Content thumbnail Partnering for Performance Part 5

Partnering for Performance Part 5

Partnering for performance Part 5: the CFO and the chief executive officer

The CFO’s role The CFO’s role has undergone a transformation. We believe that the six segments on the right represent the breadth of the CFO’s remit today. l a n r T e r t u x s T e t The leading CFOs we work with typically have some involvement in each i e n h g t t E N o h t e e c of these segments — either directly or through their team. While the g a n n l u X E i p m t t a e b c k e weighting of that involvement will depend on the maturity and ambition i r r E M n a s u m of the individual, on the sector and scale of the finance function, and on P m C m Representing Ensuring business o economic conditions, each segment is critical to effective leadership. O C the organization’s decisions are U L progress on grounded in T strategic goals sound financial I E to external criteria V y stakeholders O g e N t E a 6 1 r P t s r o D s v s Developing Providing insight i We are grateful to all the participants in this study. In particular, we would like e The d n and defining and analysis to in i to thank the following finance leaders and chief executive officers who readily s u b the overall strategy 5 CFO’s 2 support the CEO n i g g for your organization role and other senior s shared their insights in a series of interviews: n i p managers h g i Harry Bains Jose Ma. K. Lim o l e v 4 3 t CFO, CNBC International at President and CEO, Metro Pacific e D NBCUniversal, Inc. Investments Corporation (MPIC) Funding, enabling Leading key and executing initiatives in finance Christophe Le Caillec David Nicol strategy set that support overall F by the CEO strategic goals Senior Vice President and CFO, CFO, MPIC u n d i n r Global Network & International g e d Roland Sackers o r r o g Consumer Services, a n n i i CFO and Managing Director, z e a s t u i o American Express o h n a r l u o QIAGEN s y t r a g t n e i g t y t e Costas Charitou Kathy Waller E G CEO, Lanitis Group of Companies Executive Vice President and CFO, NABLEMENT Jack de Kreij The Coca-Cola Company Vice Chairman of the Executive Board and Chief Financial Officer, Royal Vopak

Partnering for performance The Partnering for performance series explores ways in which CFOs can grow, protect and transform their organization by partnering with the leaders of different functions. In this — the fifth part of the series — we explore the relationship between the CFO and the chief executive officer (CEO). In particular, we focus on the contribution that CFOs are making to four vital strategic priorities: 1. Driving and enabling the shift to digital 2. Measuring performance against strategy 3. Redesigning the operating model 4. Developing M&A strategy Our findings are based on a global survey of 652 CFOs, conducted by Longitude Research on In this report behalf of EY, and a series of in-depth interviews with CFOs, CEOs and EY professionals. Executive summary 2 For more insights for CFOs and future finance The CFO and CEO: key allies in value creation 3 leaders, visit ey.com/cfo. Driving and enabling the shift to digital 10 Measuring performance against strategy 16 Redesigning the operating model 21 Developing M&A strategy 26 Survey respondent demographics 31 Other publications in this series 33 Contacts 34 Partnering for performance Part 5: the CFO and the chief executive officer 1

Executive summary An effective CFO-CEO partnership is one of the defining characteristics of a Our study unveils a second major issue. Of the four activities requiring well-run, market-leading organization. Over the last decade, we have seen this CFO-CEO collaboration we focus on for this study, CFOs see themselves relationship evolve and shift. making the least contribution to the “shift to digital.” Only 50% consider it a CFOs have broadened their focus beyond their traditional scorekeeper role, high or very high priority in the next three years, and only 49% responded and CEOs have relied more and more on their CFO’s insights to drive business that they will make a high or very high contribution. decisions, to represent the organization’s goals to external stakeholders and This is surprising, as digital is arguably the most disruptive force organizations to help develop overall strategy. During the global financial crisis, the CFO was are facing today. It has the power to both revolutionize entire business models thrust into the limelight, as their skills and experience in financing and cost and sectors, and transform some organizations from market leaders to management provided a lifeline for many organizations. irrelevance in a frighteningly short time frame. And yet our survey suggests In the many conversations we have had with CFOs and CEOs over recent years that CFOs have not figured out what role they should play in driving and from all corners of the globe, they unanimously believe that CFOs now need to enabling the shift to digital, and managing the legal, tax and regulatory risks fulfill the role of strategic advisor to the CEO, with a focus on value creation as that it creates. well as more traditional finance responsibilities. We invite you to read our study to discover how the CFO-CEO partnership is However, when asked specifically about some of the major value creation evolving, how the two are collaborating on major business challenges and the activities on business agendas today — M&A decisions, performance obstacles they are facing. We also share suggestions and insights on how they measurement, operating model redesign and the shift to digital — our survey can work together to improve their partnership. We hope you will find our of 652 CFOs reveals a persistent focus on cost management as CFOs’ main report useful as you adapt to the continually changing business landscape, contribution. This is despite the fact that CFOs consider that their relationship and develop in your role. with the CEO has strengthened over the last three years, driven by new growth opportunities, changes in strategy and new products and services. The question arises: As the global economy makes its faltering return to a more stable footing, will CFOs’ continued focus on cost management enable them to act as a strategic business partner, focused on value creation? What do they need to do differently to be able to focus more time on strategic activities? Partnering for performance Part 5: the CFO and the chief executive officer 2

The CFO and CEO: key allies in value creation Key findings about the CFO-CEO relationship: Sixty-four percent of the 652 CFOs we surveyed say that collaboration with the CEO has increased and a significant 76% report greater involvement in corporate strategy, driven by a focus on growth. Despite this focus on strategy, CFOs are still cost-discipline champions: managing costs and budgets emerged as the number one contribution they feel they make. For the CFO to fulfill the remit of strategic partner to the CEO, they need to rethink the principles of the finance function and allow themselves the personal and organizational flexibility to act as a growth-focused strategist. “ You cannot afford to just have a numbers guy next to you. You need someone who has the awareness of where the market and competition is heading.” Costas Charitou, CEO, Lanitis Group of Companies 1 Partnering for performance Part 5: the CFO and the chief executive officer 3

The CFO and CEO: key allies in value creation Many CFOs emerged from the chaos of the global financial crisis with Chart 1: What are the main reasons you are collaborating more closely with the CEO? reputations enhanced. They had found themselves at center stage, as their (Please select up to three) CEOs turned to them to find cost reduction and financial management strategies to help them shield against the economy’s downward momentum. New growth opportunities 34 As they stepped up to the challenge, finance leaders emerged as the key ally of the CEO. Changes in strategy 33 Today, the global economy has found a more stable footing, and CEOs are New products and services 27 facing a new set of challenges. As many organizations refocus on growth, they A need to understand the key performance are receiving increasing pressure from impatient investors criticizing the pace indicators (KPIs) that are most important in 23 of change. Personal scrutiny has also increased, both of their performance tracking successful strategy execution and remuneration packages. Cost pressures 20 Meanwhile, new opportunities and threats, such as digital, are transforming Change/plans for change in the operating model 20 siness whole sectors, and causing CEOs to call into question their strategy, operating or organizational structure of the bu model and team. More than ever, CEOs need a firm ally and business partner Economic volatility 18 by their side. But, can CFOs play their part? Can they be growth advocates, as well as cost champions? New or emerging risks 17 (e.g., cyber security, tax, social media risk) CFOs aiming for strategic partnership, but cost Regulatory issues 14 mindset prevails Encouragement from the CEO 14 Our survey of 652 CFOs around the world suggests that their relationship Change/plans for change in geographical with the CEO has continued to strengthen since the financial crisis. A footprint of the business 13 majority (64%) of those surveyed say that their collaboration with the CEO Change of CEO 13 has increased, driven primarily by new growth opportunities and changes in strategy (see Chart 1). Shortcomings in financial performance 12 Questions from the board 11 Significant merger or divestiture activity 11 % 0 5 10 15 20 25 30 35 40 Partnering for performance Part 5: the CFO and the chief executive officer 4

The CFO and CEO: key allies in value creation Chart 2: In which of the following areas do you consider your contribution to strategic Today’s large corporates face daunting change priorities to be most valuable? (Select up to three) The impact of issues such as globalization, market consolidation and Managing costs/profitability 43 disruptive technologies have had a significant impact on large corporates. According to Constellation Research, since 2000, 52% of the companies Setting budgets/costs 39 listed in the Fortune 500 have either gone bankrupt, been acquired, 1 ceased to exist or dropped out of the Fortune 500. In an environment Financing 33 that is increasingly characterized by ongoing disruption, CFOs need to respond with agility and innovation, acting as challengers to the status Measuring performance 27 quo, in order to sustain the value of the enterprise in the long term. Building the business case for 23 1. “Dominate Digital Disruption Before It Dominates You,” Constellation Research, consetllationr.com, new initiatives accessed 12 August 2015. Resourcing and human capital 22 A significant majority (76%) also say that they have increased their Determining the level of ambition 21 and risk appetite for new initiatives involvement in corporate strategy. However, paradoxically, CFOs also say that the main contributions they make in working with the CEO on M&A decisions, Setting the agenda for change 21 operating model redesign, measuring organizational performance and the Ensuring value realization 20 shift to digital are cost management and setting budgets (see Chart 2). More strategic contributions — such as “setting the agenda for change” — are Change management 17 given much less emphasis. % 0 5 10 15 20 25 30 35 40 45 50 Cost management is a core finance discipline that is necessary in good times and bad times. It is critical to driving efficiency and, when access to external capital is limited, releasing funding to growth areas. However, organizations in many parts of the world today are focused on top-line growth and business model innovation. To support this strategy, CFOs need to be able to balance strict financial discipline with higher risk initiatives that will drive bold innovation and growth. Partnering for performance Part 5: the CFO and the chief executive officer 5

The CFO and CEO: key allies in value creation As Costas Charitou, CEO, Lanitis Group of Companies, says, “A CFO that only Trusted allies: thinks of the numbers would miss out on the business opportunities and the decisions we need to take. You need someone with the awareness of the 652 CFOs tell us how to strengthen the CFO-CEO alliance market, competition and future growth opportunities.” CFOs need to strike a balance between control and growth. They need to be The CFO commitment The CEO commitment able to display agility and flexibility — both personally and organizationally — as the organization’s strategy and the economic situation evolve. Develop Break down Tony Klimas, Global Finance Performance Improvement Advisory Leader, the right strategic the organizational EY, has seen this tension at play in many organizations. In his experience, skills and mindset boundaries that CFOs still the CFOs that have successfully made the transition to business partner are perceive as barriers those that have taken a step back from finance operations, and are focused on taking a strategic view on how they build and structure the finance function. “To partner in a strategic way with the CEO, CFOs need to redefine the principles of the finance function,” he says. “Many CFOs have the will and the drive to be a business partner to the CEO, but the change can’t just come Build Rethink from them. They need to ensure the larger finance function has a balanced a finance function with the the contribution skill set that covers cost control, treasury, analytics and strategic forecasting. right balance of skills to give they ask of their CFOs The CFO should be able to trust their finance leadership team and keep some finance leaders the breathing distance from each of these activities to dedicate more time to collaborating space to step away from the detail with the CEO on strategic matters.” The view from the CFO’s office: The view from the CEO’s office: “The relationship must “You cannot afford to just have a numbers be one of mutual guy next to you. You need someone who respect and trust.” has the awareness of where the market Kathy Waller and competition is heading.” Executive Vice President and CFO, Costas Charitou The Coca-Cola Company CEO, Lanitis Group of Companies Partnering for performance Part 5: the CFO and the chief executive officer 6

The CFO and CEO: key allies in value creation This will be critical if CFOs are to maintain their role as key ally to the CEO. There are warning signs that CFOs are not always at the table during key American Express: balancing control with growth discussions or asked for their input into strategic decisions. According to opportunities respondents, the top two barriers preventing a closer relationship with the At American Express, Global Network & International Consumer CEO were organizational boundaries and lack of demand from CEO for insight Services, Senior Vice President and CFO Christophe Le Caillec believes from finance into strategic issues (see Chart 3). it is critical to distinguish between the two disciplines of control and Chart 3: What do you consider to be the main barriers preventing a closer targeting future opportunities. relationship with the CEO? (Select up to three) “What has worked well at American Express is distinguishing between Organizational boundaries 39 two areas,” he says. “First, you have what we call ‘controllership,’ which is about producing the financials with the highest possible level Lack of demand from CEO for insight 33 of integrity. The second is a separate group of people who are thinking from finance into strategic issues about business decisions — how to target the best opportunities and Lack of effective data analytics to 32 questioning whether what we’re doing now is still the right thing to do provide business insight for the future.” Lack of finance resources to 30 dedicate to strategic issues Geographical boundaries 29 The onus for the CFO becoming a value creation-focused business partner to the CEO falls upon them both. The CFO needs to develop the right strategic Lack of appropriate tools 28 skills and mindset, and build a finance function with the right balance of and processes skills to enable him or her the breathing space to step away from the detail. I do not perceive any barriers 12 Meanwhile, the CEO can help break down the organizational boundaries that % our survey suggests CFOs still perceive, and rethink the contribution they ask 0 10 20 30 40 50 of their CFOs. Partnering for performance Part 5: the CFO and the chief executive officer 7

The CFO and CEO: key allies in value creation CFOs and CEOs are working toward a strategic partnership ... Top three drivers of collaboration: 1 New growth In the last 64% report greater 76% say they have increased opportunities three years: collaboration their involvement in Changes with the CEO corporate strategy 2 in strategy 3 New products and services But challenges to an effective alliance remain Cost management is the CFO's main CFOs perceive significant contribution to collaboration with the CEO relationship barriers with the CEO Top two CFO contributions: Top two relationship barriers: 1 Managing costs 1 Organizational boundaries 2 Setting budgets 2 Lack of demand from CEO for insight from finance into strategic issues Partnering for performance Part 5: the CFO and the chief executive officer 8

The CFO and CEO: key allies in value creation Through this joint commitment, CEOs and CFOs can develop a partnership “ In the relationship between CFO and CEO, there’ll to respond to the technological, economic and competitive forces that always be situations where individuals might have continually threaten to disrupt organizations today. different preferences or might see things differently The Coca-Cola Company: trust underpins a successful from a risk-return perspective. This provides good collaboration input to an inspiring dialogue focused on long-term Kathy Waller, EVP and CFO at The Coca-Cola Company, believes that value creation. There is however one fundamental total trust between the CFO and CEO is essential, not just for a productive thing that’s critical: there must be a corporate partnership, but because it sends the right message to the market. culture where you share the same values. You “The relationship must be one of mutual respect and trust,” she might have a difference of opinion on less important explains. “Six months into this role, the CEO and I went on a road show, across five cities in five days seeing over a hundred people. It was topics, but there should be full alignment between grueling, but it shows the kind of trust you need in each other because the CFO and CEO on the values of the company and my job was to talk about the financials but to also pick up the baton the implications from realizing business success. If when he needed me to. The investors are watching you for differences, whether in body language or any signal of any kind. He and I had to be there’s a difference in values, it’s impossible to act in sync, otherwise we could have been signaling some level of discord, effectively as a board.” which absolutely wasn’t the case. We support and trust each other and when it comes to the business, we are and should be able to finish each Jack de Kreij, Vice Chairman of the Executive Board and Chief other’s sentences.” Financial Officer, Royal Vopak Partnering for performance Part 5: the CFO and the chief executive officer 9

Driving and enabling the shift to digital Key findings about the CFO role in the shift to digital: Overall, only 50% of the 652 CFOs we surveyed make the shift to a digital business model a high priority. Less than half of the CFOs we surveyed (49%) feel they make a major contribution to this activity. Four digital priorities for the CFO and CEO: 1 Develop a business strategy that is fit for a digital world, and make the disruptive investment calls required. 2 Use data analytics to anticipate digital disruption, measure performance and respond quickly. 3 Create a governance and risk oversight framework that puts digital at the heart of the business. 4 Manage the tax, legal and regulatory risks of digital and support digital growth plans. 2 Partnering for performance Part 5: the CFO and the chief executive officer 10

Driving and enabling the shift to digital Digital technologies do not respect tradition. They up-end hierarchies, Digital technology is only just getting started: trample over sector boundaries, democratize information and ask hard questions of large, traditional businesses. Few business leaders will have CFOs and CEOs need to develop a strategic witnessed a more dramatic change to their industries than those being driven response and consider pre-emptive changes by digital technology. And it’s only just getting started. According to Cisco’s Chief Technology Officer, In the next three years: 2 “Only 1% of what could be connected in the world is actually connected.” The speed of change is extraordinary. For example, the most disruptive, viral only 50% CFOs only 49% CFOs technologies can now reach 50 million users in less than 35 days.3 50% consider digital 49% consider they will CFOs and CEOs must plot a response that reacts to external risks and a high or very make a high or very opportunities, and disrupts their own organization’s business and operating high priority high contribution models. They need to understand how digital can create new sources of value. Surprisingly, only 50% of the 652 CFOs we surveyed consider the shift to a % “Only 1% of what could be connected digital business model to be a high or very high priority for their organization 1 in the world is actually connected.” in the next three years (see Chart 4). Cisco’s Chief Technology Officer Chart 4: Over the next three years, how much of a priority will the shift to a digital business model be for your organization? Very high priority 18 Why digital • Creates new business models High priority 32 needs to be a Transforms startups into high CFO priority • market leaders, and market Medium priority 34 leaders into irrelevance • Accelerates pace of change Low priority 13 • Rewrites the rules of competition Very low priority 4 • Blurs boundaries between sectors % 0 5 10 15 20 25 30 35 40 2. Murray Jennex, “Knowledge Discovery, Transfer, and Management in the Information Age,” Murray Jennex, IGI Global, 2014. 3. “Reaching 50 million users,” Visually website, accessed 16 February 2015. Partnering for performance Part 5: the CFO and the chief executive officer 11

Driving and enabling the shift to digital Less than half (49%) feel they make a significant or very significant contribution to the shift to a digital business model (see Chart 5). Digital business model innovators Chart 5: How much of a contribution do you make to the shift to a digital • GE Aviation shifts to an outcome-based business model, selling business model? “power by the hour” rather than selling an engine plus a service 4 package. Very significant contribution 18 • Red Bull, the energy drink maker, expands into media, creating Significant contribution 31 content from TV shows to magazines and distributing that content across multiple channels, from TV to the web.5 Average contribution 30 • Nike uses advances in wearables and sensors to create a fitness 6 tracking community and build direct relationships with customers. Small contribution 13 4. “Commerce trends: Moving from goods to services,” The Future of Commerce, 10 April 10 2015. No contribution at all 8 5. “When a Brand Becomes a Publisher: Inside Red Bull’s Media House,” mediashift.org, 10 November 2014. % 6. “Tomorrow’s business will harness a new digital reality,” Financial Times, 13 March 2014. 0 5 10 15 20 25 30 35 This suggests that CFOs have not yet come to grips with the impact digital The CFO’s role in digital is likely to have on their organization, nor what their remit should be in While many CFOs surveyed clearly feel that digital sits outside their remit, positioning the organization to adapt and secure its relevance. they have an important role to play in both championing and embedding “Many large, traditional companies are caught between David and Goliath,” digital within their organization. For example: says Laurence Buchanan, Digital Leader for EMEIA, EY. “On the one hand, • CFOs need to understand new digital business models, how they can be you’ve got the technology mega-vendors disrupting every sector, be it applied to their sector and organization, and new ways of raising capital and insurance, health care or automotive. On the other hand, you’ve got disruptive financing such models. startups who have no legacy and can completely turn a business model on its • CFOs can leverage digital technologies within the finance function to head. Most people are caught in the middle, with yesterday’s business model improve data processing and reporting. In-memory computing has the and yesterday’s technology.” potential to revolutionize data analysis speeds, dramatically reducing the burden on the finance function. Partnering for performance Part 5: the CFO and the chief executive officer 12

Driving and enabling the shift to digital • CFOs in low-tech industries should reevaluate the organization’s corporate portfolio, and consider acquiring startups or high-tech organizations to fill Digital is headline news for CNBC’s CFO gaps in the organization’s capabilities. For Harry Bains, CFO at CNBC, the business news and information • CFOs should ensure that their finance team includes “digital natives,” who provider, there is no question about the priority attached to digital. have a detailed understanding of digital’s potential. “For us, digital really means our revenue,” he explains. “What gets tricky • CFOs can use divergent sets of internal and external historic data to inform in the digital space is monetization. You’re competing with the scale of business strategy decisions, allocate capital for investments and improve the Yahoos, Googles and Facebooks of the world, which get massive page accuracy of financial forecasts. views. That’s really put the content providers under pressure. We know that’s both a threat but also an opportunity, so it’s an area where we’re • CFOs should work closely with other leaders across the business to ensure spending a lot of time ramping up our digital capabilities. I get involved that digital investments are coordinated to support the organization’s with our strategic plan and with ensuring we have the right approach to strategy, and do not expose the organization to unmanaged risk. get better data. The accessibility and speed of getting data offers a lot of • CFOs need to keep a close eye on the changing tax, legal and regulatory opportunity to identify cost efficiencies.” landscapes as they evolve to catch up with the digital world. • CFOs need to identify and consolidate siloed and fragmented digital spend Digital nation: a country perspective on the importance across the organization along with digital agency and cloud computing of digital contracts and compliance. • CFOs need to work with their board to develop a cybersecurity strategy, Finance leaders in Brazil and the US put the highest priority on digital. which is consistent with the organization’s overall risk tolerance and Thirty-three percent of finance leaders in Brazil make it a “very high protects the most valuable assets. priority” and 29% in the US. This reflects both countries’ high number of internet users — Brazil and the US both sit in the top four countries 7 worldwide in terms of internet users. It also reflects the strong part played by digital transformation in the US business environment and surrounding markets. Many of the leading companies that have driven digital technology forward, including new consumer applications, are US giants, such as Google, Amazon and Facebook. 7. “Internet to Hit 3 Billion Users in 2015,” eMarketer.com, 20 November 2014. Partnering for performance Part 5: the CFO and the chief executive officer 13

Driving and enabling the shift to digital In developing a strategy that is fit for a digital world, the CEO and CFO will QIAGEN: data bytes are transforming health care need to evaluate a range of new risks and opportunities for the organization. Roland Sackers, CFO and Managing Director, QIAGEN, a leading global As a result, they are likely to be faced with decisions about whether to biotechnology player, says that interpretation of data is critical in health direct resources away from viable business offerings or units, because the care today. opportunity cost of not doing so is too great. “The challenge of the past 20 years was generating data; the challenge For example, it could involve shifting resources from a business unit that of tomorrow is interpreting the data,” he explains. “This is changing is profitable but under long-term threat from digital disruption, allowing the treatment of patients. If you’re a cancer patient today, doctors are the organization to channel investment to a business line that has more focused on interpreting your tumor data to help decide which kind of sustainable long-term prospects. CFOs play a critical role in deciding which treatment you should receive.” activities will best support the organization’s strategy, and how resources can be diverted and allocated to deliver it. Digital priorities for the CFO and CEO 2. Use data analytics to anticipate digital disruption, measure performance and respond quickly 1. Develop a business strategy that is fit for a digital world, For Buchanan, the pace of digital disruption can leave organizations struggling and make the disruptive investment calls required to react. Digital is rewriting the rules of competition and blurring traditional sector “The challenge is the speed at which change can happen,” he explains. “Take boundaries. It is therefore critical that organizations have a strategy that is Airbnb and Hilton. It only took Airbnb four years to build up a larger inventory fit for a digital world, and responds to the new competitive realities. This will of hotel rooms than Hilton Hotels built up in almost a century.” include developing and managing a portfolio of digital investments with a variety of profiles, from quick wins to strategic bets. The CFO plays an important role in gathering and analyzing the data — including “Every company in the world is going to use digital to support their strategy in from marketing and sales — that will provide an early-warning indicator of any some way,” explains Channing Flynn, Global Technology Industry Tax Leader, disruptive threats and opportunities that lie around the corner. This will allow EY. “Companies are becoming increasingly reliant on knowledge to drive their the organization and its CEO to develop a strategic response and consider pre- business and technologies to improve their bottom line. Everybody is going to emptive changes to its business model before the challenger achieves scale. have to adopt digital within their core economic business model.” Partnering for performance Part 5: the CFO and the chief executive officer 14

Driving and enabling the shift to digital 3. Create a governance framework that puts digital at the heart Ruby Sharma, Principal, EY Center for Board Matters, Ernst & Young LLP, of the business says digital experience on the board can help guide management through Digital needs to be at the heart of the organization’s strategy and approach, changes in business models and disruptive forces. “It is important to consider including management decision-making. Many organizations’ governance having directors with digital experience in place to ask the right questions arrangements are out of step with the changes that have swept through the and challenge management to help organizations prepare for inevitable digital economy. CFOs and CEOs can, for example, work with the board in technological disruption,” she says. “By asking the appropriate questions assessing the readiness of the board as well as the overall digital talent pipeline of management, directors can help make better and faster decisions that and bench strength within the organization to help catalyze digital business improve business performance, manage risks and protect the company’s model innovation. The skills and makeup of many boards are designed around reputation and brand.” oversight of traditional issues, such as compliance, financial reporting or risk, 4. Manage the tax, legal and regulatory risks of digital and with fewer boards that exhibit digital leadership. There is a growing need for support digital growth plans organizations to have a digital-savvy voice in the boardroom. This is being reflected in an increase in the appointment of digital directors. Tax laws have struggled to keep pace with the digital economy. The gap between the evolution of the digital economy and the legislative ability to The digital-savvy board keep up creates uncertainty and risk. The following board directors bring a digital mindset and skills to their “It is an absolute requirement that CFOs, with their tax directors, sit down board responsibilities: with the CEO and say, ‘Given how our business model is going to change, here’s the way the tax model is changing,’” says Flynn. “Companies that do 8 • The Walt Disney Company — Sheryl Sandberg, Facebook this will help ensure that they anticipate risks and support their digital growth 9 ambitions. Companies that don’t plan on that are going to face much greater • American Express — Ted Leonsis, Groupon 10 controversy, including intense media and regulatory scrutiny and the risk of • Sainsbury’s — Matt Brittin, Google reputational damage.” 8. thewaltdisneycompany.com/about-disney/leadership/board-directors/sheryl-sandberg. 9. ir.americanexpress.com/Officers-and-Directors. 10. www.j-sainsbury.co.uk/about-us/management-and-board/board-of-directors/. Partnering for performance Part 5: the CFO and the chief executive officer 15

Measuring performance against strategy Key findings about the CFO role in measuring performance against strategy: Sixty-one percent of the 652 CFOs we surveyed consider measuring performance against strategy — including financial and non-financial measures — to be an important priority for their business, making it the activity that CFOs prioritize most highly out of those examined in this study. A significant majority of the respondents — 62% — feel they make a significant or very significant contribution to performance measurement. However, performance measurement is also cited as the number one area where CFOs feel they need to make a bigger contribution. Four performance measurement priorities for the CFO and CEO: 1 Balance hindsight with foresight. 2 Turn data into performance insight through new technologies and skills. 3 Measure and manage non-financial metrics that matter such as “performance against purpose.” 4 Measure customer experience to build trust and bottom-line value. 3 Partnering for performance Part 5: the CFO and the chief executive officer 16

Measuring performance against strategy For CEOs and CFOs, growth has its flipside: complexity. As large corporates Additionally, internal and external stakeholders are looking for more frequent, grow and expand, business complexity — and therefore the complexity of accurate information. CFOs must consider the needs of different audiences, measurement — continues to rise. from supervisory boards to the media, and tailor the information they Organizations have more intertwined operations spanning many present accordingly. jurisdictions. The pace of regulatory change is also increasing, and a range Performance data also needs to be mined for forward-looking information, so of stakeholders — from investors to supervisory boards — are requesting that the CEOs do not miss strategic opportunities because they are only given deeper and more nuanced information about the organization’s performance a “rear-view-mirror“ approach that focuses on past performance. Measuring against its strategy, as well as non-financial measures, such as performance performance in this context has become extremely challenging for CFOs. on sustainability. “ Long-range planning and forecasting is of particular “ Sustainability reporting is rapidly evolving from interest to CEOs instead of just looking backwards a voluntary, nice-to-have effort to a de-facto at actual results and performance; they require compulsory and increasingly audited non-financial information that enables strategic thinking about report. These non-financial measures include the future.” how organizations are respecting human rights throughout their value chains, their impacts Tony Klimas, Global Finance Performance Improvement Advisory and dependencies on natural capital and how Leader, EY their strategies align to the UN Sustainable Development Goals.” In parallel, an increasing number of organizations have begun to consider Brendan LeBlanc, Sustainable Business Solutions Leader, their performance against their overall purpose: the meaning that sits behind Ernst & Young LLP their activities, and inspires internal and external stakeholders. Defining this purpose, and measuring performance against it, can help to unite the organization; differentiate from competitors; increase internal commitment, engender loyalty with customers and employees and build reputation with investors. Partnering for performance Part 5: the CFO and the chief executive officer 17

Measuring performance against strategy However, they also feel there is more to do. Performance measurement Lanitis Group: measuring and rewarding performance against strategy is cited as the number one area where they feel they need to across a diverse portfolio make a bigger contribution in their collaboration with the CEO (see Chart 7). The Lanitis Group, one of the largest business groups in Cyprus, has a Chart 7: In which of the following areas do you think you need to make a bigger portfolio that runs from property development to travel and tourism. For contribution? (chart shows average ranking — a lower number means it was Lanitis Group CEO Costas Charitou, establishing a consistent performance ranked more highly) measurement philosophy is key to building the right organizational culture. Measuring organizational performance against overall strategy (including 2.1 “Whether it’s a hotel, construction company or restaurant business, financial and non-financial metrics) you need to have a framework in place that will bind the group Operating model redesign/major 2.4 together,” he explains. “We reward performance on elements that are change to organizational structure the same for everybody but have the flexibility to incorporate sector- Shift to digital business model 2.7 specific performance standards for hotels, construction companies, real estate, property development and restaurants.” M&A decisions 2.8 Key findings about the CFO’s role in performance 0 1 2 3 4 5 measurement Rank (lower is better) A significant majority of CFOs (61%) make performance measurement an A significant majority of CFOs we surveyed (62%) feel they make a significant important priority for their organization in the next three years (see Chart 8). or very significant contribution to measuring performance against strategy Chart 8: Over the next three years, how much of a priority will measuring (see Chart 6). organizational performance be for your organization? Chart 6: How much of a contribution do you make to measuring performance against strategy? Very high priority 19 Very significant contribution 19 High priority 42 Significant contribution 43 Medium priority 31 Average contribution 28 Low priority 8 Small contribution 8 Very low priority 1 % No contribution at all 2 0 5 10 15 20 25 30 35 40 45 % 0 10 20 30 40 50 Partnering for performance Part 5: the CFO and the chief executive officer 18

Measuring performance against strategy Four performance measurement priorities for the 2. Turn data into performance insight through new technologies CFO and CEO and skills 1. Balance hindsight with foresight New technology advances, including cloud-based in-memory computing, are transforming the ability of organizations to analyze their performance data. While CEOs and their CFOs must track and measure the organization’s “A lot of the relational database systems that used to be the norm were current performance, they must also manage for the future. This allows an constrained by the number of dimensions you could include,” says Klimas. organization to move beyond reactive self-preservation to decisive action “The technology would only allow you to do so much. Now, with in-memory about emerging opportunities and risks. computing, you have essentially unlimited dimensions. Organizations need to On one side of the measurement coin there are the actuals — a core understand how they can use these massive capabilities and take advantage measurement responsibility of the CFO. These results, financial statements and of them.” external reports have a significant influence on stock price and controls, and are In addition, while big data technology capabilities have accelerated, the seen as evidence of the success (or otherwise) of the CEO’s current strategy. profiles and skills of the finance function have not always kept pace. “There is The other side of the coin is the forecasting or “sensing” capability. “This a disconnect between the critical accounting skills that the function will always long-range planning and forecasting is of particular interest to CEOs since need and the technology skills that are now critical,” says Klimas. “There are it generates insights into what they could be doing differently to manage not enough people with the right skills and people do not yet grasp the full performance in the future,” says Klimas. “Instead of just looking backwards capability of these new technologies. There’s a war for talent and CFOs need at actual results and performance, they require information that enables to establish how to build those skills within the organization.” strategic thinking about the future.” 3. Measure and manage non-financial metrics that matter such This is the CFO attribute that Andy Campion, Nike CFO, referred to as as “performance against purpose” “intuition” in an earlier report from EY on the role of the CFO. “As a finance Growth in shareholder value used to be the primary — and often unique — executive, you have to be able to incorporate the collective intuition of general objective against which organizations measured their performance. management, as well as your own intuition, as to which business strategies Increasingly, however, market-leading organizations are those that have a are more likely than not to cut through from a consumer perspective … you clear purpose, which employees, customers and investors both recognize and 11 must be able to couple intuition and analytics ” he said. believe in. Often, these purposes encompass a contribution to societal well-being. The CEO is the primary individual that can define their organization’s core purpose, and use it to transform the strategy and structure, culture and leadership, tools and technologies. 11. Views. Vision. Insights. The evolving role of today’s CFO, EY, 2013. Partnering for performance Part 5: the CFO and the chief executive officer 19

Measuring performance against strategy 4. Measure customer experience to build trust and bottom- Building and measuring value with purpose line value Initial analysis from the EY Beacon Institute and the University of The ability of organizations to listen to the voice of the customer — and assess Oxford Saïd Business School highlights the changing expectations of the performance of their customer experience — has extended with the corporations. Leading corporations go beyond harm reduction — or emergence of new technologies. Where companies once focused on a net taking responsibility for externalities — to having an active role in promoter score or customer satisfaction surveys, they can now measure the creating well-being. overall customer experience through a coordinated, multichannel methodology. This signals an evolution from “value creation for its own sake” to “There are so many more technologies and techniques available to “value creation without harm” to “building value for — and with — a organizations today,” explains Woody Driggs, Global Customer Advisory, 12 wider set of stakeholders.” EY. “For example, today there is social media sentiment analysis, translating the unstructured data from a phone call or tracking website behavior. 12. “Transformation trends: Phase 1 joint research study findings,” EY/University of Oxford Saïd Organizations need to be measuring that to understand the value of each Business School, 2014. interaction. It’s the sum of these interactions that define the consistent customer experience and determine whether you build trust with a customer.” For CFOs, this means changing the way in which performance is measured. Scorecards need to include metrics relating to performance against purpose, In a recent EY study — Building trusted relationships through analytics as well as traditional financial measures. and experience — less than one-third of the more than 300 surveyed Cheryl Grise, Global Advisory Strategy Leader, EY says, “You have to extend organizations said they had complete confidence that their company has a 13 your view of value past the shareholder. The difference in the future is going full grasp of where in the customer life cycle that trust is breaking down. to be how you’re delivering a trusted experience across a wide stakeholder group. Therefore, you need to define a new value scorecard. If you just focus 13. Building trusted relationships through analytics and experience, EY and Forbes Insights, 2015. on the shareholder, you most likely are not growing or innovating at the level you could be.” For Harry Bains, CFO at CNBC, finance functions need to be thinking about LeBlanc agrees. “Understanding and measuring the stakeholder experiences customer data in an environment defined by digital. that matter helps move purpose, vision, mission and values from words “In a world that’s becoming increasingly digital, you want more information on on posters in team rooms to something real. Including these non-financial the customer,“ he says. “There’s always room for rolling up your sleeves and measures in scorecards and external reporting signals the authentic thinking about what the right metrics are. As well as your standard finance expression of developing long term trusted relationships with your metrics, page clicks and video views become your bread-and-butter media stakeholder,“ he says. metrics. We try to launch the right platforms that give us visibility of customer data and customer intelligence. It’s about smarter and bigger data.” Partnering for performance Part 5: the CFO and the chief executive officer 20

Redesigning the operating model Key findings about the CFO role in operating model redesign: Eighty-five percent of CFOs who make operating model redesign a ”very high” priority tend to report closer collaboration with the CEO. Overall, more than half of the 652 CFOs we surveyed (57%) feel they make a significant or very significant contribution to operating model redesign. Four operating model redesign priorities for the CFO and CEO: 1 Determine what activities will gain most benefit from global or regional scale, and which should be retained locally. 2 Evaluate the impetus for a change to the operating model, including building the business case and tracking the benefits. 3 Build trust in restructuring decisions, inside and out. 4 Derisk major redesign and restructuring initiatives to manage tax issues. 4 Partnering for performance Part 5: the CFO and the chief executive officer 21

Redesigning the operating model For CEOs, the operating model is ultimately the vehicle for the organization’s CFOs and CEOs should redesign the operating model strategy. As that strategy changes to meet new customer and market challenges, companies are also making bold changes to their operating model to balance agility with efficiency design. Major disruptive forces, such as digital, are in some cases causing companies to rethink their operating model as a whole. Balance in-house, But some major change initiatives fail, and many fail to realize the envisaged outsourced Major systems and shared benefits. Successful transformations rely on committed sponsorship from Legal entity harmonization services the CEO, and hands-on involvement from the CFO to lead the business case, rationalization bring the work streams together and make sure the redesign delivers its Supply chain objectives. Any overhaul of the operating model will impact organizational reconfiguration design, governance, people, processes and technology, all of which need to be National to regional/global working in harmony. functions Developing an effective operating model has become an increasingly complex challenge, driven by a number of factors: • Globalization. To compete on an international scale, organizations need to capture emerging market growth, profitably. • The changing customer experience. Meeting the demands of the radically changing consumer landscape, including empowered digital consumers and a multi- or omni-channel environment is an increasingly complex challenge that organizations need to address today to maintain and grow market share (see “Transforming the supply chain operating model to meet complex customer needs” — page 25). • Continued cost pressure. To achieve bottom-line growth, organizations need to maintain focus on working capital, efficiencies and securing synergies across operating companies, divisions and business units. They also need to determine the right mix of in-house service delivery, shared services centers and outsourcing to optimize cost efficiency and service quality. • Regulatory scrutiny. A fluid and complex regulatory and tax environment may require operating model changes in particular markets to remain compliant and stay abreast and ahead of evolving issues. Partnering for performance Part 5: the CFO and the chief executive officer 22

Redesigning the operating model The CFO has several clear roles in operating model redesign: • They can measure and balance the risk and return of any changes, to help Shared services and outsourcing: CFOs in the vanguard inform the right approach. of global operational transformation • They are well-placed to identify any areas of the operating model — For the past two decades, companies have used shared services technology, process or otherwise — that are out of sync with the CEO’s and outsourcing to transform their operating model and deliver strategic ambition. increased efficiencies. • The CFO’s vantage point across the entire enterprise means that they can Many organizations, however, have reached a level of maturity in their identify the implications of change in one aspect of the operating model on shared services models that is enabling them to move toward a more another, and help ensure there is harmony across the entire organization. sophisticated and ambitious model. In the past, companies tended to set up shared service centers with a focus on a few specific functional “ CFOs play a critical role in operational transformation areas, with finance often in the vanguard. But, by bringing previously separate shared services together under one ”global business services” projects, joining the steering committee and taking roof, know-how in each functional area can be leveraged and shared ownership of the overall business case, including and the repetition of tasks and processes can be eliminated. the financial and business case for change. CEOs With the right structure in place, this kind of global service model can deliver much greater economies of scale and cost savings than can be often sit on the steering committee as well, taking achieved by having three or four separate functions doing their own a lead role on the overall design principles and the thing. By leading the way in this evolution, finance can deliver a model structural choices of the initial phases. But it is the that is genuinely transformational for the business. CFO who plays the pivotal role of bringing all the Many CFOs have experience in overseeing a shared service for their particular finance domain. But, as leading companies embrace work streams together and confirming that the multifunctional shared services, the trend is often for the head of global design actually ‘works.’” services to report either to the CFO or the COO. The CFO is increasingly at the helm of this major transformation in the way organizations Joost Vreeswijk, EY Operating Model Effectiveness Leader, Europe, structure their businesses. Middle East, India and Africa Partnering for performance Part 5: the CFO and the chief executive officer 23

Redesigning the operating model Key findings about the CFO’s role in operating model Overall, more than half (57%) of the CFOs we surveyed feel they make a redesign significant or very significant contribution to operating model redesign (see Chart 11). More than half (51%) of the 652 CFOs we surveyed make operating model Chart 11: How much of a contribution do you make to operating model redesign? redesign a high priority (see Chart 9). Chart 9: Over the next three years, how much of a priority will operating model Very significant contribution 17 redesign be for your organization? Significant contribution 40 Very high priority 14 Average contribution 26 High priority 37 Small contribution 14 Medium priority 34 No contribution at all 3 Low priority 12 % 0 5 10 15 20 25 30 35 40 45 Very low priority 3 % Four operating model redesign priorities for the 0 5 10 15 20 25 30 35 40 CFO and CEO Eighty-five percent of CFOs who make operating model redesign a very high priority tend to report closer collaboration with the CEO. This falls to 60% for 1. Determine which activities will gain the most benefit from a the rest of the sample (see Chart 10). global or regional scale, and which should be retained locally Chart 10: Percentage of CFOs whose collaboration with the CEO has increased There is always a tension between the need to realize the benefits of scale in the last three years with the ability to capture growth opportunities, achieve speed to market and CFOs who make operating model 85 respond at the local level. At the heart of this tension, companies need to redesign a very high priority make decisions about centralizing or decentralizing high-value activities and Others 60 locating management functions operationally where it makes the most sense. % According to Vreeswijk, CFOs play a critical role in moderating this tension. 0 20 40 60 80 100 “We all accept that there are benefits from centralization, but the question is, how far do you take it?” he says. “The CFO is in an ideal position to be a natural integrator who can moderate this conversation in a neutral way.” Partnering for performance Part 5: the CFO and the chief executive officer 24

Redesigning the operating model 2. Evaluate the impetus for a change to the operating model, 4. Derisk major redesign and restructuring initiatives to manage including building the business case and tracking the benefits tax issues Reconfiguring the operating model cannot be taken lightly. It is often a Global operating model redesign initiatives come up against a dauntingly significant transformation program in its own right, requiring changes in areas complex tax and regulatory landscape. that range from instilling the right behaviors to overhauling IT. Key employees may need to be relocated and their roles redesigned. Existing infrastructure “CFOs need to understand how to reduce tax risk and, where possible, maximize investments, such as manufacturing plants or office locations, may need to be the tax advantages of a restructuring that’s driven by business change,” closed, and new ones opened elsewhere. Complex regulatory and tax hurdles explains John Hobster, Global Transfer Pricing Leader, EY. “They need to will need to be overcome. understand whether a decision will cause unexpected tax shocks in the future. If you do end up with an unexpected tax bill, you face significant business CFOs and CEOs must work together to first evaluate the risks and returns of disruption in defending your position. You can get management intrusion, an operating model redesign, and second to create the impetus for change. a nasty tax shock and a spike in your effective tax rates; nobody wants that.” Success depends on a compelling business case and a robust mechanism for tracking the benefits delivered and communicating those across the organization. Transforming the supply chain operating model to meet complex customer needs 3. Build trust in restructuring decisions, inside and out In the consumer goods and retail sector, redesigning the supply chain In major transformational change programs, the CEO and CFO have an operating model is key to meeting fast-changing and complex customer important role in establishing the right “tone from the top.” Operating needs. Today’s customers expect a seamless and consistent shopping model redesign, which can involve significant restructuring decisions and experience across different channels and devices — from in-store to mobile. profound implications for the workforce, means that people’s emotions — and To deliver an omni-channel strategy to meet these needs has significant resistance — need to be carefully managed. If they don’t understand the vision implications for the supply chain. Complete visibility across channels, and commit to it, the change will fail. along with a holistic, unified view of the path to purchase is necessary. For Roland Sackers, CFO and Managing Director, QIAGEN, this means creating But a recent survey from EY and the Consumer Goods Forum — transparency about the decisions that have been made. Re-engineering the supply chain for the omni-channel of tomorrow — found that 81% of respondents believe the supply chain is no longer fit “Any kind of restructuring is also based on the transparency you have to for purpose as new channels emerge. In addition, only 38% say omni- create because if you want to have buy-in, everybody inside and outside of the channel initiatives have a positive impact on profit margins. company has to know exactly where you are,” he says. “Finance has a neutral There is a clear need for companies to transform the supply chain position in a company in terms of making fair and transparent decisions about operating model: building a more responsive, integrated supply chain where you put money and allocate investment. People have to trust the 14 finance organization — that you are taking a very neutral position, based on and improving consumer visibility.” the facts.” 14. Re-engineering the supply chain for the omni-channel of tomorrow, EY/The Consumer Goods Forum, Feb. 2015. Partnering for performance Part 5: the CFO and the chief executive officer 25

Developing M&A strategy Key findings about the CFO role in M&A decisions: Eighty-five percent of CFOs who make M&A decisions a very high priority tend to report closer collaboration with the CEO in the last three years. Half of the 652 CFOs we surveyed feel that they make a significant or very significant contribution to M&A decisions. The priority CFOs give to M&A varies by seniority. Forty-two percent of Group CFOs make M&A a high or very high priority, compared with 33% for Regional CFOs. Four M&A priorities for the CFO and CEO: 1 Revisit M&A opportunity evaluation, as digital drives more non- traditional targets in portfolios. 2 Co-develop a compelling rationale for deals. 3 Make M&A a core finance competence. 4 Ensure that tax strategy drives M&A value. 5 Partnering for performance Part 5: the CFO and the chief executive officer 26

Developing M&A strategy 15 M&A is back on the menu. EY’s May 2015 CFO Capital Confidence Barometer revealed that finance leaders see a strengthening pipeline and are planning Metro Pacific Investments Corporation (MPIC): M&A key for meaningful revenue growth from M&A. to strategy “M&A as a route to growth is firmly back on the boardroom agenda,” says Jose Ma. K. Lim, President and CEO of MPIC — a Philippine-based, Pip McCrostie, Global Vice Chair of Transaction Advisory Services (TAS), EY. publicly listed investment and management company — relies on his “There are two clear drivers of activity after half a decade of deal stagnation. CFO to provide insight on how to manage the M&A portfolio to support Disruptive forces are driving deal making at every level. The disruption the organization’s strategy. is triggered by sector convergence, technology and changing consumer “I view the relationship as a partnership and rely on my CFO to give preferences. In addition, divergent economic conditions are accelerating guidance on the financial cost and the risks in the portfolio as a whole,” cross-border M&A.” he explains. “We have a portfolio of companies and we operate by But this renewed taste for deals can still be soured by the perennial issue acquiring brownfield projects and investing in the necessary change — facing this critical activity: the tendency of acquisition benefits to disappoint. from technology to human resources — to turn the operations around as Companies need to focus their energies on a targeted M&A strategy, quickly as possible to create value.” concentrating on a carefully screened portfolio of assets. In addition, MPIC’s CFO, David Nicol, says, “The CEO and CFO have to be incredibly companies are changing their M&A strategies to adapt to the need to close to each other in terms of what they’re doing, and I think that’s digitize, incorporating non-traditional targets into their portfolios to enhance inevitable in every sort of investment and management conglomerate capability, which increases the complexity of ensuring value realization. like this. There isn’t even a cigarette-paper-sized difference between us Getting this approach right requires a strong CFO-CEO partnership. M&A in terms of what’s happening in the business.” decisions need to reflect the CEO’s strategic intent, while drawing on the CFO’s ability to analyze exactly where value will be created in a transaction and how deals will link to other growth drivers in the business. “ You have to act as an entrepreneur who takes accountability for the business success.” Roland Sackers, CFO and Managing Director at QIAGEN 15. CFO Capital Confidence Barometer, EY, May 2014. Partnering for performance Part 5: the CFO and the chief executive officer 27

Developing M&A strategy Key findings about the CFO’s role in developing M&A strategy M&A: the lifeblood of life sciences Eighty-five percent of CFOs who make M&A decisions a very high priority tend Forty-eight percent of CFOs in the life sciences industry make M&A to report increased collaboration with the CEO in the last three years. This decisions a high or very high priority. In this industry, M&A is an falls to 61% for the rest of the sample (see Chart 12). essential part of the strategic agenda. Chart 12: Percentage of CFOs whose collaboration with the CEO has increased As Andrew Forman, EY’s Global Life Sciences Sector Resident, in the last three years Transaction Advisory Services, observes, “We have seen that M&A in life sciences has continued to be strong throughout the first half of CFOs who make M&A 85 2015, with more than US$160b worth of deals announced and the decisions a very high priority pipeline including several proposed deals that may mean 2015 nears Others 61 2014’s record levels. In life sciences, it’s important to not get left % behind in this rich deal environment.” 0 20 40 60 80 100 There are a number of reasons why M&A is a critical activity for Overall, 37% of CFOs make M&A decisions a high priority (see Chart 13). The this sector: priority CFOs give to M&A varies by seniority, however. Forty-two percent of • Companies have the firepower: life sciences outperformed all other Group CFOs make M&A a high or very high priority, compared with 33% for sectors on the stock markets in the first half of 2015. Regional CFOs. • Big pharmaceutical companies are undertaking portfolio rationalization Chart 13: Over the next three years, how much of a priority will M&A decisions be for to focus on core businesses, leading to multiple divestitures. your organization? • Large global pharmaceutical companies have had very little growth Very high priority 10 in the last four years: M&A can help close the US$100b growth gap. • Companies are seeking to expand scale and share as unit volume High priority 27 growth may be needed to offset weaker pricing. • In the US, as the implementation of the ACA (Affordable Care Act) Medium priority 40 moves forward there has been consolidations among payers who are pressuring prices on drugs and medical devices. Low priority 17 Very low priority 6 % 0 10 20 30 40 50 Partnering for performance Part 5: the CFO and the chief executive officer 28

Developing M&A strategy Half of the CFOs we surveyed feel that they make a significant or very like the compatibility of the technology you are acquiring and the customer significant contribution to M&A decisions (see Chart 14). experience you are creating, will be just as important. To do the right deal, you Chart 14: How much of a contribution do you make to M&A decisions? will need to engage a broader sphere of specialists.” Very significant contribution 16 2. Co-develop a compelling narrative for your deals With many M&As failing to deliver value, CFOs and CEOs need to set the right Significant contribution 34 expectations. There needs to be a clear and realistic message about the value of anticipated synergies and a compelling narrative about the rationale for Average contribution 32 the deal. This sets the tone and keeps key stakeholders — from the media to shareholders — onside. Small contribution 14 The CFO has an important role to play in creating that narrative. No contribution at all 4 Paul Hammes, Global Divestiture Advisory Services Leader, EY says, “In an % acquisition, the CFO needs to get into the brass tacks of the synergies with all 0 10 20 30 40 the functional areas, from IT to finance, and tax to procurement. They need to make sure they’re realistic and achievable in the timeframe before they’re Four M&A strategy priorities for the CFO and CEO communicated to the street. CFOs need to help CEOs understand those figures for their critical communications.” 1. Revisit M&A opportunity evaluation, as digital drives more 3. Make M&A a core finance competence non-traditional targets in portfolios The disruptive impact of new digital technologies means that companies To help ensure consistent success from their M&A deals, the finance function are now using acquisition to create new business models and a technology- should have the skills to execute M&A as a repeatable capability. A repeatable, driven competitive advantage. For example, Monsanto (agricultural products) disciplined capability increases the chances of M&A success, from identifying 16 the right targets to eventual integration. acquired Climate Corporation (a data science company) with a view to accessing and analyzing information to assist farmers. For Kathy Waller, EVP and CFO at The Coca-Cola Company, M&A is one of the For Paul Macaluso, Global Innovation Leader, Transaction Advisory Services, main pillars of the finance function. EY, evaluating these non-traditional transactions means CFOs will need to “My time is largely spent in three places: reviewing and discussing the engage a wider set of stakeholders. financials, investor relations and M&A. In our business planning meetings, “For many organizations, this type of M&A sits beyond their comfort zone,” each of our business units will present their three-year plan, including their he explains. “It’s going to require a fundamentally different approach and M&A plans. My M&A team is organized geographically and works closely with it’s no longer just going to be principally about the numbers. Other factors the business units on the M&A proposals that are included in their three-year plans. My head of M&A will allocate resources to deals based on the strategic needs of the company.” 16. “Monsanto buys Climate Corporation for $930m,” Financial Times, 2 October 2013. Partnering for performance Part 5: the CFO and the chief executive officer 29

Developing M&A strategy 4. Ensure that tax strategy drives M&A value Tax is a critical component for M&A. EY’s global study, Global M&A tax survey Five M&A tax considerations and trends, found that 84% of global tax directors said they had an increased 1. Create robust processes that manage tax risk, such as tax focus on finding tax efficiencies to reduce the costs of deals or improve authority scrutiny, including developing predetermined practices 17 and procedures. returns on them. The increasing scrutiny of deals by tax authorities is also a critical factor: the survey found that scrutiny of the tax planning aspects of 2. Improve the connection between the tax function and M&A business/ deals has increased. corporate development teams. “The intersection between tax and corporate M&A strategy is as significant 3. Find new sources of tax value to factor into the valuation model and and meaningful today as it has ever been,” says Torsdon Poon, Americas negotiations. Transaction Tax Markets Leader, Ernst & Young LLP. “As a governance matter, companies are paying more attention to the reputational elements 4. Ask your tax director to identify any post-deal synergies that could of tax strategy, making sure the tax strategy for acquisitions aligns with their create further value. appetite for risk, and manages their profile. We’re also seeing tax play a more 5. Carefully assess the tax risks of transactions in emerging markets. prominent role in increasing or destroying value and deals. Finding an optimal, efficient tax structure that aligns to the corporate strategy for the deal is increasingly viewed as a value enhancer or destroyer, depending on how effectively you manage that.” 17. Global M&A tax survey and trends, EY, 2012. Partnering for performance Part 5: the CFO and the chief executive officer 30

Survey respondent demographics Industry Consumer products 67 Banking and capital markets 58 Technology 57 Life sciences 56 Insurance 56 Oil and gas 55 Power and utilities 53 Diversified industrial products (including 32 aerospace and defense and chemicals) Mining and metals 31 Automotive and transportation 28 Cleantech (including energy, water, 27 transportation, agriculture and manufacturing) Asset management 26 Real estate 25 Telecommunications 23 Media and entertainment 15 Private equity 12 Construction 7 Import/export/wholesaling 7 Professional services 6 Other 5 Transportation 4 Health care 2 6 Partnering for performance Part 5: the CFO and the chief executive officer 31

Survey respondent demographics Country US 80 Finance roles China 80 Brazil 42 Group CFO or finance director 329 United Kingdom 40 Divisional CFO or finance director 159 Mexico 31 Regional CFO or finance director 164 India 30 Canada 30 Australia 30 Germany 29 Annual revenue in US$ Singapore 28 Greater than $20b 28 Russia 25 Between $10b and $20b 45 France 24 Between $5b and $10b 91 Hong Kong, China 21 Between $1b and $5b 158 Argentina 20 Between $500m and $1b 120 South Africa 20 Between $250m and $500m 89 Indonesia 20 Between $100m and $250m 121 Philippines 15 Colombia 11 United Arab Emirates 10 Turkey 10 Spain 10 South Korea 10 Saudi Arabia 10 Italy 10 Nigeria 5 Sweden 3 Netherlands 3 Norway 2 Belgium 2 Portugal 1 Partnering for performance Part 5: the CFO and the chief executive officer 32

Other publications in this series EY’s CFO agenda offers insights to help CFOs grow, protect and transform their organization. Previous studies in the Partnering for performance series are: EY is the exclusive sponsor of the CNBC Global CFO Council. Partnering for performance Partnering for performance Part 1: the CFO and the supply chain Part 2: the CFO and HR Partnering for performance Partnering for performance Part 3: the CFO and the CIO Part 4: the CFO and the CMO For more insights for CFOs, visit ey.com/cfo. Partnering for performance Part 5: the CFO and the chief executive officer 33

Contacts For further information, please contact: CFO agenda Tony Klimas Transaction Advisory Services Climate Change and Robert Brand Global Finance Performance Improvement Paul Hammes Sustainability Services Global CFO Agenda Leader Advisory Leader Global Divestiture Advisory Services Leader Brendan LeBlanc Tel: +1 201 872 5692 Tel: +1 212 773 5949 Tel: +1 312 879 3741 Sustainable Business Solutions Leader Email: [email protected] Email: [email protected] Email: [email protected] Ernst & Young LLP Joost Vreeswijk Paul Macaluso Tel: +1 617 585 1819 Operating Model Effectiveness Leader, Email: [email protected] Advisory Europe, Middle East, India and Africa Global Innovation Leader, Tel: +41 58 286 2409 Transaction Advisory Services Laurence Buchanan Email: [email protected] Tel: +1 213 240 7040 EY Center for Board Matters Digital Leader Email: [email protected] Europe, Middle East, India and Africa Pip McCrostie Ruby Sharma Tel: +44 207 951 9988 Tax Principal, Center for Board Matters Leader Email: [email protected] Global Vice Chair, Ernst & Young LLP Channing Flynn Transaction Advisory Services Tel: +1 212 773 0078 Woody Driggs Global Technology Industry Tax Leader Tel: +44 207 980 0500 Email: [email protected] Global Customer Advisory Leader Tel: +1 408 947 5435 Email: [email protected] Tel: +1 703 747 1389 Email: [email protected] Torsdon Poon Email: [email protected] John Hobster Americas Transaction Tax Leader Cheryl Grise Global Transfer Pricing Leader Ernst & Young LLP Global Advisory Strategy Leader Tel: +44 20 7951 6438 Tel: +1 202 327 8005 Tel: +1 310 902 3239 Email: [email protected] Email: [email protected] Email: [email protected] Partnering for performance Part 5: the CFO and the chief executive officer 34

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