CFO'S Role in corporate Governance. Challenges and Solution

Financial executives are well-positioned to strengthen the links between corporate governance and management controls -- and foster organisational success and survival. 

As boards come under finer scrutiny, they will need greater assurance from management. In order to respond to these demands, the CEO will require significant analytical support from the CFO. Rather than just blindly responding to externally imposed guidelines, there is a real opportunity for the CFO, in partnership with the CEO, to put these requirements into a strategic context and tackle them in a way that adds significant value to the organisation.

Since CFOs traditionally play a pivotal role in planning, it is quite natural for them to translate the emerging elements of good governance into a process perspective.

The integrated management control framework 

In the past, management control was viewed more from restrictions or barriers. In the broader context, an integrated management control framework responds to the organisation's unique needs. It consists of several interrelated components, reflects external inputs, responds to various policy inputs, and is communicated in the business language of the organisation. It is derived from how management runs the business and is built into the management processes. 

The framework can be visually reflected in several ways, but it presents the dynamic interrelationships of the components. Figure 1 is an example of a high-level framework. 

The framework consists of the following components: 

• The business environment includes integrity, ethical values, operating style, competence, and trust. 
• Objective setting and opportunity/risk analysis reflects identifying opportunities and the careful evaluation of those activities which need to be managed to avoid undue risks. 
• Stewardship and accountability represent several activities related to information systems and manual operations built into the organisation's daily operations. 
• Feedback and change are accomplished through various surveys, performance indicators, internal and external audits, and "self-assessment" activities. 

By promoting dialogue within the organisation using its common business language, the CFO can support the development of a process that aligns management controls with the accountability for business operations, is adapted as change occurs, and balances costs and risks. Risk assessment is a critical component of this process. 

Opportunity assessment and risk assessment are fundamental concepts that support the development of reasonable objectives which emphasise the unique advantages and risks associated with core and ancillary businesses. 

This approach is consistent with the coaching, facilitation, and technical skills required by the modern financial officer. 

The solution 

The starting point for implementing an integrated management control framework will differ depending on the skills and interests of the organisations. 

Implementation begins with developing and implementing a fully functioning strategic planning process. In more sophisticated organisations, the current process may only require added involvement by the board of directors. 

However, in other organisations with a short-term or operational focus, there may be a real need to develop processes that integrate the strategic planning process with greater involvement and participation of the board of directors. 

Challenges for the CFO in governance

The challenges for the CFO in implementing a practical framework include the following: 

• Development of participation throughout the organisation is needed to ensure that this is seen as more than just a compliance exercise. 
• Monitoring of statutory changes that redefine the needs of management and the board. 
• Dedication of the appropriate time and resources to lead this change. 

The CFO'S Role in corporate Governance

Financial executives are well positioned within the organisation to support this initiative because ongoing activities require them to view the organisation from the top and analyse the processes that cut across the organisation. 

Opening the dialogue with senior management and all functional groups across the organisation will require skill and significant energy to build the consensus for the organisation to accept the management framework. 

Communication barriers must be overcome to ensure that all parts of the organisation build the optimal governing structure for the business. 

Once a common understanding has been achieved, it will be important that the CFO develops a project structure that aligns roles and responsibilities and includes a methodology to review all business processes using the management control framework. 

This undertaking should identify business opportunities, risks, barriers to achieving corporate objectives, and inefficiencies in the underlying business processes. The governance processes should be considered like any other business process during the review. 

Initially, this challenge should be undertaken by a multifunctional team of individuals; however, gradually, it will represent an ongoing part of the daily operations. 

After some time, the approach will provide input to the unique policy needs of the organisation in the areas of the board of directors; human resources; ethics; information systems management; health, safety and environment. Management practices will evolve within the framework over time and result in the development of new policies and modifications to existing practices. 

In summary, these challenges represent an opportunity for the CFO to contribute to their organisation significantly. 

With the proper support, a proactive "process approach" will identify opportunities to eliminate "non-value added" activities. In addition, it will provide significant input to the operational and strategic planning processes and ongoing continuous improvement. It will also provide the analytical input imperative to the current needs of the board of directors. 

Effective corporate governance cannot guarantee improved corporate performance, but it will increase the likelihood of success and survival in today's competitive world.

Read our blog on effective CFO skills

Closing comments

The role of the CFO is evolving. In order to be successful, CFOs must partner with the CEO to put externally imposed guidelines into a strategic context and tackle them in a way that adds value to the organisation.

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