Bold CFOs will reign over Brexit

Thomas Roberts, finance advisory leader at CEB, now part of Gartner, explains why CFOs need to be bold in the face of Brexit

Now that Article 50 has been formally triggered, the UK government has started the most important, complex, and uncertain negotiations it has ever entered into.

While many will approach this Brexit negotiation period with caution, progressive CFOs will see this time for what it is: the best opportunity to demonstrate value-enhancing leadership in the last 50 years.

Over the next two years of bargaining, every twist and turn will be covered in detail, and there will be no shortage of experts wheeled out to pontificate on what it could mean for a “post Brexit future.”

Much of the commentary will be mere speculation, given that so little is certain and so much of the UK and EU’s public relations are designed to engineer a negotiating position, with no historical example to provide a guide for anyone.

Senior management teams – even those with extensive operations on both sides of the English Channel – could be forgiven for tuning out at times in the months to come.

But there is a difference between filtering useful information from noise and simply waiting to see what happens.

The best CFOs recognise that businesses cannot afford to tread water for the next two years, but understand that taking small incremental bets to move forward will be the natural tendency for business leaders.

Research shows that in 2016, 77% of CFOs and finance directors reported that their leadership teams were more risk-averse when funding projects in 2016 compared to the year before.

In-depth analysis of corporate performance across the past 20 years shows that the handful of firms that have managed to be successful through that time had CFOs that empowered and rewarded their organisations to consistently make bigger, riskier growth bets than their competitors, including during times of uncertainty.

This may make for uncomfortable reading for many finance leaders. Brexit is exactly the kind of situation that will lead many leadership teams to be err on the side of caution.

These same reactions create a window of opportunity right now for bold CFOs to break down bureaucratic red-tape, identify true growth opportunities, fund innovation and enable business leaders to deliver more growth.

Companies with growth-focused, forward-thinking CFOs will make smarter bets and reap the rewards.

First, Understand Brexit’s Implications

CFOs and their teams have more responsibility for pushing business leaders away from risk-aversion than most realise, including educating them on the difference between bold and reckless decision-making.

With Brexit, if they have not already done so, CFOs should help management teams forge a common and comprehensive understanding of their company’s ‘ecosystem’ – its sources of labour, capital, goods and services, its operations and the markets and customers its sells to.

From there, they must take the time to learn how the most likely Brexit scenarios will affect each and every part.

One company that we work with has built a formal Brexit Steering Committee comprised of key influencers from across the core business lines and corporate functions.

The group’s sole purpose is to identify the critical business areas that Brexit could materially impact and share them with leadership and the Board of Directors.

The goal is to help them identify, prioritise and design strategic responses for the highest potential impact outcomes.

This company has focused on how they would respond to the most tangible risks and opportunities in their product and customer channels so that their organisation is prepared to withstand the shocks of Brexit and execute a focused response quickly.

They recognise that no one will be able to precisely predict every risk or opportunity, but it’s a bigger risk to wait for full clarity before developing a strategic plan.

CFOs should not expect their business leaders to precisely predict each element of change or its potential impact, but identity the key drivers, factors and shifts in revenue, costs and customer behaviours, based on various Brexit scenarios.

The best CFOs do not simply identify risks in their scenario planning, but collaborate with their leadership teams to understand the specific factors, metrics, trends and drivers they use to make critical business decisions.

They partner to perfect key performance indicators and build a framework to ensure the organisation is prepared to respond to risks faster than their competition.

Then, Be Bold

Once CFOs have this common and deep understanding of where the firm is going strategically, they need to adjust finance to focus, not solely on operational efficiency, but also on generating greater returns from traditional finance responsibilities.

Most successful big companies of the past two decades have not outperformed competitors by being operationally excellent. In fact, they are less efficient with SG&A spending (i.e., they have higher SG&A costs as a proportion of revenue), have a higher effective tax rate, and their turnover of working capital is lower than their less successful peers and competitors.

CFOs at these companies are far better at making growth bets and making use of the assets they already have.

These CFOs recognize that when finance removes the anchors that it places on growth (through obstacles like complex investment appraisal processes, inflexible portfolio reviews, stale budgeting process, traditional business performance management activities and poorly designed incentive plans), positive results develop.

In fact, CFOs at these companies have seen a 32% greater return on assets than the control group in the study and a 10% greater return on invested capital.

The progressive CFOs don’t stop there; data shows that, as well as the above mentioned results, when these CFOs do go shopping they make bigger, bolder M&A bets, and communicate more candidly and frequently with their investors.

The markets clearly reward this kind of approach to business. The best companies have seen a 7% annual shareholder premium compared to their peers.

The path for negotiating Brexit will be choppy, volatile and noisy.

This creates a tremendous opportunity for CFOs to demonstrate bold and effective leadership, as many of their colleagues and stakeholders become more risk averse.

The opportunity to come out a stronger company on the other side of Brexit is real, but only for CFOs who prepare and act now, before their competitors do.

 

Thomas Roberts is finance advisory leader at CEB, now part of Gartner.