By Sean Hanley and Jerrad Hall
A Greek philosopher once said that change is the only constant in life. The truth of this saying is evident in virtually every facet of business, but perhaps none more so than the rapidly evolving role of the finance executive. Over the past few years, the CFO has gone from the back office suite to front-and-center in the boardroom.
To use a sports analogy, that’s like going from scorekeeper to coach.
The concept of the “traditional” chief financial officer (CFO) conjures up a universal image: a numbers whiz, tucked into a quiet office surrounded by spreadsheets, accounting records, and budget reports. They have excellent technical skills and maintain precise attention to detail, but strategic business decisions are probably made around them as opposed to being driven by them or even made in consultation with them.
Fast-forward to today, and the picture looks much different (or at least it should). The CFO role—and by extension, the entire finance function—has undergone tremendous transformation.
No longer are finance leaders focused primarily on what has already happened: keeping the books, managing financial reports, and handling statutory compliance. As technology and consumer behavior have evolved and the economy has become increasingly global, the expectations placed on CFOs have shifted and expanded; CFOs are now expected to provide business insight that drives what happens in the future.
The unique business challenges created by a years-long global health crisis have only accelerated the importance of the role that finance leaders play within their organizations.
Let’s examine some of the expectations and challenges faced by modern finance leaders—and break down the issues that are most pressing to CFOs in the post-pandemic business landscape.
What do companies expect from their finance executives in today’s world?
Traditional finance tasks—management of the company’s books, ensuring compliance requirements are met, financial reporting—are still firmly the responsibility of the CFO and finance team. However, with enhancements in process and technology, far less time is being spent on these tasks, freeing up CFOs and their teams to expand their impact beyond the operational and into the strategic realm.
Across an organization, expectations on the finance leader span far and wide:
- Chief executive officers (CEOs) often look to CFOs to be their right hand and key business partner in virtually all strategic decision-making. CFOs are expected to be excellent communicators and storytellers and to provide frank and honest feedback and insight to every level of executive leadership.
- Boards continue to expect CFOs to deliver sound and accurate financial data and guidance that they can trust in their decision-making. CFOs are often expected to engage boards directly, as both the interpreters of key financial data but also as analytical and strategic thinkers who bring solutions, not simply issues, to the boardroom.
- The wider C-Suite now looks for CFOs to possess both the technical prowess and the soft skills and leadership acumen necessary to drive change and inspire trust—in both internal and external stakeholders.
- CFOs are often expected to drive M&A activity in the organization, on both the buy side and sell side. In addition to providing meticulous and accurate financial data (and being able to effectively explain that data to potential investors or targets), CFOs are also charged with performing extensive due diligence for any potential buys or sales and being a key player in the development of the corporate development thesis. Furthermore, modern CFOs often lead post-merger integrations and work with multiple departments to identify and prioritize value-driving integration opportunities. McKinsey has recently reported that companies are more likely to capture cost and revenue synergies in a merger integration when the CFO was “highly involved.”
This is far from an exhaustive list of the responsibilities and expectations placed on the CFO and the finance function in 2022. As more companies discover the power of monetizable, data-driven insights, chief financial officers are firmly entrenched as the standard bearers of digital transformation within their organizations. Many finance leaders are expected to not only be digitally fluent, they’re also expected to drive and evangelize company-wide technology implementation, whether it’s automation, AI, or legacy system upgrades.
Concerns and challenges for finance leaders in 2022
While the role and impact of finance leaders has been evolving for over a decade, the COVID-19 pandemic accelerated many trends that were already on the rise. It also brought new challenges that have reshaped the way organizations and CFOs respond to disruption and prepare for uncertainty.
Supply chain disruption
Pandemic-related supply chain issues have had a major impact on businesses of all sizes, across all industries. The labor shortage, COVID-19 lockdowns, inflation, the rise in cyber attacks, and geopolitical forces have all played a role in revealing just how tenuous our global supply chain really is.
The results of these supply chain disruptions—rising costs of products and materials, more expensive shipping contracts, and shipping and production delays—have eaten into many companies’ profits and revenue, frustrated customers, and caused reputational damage. In many cases, these issues have prevented businesses from expanding into new markets or launching new product lines.
It isn’t just consumer goods or manufacturing businesses that have been impacted, either. A professional services firm needs goods and equipment so its workforce can effectively provide service and bill hours to generate revenue. Smaller companies with fewer supply chain resources and tighter teams may be significantly impacted by the smallest delay or disruption, experiencing a ripple effect throughout their entire organization.
For chief financial officers and their teams, these issues are a major concern in 2022 and beyond. Challenges with budgeting, reporting, financial planning and cash management have forced finance executives to reexamine many of their pre-pandemic supply chain processes.
Just-in-time production, single-source, offshore shipping partners, and legacy supply chain systems are just a few of the factors that are undergoing close scrutiny in the post-pandemic business environment.
To address some of the serious financial and business risks introduced by supply chain issues, finance executives are turning to a number of strategies:
- Identifying and prioritizing supply chain risks, e.g. understanding Tier 2 and Tier 3 vendors, securing multiple options for product and service sourcing, and incorporating protections and performance clauses in supplier contracts
- Driving collaboration with internal business processes and operations while keeping a pulse on external forces, e.g. utilizing open-book accounting, scenario modeling, and regularly refreshing forecasting
- Optimizing supply chain strategy through technology, e.g. investing in predictive analytics, implementing just-in-case inventory, and evaluating value chain, costing systems and make-or-buy decisions
The labor shortage
In a 2021 survey conducted by Vaco and MorganFranklin Consulting, 47% of finance leaders said a shortage of qualified resources was their biggest barrier to business success in 2022. 32% said talent acquisition and employee training were among their top strategies for investing in growth throughout the year.
After a year of unprecedented labor market disruptions, 2022 has brought little relief for employers in the hiring arena. February 2022 saw another 4.4 million American workers quit their jobs as part of the Great Resignation, with the number of job openings outpacing the number of available workers by five million. That’s the largest gap ever recorded between labor supply and demand in the United States.
For CFOs, the labor shortage is bad news for company growth and revenue. In the The CFO Survey, conducted by Duke Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta, roughly half the 1,200 respondents said their companies were experiencing hiring struggles in Q1 of 2022. Among those CFOs, three-quarters said the labor shortage was negatively impacting revenue.
With the labor market likely to remain tight throughout 2022, many CFOs are turning to labor-saving automation systems and employee training and upskilling to try and fill the gaps. Where that isn’t possible, they’re engaging with consulting and contracting services to address gaps in capability depth and breadth.
Environmental, Social, and Governance (ESG)
As social demographics have shifted (primarily over the past several years), companies have faced increasing societal pressure to adopt business practices that are environmentally friendly and culturally inclusive. That pressure is also coming from investors and asset managers.
The pandemic became a flashpoint in sustainable investing and inspired renewed scrutiny of companies’ ESG metrics—not just among investors, but also among public policymakers and the average consumer. The demand for transparent ESG performance data has quickly spilled into wider public consciousness, and companies that fail to meet the new demands incur significant risks, to their reputations and to their revenues.
For many investors, the pandemic reinforced what they already believed: companies that ignore or downplay the importance of ESG often struggle to adapt during times of disruption and stress. For many investment managers, climate, leadership and social risk equals investment risk.
In 2022, ESG is a chief concern for CFOs for a number of reasons:
- In March 2022, the SEC proposed new rules for standardizing how companies communicate their climate-related risks to investors.
- A 2021 report from Fidelity International found that publicly traded companies with a high ESG rating experienced higher levels of historical dividend growth.
- In the first quarter of 2021, net inflows for U.S. sustainable funds hit an all-time high of $21.5 billion.
- In the decade from 2009 to 2019, capital allocation into sustainable mutual funds grew from $113 million to $1.6 trillion.
- In a survey from December 2020, 83% of business leaders said they believed ESG would be a critical factor in M&A decision-making through the end of 2022.
- In November 2021, the International Financial Reporting Standards (IFRS) Foundation Trustees formed the International Sustainability Standards Board (ISSB); the function of ISSB is to produce a comprehensive global framework for sustainability disclosure standards for the financial markets.
- The Climate Disclosure Standards Board (CDSB) was consolidated under the IFRS in January 2022; the Value Reporting Framework will be consolidated by June 2022.
- Major investment managers BlackRock and State Street have formally asked companies to produce business plans and reporting that are aligned with investors’ expectations and global goals regarding climate risk, diversity, and corporate governance. Both organizations have stated that they will take voting action against companies who do not meet ESG expectations.
The costs—both financial and reputational—of ignoring demands for ESG transparency are getting harder to dispute or downplay. When so many of the risks are tied to long-term financial performance and shareholder value, it’s not surprising that ESG is a top focus for CFOs in 2022.
Take a deep-dive into how ESG will affect M&A in 2022 by watching MorganFranklin’s on-demand webinar, “Unlocking Impact: Value Creation Through M&A and ESG”.
Another impact from the global pandemic was the rise of the remote/hybrid workforce. At the height of COVID lockdowns, an estimated 44% of U.S. employees were working from home five days per week. With the massive uptick in employees working exclusively or partly outside the office, companies’ systems and networks were opened to multiple unforeseen vulnerabilities—and cyber criminals have exploited those new weaknesses.
According to new information from security vendor Check Point, cyber attacks against corporate networks increased by 50% in 2021. In Q4, the number of global weekly cyberattacks against organizations hit an all-time high.
Ransomware attacks have been especially problematic for companies since the pandemic hit in 2020; IT security company Mimecast reported that ransomware attacks accounted for 30% of U.S.-based cyber attacks in 2021.
As the sheer number of cyber threats have increased, so have the financial consequences of falling victim to an attack. In a recent report, IBM placed the average cost of a data breach at $4.24 million in 2021—that’s a 17-year high.
In the post-pandemic business environment, cyber attacks are one of the top financial threats to businesses large and small. As digital initiatives are accelerated and remote work becomes a permanent fixture for many companies, cyber risk management will be a top priority for finance leaders and their teams.
As the coming years unfold, the CFO role will continue to evolve beyond traditional responsibilities and expertise. Financial prowess must be combined with leadership skills, digital savvy, and a commitment to the powerful data analytics of the future.
As business functions converge to facilitate integration and transparency, the CFO will play a pivotal role in both the future of finance and the trajectory of business. Their impact will extend from overall business strategy and decision-making to driving transformation and digital fluency, not only in the finance function but throughout the entire organization.
Watch our webinar, “Fueling Growth through Digital Enablement” to get insight and advice on finance transformation from Vaco thought leaders and finance industry veterans.
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