The Activist Cfo Alignment With Strategy

The Activist CFO—Alignment With
Strategy, Not Just With the Business
A report prepared by CFO Research Services
in collaboration with Booz Allen Hamilton

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CONTENTS

About this Report 2
Introduction 3
Four Profiles for the Corporate Finance Team 5
Profitability, Profiles, and Mismatched Finance Agendas 12
Activist Role as a New Model for the Senior Finance Team 15
Conclusion 19
Appendix: CFO Agenda Profiler 21
Sponsor’s Perspective 22

APRIL 2005 © 2005 CFO PUBLISHING CORP.

2 The Activist CFO—Alignment With

ABOUT THIS REPORT
In October 2004, CFO Research Services (a unit of CFO Publishing Corp.) and
Booz Allen Hamilton launched a research program to explore the changing agenda
of senior finance teams and to document an increasingly activist role among leading
CFOs. This report presents the findings of our electronic survey of more than 1,600
senior finance executives and in-depth interviews with finance executives.

CFO Research Services and Booz Allen Hamilton developed the hypotheses for this
research jointly. Booz Allen Hamilton funded the research and publication of our
findings, and we would like to acknowledge Vinay Couto, Gary Neilson, Mark
Moran, and Frank Galioto for their contributions and support. At CFO Research
Services, Sam Knox edited the report and managed the project.

The Activist CFO—Alignment With Strategy, Not Just With the Business is published
by CFO Publishing Corp., 253 Summer Street, Boston, MA 02210. Please direct
inquiries to Lisa Nelson at 617-345-9700, ext. 249 or lisanelson@cfo.com.

April 2005
Copyright © 2005 CFO Publishing Corp.,
which is solely responsible for its content. All
rights reserved. No part of this report may be
reproduced, stored in a retrieval system, or
transmitted in any form, by any means,
without written permission.

© 2005 CFO PUBLISHING CORP. APRIL 2005

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INTRODUCTION
“I think controllership is an essential part of the CFO’s role,” says Bruce Nolop,
CFO of Pitney Bowes, “but what’s important now more than ever is to be a well-
rounded CFO so you’re not just a business partner but also an alter ego to the
CEO—to really influence and deliver on strategy.” Nolop brings to the surface an
emerging role for the CFO and the senior finance team—one in which finance serves
the company’s strategy as much as it fills the traditional roles of controllership, financial
reporting, regulatory compliance, and decision support.

Most observers would agree that CFOs and their senior finance teams should base
their finance agendas on their companies’ overall corporate strategies. Companies
focused on growth through innovation and market expansion have one set of priorities.
Those facing a turnaround have priorities that are often entirely different. For the
finance organization to be truly effective, its agenda—the initiatives it pursues to
track and report results, to allocate capital, to ensure control and compliance, and
to support decision making—should be aligned closely with the company’s overall
strategy. Such alignment with the finance function, or indeed any function, should
be commonplace across all companies, large or small.

CFOs are increasingly But recent changes in the C-suite and companies’ external environment have thrust
aligning their function not the CFO into a new and expanded role in which finance teams are revisiting this
issue of alignment. Increasingly, investors have little tolerance for companies that
just with the business but cannot deliver on growth and earnings commitments. Regulators and prosecutors
with the company’s overall have come down hard on companies in an effort to restore confidence in the
strategy. And by doing so, transparency of reporting to the capital markets. And as CEOs are challenged by the
they are not just supporting external market and their boards of directors, they increasingly need a trusted
adviser to help develop and execute corporate strategy. Thus CFOs are poised to
the business with information
take on an expanded and increasingly activist role within their companies. As part
and analyses, but also of this activist role, CFOs are increasingly aligning their function not just with the
ensuring that the entire business but with the company’s overall strategy. And by doing so, they are not just
enterprise delivers on its supporting the business with information and analyses, but also ensuring that the
commitments. entire enterprise delivers on its commitments.

So what is an activist CFO? How is his or her finance agenda unique? Regardless
of industry or strategic position, the activist CFO has an expanded and ambitious
relationship with his or her C-suite peers and business unit leaders. And he or she
has recast the agenda of the corporate finance organization, tying it closely to
competitive and operating dynamics and aligning it with the company’s strategic
mission. Perhaps most important, however, is the root cause of activism in finance.
This research program finds that activism correlates closely with higher expectations
and an expanded relationship with a company’s board of directors and external
stakeholders. That is, when the board seeks change, activist CFOs and their teams
rise to the challenge.

This activist CFO may sound a lot like a CEO, an overall leader of the enterprise
and a super-line manager. But the activist CFO remains committed to his or her staff
position. The activist CFO has, however, expanded that role to focus first on the
strategy, not just on business support. And while we don’t believe there is a trend
underway for the CFO to usurp power and influence from the CEO, recent executive
appointments suggest that the activist CFO is ideally suited to an expanded role.
Corporate boards filled two high-profile CEO vacancies—at Hewlett-Packard and
Boeing—with their CFOs, at least for the time being. And the list of CFOs stepping
up to the highest levels of managerial authority extends to Smith Barney, Pfizer,
Metro-Goldwyn-Mayer, and many other companies—all of which have promoted
CFOs or hired them from outside to guide their companies through strategic change.



With these trends in mind, we have conducted a research program with more than
1,600 senior finance executives in an effort to explore how senior finance teams
craft their agendas, whether finance executives see an expanded role for their function,
and the extent to which overall company performance tracks with finance’s priorities.
We’ve segmented the respondents according to logic based on our experience and
expectations for finance’s emerging role.

About this Research
In January 2005, CFO Research Services and Booz Allen Hamilton launched a
research program among senior finance executives to explore the links between
overall corporate strategy and the finance team’s agenda. To see the survey instrument
and include your views in this research, visit www.cfoagenda.com. In total, more
than 1,600 finance executives from around the world contributed their opinions to
this research.

More than 1,600 senior With a view toward capturing useful data across all industries and company sizes,
we asked a series of simple questions about company strategy, competitive and
finance executives from
industry dynamics, and firm-specific concerns (see appendix). In addition, we sought
around the world answered data on how senior finance executives seek to collaborate with the rest of the executive
questions about their team and the barriers that finance faces in implementing its strategy. Finally, we asked
strategies and the role of respondents about the role of finance within their companies, in search of evidence of
finance at their companies. an emerging activist role among finance executives. We’ve supplemented this data
with interviews and conference remarks from leading voices in corporate finance.

Using the data from this survey, we’ve segmented the respondents into four categories
and discerned similarities and differences—some subtle, some pronounced—among
the various types of finance organizations. We developed this segmentation logic
before collecting the data and based it on experience with senior finance teams and
on trends and forces that affect strategy, finance, and overall company operations.
Based on these findings, we offer recommendations on how senior finance teams
can reevaluate both their strategies and their finance agendas in pursuit of higher
company performance.


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Companies are segmented FOUR PROFILES FOR THE CORPORATE FINANCE TEAM
into four profiles according We asked senior finance executives to answer 16 questions about their companies’
to their strategies, industry strategies and the challenges and obstacles they face in executing their agendas. Then
dynamics, and firm-specific we segmented them into four groups based on an algorithm of logical priorities we
concerns. anticipated for finance teams. (See Figure 1 for a more detailed description of these
profiles.) The four profiles are:

• Growth navigators: CFOs who work closely with CEOs to map out an aggressive
course to profitable growth through acquisition or organic channels. To be included
in this group, executives had to say in the survey that top-line growth, not cost
containment, was the primary driver of future performance and that analysts
expected continued improvement, not major change, in the years ahead. Fully 52
percent of respondents fall into the growth navigator category.

Figure 1. Profitability and internal/external concerns drive segmentation

Execution Maestros (28 percent) Growth Navigators (52 percent)
Profitable companies that seek to boost profitability Profitable companies that seek top-line growth and
through operational excellence incremental internal change

Common in mature, closely regulated, low-risk, Common in high-margin, high-growth, risky, and
low-growth, high-fixed-cost, capital-intensive knowledge-intensive industries such as banking,
industries such as energy, insurance, transportation, pharmaceuticals, high tech, and professional services
retail, and hotels/restaurants/leisure
Top barriers to change: outmoded business
Top barriers to change: outmoded business intelligence, fragmented technology, unsophisticated
intelligence, fragmented technology, and processes for resource/capital prioritization
unsophisticated processes, along with difficult
corporate culture

Profitability
Turnaround Surgeons (12 percent) Business Model Transformers (8 percent)
Low-profitability companies that seek dramatic change in Low-profitability companies that seek dramatic
their operations in the near term and wrestle first with change in how they address their disrupted markets
internal, not external, problems in the long term and wrestle first with external
market dynamics
Common in industries affected by the business cycle
and changing customer preferences such as Common in industries disrupted by deregulation,
automobiles, capital goods, consumer durables, market and channel shifts, booms and busts,
food/beverage/tobacco, and telecommunications and dramatic cost escalation such as health care,
consumer goods, real estate, and diversified
Often have high turnover among senior team financial services

Top barriers to change: outmoded business intelligence, Top barriers to change: despite external problems,
inability to change corporate culture, and resource these companies wrestle with both internal barriers,
constraints such as an intractable corporate culture and unevenness
in their finance teams’ “consultative smarts,”
and external barriers such as outmoded business
intelligence and fragmented technology

Internal focus External focus



• Execution maestros: CFOs who focus on operational excellence and instill in their
companies a value discipline that enables them to do more with less. Our segmentation
logic calls for execution maestros to deliver continued improvement, not dramatic
change in the future, and to focus on “executing the basics,” not “generating new
products and services” as their primary source of value. The execution maestro
logic also considers the board’s satisfaction with company performance, the stability
of the company’s industry, and the degree of change that the company’s operating
model needs. All told, 28 percent of respondents are execution maestros.

• Turnaround surgeons: CFOs who step in under close scrutiny to make difficult
decisions that others often will not make—with the goal of restoring ailing companies
to financial health. Required for inclusion in this category are analysts’ expectations
for major change in the near term, as well as a combination of board dissatisfaction,
a need to restructure and stabilize the company, high turnover among top management,
and an overhaul of the company’s operating model. Only 12 percent of respondents
are turnaround surgeons.

• Business model transformers: CFOs who identify opportunities for strategic
innovation and take advantage of them by recasting their companies’ business models
and organizations. To be categorized as a business model transformer, a CFO’s
company must have a board expecting change in the long term and a need for an
overhaul of its operating model—along with some combination of board and analyst
disappointment with company performance. Only 8 percent of respondents fall into
this category.

Acquisitions, new products, Broadly speaking, companies fall into two larger groups: successful companies that
and market expansion fuel aspire to generate more value for their shareholders, and companies that sense trouble
and seek more dramatic change. Companies that say they are more profitable than
the future of growth their peers are most common in the growth navigator and execution maestro categories.
navigators. Such companies have well-established market positions, tight controls, and well-
managed operations—all of which contribute to their higher performance. These highly
profitable enterprises are models for their less profitable, lower-performing peers.

Growth navigators—Aggressive expansion led by new products and
building on the core business
Growth navigators develop aggressive plans for profitable growth through market
expansion, new product development, and acquisitions. And although growth navigators
show up in all industries, they are particularly common in high-growth, knowledge-
intensive industries in which net margins are relatively high. More than half of
respondents in the banking, pharmaceutical, professional services, real estate, and
high-tech industries fall into the growth navigator profile. Competitive advantage for
such companies grows out of innovation, nimble reactions to market dynamics, and
creative commercial engineering. Accordingly, such companies are simultaneously
entrepreneurial, operationally focused, and adept at both resource management and
the complexity of integrating disparate organizations.

Collaboration with core, company-wide functions of the business is a top priority for
growth navigators. Sixty-one percent of growth navigators seek to work more closely
with their operations teams, and more than half seek closer relations with information
technology groups. Growth navigators also seek closer working relationships with
externally oriented organizations like marketing and sales, but they are least likely
to tighten their relationships with human resources. These companies also have stable
executive teams, with only 13 percent reporting high executive turnover in recent years.

But problems with technology and business processes hold growth navigators back,
say respondents. Like their peers in other profiles, growth navigators see “outmoded


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Figure 2. Business intelligence prevails among top barriers in all profiles

Barriers to finance achieving its strategic objectives (rank order)

Growth Navigator Execution Maestro Turnaround Surgeon Business Model Transformer
Outmoded or missing business intelligence and 1 1 1 2
forward-planning capability
Multiple, fragmented technology architectures 2 2 8 3
preventing seamless enterprise integration
Inadequate resource firepower, unsophisticated 3 3 3 5
processes for resource/capital prioritization
Resource constraints 4 5 4 10

Highly customized or unreliable financial processes 5 9 5 5
supported by underdeveloped analytical tools
Uneven depth of leadership and consultative 6 5 7 3
smarts within the finance organization
Inability to change a decades-old corporate 7 3 2 1
culture
Strongly autonomous business units and an 8 8 9 7
arm’s-length managing corporate center
Finance bogged down in transaction 9 7 5 8
processing and crises
Stature and influence of finance leadership 10 10 10 8

business intelligence and forward planning capabilities” as their most formidable
barrier, followed closely by fragmented technology and unsophisticated business
processes (see Figure 2).

In charting their course for finance’s delivery on strategy, growth navigators are unusu-
ally focused and disciplined on a few core ideals for their finance team. “I think,” said
Execution maestros focus on Susan Decker, CFO of Yahoo, at the 2005 CFO Rising conference, “every company
should have analogues financially for everything it’s doing on the business side. And
the core business and optimize
since I’m a free cash flow addict, driving free cash flow per share and trying to limit
the efficiency of their profit volatility are our goals. That’s our mission. That’s our reason for being in business and
engines. it drives market value.” Accordingly, says Decker, her finance organization adheres
closely to five core principles in all it does: (1) focus on cash, (2) think in the long term,
not the short term, (3) allocate capital accordingly, (4) institute metrics that matter, and
(5) communicate transparently and consistently. These principles, says Decker, guide
everything that she and her finance team do in support of the company’s strategy.

Growth navigators, as profitable companies in high-margin, sexy industries, are
often Wall Street darlings and receive press coverage and admiration of executives
throughout industry. And while they aspire to generate more value for shareholders
with a tightly aligned strategy for finance, so do their operationally focused peers,
the execution maestros.

Execution maestros—Running and optimizing a profit engine
Execution maestros operate under “normal” conditions and focus on operational
excellence, seeking ways to do more with less. They spot early signs of failure,
participate actively in operating reviews, and through running a lean and efficient



enterprise, seek to extract an “operating premium” from the capital markets.
Execution maestros, like their growth-oriented brethren, report higher-than-average
profitability versus their peers and often compete in mature, regulated, information-
intensive, low-margin, and capital-intensive industries such as utilities, energy,
transportation, insurance, and retail. Given the sources of value in these mature
industries—low cost, operating efficiency, economies of scale—it comes as little
surprise that execution maestros are concentrated in them.

Execution maestros have economic engines that run smoothly, and their finance
teams work to optimize the efficiency and throughput of these engines. Accordingly,
execution maestros collaborate most closely with business operations and information
technology, putting little emphasis on sales, marketing, and product development.
And like growth navigators, execution maestros see outmoded business intelligence,
a lack of forward-planning capabilities, and fragmented technology as barriers to
achieving their finance goals. But they also see problems with ingrained corporate
culture—large, often unionized workforces, regulatory compliance infrastructure,
and so on—which hold companies back from making dramatic structural change.

Bruce Nolop, CFO at Pitney Bowes, speaks clearly on the priorities of the execution
maestro. Nolop joined the company as it reevaluated its diversification strategy and
Spurred on by higher board worked aggressively to focus on its core, highly profitable mailing automation
business. To do so, he and his team focused on building a corporate development
expectations, turnaround
team as part of the finance group, bringing order and discipline to selling off and
surgeons rebuild their acquiring businesses. “Their role is to facilitate with transaction skills,” says Nolop,
companies through cost “and to make sure what we do is rigorous and consistent. They answer questions
control and overhauling with the business units such as ‘Why are we doing this transaction? Why do we think
operations. this fits with our business strategy? Why do we think we can manage it?’ So process
discipline is their primary role.” This focus on process discipline extends, says Nolop,
into every aspect of finance and the company’s business—from tax, to performance
management, to HR and compensation.

Execution maestros and growth navigators are in some respects the envy of their
less profitable peers. They have business models and operations that are efficient,
innovative, and ultimately profitable. And while their finance teams face barriers
such as weak business intelligence and planning systems and technology platforms
that don’t support their strategies well, these companies and their finance teams are
poised for further growth and profitability. Their less profitable peers, however, are
less sanguine about the future and position themselves for turnarounds and more
dramatic rebuilding of their business models.

Respondents who say their companies are less profitable than their industry peers
are concentrated in two other profiles: the turnaround surgeon and the business
model transformer. Sensing immediate or longer-term problems with the market and
their companies’ responses to it, these CFOs are focused on more dramatic changes
to their companies and how they do business.

Turnaround surgeons—Responding quickly to the board’s
higher expectations
The turnaround surgeon makes difficult decisions that others will not make in an
effort to restore a company to financial health. Among the determinants for inclusion
in the category are an expectation from the board of directors and analysts that the
company achieve substantial gains in the next six months (rather than over the next
several years), overall investor dissatisfaction, high turnover among senior management,
and an awareness of the need for both cost control and an overhaul of the company’s
operating model.


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Turnaround surgeons are common in industries that are tied to the business cycle
and to consumer preferences—automobiles and components, capital goods, consumer
durables and apparel, food, beverages, and tobacco, and media. Given the recent
economic slowdown, it’s surprising that only 12 percent of respondents fall into the
turnaround surgeon profile.

Like the execution maestro, turnaround surgeons place a premium on collaboration
with operations and with IT. But in the effort to restore their business to financial
health, the turnaround surgeon’s finance team seeks close collaboration with the
sales team (60 percent) and marketing (30 percent).

One turnaround led in part by finance illustrates the turnaround surgeon’s role.
Safeco, an auto, home, and small-business insurance provider, needed a dramatic
turnaround in the late 1990s, after over-diversifying and taking on too much debt.
The new CEO called on Christine Mead to serve as CFO and to orchestrate much
of the turnaround. Mead spoke of the turnaround and the company’s efforts to
emerge from it not just stable but healthy and growing—that is, to emerge as
a growth navigator or an execution maestro. To do so, says Mead, was a matter
of “rebuilding the foundation, rebuilding the product, strengthening the capital
structure, and putting performance measurements and risk management into place
to ensure our future success and that we wouldn’t fall behind again.... You don’t
want to go through a turnaround and then say, ‘So what?’ So for us it was about
setting long-term strategy and then investing in products, the people of the company,
and finance’s wherewithal.”

Mead describes finance’s contribution to the turnaround as “intertwined and
interlinked with what the product teams are doing.” And in addition to the core
performance management discipline of new metrics, Mead cites an overarching
requirement for finance to both lead and support Safeco’s organization. “We’ve
restructured the leadership team so that we’re aligned around our strategies, so
my responsibilities include the platform—finance, technology, service, and human
resources—the people, processes, and technology that make everything go at
Safeco.” And Mead cites collaboration between all members of the C-suite—
“bringing the best thinking on any business issue, regardless of traditional silos, gets us
to the best conclusion.” This culture of collaboration extends, says Mead, not just
internally but externally to the company’s agent pool, which sells products to consumers.

Perhaps the most important difference between turnaround surgeons and their more
profitable peers is their focus on internal rather than external matters. Senior finance
executives in the turnaround surgeon profile cite organizational problems—such as
an inability to change corporate culture and inadequate resources—far more often
than do their more profitable peers. This intuition may well be correct; there seems
to be little in the world outside the company that correlates closely with the
turnaround surgeon profile. As a group, respondents in this profile say their industries
are both consolidating and expanding (60 percent) and stable and mature (40 percent);
new entrants appear both frequently (59 percent) and rarely (41 percent). The inference:
The source of turnaround surgeons’ difficulties lies more with internal problems
than with external factors such as market structure and industry maturity.

The importance of internal concerns in a turnaround was brought home by Keith
Heffron, VP of finance at Adelphia Communications, a cable television company
that has been rocked by scandal in recent years. Adelphia’s response to this scandal
—a scandal which included widespread fraud at the top of the organization—has
been an insistence on very tight controls on all business processes, benchmarking of
company performance against internal and industry standards, and—somewhat
surprisingly—a decentralized finance organization. Says Heffron of the old Adelphia



structure, “It was the kind of organization that made all decisions centrally, and as
a result, trained the rest of the organization not to make any decisions at all.” But
for such decentralized decision making to work effectively, a sound control
environment with increasingly automated checks needs to be in place, says Heffron.

Collaboration, too, figures prominently in Adelphia’s turnaround: “I can say I work
closer on a daily basis with our VP of marketing and sales than with anyone else.
I know his team is as intimately plugged into revenue as mine is—not just into
customer growth. Last week, we had a lengthy discussion of key operating metrics
like average revenue per unit and their impact on the bottom line. They get it, and
we’ve really built a level of financial literacy cross-functionally.”

Business model transformers—A small group of companies seeking
a new approach to altered markets
Business model transformer is the fourth profile in the quantitative research among
senior finance executives, and it’s the smallest segment, making up only 8 percent
of respondents. Business model transformers recognize opportunities for strategic
innovation and recast their organizations and their business models in a way
that alters their competitive dynamics. Like turnaround surgeons, business model
transformers report lower profitability than their peers, although they are in perhaps
less dire straits than the turnaround surgeons.

AutoNation, a national rollup of automotive retailers, surely has a heritage of business
model transformation. The company began in the mid-1990s as a conglomerate,
Business model transformers focusing on a portfolio of waste management, auto rental, and auto retailing and
seek dramatic change in their financing businesses. Over the next several years, the company shed its car rental
organizations and in their and waste management businesses and acquired a collection of more than 350
approach to the external automotive franchises around the country. AutoNation’s CFO, Craig Monaghan,
says that the company set out to change the core business model of selling cars
market. to consumers by using best practices, standardizing, and branding the car-buying
experience.

To do so, the company focused on bringing scale advantages to a highly fractured
but successful entrepreneurial business operating in a local market environment.
After bringing all these stores together, the company asked, “How do we add value?”
AutoNation needed to maintain the local entrepreneurial spirit in each market, but
at the same time it needed to create a disciplined operating environment that would
strike a balance between entrepreneurial energy and scalable, best-practice processes,
and use technology to create a better customer experience. “With a $19 billion
organization, you get to the point where instead of having all your decisions made
locally, you need to make some regionally and some nationally. But changing that
culture without blowing up a successful organization was our number one challenge,”
says Monaghan.

Central to AutoNation’s recasting of its business model was a focus on automating
and controlling its operations. “You can’t run an organization with 280 accounting
locations across the country and not have problems,” say Monaghan, “and I’ll tell
you we took some significant write-offs early on because we constantly had
surprises coming from each of these stand-alone accounting operations.” Monaghan
says the company and its finance team have lead this effort through implementing
tighter controls, modernizing its technology, and implementing shared services
centers for IT and parts of finance. To do so, says Monaghan, the company looked
outside automotive retailing to mortgage companies, big-box retailers, and others
for good ideas on how to structure, automate, and centralize its back office operations
in support of strategy.


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Business model transformers are common in industries that have been disrupted by
competitive dynamics in recent years. The most common industries among business
Business model transformers model transformers include real estate (which has been disrupted by regional bubbles
are common in disrupted and busts), diversified financial services (adversely affected by deregulation, firms’
markets in which companies’ over-diversification, and financial market instability), health care (disrupted by
regulation and rising costs), and consumer products (shaken by the power of
competitive advantage is big-box retailers). As a result of these disruptions, finance teams at business model
weakened by external factors. transformers seek to lead dramatic changes in how their companies approach
their markets. Like the turnaround surgeon, the business model transformer is
troubled by internal barriers to change such as an intractable corporate culture and
uneven consultative skills among the finance team. And like other profiles, the
transformers seek close collaboration with business operations and information
technology.



PROFITABILITY, PROFILES, AND MISMATCHED
FINANCE AGENDAS
While profitability seems to track fairly closely with the profiler results—with
highly profitable companies falling into the growth navigator or execution maestro
categories, and less profitable ones falling into turnaround and transformation cate-
gories—companies that report average profitability versus their peers describe their
finance agendas in a way that seems somewhat troubling. Companies reporting
average profitability fall into the growth navigator and execution maestro segments,
when in fact their business problems and lack of profitability may well require
the more ambitious changes that come from a turnaround or business model
transformation.

Overall, companies seem to have overestimated the strength of their financial
performance; 20 percent reported profitability below that of their peers, while 43
percent claimed high profitability and 37 percent claimed average profitability.
These average-profitability companies identify themselves more with their
profitable peers, which they hope to emulate, than with less profitable companies
(see Figure 3). Many of these middling-performance companies are likely to be less
profitable than their peers and should have a corporate strategy and finance agenda
that focuses on the more dramatic change of a turnaround or a business model
transformation.

Figure 3. Profitability tracks closely with finance agenda, but many companies overestimate their
own performance

Some companies Companies seeking Companies seeing trouble and
growth and stability seeking dramatic change
overestimate their true
profitability, and as a result
may have finance agendas 100%
that are not aligned with
the true state of their 80%
strategic position.
60%

40%

20%

0%
Growth Execution Turnaround Business Model
Navigator Maestro Surgeon Transformer

More profitable Average profitability Less profitable

Barriers to Change in the Finance Organization
We queried finance executives on the barriers they face in pursuing their strategies
for finance. By understanding the barriers that finance faces, we can deduce where


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finance teams will seek to devote their time and attention in the future. Comparing
these barriers across the various finance agendas produces a clearer picture of each
profile. We found first that companies are most often concerned with “outmoded or
missing business intelligence and forward planning capabilities,” with more than a
third of respondents citing this problem as one of their top three barriers. Fragmented
technology/multiple systems and “inadequate resource firepower and unsophisticated
processes for resource and capital prioritization” were also cited frequently by the
full population of respondents.

Figure 4. Profitable companies focus on core finance capabilities and company-wide complexity

Top obstacles to achieving finance’s current agenda

Less profitable Average profitability More profitable
Outmoded or missing business intelligence and 44% 35% 38%
forward-planning capability
Multiple, fragmented technology architectures 24% 34% 36%
preventing seamless enterprise integration
Inadequate resource firepower, unsophisticated 35% 33% 29%
processes for resource/capital prioritization
Uneven depth of leadership and consultative 24% 29% 29%
smarts within the finance organization
Highly customized or unreliable financial processes 24% 24% 28%
supported by underdeveloped analytical tools
Inability to change a decades-old corporate 33% 30% 26%
culture
Resource constraints 29% 30% 26%

Strongly autonomous business units and an 19% 22% 25%
arm’s-length managing corporate center
Finance bogged down in transaction processing 24% 21% 22%
and crises
Stature and influence of finance leadership 15% 10% 14%

(Percentage of respondents identifying each item as one of their top three barriers to change)

A segmentation of these barriers by respondents’ profitability, however, shows that
highly profitable companies see core finance capabilities and company-wide
complexity as the most formidable barriers to change (see Figure 4). By contrast,
their less profitable peers feel constrained by the organization around them.They
believe they are held back by the problems within their companies and see barriers
such as the “inability to change a decades-old corporate culture” as the most
formidable.

Collaboration with other functions and C-suite executives
In the survey and interview program, we asked senior finance executives about their
relationships with the rest of the organization. Companies consistently called for
closer collaboration with their operating units (see Figure 5, next page).



But while finance will work more closely with operations, IT and sales in the years
ahead, it’s worth noting that externally oriented companies—growth navigators and
business model transformers—are more likely to ally themselves with product
development, research and development, and marketing. And many internally
focused companies, especially those led by turnaround surgeons in finance seek
to drive improved performance through working more closely with—and even
scrutinizing—operations and sales efforts.

Figure 5. Collaboration is central to finance effectiveness—especially with operations and IT functions

With which of the following functions do you anticipate collaborating most closely in the future?

Operations

Information
Technology

Sales

Marketing

Product
Development/R&D

External
Stakeholders

Human
Resources

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Business Model Transformer Turnaround Surgeon Execution Maestro Growth Navigator

(Percentage of respondents)


15

ACTIVIST ROLE AS A NEW MODEL FOR THE SENIOR
FINANCE TEAM
Finance organizations have served historically as control and compliance stewards, as
the “keepers of the books,” and as ad hoc counselors to the CEO and business units on
investment decisions, budgeting, and so on. Indeed, for years, finance organizations
have aspired to streamline their transaction processing roles and step up to greater
decision support, all under the rubric of “supporting the business.” But our research
finds that finance doesn’t seek to just support the business with information and analyses.
Increasingly, it seeks to lead, to guide, and to guarantee that the business is in fact
supporting and pursuing the enterprise’s overall strategy. This change—this shift from
supporting business units to ensuring business performance and strategic execution—
offers a new role, new responsibilities, and a new agenda for the finance team.

Finance activism—defined One leading voice in finance articulated activism perfectly in a recent interview: “I
think there’s a spectrum on which CFOs operate,” says Mick Murray, senior vice
as finance in a role beyond president and chief accounting officer at Yahoo. “At one end of the spectrum is the
controllership and decision CFO whose primary orientation is on the fiduciary side—internal controls and
support—occurs more often financial operations. At the other end of the spectrum is the CFO who’s the strategist
among survey respondents who who’s there at the table driving the broader corporate strategy, particularly in the
context of the long-term financial objectives of the company.” To Murray and
say their finance teams have
his team, activism means finance in a company-wide, strategic role. Later in the
become more closely engaged conversation, Murray called for finance to establish an internal brand within a
with the board of directors in company. “A successful finance organization operates as one branded group across
the last two years. the company—across all business units and geographies—with a common, shared
perception of our fiduciary and strategic roles.”

In the CFO Agenda survey, we queried senior finance executives on the role of finance
in their organizations. Are you, we asked, an accountant focused on control and reporting,
a business partner supporting decisions with data and analysis, an architect creating
measurements and leading planning? Or are you more an activist and interventionist—
one who challenges the business from a neutral, objective position, one who acts as an
arbiter of performance with a mandate from the Board and CEO to prompt change?

Allowing for multiple responses, we found that more than 40 percent of senior
finance executives say they and their teams are activists and interventionists—that
is, they play a role beyond accounting, control, and business decision support.
Perhaps most interestingly, this activist/interventionist role is independent of the
profiles and reported company profitability. Finance activism occurs consistently in all
profiles and profitability bands.

We view the number of activists—more than 40 percent of respondents—with a bit
of skepticism. Yes, nearly half of senior finance executives say their organizations
“leverage the unique position of finance to proactively challenge the business and
lead the next wave of opportunity capture.” But this may well be more an aspiration
to lead their pursuit of strategy than a clear-eyed statement of finance’s actual role.
Whether an aspiration or a realized role for finance, activism represents a new
model for finance’s contribution to enterprise performance.

Activism—again, defined as finance in a role beyond controllership and decision
support—occurs more often among survey respondents who say their finance teams
have become more closely engaged with the board of directors in the last two years
(see Figure 6, next page). Sixty percent of senior finance executives who say their
CFOs have a closer role with the board also identify themselves as activists—while
their peers who perceive no change in finance’s relationship with the board are far
less likely to say they have an activist agenda.


16 The Activist CFO — Alignment with

Figure 6. Finance becomes more active in managing the business in response to closer relations
with the board of directors
Finance’s activism versus interaction with board
100%
Closer relations between
finance and the board of 80%
directors are tied to
analysts’ expectations, 60%
high turnover among top
management, and a need 40%
to overhaul operations.
20%

0%
No change in board/ Increased board/
CFO relations CFO interaction

Nonactivists Activists


We draw further inferences about the relationship between finance and the board
after looking at responses to other questions. We find that closer board relations are
tied to external pressure from analysts for change, to significant turnover among top
management, and to an acknowledgement of the need to overhaul a company’s
operating model (see Figure 7). Based on these findings, we infer that the activist
role is finance’s response to a clear sense of urgency from the board, and that boards
seek finance’s expertise and organizational scope in times of operating distress.

Figure 7. Boards call on finance in times of operating distress

Relations between board and finance versus indicators of operating distress

Operating model
overhaul

High executive
turnover

Analysts call for
major change

0% 5% 10% 15% 20% 25% 30% 35% 40%

No change in board/CFO relations Increased board/CFO interaction



17

Senior finance executives in some industries have embraced finance activism more
fully than others—perhaps out of the need for the activist’s guidance in driving
change within the organization. Executives in the capital goods, retail, transportation,
and telecommunications industries are more likely to be activists than their peers in
banking, professional services, and energy. And while we found little variation in
activism across the profiles, there is clearly a trend in the data suggesting that
finance executives in historically low-margin industries such as transportation,
capital goods, retail, and telecommunications have adopted activism, perhaps out of
necessity in pursuing turnarounds and business model transformations. Executives
in historically higher-margin businesses such as banking, professional services, and
real estate—which have a higher percentage of growth navigators and execution
maestros—are less likely to adopt an activist agenda.

The other noteworthy difference between activists and their non-activist peers is
activists’ focus on systems, resource constraints, and technology, and non-activists
concern for business intelligence, corporate culture, and the stature of finance leadership
(see Figure 8). Activists don’t wrestle as much with an intractable corporate culture,
nor do they lament the stature of their function within the organization. Rather, they
identify core managerial and business problems—notably, poor technology and
resource scarcity—and seek to solve them.

Figure 8. Activists focus on the external market and are less likely to get distracted by
difficult corporate culture

New entrants
appear frequently

Activists identify core Industries are
managerial and business consolidating

problems—poor technology,
process inefficiency, and More external
resource scarcity—and turbulence

are less concerned with
intractable corporate Need to focus
culture. on the core

Corporate culture
represents a barrier

0% 20% 40% 60%

Yes No

(Percentage of activism for respondents choosing Yes or No for each item)


19

CONCLUSION
How can finance teams take these findings on how their peers are crafting their agendas
to match their corporate strategies and put them to practical use?

First, companies should take a close look at the core issue of alignment between
finance and the organization. Does finance support the business or support the strategy?
A careful review of Are finance’s priorities and efforts focused on helping business units make good
decisions, or has finance stepped beyond decision support to embrace a more activist
fundamental questions role in delivering results? There’s no single right answer or remedy to questions and
about finance’s support for problems like these. But finance teams would be well served by reevaluating whom
strategy and for the board’s they serve and how they do so.
expectations will yield a
Second, finance executives should be careful to view their companies’ performance
new and stronger finance realistically, rather than exuberantly. Profiler respondents seem to have an overly
agenda. optimistic view of their own performance and the depth of their strategic role.
Many senior finance executives seem to believe their companies are more profitable
than they really are. Many respondents say they play a role and have influence that
may well lie beyond their true position within their organizations. If finance executives—
the stewards of information, the people with perhaps the best view of company per-
formance—can’t say with authority how their companies are performing, who can?

Finally, finance teams should consider their mandate from the board of directors and
carefully consider how to pursue this mandate. Findings from the survey suggest
that an activist agenda beyond controllership and decision support is more likely
among companies with close finance/board relations. With this in mind, perhaps the
most important question for finance teams is this: Does our board expect a greater
role from the finance team—and if so, how do we alter our finance agenda to play
this role effectively?


21

APPENDIX: CFO AGENDA PROFILER
More than 1,600 senior finance executives around the world answered the following 16 questions, which form the
basis for this report. Readers are welcome to visit www.cfoagenda.com to contribute their views to this research.

Which choice best describes the situation at your company?

1. The greatest contributor to earnings over the next 3 years Growth focus
Low-cost orientation
2. The board’s view of the company’s past 3 years’ performance Dissatisfied
Satisfied
3. External stock analysts’ expectations over the next 3 years Continued improvement
Major change
4. The Board expects the majority of anticipated changes to be made In 6 to 12 months
Over the next 2 to 3 years
5. Company’s primary industry Consolidating or expanding
Stable, mature
6. Company’s strategic intent Focus on the core
Diversify
7. New market entrants in company’s industry Rare
Frequent
8. Primary challenge for the business over the next 3 years? Restructure and stabilize
Sustain and build
9. How will the organization provide more value over the next 3 years? Generate new products/services
Execute the basics more consistently
10. Top management team turnover over the past 2 years Less than 40%
40% or more
11. CFO interaction with Board and Board issues from 2 years ago No change or moderate change
Significant increase
12. Cost management is… A normal part of business
A key driver of future performance
13. The changes needed to the current operating model Fine-tuning and execution
Overhaul

14. To execute your agenda, with which of the following functions do you anticipate collaborating most closely?
(Please choose three)
Marketing Sales
Human resources Operations
Information technology Product development/R&D
External stakeholders (e.g., investors,
creditors, legal counsel, unions, regulators)

15. Identify the THREE biggest obstacles to executing your current agenda:
Uneven depth of leadership and consultative smarts within the finance organization
Inadequate resource firepower, unsophisticated processes for resource/capital prioritization
Highly customized or unreliable financial processes supported by underdeveloped analytical tools
Multiple, fragmented technology architectures preventing seamless enterprise integration
Outmoded or missing business intelligence and forward planning capability
Stature and influence of Finance leadership
Strongly autonomous business units and an “arm’s-length managing” corporate center
Inability to change a decades-old corporate culture
Resource constraints
Finance bogged down in transaction processing and crises
Other (please specify) ________________________

16. How would you describe the role of finance in your company? (Check all that apply)
Accountant: Maintains control environment and ensures integrity of reporting
Business Partner: At the table with the business, playing a supporting role to the business
Architect: Creates the yardstick against which performance is measured and leads planning processes and
management forums
Activist: Leverages the unique, neutral position of finance to proactively challenge the business and lead
the next wave of opportunity capture
Interventionist: Acts as the final arbiter of performance and has the mandate to prompt change in the businesses


22 SPONSOR’S PERSPECTIVE

SPONSOR’S PERSPECTIVE
The era of the Activist CFO has arrived. More than control agents or scorekeepers,
leading CFOs have become active, innovative, and independent transformation
agents. They identify and focus on the next “billion-dollar decisions,” while at the
same time ensuring the right mechanisms are in place for the thousands of smaller
decisions to be made with the necessary rigor, transparency, and insight. To succeed,
this new breed of CFO must develop an activist agenda that aligns with the company’s
strategic priorities and performance goals.

In our work with CFOs and their organizations, we have observed Activist CFOs
leveraging their unique position to influence their organizations’ agendas and ensure
they are achieved. Indeed, the best CFOs have a combination of objectivity, credibility,
organization-wide perspective, detailed business understanding, and influential
relationships that uniquely positions them to influence the agenda. In addition, they
are increasingly called upon to lead change or transformations in their organiza-
tions, further influencing the agenda.

Booz Allen Hamilton teamed with CFO Publishing to undertake this research to better
understand the Activist CFO profile and how Activist CFOs influence corporate
agendas both within the Finance organization and beyond. In addition to this
research, our recently published book, CFO Thought Leaders: Advancing the
Frontiers of Finance, contains interviews with 17 of the world’s most influential
CFO thought leaders describing their own agendas and providing insights on their
own Activist agendas.

Booz Allen’s interest in the Activist CFO Agenda originates from our work with
leading CFOs and their organizations, helping them address their most important
concerns. Our specific experience and capabilities include:

• Corporate Valuation, Portfolio Analysis, and Merger Integration Support
• Planning and Performance Management Design
• Finance IT Architecture Design
• Organization Design to Produce Results
• Cost Efficacy Analysis and Implementation
• Outsourcing and Offshoring Strategy Development
• Finance Talent Management
• Corporate Governance and Enterprise Resilience Design

Booz Allen Hamilton has been at the forefront of management consulting for businesses
and governments for 90 years. Booz Allen, a global strategy and technology consulting
firm, works with clients to deliver results that endure.

With more than 16,000 employees on six continents, the firm generates annual sales
of $3 billion. Booz Allen provides services in strategy, organization, operations,
systems, and technology to the world’s leading corporations, government and other
public agencies, emerging growth companies, and institutions.

Booz Allen has been recognized as a consultant and employer of choice. In a recent
independent study by Kennedy Information, Booz Allen was rated the industry leader
in performance and favorable client perceptions among general management consulting
firms. Additionally, for the past six years, Working Mother has ranked the firm among
its “100 Best Companies for Working Mothers” list. And in 2005, Fortune magazine
named Booz Allen one of “The 100 Best Companies to Work For.”

To learn more about the firm, visit the Booz Allen Web site at www.boozallen.com.
To learn more about the best ideas in business, visit www.strategy-business.com,
the Web site for strategy+business, a quarterly journal sponsored by Booz Allen.


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