EgonZehnder International

G100 NATIONAL CONGRESS

CFOs—The Momentum Towards Greater Leadership

Chris Figgis & Kokkong Chan

Egon Zehnder International

Wednesday 27 September 2006

2

Today’s discussion

• Leadership trends

• Constituents of leadership

• The EZI framework

• Do CFOs measure up?

• What next?

3

The good old days . . .

The original computer!!

Print

Delete

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The CFO of the past

• Highly technical “scorekeeping” function

• Not represented on the Board

• Strategic planning was a financial projection

• Expenditure and administrative control function

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A review of job descriptions . . .

c. 1985 2006

• “major emphasis on cash management”

• “ability to be an active thought partner of CEO and be capable of influencing outcomes in the strategic agenda”

• “profit improvement responsibility . . . control of cash, inventories and capital expenditure”

• “hit targets through drive and ability to change processes to deliver improvements to performance”

• “introduce professional financial management planning to cover banking relationships and insurance”

• “able to delegate appropriately, and empower direct reports to perform at a higher level”

• Called Group Financial Controller, GM Finance and Administration

• Called CFO, Finance Director

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Drivers of change

• Capabilities of CFOs

• More sophisticated financial markets

• Size, complexity, internationalization

• More focus on governance/risk and compliance

• Increase in capability of technology

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“Because the CFO puts together the information necessary to manage the company, he naturally becomes a cornerstone in all projects, whether the question at hand is the strategic evolution of business units or identifying takeover targets.”

—Emmanuel BabeauCFO, Pernod Ricard

On breadth of leadership …

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“A good CFO must be able to stand in for the General Manager of any business unit since he shadows every operation through reporting and accounting.”

—Jean-Marc HuetCFO, Royal Numico

On taking on “business” leadership roles . . .

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Why is leadership important anyway?

Impact

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Research on the value of top management

Company value

Leader effect

Company effect

Industry effect

Year effect

The leader effect accounts for up to

40% of the variance in value

Source: “When Does Leadership Matter?” ; Wasserman, Nohria and Anand; Harvard Business School working paper no. 01-063, April 2001

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Our own analyses confirm these findings

Management quality index

(MQI)

Outstandin

g

Goo

d

Some reservation

s

Majorreservations

-1 0 1 2

EBITDA Impact of management quality

Source: Egon Zehnder International

Correlation : 0.6 to 0.8

EBITDA margin

0.3

to 1

% im

pro

vem

en

t in

EB

ITD

A m

arg

in

0.1 improvement in MQI

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How have CFOs responded?

• Broadening exposure, eg COO roles

• Additional training in skills, eg IT

• Formal courses, eg AICD, MBA

Aim: Build new technical skill sets and expand experience

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Technical skills and experience

Leadership competence

But . . .

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To summarise our proposition . . .

The CFO’s continuous momentum towards leadership generates . . .

NOT a need for an increase in Experience

BUT an increase in Competencies

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Some common competencies!

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• Leadership abilities can be described by certain behaviours

• Behaviours can be categorised into competencies

• Almost all senior management roles can be defined by 7–9 competencies

The EZI philosophy in leadership assessment

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What distinguishes leadership?

Business leadership

Thoughtleadership

People and

organisation leadership

• Results orientation

• Market knowledge

• Strategic orientation

• Functional capability

• Collaboration

• People development

• Team leadership

• Change leadership

• Customer focus

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Competencies—what are they?

• A measurable characteristic of a person that is related to success at work. It may be a behavioural skill, a technical skill, knowledge, or ability. For example:

– Results orientation

• Each competency has a set of behavioural indicators. For example:

– Works on assigned roles and tasks, works to complete tasks

– Introduces a new model that successfully transforms an existing business

• We order these behavioural indicators by relative difficulty and sophistication thereby scaling each competency

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1

2

3

4

5

6

7

Measuring people against role requirements

Fulfills assigned tasks

Would like to make things better

Driven by goals

Drives to exceed goals

Improves business practices

Redesigns business practices

Transforms business model

Front-linemanager Manager

EGM

Individualcontributor

GGM-GMGGM-GM

These become targets against which

individuals can be as assessed

Results orientation

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Better leaders demonstrate increasing levels of proactivity

Competencies are defined by behavioural indicators ordered by relative difficulty

1

2

3

4

5

6

7

Understand

Try

Interact

Willing

Make no mistakes

Respond

Apply

Meet

Collaborate

Doing

Take on ownership

Be involved

Improve

Exceed

Inspire

Getting others to do it

Take risks

Proactive

Lower

Higher

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EZI research and analysis

• Early findings of analysis selected from a database of several thousand assessments done globally, all at senior manager to CEO levels

• Focus specifically on:

– How CFOs rate against CEOs

– How the next rung rate in leadership

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Findings from ongoing research on the CFO function

All EZI database

15%

51%

28%

6%

Rating

Outstanding

Good

Some reservations

Major reservations

All finance executives

23%

55%

19%

3%

Finance people rate highly against peers overall

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Outstanding CFOs compared with outstanding CEOs

Resul

ts

orie

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know

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Outstanding CFOs

Outstanding CEOs

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Why don’t more CFOs become CEOs?

• Motivation

• Company structure

• Opportunity

• Not knowing WGLL

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Reflection

• How are you tracking according to these leadership competencies?

• Do you have a plan for getting there?

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CFOs vs Finance leaders who report into CFOs

Resul

ts

orie

ntat

ion

Marke

t

know

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Func

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capa

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Colla

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lead

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Report to CFOs

Report to CEOs

Significant Development Gap = 4.4Mainly on “business management” competencies

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CFOs vs Finance leaders who report into CFOs

Resul

ts

orie

ntat

ion

Marke

t

know

ledg

e

Func

tiona

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capa

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Report to CFOs

Report to CEOs

But even on “finance function” competencies,There are sizeable differences

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Outstanding CFOs vs Good CFOs

Resul

ts

orie

ntat

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Marke

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Func

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Good CFOs

Outstanding CFOs

Development Gap = 9Key Differentiators: Functional strength, and ability to

change a direction through personal influence and people

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Next rung down is not ready

• Good news about CFOs’ leadership capabilities ends at the next level down

– Both when viewed by seniority, or by level of capability

• The gap to the next level down is too wide

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Why is this?

• Not identifying WGLL

• Solution before diagnosis

• “Ad-hoc” development plans

• Inertia in opportunity creation

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Reflection on team

• Do you know their individual and collective development gap?

• Are you spending your training and development funds effectively?

• Are you taking risks with leadership development?

• Are you hiring correctly and getting the right advice?

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Summary

• The CFO of today and the future is a “business leader” in his/her organisation

• Yet the development of future CFO leaders have lagged behind

• CFOs need to do better in both

– Their own leadership competency development; and

– That of their team

• Overall improvement in top management competencies has strong correlation with shareholder returns