VideoAn unprecedented banking crisis that would require billions of dollars in taxpayer bailouts; a President frustrated by House Republicans who defy his top domestic-policy initiative; endlessly replayed TV footage of U.S. airline passengers imperiled by a terrorist threat.
Welcome to 1985, the year in which CFO was launched. Amid the unfolding S&L scandal, Ronald Reagan's struggle to enact tax reform, and the 17-day drama surrounding the hijacking of TWA Flight 847, a new monthly business magazine was created with the express purpose of highlighting the strategic importance of corporate finance.
Our inaugural issue quoted a turnaround expert who had helped hundreds of companies survive troubled times. Asked what his experience had taught him about the value of CFOs, he said: "The role and definition of the CFO has to be broadened and changed. I can think of numerous cases in which the CFO has told the company what steps it needed to take but nobody listened. And unfortunately, justified or not, often it's the CFO who takes the blame. That has to change, too."
In the ensuing 25 years, his first recommendation has certainly come to pass; the CFO role has broadened dramatically, in many companies expanding to that of a de facto chief operating officer. As the role has expanded, so too has the CFO's sphere of influence. As for the concern that finance chiefs too often play the fall guy…well, some changes take longer than others.
The CFO position, in fact, entails even more risk today, thanks to the Sarbanes-Oxley Act. Complying with that sweeping regulatory change represents just one of many seismic shifts that CFOs have had to adjust to over the past quarter century. A CFO who had a Rip Van Winkle moment in 1985 and fell asleep for 25 years would awaken today to a vastly different world, both within his own department and throughout the entire realm of business.
What changes might prove the most mind-boggling? As we reviewed developments that have made the largest impact on corporate finance, three stood out:
Complexity
"Twenty-five years ago, the CFO was essentially the chief accounting officer," says John Graham, finance professor at Duke University's Fuqua School of Business, which, in partnership with CFO magazine, has surveyed finance chiefs every quarter for the last 14 of those years. "It was a challenging role, but it was focused. Now the CFO deals with M&A, strategy, capital investments, and many other duties. CFOs track more things, and each of those things has become more complex."
Even if a CFO managed to stay focused on accounting, he would nonetheless confront profound changes. As James Flaws, the CFO of Corning Inc., points out, "By 1985, the Financial Accounting Standards Board had issued 83 standards. Since then, the number has doubled, and many of those new standards are very technical."
One result, he says, is that CFOs now confront "tension between their role as strategic adviser and their need to oversee much more sophisticated levels of financial requirements." Or, put another way, "You can't screw up the accounting issues even though the CEO wants more help in running the business."
Graham points to the way in which CFOs assess capital-spending decisions as another example of increased complexity. "In the '80s," he says, "companies based capex decisions on simple rules, such as whether they expected a payback in two years. Now you have net present value, discounted cash flows, the impact of the options markets, and various efforts to calculate other, more-nuanced benefits."
Other CFOs point to the credit markets as an area that has changed markedly since the mid-1980s. Instead of a warm, fuzzy relationship with a local banker, finance chiefs at companies of all sizes now routinely negotiate with global banking giants, and must navigate all the requirements that such a relationship implies.
Which brings us to another dominant theme…
Globalization
For all but the largest companies, "global business" used to mean "exporting to Europe." Today, companies of all sizes have supply chains that span multiple continents, growth plans that seek to exploit China's burgeoning economy, offshoring relationships that blur the distinction between internal and external workforces, and a host of complex tax and foreign-currency calculations that often spell the difference between black and red ink.
As the company's name implies, "We went global well before 1985," says Jeffrey Burchill, CFO at commercial-property insurer FM Global. "Initially we did it to keep pace with select clients as they expanded into Europe. Today all our clients are global, and we have become truly global ourselves."
A CFO awakening from that aforementioned Rip Van Winkle moment would, in fact, "probably find the global aspect of business the most daunting," Duke's Graham suggests. "The outsourcing and global supply-chain responsibilities alone would represent a huge change" to that CFO's conception of the business world.
Our second issue featured a cover story on "Innocents (and Dollars) Abroad." The focus then was on cash management, specifically currency conversion and rebilling. These days it wouldn't be unusual for us to address offshoring, international financial reporting standards, the Foreign Corrupt Practices Act, the impact of a strong euro, the fate of the Asian supply base, and the risks posed by Somali pirates — all in a single issue.
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