The Role of Chief Financial Officers in Corporate Governance
The CFO (chief financial officer) is a senior executive position that reports to the CEO (chief executive officer). Together with other members of the company’s senior leadership team, they make high-level decisions about the future direction of the business.
Finance leaders today face an expanding portfolio of responsibilities. Here’s how they can balance and fulfill those responsibilities.
CFOs and Corporate Ethics
When the finance function is embedded throughout an entire company, it can become a “financial ambassador” that ensures that all employees adhere to the same ethical standards. IMA’s Ethics Center says the finance department is the ideal position to lead in establishing and enforcing an organization’s ethics because of how plugged it is to all facets of the business.
CFOs can become ethics champions by encouraging open communication and transparency, promoting accountability, and establishing a straightforward process for reporting unethical activity to the company. In addition, they should be mindful of their actions impact on the environment and work with outside parties to ensure that their business partners follow sustainability principles.
Additionally, suppose the finance leader holds CPA certification. In that case, they are expected to follow ethical and professional requirements for certified public accountants, including complying with legal and regulatory obligations and avoiding any act or omission that would discredit themselves, their employer, or the finance profession.
The CFO’s Role in Financial Reporting Standards
As a high-ranking finance department member, CFOs oversee accounting operations, including financial planning and analysis, treasury management, budgeting, and tax. They also prepare historical financial reports for shareholders, investors, researchers, lenders, and government agencies.
As such, they must ensure that these reports comply with generally accepted accounting principles and other regulatory standards. This includes following the Sarbanes-Oxley Act, adhering to Securities and Exchange Commission (SEC) regulations, and submitting regular reporting.
Moreover, they play an essential role in leveraging data for strategic decision-making, advising other departments on how to spend money to maximize revenue and control costs without sacrificing customer or employee satisfaction. For example, when the marketing department wants to launch a new campaign, the CFO may advise them on whether or not they have enough funds for it. CFOs must also manage the company’s liquidity by balancing incoming revenues, outgoing payments, and short- and long-term liabilities. They are also responsible for establishing cash flow forecasts to help the company plan ahead.
CFOs and Compliance
With regulations increasing at lightning speed, CFOS must monitor compliance. A Thomas Risk Management Solutions study indicated that a new alert hits businesses every 12 minutes. Hence, it’s no wonder that CFOs are tasked with navigating the latest regulatory challenges to protect business growth and profitability.
One of the most critical areas for CFOs to focus on is ensuring that companies comply with all state and local tax laws. For example, Rhode Island recently passed a law expanding the sales and use tax to include digital products like e-books, streaming services, and software-as-a-service.
Another crucial area is cash flow forecasting and balancing. CFOS must clearly understand their companies’ liquidity (the amount of readily available funds), especially since a company could face trouble if it doesn’t have enough runway. This requires CFOs to ensure that incoming revenues and accounts receivable are closely monitored with an eye on outgoing payments and short- and long-term liability.
The CFO’s Role in Investor Relations
CFOs must be able to communicate clearly and efficiently with shareholders. They are also tasked with creating and managing an investor relations team that can effectively disseminate financial data and respond to questions from investors. This requires a skill level beyond the traditional finance background that many CFOs have acquired.
Investor relations is a growing function for many publicly traded companies. The role is becoming even more critical in the case of private firms, which are not required to create financial statements but still have to produce them for fundraising purposes.
The CFO’s job includes ensuring the company can meet its financial obligations, such as paying bills and providing enough cash to make significant capital investments. This often means evaluating whether a project has a robust return on investment (ROI) to make it worth the cost.
This is a difficult task, as many variables can influence ROI. This is why CFOs must be able to provide the necessary context to allow business leaders to make decisions free of biases.
CFOs and Ethical Financial Practices
Finance executives are vital to the company leadership team and have a broad view of the company’s financial health. Unlike controllers, treasurers, and FP&A analysts who focus on specific business areas, CFOs oversee the entire finance operation and accounting function.
Historically, the finance function’s top priorities were bookkeeping, financial reporting, and statutory compliance. While these tasks remain essential, the finance function now focuses on the impact of ethical and social issues on the organization’s financial performance.
One of the most critical issues is maintaining sufficient liquidity (cash and marketable securities) to cover short-term liabilities when needed. This requires careful management of incoming revenue, accounts receivable and outgoing payments and an ongoing analysis of scenarios that could affect liquidity.
It’s also crucial for CFOs to make sure that a company is adhering to environmental, social, and governance (ESG) reporting standards. This requires a comprehensive understanding of emerging reporting requirements and leveraging technology to help ensure timely and accurate filings. In addition, CFOs should lead the effort to screen third parties for integrity by using tools that help identify potential red flags.
The CFO’s Role in Audit Committees
CFOs have a unique position in the company as they are positioned to see the big picture regarding finances, which helps them serve as the critical link between business strategy and the bottom line. While controllers, treasurers, and FP&A analysts can provide valuable insights, they do not have the same breadth of knowledge that a CFO has about a company’s financial health.
This makes it essential for the CFO to maintain a solid rapport with audit committee members to ensure that their concerns about regulatory compliance and risk management are addressed. While some of these concerns may seem niggling initially, a proactive approach from the CFO and the head of internal audit will go a long way in building a mutually beneficial relationship.
It is also helpful for the CFO to push past the must-dos when speaking with audit committee members and focus on a discussion driven by business goals. This will help ensure that the issues discussed are relevant and timely.
CFOs and Transparency in Financial Reporting
One of the most important responsibilities of CFOs is ensuring transparency in financial reporting. This means being able to accurately communicate all the financial details of a company to investors and other stakeholders. It also means ensuring that internal teams have the tools to create transparent reports and analytics.
This includes everything from generating revenue and gross profit margin to the cost of goods sold and operational expenses. It also involves calculating debt-to-asset ratios, measuring liquidity, and determining short-term liabilities and cash flow.
In addition to ensuring transparent financial reporting, CFOs must be prepared to communicate bad news when necessary. They must encourage a culture of truthfulness and use insights to guide companies through periods of declining performance or uncertainty.
To prepare for this, CFOS needs to gain a breadth of experience in roles that offer exposure to commercial and operations functions. They should also leverage a fast financial reporting solution to reduce data entry and processing time to process management and provide insightful reports to their teams and stakeholders.
The CFO’s Role in Corporate Social Responsibility
Finance professionals are accustomed to focusing on financial metrics, and they understand how certain reputational and operational risks can impact a company’s bottom line. As such, CFOs have a unique opportunity to lead the charge on corporate social responsibility initiatives.
For example, CFOs can help define the rigor of ESG reporting standards and align policies to preempt stakeholder skepticism. They can also work with internal and external audit teams to ensure systems are in place to collect non-financial data and support ESG goals.
A strong finance team can also help businesses make the best investment decisions in sustainable practices and infrastructure. This can include building a supply chain that is kinder to the environment, improving energy efficiency, or supporting local community programs. CFOs are well-positioned to assess the cost/benefits of these investments and articulate a clear message about the value being created for stakeholders. In addition, CFOs can help identify the trade-offs that will inevitably arise as sustainability and bottom-line priorities are weighed against one another.