CFO today needs to be a Jack of all trades: Experts

The CFO over the years has clearly evolved into becoming perhaps the company’s most important or at least second most important person. He has evolved from being merely a bean pusher to becoming a strategist and a number of CFOs are actually leading companies.

CNBC-TV18 spoke to Diwakar Gupta, MD & CFO of SBI, R Shankar Raman, CFO at L&T, Akshaya Moondra, CFO of Idea Cellular, PR Ramesh, chairman of Deloitte India and Anis Chakravarty, senior director of Deloitte India who share their views on the challenges before a CFO today in a world that is becoming increasingly complex and depressing.
Beyond the traditional role of a CFO, Gupta says, today the focus has shifted to integrity, compliance, regulation, cost control and governance. And from there to strategy because strategy today drives bottom-lines to a very large extent, whether you need to merge, divest, or whether you need partnerships and so on. The CFO has another important job of being a transformation agent.
L&T’s Raman says the thing that a CFO needs to really focus on is to spend time on understanding volatility in the system, to be able to device some kind of counter strategies to manage the volatility. So a CFO is getting intimately connected with the entire gamut of risk management, be it financial, operational, or cost risk management.
Moondra of Idea Cellular feels a CFO needs to change your gears to do the right thing at the right point of time. According to him that is the only way a CFO can deal with people who may not want to be so careful about volatility.
Chakravarty of Deloitte India says the CFO today also needs to be a crystal ball gazer inorder to answer questions such as whether 5-6 percent is the new normal or whether we will get back to 8 percent, and so on. Below is the verbatim transcript of Diwakar Gupta, R Shankar Raman, Akshaya Moondra, PR Ramesh and Anis Chakravarty’s interview on CNBC-TV18 Q: It is an interesting time, the challenges are there for all of us to see whether it is the rupee, or fluctuations in the stock markets, the sudden realisation that perhaps the new normal is not 8 percent, it is maybe 5-6 percent. How do you prioritize your role now, how do you prioritize where and what you look at? Gupta: You are right, the role of a CFO has enlarged. The traditional role was about cost control, productivity, parameters of budgeting, performance which we still look after but increasingly the focus has shifted to integrity, compliance, regulation. From there to strategy because strategy today will drive bottom-lines to a very large extent, whether you need to merge, divest, whether you need partnerships and so on. And then it comes to governance because really deficit on governance is something which comes to haunt us from time to time.
So from cost control to integrity to governance, thought leadership. As a voice of the industry with the regulators and most importantly as a change agent because today change is constant and there is a fair amount of uncertainty. And you have to be really thinking on your feet and the CFO then has a very important role to be a transformation agent. Q: At one level the CFOs role has changed to become a strategist and someone who facilitates growth. Equally important is compliance and governance. How do you balance these two, are they contradictory? Raman: Actually the trick is to make compliance and governance hygiene factors in the organization. If you can drive the processes in the company which enables governance and compliance as non negotiable items then you don't have to be worried about compliance. The process takes over there after.
What obviously we are required to spend time on is to understand the volatility in the system, to be able to device some kind of counter strategies to manage the volatility. There is no point in trying to avoid volatility, you are going to be impacted by volatility, rupee is one such. So the entire gamut of risk management be it financial, operational, cost risk management is something that the CFOs are increasingly getting intimately connected with. Q: Generally how does a CFO deal with others who may not want you to be so careful about volatility? Moondra: I think as the industry evolves at different points of time you also have to change your gears to see what is the right thing to do at the right point of time or at different points of time although the issue behind you may be the same? Q: How has your advice changed to reflect this? Ramesh: In recent times I have seen a trend and there are two aspects which a CFO would look at. One is to see that there is nothing which diverts management time to insignificant matters and focus on success of the company. And two things impact that, one is this has a long-term impact. The second more importantly is perception which has short-term impact.
Again two aspects of it, financial reporting, regulatory action. Financial reporting is significantly both perception and fundamentals. And CFOs are very concerned about how financial reporting is. They do pay a lot of attention not withstanding the fact that they have to be strategists, they have other roles, etc. So we see a lot of advice in terms of how best to present the reality. The second is every CFO realizes that regulatory action damages the brand significantly and there is a short-term impact. Q: If you have a robust system in place how much time will all of that really need? Ramesh: A system will prevent some things from happening, but every system constantly needs to be calibrated and monitored to see that it is functioning and that is where they are seeking. Technology has its impact. Whether in the banking sector you would see the impact of technology, whether it is mobile banking etc. That itself requires newer controls in place. The impact of new regulations, whether it is anti-money laundering or anything which comes up, these are emerging areas where CFOs seek advice. Q: As a lead economist, the biggest question always is, if 5-6 percent is the new normal? Will we get back to 8 percent? Is that the biggest worry? Chakravarty: One of the roles that we have not really talked about is a role of crystal ball gazing that every CFO needs to do. Gone are the days when we have an 8.2 percent target and look forward to a 10 percent growth, because everything was going great. I think 5 percent is the new reality. Perhaps 5 percent will go to 6 percent, who knows and if it does things will not move forward. Interestingly; certain things come out which are very important to note.
We have recently done a CFOs survey and in that we noticed that 62 percent of the respondents who were CFOs looked at this whole economy from the perspective of cautious optimism. The first thing is there was recognition that the government is trying to do a few things. FDI reforms were on the way. There was a lot of action around tax reform policies.
The diesel price deregulation, reduction of subsidies were an important area that they focused upon, however, the level of optimism was not really in the short-term or the medium-term, it was really the long-term and that tells us that there is this general underlying belief that the economy is strong. It will bounce back to a certain extent, but it is not going to happen now. So this volatility is something they need to deal with. Q: If you look at it in reality in 2008 we had all thought 8.2 percent, looking optimistically at 9-10 percent. Lehman happened but then we thought the government’s responding, this is a temporary phase of 5-6 percent but once the government gets its act together and pumps in enough money it will possibly go back to 9 percent but somewhere in the back of the mind you are also saying no that may not happen, makes your planning far more difficult because you are hoping to go back to 8.2-9 percent, hoping that whatever the government does will work somehow and make a miracle happen and everything picks up, so how do you plan for these things because you don’t want to miss the bus when it actually takes off nor do you want to be caught with no clothes? Gupta: It is a fact that business will go through cycles. So, the times when you have maximum stability are the times when the seeds for maximum risk are sown because it is human nature to under price risk in good times. The problem is that these cycles are shorter and shorter now and therefore the volatility increases. So, if you go from 1997, you had the Asian crisis in 1998, Pokhran blasts in 1998, the Kargil war in 2000, then the Japanese earthquake, etc.
Every year there is something and in a globally integrated economy there is contingent and therefore there is going to be volatility. So, for a CFO to remain grounded in good operational execution and efficiency is the given. You have to plan for three months at a time and take up signals very quickly on what seems to be going wrong or what is already unfixed and needs to be settled in the shortest possible time. Thereafter the CFO is actually a monitor to the business. He is somebody who can have a helicopter view of the business without having operational responsibility, therefore no conflict of interest on performance targets as well as a much better overview of everything, that is where the strategy, vision and all come in.
However, today the CFO has to be grounded on what he has to do over the next three months to see that the business remains on even keel. That is what I have been doing for the last two and a half years. I need to worry whether my net interest income (NII) is on track, whether my other income is growing, whether income is growing in tandem with expenses or not, if not what are the heads that I need to control, do we have an issue with FATCA (foreign account tax compliance Act) or money laundering, etc.
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So, what Shankar said about hygiene is true but the problem is with human nature that hygiene never remains hygiene, entropy always increases. To remain where you are you need to keep pulling back. So, when everything is hunky-dory you will find that there is an insider fraud and that is why the CFO has to be constantly worrying about it and increasingly now it is about communication, technology, risk analytics and all that is a part of the CFOs job. Raman: Just to supplement what Gupta is saying, 15 years ago we used to have a budget and we used to just be guided by the budget. There never used to be any dynamism post that budget event. It is just a question of accomplishing the budget numbers. Q: How do you manage cash flows here because management of cash flows becomes very important if it is rolling forecast? Raman: The cushion that an organisation needs to have is something that they need to discover within the system as to what is that headroom, safety of comfort they need to operate on. However, cash flows come from customers and vendors as well and they are all a part of the same system. Q: How are Indian CFOs dealing with this increased volatility in growth? Ramesh: I will take on from what Shankar said and that is very critical even we are seeing where the rupee is moving. One of the biggest challenges for CFOs and CEOs is not about achieving a business plan. You may have a business plan, you may exceed the business plan but the markets will still punish you if you do not outperform competition. So, let's say as a company I have covered the rupee volatility and if I am a company in exports and the rupee has significantly depreciated and I had covered it in a manner that I have even locked the upside. Now, I would have lost the benefit of the upside, whereas a competitor if he has not covered he gets the benefit and the market will say great performance by the competitor, you are beaten up.
However, you have performed according to plan, you protected and you managed your risk management strategy. That is a huge challenge today and that is where this sort of rolling plan and rolling strategies come. Q: What would you advice as a banker, how do they handle the currency fluctuations, how long can you hedge for the kind of volatility that we have seen? Gupta: You are absolutely right and I don’t think there is a good answer to your question. Banks can hedge themselves, but corporates won’t be able to hedge themselves and to the extent that the corporates are under increased stress it comes to haunt the banks because it affects asset quality which is already difficult. In fact the last couple of days we have been discussing this after the RBI put up its draft guidelines and forex exposure hedging.
The point I was making and I would like to make again is we are not in a sellers market. The seller here is competing with the international suppliers so when the rupee plunges the buyer is able to force a lower price. So, if at all he has the benefit of rupee depreciation as an exporter it is only one cycle. However, after that if the rupee recovers he will never be able to get the buyer to increase the dollar price because he will say I will also source from Bangladesh, China, Sri Lanka or wherever.
So, effectively the buyer is under pressure, he can't pass on rising input cost or rupee cost. If you are an importer you are anyway hit because raw material is expensive so this volatility is very difficult to negotiate and I don’t think there is a fix to it except that the establishment has to do something to cut it. Q: Since you are here and since we were just talking about the rupee look at your crystal ball and tell where is it going, 70 or 50? Chakravarty: There was some discussion that people have given up hope on the rupee. However, interestingly a few things, in my mind this is not something which is new, it has been seen in the past. Rupee has fallen in the past as well, it is really where it stops which is where the crystal ball gazing comes up. One thing which we have to remember is the economy is volatile. The rupee fall should not be seen as a situation where it is purely Indian in origin.
We have seen the US economy picking up and signs of the dollar growing stronger vis-à-vis a lot of Asian currencies and the rupee is just a part of it. So, I would be hesitant to isolate this purely as an Indian problem. It is a general – I won't say a problem, it is a boon for a lot of people especially exporters that the US economy is reviving and I would look at it from that perspective. Q: Clearly as Gupta said that exporter maybe lucky only for one season because by then the reality… (Interrupted) Moondra: I was in Thailand when the 1997 crisis happened and there we had a fairly large foreign currency exposure. However, it is important to understand maybe not exactly in the Indian situation but there in South East Asia when the currencies depreciated the competitiveness of those economies improved significantly. Q: How is that? Moondra: If your factor costs – what are your factor cost? Labour cost, energy cost which are somewhat domestic in nature. So, if at that time Thai Baht devalued from a USD 26 to a USD 40-45 and went up all the way to USD 57. Now, let us say it stabilised around USD 40 so my input cost in dollar terms reduced. So, my exports have become much more competitive, so devaluation may not always be bad. Q: I thought the industry had become more competitive by becoming more efficient? Moondra: Some of the industries will but the only point I am making is that the weakening of rupee may also provide vis-à-vis dollar opportunities for some industries. Q: Before we get onto the rest, you spent a lot of time with South East Asia. How is the CFO there different from being a CFO here because I believe regulations there are not as strict as regulations here. So, could you devote more time to strategy than you devote here? Moondra: It is not about strict and not strict, but there was very little legislation there. The count of legislation that we have in India and probably it is a bit of a British legacy. But if you go anywhere in South East Asia generally there is very little legislation. So I was the CFO also for the company, but I was also responsible for managing the business side of the company and I could do that because there was very little work which was related to compliance. I think you cannot imagine this kind of a role generally-speaking in India because you need to spend so much of time on compliance-related issues. Q: You think this is more exciting because you are not the traditional CFO in that sense, in a bank you played a variety of the roles? Gupta: Right and I have been very lucky. It has its challenges and it has got a very large role. You can contribute in very many ways in this job. It is very exciting in that sense. Q: Before you have been in this role not as a CFO, but in the industry for almost 25-30 years. When you came into it did you think it will evolve into what it is today, being possibly the second most important man in the company? Raman: No, I don’t think so. I think we are discovering the value of this role, as we go along, as the complexities are increasing. I completely agree with what Mr Gupta is saying in terms of opportunity to contribute is immense in this role and I don’t think 10-15 years ago we had similar opportunities because the complexities were far lower and secondly, I think the businesses have got far more globalised today. It is just that opportunity is so compelling and I think you never get tired of this job. Q: He says the opportunities are compelling, but to be opportune ready you need to scale up your ability as well. So, how many CFOs in your opinion – or how far the Indian CFOs have to go to really be ready to grab this opportunity because the role has changed. So what is the biggest challenge? Ramesh: From the outside as I see, we have seen the transformation of the CFO and I think most Indian CFOs have risen to the occasion. The compulsions which the CFO is going through in this new role is increasing, he becomes the point man for sourcing of services and for us the bouquet of services is ever widening because of the changing role of CFOs. Q: You said that in your previous role in Thailand you could drive business as well as act as a CFO, are you missing that or are you happy with the challenges that running a complex industry like telecom does? Moondra: My satisfaction comes from that if I have spent a good day at the office and I have added value and I think the job in Thailand was equally satisfying, the job here is also equally satisfying. But I would say that the difference that I find here is that a lot of work that I do here, which is to handle regulation and all you would call it value adding to the organisation, but whether it is value adding to the country as a whole or industry as a whole maybe it is not.
So, in terms of activity that you are doing you would not think of so much value adding at times, whereas if you could focus totally on the business or spend more time on how to develop or grow the business, which opportunity exists here also today.
But the compliance cannot be – you cannot backtrack the compliance and say I will focus on business that is the most essential part which needs to be done first before you can address anything else. Q: So, the environment leaves you no choice? Moondra: Yes. Q: What is it that CFOs when they meet you, what is it that they ask you for? They ask you for growth rate? They ask you for rupee? Because you are the economist, so what do they want from your crystal ball? Chakravarty: I will give you a short example and this happened a few days back. We noticed that current account deficit (CAD) was at 6.7 percent, dropped to about 3.6 percent. So, we effectively have a 300 basis point (bps) correction, that is massive, but at the same time you have the rupee depreciating, which will have an adverse effect on CAD.
Now a CFO who is going out and trying to borrow funds from outside is cash-strapped to a certain extent and is looking for funds with the rupee depreciation that is getting increasingly difficult. When he looks internally he is seeing that because of fiscal deficit management which is very important from the government’s perspective as well there is a slight crowding out effect.
So, effectively you are in a situation where you are cash-strapped, where you do not have anything, you do not have cash in the market, what do you do? And you need cash for expansion. Your CEO is looking at you for expansion and these are some of the typical challenges that we see.
I think the issue is not about whether my CAD is not going to be 3.6 percent or 4.2 percent tomorrow, whether inflation is going to be consistent with below 5 percent, the issue is if that happens how does that affect me as a company, sometimes on the cost side, sometimes on the demand side, but it is ever-changing and I think that fits in perfectly well with the topic that we are discussing that it is increasingly a strategic role. It is crystal-ball gazing because of the volatility that we see. It is not perhaps the operational that we had seen in the past.