CFO: Heart of the company and conscience of the board

By Kinita Shenoy

In a move to address the constantly-evolving role of the CFO, the Sri Lanka Institute of Directors (SLID) recently held a Power Evening at the Park Premier banquet hall, Excel World. The evening was conducted in an open debate setting, with SLID President and Group Financial Director at John Keells Holdings, Ronnie Peiris as moderator.

The panel included an array of key players in the country’s financial sector, including Group Director at Capital Maharaja Organisation Srilal Ahangama, CFO at Commercial Bank of Ceylon Nandika Buddhipala, Finance Director at Finlays Colombo Coralie Pietersz, and CFO at Vallibel One Haresh Somashantha.

The SLID has numerous expansion plans underway, including the creation of academic and practical curriculum for education and training and the spreading of the message of corporate governance to other parts of the island. It was announced that a Regulator’s Forum and a Chairman’s Forum would be organised in the coming months.

No longer a glorified accountant

The topic at hand was chosen due to its current global relevancy.  No longer a glorified accountant, the role of an organisation’s Chief Financial Officer, encompasses that of a business controller and organisational optimiser, as well as a warrior against waste and corruption.

Moderator of the evening, Ronnie Peiris, set the tone of the proceedings with a few introductory comments regarding the core challenges facing CFOs; responding to various pressures of their surrounding such as their CEOs and regulators, while supporting and facilitating business operations in an ethical manner.

He went on to pose certain key questions regarding boardroom governance, such as whether CFOs are given their rightful place in managerial decision making, and urged both panellists and audience to consider whether their CEOs and boards are making sufficient use of what CFOs bring to the table.

Peiris reminded the assembled that many financial disasters could have been nipped in the bud should the CFO have played a more prominent role or had their advice taken. Despite this fact and the burgeoning number of financial scandals ongoing on the global stage, out of 7,034 listed US companies, only 8% of CFOs were included on boards.

Panellist Haresh Somashantha responded in agreement, and added a local perspective, that within most current organisational structures, the CFOs are not given adequate hearing, although they are held responsible during financial hardships or lull periods. He added that financial officers should be involved in modelling the business, as opposed to being informed of decisions as a courtesy or afterthought, after they have been implemented by the boards.

Somashantha mentioned a positive trend within the country, noticing that local companies are slowly moving out of this practice, indicating more involvement of CFOs in decision making processes. On the other hand, CFOs are required to be experienced and competent enough to be given adequate involvement in key business decisions.

Power of CFOs

Srilal Ahangama provided the evening with snippets of his experience within the Maharaja Group. He mentioned that CFOs have a lot more power as they have back-up in the core organisational structure. The financial chief of a particular group, while responsible to his CEO, can also approach the Group Financial Director if he disagrees with a particular decision, or even to the head of the group. In certain cases, CEOs tend to dominate the financial officers, which can eventually lead to more than just fiscal difficulties for the company. Thus he further reiterated that within the Maharaja group, CFOs also have a say in operational capacities, and not purely financial matters.

As former ACCA President and current CFO at Commercial Bank, Nandika Buddhipala responded to Peiris’ queries with the banking sector as a framework. He stated that within a banking environment, CFOs have a large amount of responsibility and opportunity within committees to make their voices and recommendations heard. However, he stressed that the role of the CFO is entirely dependent upon organisational culture.

Managing to extract companies from manifestations of corruption is one of the challenges that CFOs face. He too noticed a positive trend within the country, as he mentioned that the last 5 years have shown a definite improvement in the professionalism and involvement of Financial Chiefs, even within smaller companies although to a lesser extent.

Three key points

Three key points brought up during the debate were; the importance of the ‘tone from the top’, organisational culture, and the influence of CFOs in operational matters and whether this could lead to conflict between CFOs and CEOs.

Coralie Pietersz, panellist and Finance Director at Finlays responded to these points with a few key suggestions, including the need for CFOs to manage risk, and support the CEO’s decisions without “upturning the apple cart” by aiming for organisational harmony, as opposed to harbouring intra-company rifts.

She also mentioned that the tone from the top is extremely important, to support and encourage the financial independence of the CFO. Pietersz stressed the importance of following good corporate governance principles, as the CFO sees the whole picture, which also vests them with a large amount of responsibility.

Peiris referred to an Ernst & Young report that indicated that in previous years, it was the general assumption that CFOs aspired to eventually rise to the CEO position, as part of a natural career arc. However, the recent report displayed a clear shift in long-term career, as most financial officers now view the CFO position as the goal of their career, as the role of the CFO has been greatly enriched in the wake of “various financial fiascos” globally within the last decade or so. As mentioned by the SLID, this is due to the “evolution from purely an accountant to a business strategist and organisational optimiser”.

Country Head at Fitch Ratings Lanka Maninda Wickramasinghe, who was present as a member of the audience, added that the ongoing rift between CFOs and CEOs tended to be drawn from CFO’s tendency to overvalue businesses and a system of checks and balances needs to be instated, as it is currently lacking in the Sri Lankan financial organisation. He also concurred with the general viewed aired, that of late, the role of CEOs have expanded holistically, and many within the country are responsible for driving business strategy.

The question of whether CFOs should have veto power over key business decisions was then raised, along with issues of the importance of dual reporting required and empowerment of officers as individuals.

Right to be heard

Rimoe Saldin, COO at Browns Investment, was also in attendance in the audience, and stated that the technical competence of the CFOs was extremely important, in conjunction with the CFO’s willingness to make their voices heard. He further stressed that companies in the country do not have dual reporting organisational structures, and afford no protection for their Financial Officers.

Saldin also touched upon the importance of CFOs adherence to existing power structures, as their knowledge may not extend into other business processes. For example; as a general rule, finance departments in organisations tend to display a certain scepticism or lack of enthusiasm for marketing expenditure, although the CEO can see that the long-term efficacy of marketing functions are apparent.

On the panel, Ahangama agreed with Saldin’s line of thought; that although the final decision making power in terms of strategy should lie with the CEO, while adding that the voice and recommendations of the CFO have the right to be heard.

The topic of the importance of alignment of recommendations of auditors, regulators, and actions of the CFO was then raised. The panel came to a general consensus that CFOs had a responsibility to speak out or whistle-blow in order to make audit committees and boards aware of financial discrepancies under the CEO’s charge.

It was further mentioned that contraventions to an organisation’s accounting policy cannot be signed off on, and must be actively questioned. The key importance of professionalism and independence in conduct between the board and all members of an organisational structure was also pointed out.  Friendships or personal relationships should not allow for deviations of ethical code or manipulations of the truth.

Public interest and integrity

This led to the next topic at hand, whether or not CFOs are extending their professionalism adequately in today’s business arena. Peiris added that CFOs are expected to act in public interest, and owe the public the professionalism they would extend to the organisation they are a part of.

According to Ahangama, the biggest challenge to an accountant is that to his integrity, whereas technical challenges can be easily overcome. He went on to stress his point on the repercussions of lack of integrity, “No one is going to invest in a country rife with corruption at the highest levels”.

Lack of protection

The panel then discussed the absolute lack of protection for CFOs within the Sri Lankan context. Increments and job security are often in the hands of the CEO, whereas they should perhaps be in that of an external auditor. They went on to explain that if the bonus of a CFO and their team is tied to a company’s profitability, this leads to temptation in terms of ethical malpractices. Thus, until a method of external assessment is in place, the social and organisational culture is vital in ensuring younger members follow the ethical path.

The possibility of the establishment of ground rules or guidelines by third-party institutions was raised, and as former ACCA president, Buddhipala responded that they simply do not possess the authority to do so in Sri Lanka. Ahangama then mentioned that it was this lack of authority that led to a consequent lack of action taken by disciplinary committees and hearings in the wake of financial malpractice. He further stated that the integrity of the profession needs to upheld and governed by the particular professional body that gives out the qualification.

Seated in the audience was Preethi Jayawardene, who added that in cases of financial malpractice, it is a frequent occurrence that the companies withdraw their complaints themselves, although the regulating bodies conduct thorough investigations.

Arjuna Herath, partner at Ernst & Young and audience member, mentioned that Sri Lanka possesses one outdated act that looks at professional misconduct, and should the particular activity not fall into the guidelines of this act, the perpetrator cannot technically be held in violation of any law. He also stressed on the importance of regulatory bodies to no just control and appraise but also influence.

The next question addressed the likelihood of the average CFO resigning from a company should he or she uncover organisational malpractice, after being unable to stop it. Would a CFO walk away from a top-level job or stay, and compromise their ethical values?

Seated in the audience, Maninda Wickramasinghe stated that it was unfair to place the onus of the matter on an individual, and that it was important to have structures in place that support the CFO and encourage fair practice. He concurred that the SEC act falls short of legal procedure, and needs to be strengthened. Independent professional regulatory bodies need to be created and given sufficient authority to bolster and support CFO whistle-blowing. Office-holders are transient, but their charters must endure and evolve to ensure the integrity and endurance of the professional body.

However, it was astutely observed that social and cultural norms dictate that whistle-blowers tend to be “difficult employees”, so most financial officers stay silent on incidences of malpractice, as they want to avoid a reputation that will deny them further employment, even in other organisations. Hence, there is a certain importance of individualism and building up a reputation of ethical integrity.

It was further mentioned that there is evidence of less manipulation of accounts when CFOs are included on boards. In instances where they are not, the CEO has total control over the activities and decision making powers of their Financial Officers, which leads to many more instances of malpractices and financial misdoings.

Getting heard

A member of audience posed the pertinent question, “How do we get the CFOs heard?”  Members of the panel and audience concurred that it boils down not just to individual and institutional values, but to organisational culture – which essentially creates the structure. The process of whistle-blowing does not have existing mechanisms that can facilitate fair practices, although the maintenance of the independence of the CFO is crucial for corporate governance. However, there must be alignment of goals and values, the CFO, board and CEO must try and head the company in the same direction.

Concluding remarks essentially encompassed the topics raised during the course of the evening, reiterating that being a part of an organisation does not mean the CFO cannot speak his mind, follow ethical principles, hold a sense of responsibility to the public, and ideally be able to approach the highest levels of the organisation.

President Ronnie Peiris wrapped up the power evening by stating that if companies or CFOs as individuals are undergoing ethical dilemmas in terms of financial misconduct, they should approach institutions, such as SLID. More than just the financial flag bearer, the CFO is the heart of the company.