I recently attended the 12th Annual MIT Sloan CFO Summit, which, as always, was great. The title, the Future Forward CFO, articulated the theme that CFOs have moved from reporting the past to helping shape their company’s future. A CFO’s position has grown beyond reporting accurate financial statements and historical analysis to proactive strategic planning, and essentially replacing the COO in overseeing on-going company operations. The CFO should be right in the middle of the strategic conversation within the company; s/he has the analytical staff and deep understanding of the nuts and bolts of the business model in order to take a more proactive role.
CFOs Aren’t Overly Sharing Types
But stepping up to this new role means that a CFO has to learn to live with ambiguity and experimentation, while learning the nuances of communication with different types of stake holders. As one presenter put it, “CFOs aren’t overly sharing types.” One of the six conference tracks focused on the challenge and importance of learning how to communicate; here's some of my take aways.
Communicating in the Budget Process
Top down/bottom up
All speakers agreed that the budget process was a tops down/bottoms up process. One public company said their executive team kicked off the annual budget process by meeting to review their revenue and profit targets in their 3 year strategic plan. Once they had agreed on the revenue and profit targets, then they built out the annual operating expenses. If there are problems at the OPEX budgeting level, it has to be worked out in the context of those agreed upon revenue and profit targets. The prior agreement on revenue and profits provided the discipline to bring OPEX in line with those targets. My comment - easier for a public company where you can always fall back on "we've already told the street those numbers, we've got to make it work." For private companies, it depends on how strong the leadership is in sticking to the verbal agreement.
Don’t do the work for the operating departments
Another panelist pointed out that it is very tempting for Finance to do the departmental and divisional budget planning for the operating groups, especially when they are late responding to the budgeting process. Finance usually feels like they have the tools, data and expertise to quickly put together good budget plans for each department, and it would be a lot easier than to wait for the department heads to take care of it. Resist this impulse: let department heads do it themselves. Finance needs the buy-in from the operating departments; they won’t feel committed if finance does all the work.
Scenario Planning
A third panelist said that their company uses scenario planning to give the budget process some flexibility. This gives the operating heads some flexibility to plan for various scenarios, so if revenue is X, then OPEX is Y, but if revenue is XX, then OPEX could be YY. My comment: this works, again, if management is disciplined. One may hear the argument, well, if we spend YY, then we'll get to revenue XX - scenario planning spinning into chicken or egg discussions.
CFOs Communication with Employees
Develop a relationship with employees throughout the company. CFOs tend to spend a lot of time in meetings with other executives, but need to be in regular communication with a broad spectrum of employees. Walk around, be accessible. (Once upon a time, this was called Management By Walking Around, or MBWA.) Start the process early when recruiting and hiring. Learn what is most important to new and to young employees (it isn't always salary and more stock options). Be involved in orientation and educating new hires. Help them understand the “why” behind procedures; always make sure everyone understands why the company has certain procedures, it will help ensure compliance. Sometimes it is hard to imagine that people don't really understand why the company has certain policies, but it is true. Over explaining is better than under explaining and building resentment.
A couple of speakers mentioned problems with young employees understanding the sensitivity of proprietary or confidential information in a day and age of Facebook, Twitter, etc.; they had no idea about the intellectual property of the company.
Explain what the important metrics for the business are, how they are measured, and the impact of achieving, or not achieving, those targets – both for the company, and for the value of stock options.
When making policy or procedure changes, help employees understand the “why” behind the change, not just what the change is. Use a cross functional team to give you feedback on new policies (new travel expense policy, new vacation policy, etc.) – and make tweaks to it as you go along based on feedback.
Communicating with Boards and Investors
Communication with Private Investors: Keep it consistent, keep them informed about issues - early and often - so there are no surprises.
Remember with the venture community, it is all about cash and fundraising and when you are going to need more money. You need to show what you’ve done so far with the cash that has been invested, and if you need more money, what in addition you are going to do with it. Keep reminding them of all the company’s accomplishments. The tendency of entrepreneurs is to want to have something new to say, but it is better to have a consistent message. Investors don’t want to feel like you are moving from one shiny object to the next. Investors see a lot of shiny objects; they like to see consistent movement forward on the things they invested in.
Communicating with the board: develop relationships outside monthly or quarterly board meetings, give them early heads up on issues, get advice outside the meeting on difficult topics, do pre-selling, make them part of the solution. At the same time, be careful of what you ask for, you probably don’t want a lot of help operationally, focus on strategic and fundraising issues with the board.
Public Company Investor Communications
As a public company, how do you communicate with the investor community? One key strategy to follow from the very first days of going public: get a few key messages across with each communication. Balance having new information to get attention with consistent messages. Focus on metrics that are sustainable. Figure out metrics early on about new businesses or initiatives that show progress, but not based on revenue and profitability. Try not to introduce new metrics all the time, or to change what metrics you use to show the business – sometimes if you change the metrics, the investor community reacts with suspicion that you are trying to hide something. In addition, investors don’t have a lot of time to figure out new metrics and follow new stories, if your messages are consistent, and your metrics are consistent, you inspire more confidence in your company. My comment - this is also true for private investors.
In general, both internal employee communications and external communications with investors are primarily about setting expectations so people feel you can meet those expectations. Present a culture of success in meeting expectations, as compared to always coming up short. When dealing with investors, know what your desired outcome is in your communications.
At the same time, and probably harder for CFOs who came up the ladder in finance, learn how to handle ambiguity and experimentation. Figure out what metrics helps you frame performance in new business areas and defines value for your company - and communicate this to your internal and external stakeholders.
