly yourself in accordance with the way, victorious by ruling your country, victorious in order to feed the people, victorious by applying the law of the world in the best way. Thus it is necessary to know how not to lose to anyone—in any of the ways—and to firmly establish your position and your honor. That is the way of strategy.”

He makes it clear that you can take knowledge of individual combat and apply it to larger fights, but you cannot rely on just your individual victory. Rather, you need to take the same foundation you developed to win a sword fight yourself, against one of more enemies, and then use the greater resources your army gives you to win a bigger fight. If you are good yourself, think of what you need others to do to leverage your strengths and their own strengths. He says you need good quality people and then you need to lead them well.

Musashi says “It is necessary to know ten thousand things by knowing one well. If you are to practice the way of strategy, nothing must escape your eyes.”

His advice goes back to this theme quite often. He tells you to see, not just look. To understand and use your understanding in a broad way.
“You should not have a predilection for certain weapons. Putting too much emphasis on one weapon results in not having enough of the others. Weapons should be adapted to your personal qualities and be ones you can handle. It is useless to imitate others. For a general as for a soldier, it is negative to have marked preferences. You should examine this point well.”

With this advice, Musashi tells us that we should not have only one weapon or way to solve problems and not just to blindly copy others. He tells us to be versatile and open to what is the best technique for the problem in front of us. Far too often a CFO will try and use numbers to win, and sometimes it takes something different than numbers. Even if you don’t like leverage, borrowing money might be the right thing to do.

Finally, Musashi makes it very plain what the purpose of strategy is, to win.

“Generally speaking, when people contemplate the heart of warrior thought, they consider it simply a Way in which a warrior learns to be resolute toward death. But this is not actually the essence of the Way: what distinguishes the warrior and is most basic in the Way of the Martial Arts is learning to overcome your opponent in each and every event.”

“The true Way of swordsmanship is to fight with your opponent and win.”

“Your real intent should not be to die with weapons worn uselessly at your side.”

If you want to be a strategic CFO, you must be able to help or make your company win. There are no shortcuts or avoiding this. You may not have to leave your opponent on the ground bleeding to death or already dead like Musashi did, but you do need to win.

Business can be very black and white. There are winners and losers. No company consistently wins over time without the right strategy and culture. I will address company culture in a blog in the future, but the management team needs to be able to develop a winning strategy and execute on it.

I think there is nothing more that you boss hopes for more from his CFO is for them to help him be a winner. No one likes to lose, so the basic risk control and proper reporting skills of a good CFO are appreciated, but not losing is not necessarily winning. A winning strategy might be to survive a down cycle, to understand the market cadence that says you cannot prosper right now so you save resources for when you can, but more often winning is marshaling your internal resources and leveraging the external resources you have available to you.

Musashi says the heart of strategy is winning. He says to fight with what you have, not to leave weapons unused. No company is limited to only Finance tools. A strategic CFO knows how to enable or lead other functions when they are needed to win.

Assuming that you agree with me that the heart of strategy is to win, then you might be wondering what you can do to become a strategic CFO and to become a winner. I can tell you that I personally am not 100% sure how to answer that question from my own experience. I have done well at the various companies I have worked at and in all cases we grew and won. However I know that I am still on the path, I have not arrived at the destination. I do think that the advice that Musashi gave on this is quite good.

“See to it that you temper yourself with one thousand days of practice, and refine yourself with ten thousand days of training.”

When you are not doing, you need to be practicing. Develop skills, develop staff, debate and fight practice battles with your team and the senior management team. Experience helps. When the moment comes to execute and you need to make a decision that leads to victory, if it is something you have practiced or at least thought of in advance, then you will be quicker to act and more likely to make the right choice. Even practicing choosing helps.

This has just been the broadest overview on what strategy is and how you can use that understanding to be more strategic in your career. I plan on delving deeper into this topic in future entries in my blog and try to use some specific actions and examples I have encountered in my career. For those that care about my hobby posts, I will also go deeper into Musashi and how his book can make you a better sword fighter. I have a few other topics I want to discuss first, but feel free to contact me and ask to move up these discussions.

Strategy Books (all of which I personally own or have visited)

Website with an online, free copy of The Book of Five Rings

The Book of Five Rings

Books, either in paper or on Kindle (all links go to Amazon.com)

The version I quote here:

The Complete Book of Five Rings

The Complete Book of Five Rings – Kindle version

The translation I first read

A Book of Five Rings: The Classic Guide to Strategy

A Book of Five Rings: The Classic Guide to Strategy – Kindle Version

An account of Musashi’s life

The Lone Samuari: The Life of Miyamoto Musashi

Fictionalized versions of Musashi’s life

Musashi

Musashi – Kindle version

Samurai Trilogy [blue-ray]

Page 4 of 5

Previous

Next

Powered by WordPress & Theme by Anders Norén