Posted by: CS Shilpi Thapar
As per The Institute of Company Secretaries of India (ICSI), Corporate Governance is defined as “The application of best management practices, compliances of law in letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”
The main purpose of Corporate Governance policies and practices should be wealth creation, wealth management, and wealth sharing. Adherence to laws and regulations, financial goals and communications with stakeholders are major factors that make up the way in which companies is governed.
Frits Bolkestein, the European Union’s internal market Commissioner highlighted some of the wider impacts of corporate governance in a speech. “Economies only work if companies are run efficiently and transparently. We have seen vividly what happens if they are not- Investment and jobs will be lost and in the worst cases –of which there are too many- Shareholders, employees, creditors and the public are ripped off.”
The financial meltdowns of Enron, Tyco, AIG, WorldCom, Xerox, Satyam have increased the concerns about corporate governance, which is a system of regulations and policies to hold corporate leaders accountable and protect company stakeholders. It is high time for companies to hold the spirit of the corporate governance practices rather than settle for the chore of compliances.
Due to increasing high profile scams and governance failures, the expectations of stakeholders have increased and they demand that there should be value creation by the companies which should be visible and measurable. They expect companies to meet standards of social, environmental and economic performance. They measure company performance in ESG field i.e. Environmental, Social and Governance also referred to as “Triple Bottom Line.”
With Globalization, Stiff Competition, uncertain Capital Markets, Shareholders Activism, Technological modernization and a sharper focus on Corporate Governance, the role of Chief Financial Officer (CFO) is changing radically. In past CFO role was of Finance Accountant who ensure that strategy of the company fits the budget , annual accounts are prepared in time, Income tax returns are filed timely, internal controls are properly implemented in the company but over past 5 years as companies have started developing their business globally by establishing their business offices worldwide, making investments, incurring huge expenses in R & D, deploying talent to do business globally, the role of CFO is becoming more complex and important . He no longer regarded as Guardian of Accounts Books and Records, crunching numbers, or focusing on their finance functions. Modern CFO deals with company-wide concerns and needs to be a valued integrator.
Gradually, due to increasing statutory compliances and corporate governance codes and practices, acceptance of globally harmonized reporting standards, there was a need to make finance accountants answerable to Board of Directors and stakeholders by getting financial statements of the company endorsed by them, which has turned Finance Accountants to Chief Financial Officers (CFO) and made them key player in today’s C-Suite.
Increasing Role of CFO towards Company and Stakeholders:
CFO has an increasingly vital role in Corporate Governance. Quoting a survey of 500 senior executives conducted by Deloitte consulting and business week, it showed that the CFO was pivotal to restoring public trust and he had to serve as a bridge between the CEO and Board on strategic and governing/compliance matters.
As per Deloitte Article “The Four Faces of the CFO. (2007)” CFO role is not only of Steward, Operator but he has to act as Catalyst and Strategist as of CEO.
It is noticed that CFOs of all major Listed Companies, Public Limited Companies, Financial Institutions, Banks, Insurance nowadays are part of Board structure and serve on Boards. They attend all Board and Shareholders meetings. In a survey of CFO Europe, 71 percent of the CEOs reported that their CFO was their closest business confidant. Further, as per Canadian Institute of Chartered Accountants, “The CEO is a valuable resource to the Board as the internal expert who can present financial information to the directors in a credible relevant and understandable way.”
As per Deloitte CFO Survey, “CFOs have balanced their workload effectively over the past year, devoting 53 percent of their time to the core roles of steward and operator of the business and relating to strategy and driving change.”
The work of Effective Governance Pty Ltd, Board, and Governance consulting firm has found that financial stewardship, compliance, risk management, strategy, leadership, executive partnership, communication, and education will be key performance areas of the CFOs of tomorrow.
CFO is a valuable resource to the Board. Some of the top ten roles of Modern CFOs are:
- He has to be a steward, operator, catalyst, and strategist as of CEO.
- He should look beyond the balance sheet to understand and manage risks and opportunities and communicate in clear terms to the management of the company and its stakeholders. He must serve as the financial authority in the company ensuring proper transparency, accountability, and integrity of financial, non-financial and external reporting.
- Besides Projecting and attending financial position of the company, he should support the Board in making strategic decisions by timely placing the following information before the Board of Directors for consideration: a. Annual Business plans, b. Monthly/Quarterly financial results, c.Cash Flow Statements and Cash Flow Projections,d.Annual Budgets,e.Details of foreign collaborations, Joint Ventures and other financial commitments related to it,f.Details of outstanding Secured and Unsecured Debts including principal and interest, Statutory Dues, any defaults in payments thereto, g.Details of Bad debts, debtors and creditors on monthly basis,h.Details of Show cause Notices, pending litigations and contingent claims against the company in future.
- He must assure to Board of Directors for making disclosures in the Director’s Report that: a. In the preparation of annual accounts for the financial year, the applicable standards and the requirements set out under statutory laws have been followed and there are no material departures from the same; b.The accounting policies have been properly selected and applied consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company; c.Proper and sufficient care have been taken for the maintenance of adequate accounting records in accordance with the provisions of applicable statutory acts for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities and;d.Annual accounts of the company are prepared on a “Going Concern” basis.e. There are no material departures from the codes of Corporate Governance, listing regulations and any other company policies.f. Internal Control systems are effectively implemented and maintained and in the case of any deficiencies in the design or operation of internal controls if any it is well disclosed to Auditors and Audit Committee of the Company.
- He should be an effective leader, possess team building skills, negotiation to manage the finance functions. He should be flexible, presentable, multi-lingual and global minded.
- He should possess skill and expertise that have an impact on Board processes and strategic decisions.
- He should provide forecasts , manage risk and provide insight into the issues ranging from price to production to sales, spot market opportunities, predict change in business, environment , develop the process for sustainable business, do more business development and operations, refocus on technical skills with implications on IFRS, ensure integration of regulatory environmental outlook with business environmental outlook, implement corporate governance code and practices and internal controls.
- He must stay up to date on their companies, statutory provisions, sustainability policies and initiatives and on ESG issues more broadly.
- As an Advocate and Ambassador for the company, he should focus more on Investor Relations by ensuring better and continuous communications with stakeholders.
- He should assist the Board in strategic development, operational planning and financial risk management, fraud prevention, fraud detection, and investigation.
In the present corporate scenario, CFO is considered as the key influencer in the Board. He works in close nexus with the Board and CEO. It is also noticed that mostly in big corporate scams, CFO is connected with CEO closely. The mere existence of nexus is not bad and it does not necessarily indicate detrimental boards or governance systems. It is important to focus on the origin of such nexus. Thus, the key focus of regulators, policy makers, institutional investors and shareholders is to monitor and control the CEO- CFO-Board nexus in the companies in order control corporate frauds and develop sustainable business. There has to be arm’s length independence between boards, CEOs and CFOs then only the corporate governance codes can be implemented in the company both in letter and spirit, which will reap rewards for them in the form of sustainable business and profit maximization.
(Ref: Various online publications)