CFO Magazine 2006

CFO Magazine is Australia's leading business publication for chief financial officers and other senior executives in finance and related disciplines, including corporate governance. Ann-Maree Moodie is one of CFO's opinion columnists.

Contents

Corporate Governance Opinion Column

• The buck stops where? - June 2006
• Corporate Governance - keep it clean. - May 2006
• Boomers must open up in the boardroom. - April 2006
• Filling the boss's shoes. - March 2006
• Know thy self interest. - February 2006
• A dog is not a duck. - December 2005/January 2006

Cover Stories

• What's your story. - March 2006
• Down by law. - December 2005/ January 2006

The buck stops where?

A good board is adept at damage control if the chief's behaviour is bad, a great board basks in the glow of a dazzling CEO.

When directors were asked to identify the primary purpose of a board during my research for The Twenty-First Century Board, the answer was inevitably, "to hire and fire the chief executive".

At first reading, this answer is glib, maybe even facetious. Surely the role of the board is to do much more? Given that the average tenure of a chief executive is about five years, the cynic may ask: "What does the board do for the rest of the time?"

The proper interpretation, however, is that board members consider it a priority to ensure the right chief executive is selected because otherwise the company is doomed. "If you have a board of seven or eight people, you can live with the odd turkey," a chairman explains. "But you can't live with a chief executive who's a turkey because you're putting him in control of the company."

While the choice of chief executive affects the company, it also reflects on the reputation of the board. If a chief executive turns out to be a star - such as a Michael Chaney, David Murray or Gail Kelly - the board likewise sparkles, and that particular chief executive is bound for a fast-track career as a non-executive director.

History attests to governance failures only too similar to some of the more recent corporate debacles. There is the famous case study of the National Safety Council of Australia and its chief executive, John Friedrich, during the 1980s. Twenty years later, HIH imploded in part because of the actions of chief executive Ray Williams. Around the same time came the demise of the Kenneth Lay-led Enron in the United States. The actions of these men ultimately destroyed the reputation of the companies they worked for and the boards they answered to. For Williams and Lay, their conduct saw them judged in court; for Friedrich, the conclusion was suicide.

Financial misconduct may be a more popular way of soiling a company's reputation, but the comparatively minor act of plagiarism can also be as effective.

William Swanson's new career as a management guru following the publication of Swanson's Unwritten Laws of Management turned out to be short-lived when it was revealed that his laws weren't original. The chief executive of defence technology company Raytheon had allegedly received more than inspiration from 1944's The Unwritten Laws of Engineering, by Professor W.J. King.

"The booklet has helped put a softer face on a company that specialises in high-technology warfare and had benefited as military spending has increased from wars in Iraq and Afghanistan," The New York Times reported.

Swanson publicly defended his alleged plagiarism and, even if he is cleared and forgiven, he has still damaged his reputation and that of the company. It follows from this case that a board should never allow itself to be seduced by an apparent glow surrounding a chief executive. One of the easiest sins for a board to make in its overseeing role is to become complacent with its main man (or woman).

A recent Harvard Business Review article promoted the idea of a chief executive publicly apologising for any irregularities, as long as it is done the "right" way and for the "right" reasons.

"A good apology must be seen as genuine, as an honest appeal for forgiveness," Barbara Kellerman writes. "Such apologies are best offered in a timely manner, and they consist of the following four parts: an acknowledgement of the mistake or wrongdoing, the acceptance of responsibility, an expression of regret and a promise that the offence will not be repeated."

In the examples she provides, however, most corporate leaders apologise for strategic rather than for authentic reasons. "Leaders will publicly apologise if and when they calculate the costs of doing so to be lower than the costs of not doing so," Kellerman writes. "More precisely, leaders will apologise if and when they calculate that staying silent threatens a 'current and future relationship' between them and one or more key constituencies - followers, customers, stockholders or the public."

The exception to the rule is the 1982 Johnson & Johnson Tylenol cyanide poisoning case when then CEO James Burke took a "the buck stops here" approach to corporate stewardship. The tactic is believed in hindsight to have been the catalyst for the Tylenol brand's return to 90 per cent market share within a year of the crisis.

The lesson, as Swanson has learned, is to try not to do anything that will require a public apology. "I regret that over the course of the years and in the process of compiling the 'Unwritten Rules', any reference to Professor King's work was not properly credited," Swanson is quoted on the Raytheon website.

"This experience has taught me a valuable lesson - new Rule #34: 'Regarding the truisms of human behaviour, there are no original rules'."

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Corporate Governance - keep it clean.

Executives must ensure that anyone with access to their company's price-sensitive information understands the perils of insider trading.

When Robert Middlemiss, the company secretary at the Profile Media Group, learned that the company's revenues were likely to be significantly below expectations, he sold a parcel of shares to avoid making a loss.

A few months later, Peter Bracken, the former group head of communications at the Whitehead Mann Group, was told that the company was likely to issue a negative trading statement in the near future. He rang his broker and ordered a sale of his shares.

In both cases, the Financial Services Authority, Britain's regulator with the power to impose financial penalties, fined the men for committing acts of market abuse, which includes behaviour such as misuse of information, misleading statements and impressions, and market distortion, otherwise known as insider trading.

The cases highlight the challenges that arise for anyone in charge of communicating corporate information.

"We will not tolerate individuals using a position of trust for their own personal financial gain ... and who, on the basis of unpublished information, deal ahead of announcements," the FSA said.

Australia has its own case of a public relations consultant being convicted of misusing inside information. In 1996 Murray Williams, an external communications consultant to Australis Media, was found guilty of insider trading, and sentenced to periodic detention.

In Australia, insider trading is defined as an act of a director or officer, or an act by them, which causes others to act on material non-public information that would affect the value of the investment, (Corporations Act, s1043A).

It affects directors as well as officers of the company who are in a position to influence trade through the publication of information. Those working in public affairs, investor relations and as company secretaries can fall into this category. While they must know of the information in order to pass it on, they cannot use it for personal gain. A study by the FSA found that there may have been insider trading in nearly a third of mergers and acquisitions in Britain in the past five years, including those involving people working in corporate communications.

The researchers analysed 1500 market announcements in two categories: those relating to takeover bids in 2000 and 2004, and announcements about the trading performance of companies listed on the FTSE 350 between 1998 and 2003.

The methodology measured "market cleanliness" by looking at the extent to which share prices moved ahead of the regulatory announcements that companies are required to make to the market.

The announcements examined were those that led to large or abnormal share price movements. Of these, the proportion of such announcements that were preceded by an apparent informed price movement were identified because this could indicate that some trading on unpublished information had occurred.

The results did not show exactly the degree of market abuse but did detect price movements, which suggests that some informed trading may have taken place before 29 per cent of the takeover announcements. A further 22 per cent of the FTSE 350 trading announcements were identified as being most likely to contain information of use to an insider trader. These findings suggested a deterioration in market cleanliness.

It's a tricky position for those who are charged with delivering price-sensitive information, particularly if they own shares in the company.

While it's easy to assume that insider trading laws affect directors predominantly, don't forget the law also captures officers of a company.

Under the Corporations Act, an officer is a director, a secretary or a person "who makes, or participates in making, decisions that affect the whole, or a substantial part of the business of the corporation; or who has the capacity to affect the corporation's financial standing". Therefore, an officer of a company is considered to be someone who has statutory obligations similar to those of a director.

Under this definition, those who publish price-sensitive information are indeed in a position to influence the financial standing of the entity. As officers, they are also subject to s1043A of the Corporations Act which refers to prohibited conduct by those in possession of inside information.

For a director, whose duty it is to protect the interests of the shareholders, ensuring that financial information about the company is released in a timely and appropriate manner is part of the job of protecting the company's reputation.

It may be comforting to know that those involved in corporate communications may fall within the legal definition of a company officer, and therefore can be punished for a breach of their duties. However, ensuring the company culture is one that upholds personal integrity is a better starting position.

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Boomers must open up in the boardroom.

The composition of senior management teams and boards should reflect the diversity of the global workforce.

"The years to 2010 promise a significant change ... successful executives will be those who can manage three generations in the workplace, create more flexible working environments, optimise individual and team performance, balance stakeholder interests and build and maintain their personal expertise."

The Boston Consulting Group

"In 2002 and 2003, many new directors were appointed to boards. However that trend has now slowed, and with the average age of board meetings 58 … there may well be a shortage of talent in the future."

Korn/Ferry International

Two reports released over the past six months - one on the future of management in Australia and the other on company boards - indicate that the key corporate governance issue in the immediate future will be the relevance of the incumbent board member population to the changing needs of the workforce.

In its annual report on the structure, performance and compensation of boards of directors in Australia and New Zealand, Korn/Ferry International found the average age of board members hasn't changed in years.

Although it didn't survey the backgrounds of directors, it seems the corporate governance reform process of this decade, and especially its emphasis on independence, will have an effect on how boards attract members.

"A further challenge is to recruit appropriately qualified and experienced independent directors in an environment when cross-directorships are under scrutiny," the report says.

A concurrent survey by the Boston Consulting Group followed up the earlier Karpin Report and found a range of new issues to be addressed by managers between now and 2010. These include the ability to manage three generations simultaneously, to operate in a trading environment dominated by the rise of China and India, and to redress the low numbers of women in senior executive ranks.

The basic tenet of boardroom recruiting is to compose the board so that its skills and experience reflect the strategic imperative of the organisation, rather than hiring yet another former partner from an accounting or law firm.

While the "boys' club" style of recruitment is still practised, the game of "who do you know" is at least played out within a framework provided by a gap analysis of skills on the board, matched to where the company is heading.

The 2010 chief executive is expected to navigate "a dynamic global world and a more diverse workforce", BCG states. But is the board similarly prepared?

Although the average age of directors is 59, the age range is 29 to 83 years. Although it's hardly indicative of gen X and gen Y, and more about the ageing baby boomers, board composition is at least in a small way showing a greater diversity of age.

Even billionaire Warren Buffett knows when it's time to move on, resigning recently from the board of Coca-Cola in the United States after 17 years.

The global marketplace is a trickier concept to represent at board level as it goes much deeper than token multiculturalism. However, the fact remains that the re-emergence of China and India as potential global powerhouses is undeniable, and the effect of these two countries on global trade can be ignored only at a board's peril.

Finally, there is the murky issue of gender diversity. It will continue to be a mistake for companies to promote equal opportunity as a point of difference if the board is comprised of men in their 60s. And worse, if there is only one woman, as she will always be in danger of being labelled "token".

According to Korn/Ferry, 15 per cent of directors of the top 100 companies are women. But this figure is less impressive for boards overall, where figures range from 8 to 10 per cent.

Looking overseas, Norway has 21 per cent; Sweden, 20 per cent; the United Kingdom, 14 per cent and Germany 12 per cent.

A European Union survey of the top 50 companies in developing countries found that 19 per cent of board seats in Estonia are held by women. Slovenia and Bulgaria have 18 per cent, Romania 15 per cent and Latvia 12 per cent. Norway tops the list because of a government decree that 40 per cent of company directorships should be held by women.

The 2010 manager profiled in the initial research for the Karpin Report in the early 1990s is widely accepted as being reflected in contemporary practice.

It is unfortunate that the composition of boards hasn't likewise moved with the times.

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Filling the boss's shoes.

Succession planning at board level is usually viewed as a strategy for loss, and the consequences can be costly.

When Nike chief executive William Perez stepped down after a short 13 months in the job, the reason for his departure was reportedly a falling out with the company's founder and chairman, Philip Knight.

What followed was a highly typical series of reactions: a drop in the share price (by 2 per cent), an announcement that Perez would receive an $US8 million-plus ($10.6 million) severance payout (including two years' salary at $US1.4 million a year, a $US1.76 million bonus and the purchase of his house for $US3.6 million), and investor angst that the boss left after such a short period.

Nike's explanation was typical - a rhetorical flourish devoid of substance. "Succession at any company is challenging, and unfortunately the expectations that Bill and I and others had when he joined the company a year ago didn't play out as we had hoped," Knight said in a statement reported by The New York Times.

However, the problem the Nike board faced was bigger than an inability to see eye-to-eye with the chief executive. Like many boards, Nike's succession planning didn't address wider issues associated with a loss of leadership at the top.

It left open questions such as how the departure of a chief executive before time would affect the reputation of the company and/or the brand. Why would the market continue to invest in a company with dodgy steering? Why would anyone take on the chief executive's role if it meant being a lackey for the real source of power, the chairman?

When Perez was hired just over a year ago, the Nike board should have considered his appointment in the same way that it would have thought about buying a set of tyres for a car - all four tyres will need to be replaced eventually because of wear and tear, and age. Tyres are essential for the vehicle to move, but they aren't irreplaceable. And there's always a need for a spare.

The tyre analogy is useful because boards usually don't think of their succession planning as being anything more than looking for a new chief executive every four years or so (the average tenure of a CEO). But, like a tyre, everyone has a finite capability. Chief executives shouldn't be hired with the expectation that they are irreplaceable. The nominations committee - and the whole board - must avoid making a judgement on a candidate based on their health or expectations of longevity in the role. They should also consider appointing an understudy in case the chief executive does a Perez.

In a family business, succession planning is always apparent because it's absolutely certain that the founder and leader of the company will die. The late Kerry Packer might have liked to say he was immortal (especially after collapsing, dying then being resuscitated) but a higher order won out eventually.

There are usually built-in "spare tyres" in a family business, depending on whether the children want the job or whether they have the business acumen and entrepreneurial flair to do it well.

The Packer and Murdoch families have each experienced intense scrutiny about succession planning in the family business. In the case of Publishing and Broadcasting, James Packer rather than his sister, Gretel, was always seen as being anointed for the role. Yet James was constantly expected to prove his capabilities (especially after the collapse of One.Tel).

The Murdoch family's situation is more complex. Rupert's third marriage, the birth of two more children, his age and his capacity and desire to keep working rather than retire mean the succession of leadership at News Corp is not going to be smooth. Under these circumstances, it wasn't a complete surprise when the son-most-likely, Lachlan, resigned.

Even in the public sector, succession planning is unreliable because the chief executive is beholden to the government of the day. Therefore, the continuity of leadership is unreliable unless systems are created that capture an attitude of legacy.

If the chief executive or any other member of the senior executive team leaves suddenly, what will they take with them that the business can't recover? Conversations with strategic partners that are part of building a strategic alliance are intangible assets, but are also of immense value. By their nature, many of these intangible assets are built upon relationships and these relationships are often reliant on one person. When that person leaves, do these relationships die also?

The dictionary definition of "succession" is an action of one party, person or product being replaced by another that has become obsolete, incapacitated, retired or deceased. Ideally, a successor will fill the role of a predecessor, being fully compatible with all other individuals in place and perfectly functional without any interruption in service.

It's telling that the etymology for "succession" is the verb "to succeed", yet succession planning at board level is traditionally viewed as a strategy for loss.

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Know they self interest.

Boards should acknowledge they are prey to human foibles and implement structures and procedures to manage them.

It is wonderful how preposterously the affairs of the world are managed. We assemble parliaments and councils to have the benefit of collective wisdom, but we necessarily have, at the same time, the inconvenience of their collected passions, prejudices and private interests.

- Benjamin Franklin (1706-1790)

One of the great tensions of a company board is the requirement for directors - executive and non-executive - to exercise independent judgement within the context of a thorough understanding of the company's business and its industry.

This means board members must not allow matters of self-interest to interfere in their involvement with the company.

At the same time, they must be able to demonstrate a thorough knowledge of the business combined with a considered perspective on the broader business and socioeconomic environment affecting the company.

In order to resolve this tension, board members must juggle their legal obligations as directors, as well as issues of professional and personal ethics, and the constraints of boardroom culture.

Under the Corporations Act 2001, and at common law, directors are prohibited from placing themselves in a position where their duty to the company may conflict with a personal interest or with a separate duty that is owed to another corporation.

The duty arises even when the conflict does not cause the company to suffer loss or the director does not make any profit from the conflict.

A director is legally bound to give full and frank disclosure regarding the nature of the conflict as opposed to merely abstaining from voting on the matter. In some cases, however, disclosure may not be sufficient and the director will be required to resign in order to resolve the conflict.

"A common cause of potential conflict is where two companies with common ownership have an interlocking relationship in the same fields of business," says corporate lawyer Bob Baxt. "A company, for example, may occupy the premises of, and pay rent to, another company, the shareholders and directors of both companies being the same.

"If the shareholding were the same, the conflict is manageable, except if one or other company suffers insolvency. If the shareholding is slightly different, the conflict is immediate.

How do the directors set the level of rental? This is a simplified example of the type of conflict overlooked by directors every day and that leads to great personal difficulties at times of dispute or financial difficulty. Managing conflicts of interest is a serious matter. The first step is to make a full and frank disclosure of the conflict to the board. A director should refrain from participating in discussions or from voting on the matter. If the conflict is irreconcilable, the only course of action will be resignation.

The penalties for not revealing the conflict are stiff fines and/or jail terms as well as the wider consequences of a loss of corporate reputation. Inspiration can be drawn from the corporate hall of fame and popular exhibits Steve Vizard, Rodney Adler, the late Rene Rivkin, as well as HIH, One.Tel and Enron.

While the law helps shape boardroom culture, it remains the responsibility of the whole board to create and to honour an ethos that acknowledges the foibles of human nature in the context of the board's work.

Tackling the problem bluntly is the only course of action. One option, suggested by law firm Minter Ellison, is for the company secretary to maintain a "conflict database" or a "register of interest" that records the description of the interest notified by directors and details of other companies or organisations in which directors are involved.

It is also effective to circulate a "conflicts notice" for each board meeting and include it on the agenda to prompt directors and officers to disclose current and potential conflicts.

Corporate governance researchers Ada Demb and Friedrich Neubauer write that a board needs company knowledge, contextual breadth, involvement and detachment in order to overcome the issues inherent in executing well-informed overseeing.

"Procedures and structures can go a long way toward rectifying the compositional imbalances that result from seeking a membership that can exercise both critical and independent judgement," Demb and Neubauer write in The Corporate Board: Confronting the Paradoxes, (Oxford University Press, 1992)

"Behavioural scientists disagree whether attitudes follow behaviours, or behaviours follow attitudes. However, attitudes, (including boardroom atmosphere, expectations and trust), are the key to whether procedures and structures accomplish their purposes."

In other words, board members should put in place protocols to deal with such problems, should they occur. The alternative is to ignore the issues when they are obvious to everyone, including shareholders and regulators, and to suffer the consequences.

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A dog is not a duck.

Corporate wrongdoers are using tortured logic in their defence and whistleblowers are becoming the new corporate heroes.

When Bethany McLean, the Fortune journalist who first dared to challenge how Enron made its money, concluded her address to the Committee for Economic Development of Australia recently, she posed the question: "Isn't anybody sorry?"

The board of directors of Enron shirked responsibility, passing the buck to the company's accountants and auditors who, not surprisingly, shifted the blame again. No one has apologised.

The tale of Enron, McLean said, isn't a story of corporate fraud; it is a story about the dark side of human nature.

"It is a story of human weakness, of hubris and greed and rampant self-delusion. Of ambition run amok. Of a grand experiment in a deregulated world, of a business model that didn't work. And of smart people who believed their next gamble would cover their last disaster - and who couldn't admit they were wrong."

The collapse of Enron was both the reaction to, and the catalyst for, the corporate governance reform process that Australia and other parts of the Western world have been subject to since 2000. The reform process consists of a combination of voluntary codes and black-letter law with the overall purpose of creating transparency, honesty and integrity in corporate leadership. Yet at the end of another year filled with examples of fraudulent behaviour by company executives and criminal proceedings against the rogue traders of National Australia Bank, one must ask whether anything has really changed. Echoing McLean, is anybody prepared to take responsibility for the corporate malfeasance which has continued unabated?

The corporate pin-up boys of the 1990s are hardly upstanding examples of people who accept responsibility: Rene Rivkin is dead; Rodney Adler is in jail (and doesn't seem to know why); and Steve Vizard passed "Go" and went straight to a European holiday - leaving the Australian Securities and Investments Commission to explain. Like their ethical counterparts at Enron and WorldCom, all are aficionados of the "dog/duck defence" - a blatant abuse of the rules and standards of proper behaviour in order to shirk responsibility.

In her book about Enron, The Smartest Guys in the Room, McLean explains the process as it applies to accounting rules: "Say you have a dog, but you need to create a duck on the financial statements. Fortunately, there are specific accounting rules for what constitutes a duck: yellow feet, white covering, orange beak. So you take the dog and paint its feet yellow and its fur white and you paste an orange plastic beak on its nose, and then you say to your accountants, 'This is a duck! Don't you agree it's a duck?' And the accountants say, 'Yes, according to the rules, this is a duck.' Everybody knows that it's a dog, not a duck, but it doesn't matter, because you've met the rules for calling it a duck."

The dog/duck defence promotes a belief that doing wrong is permissible if you can find a legal loophole that allows it. It also applies beyond the realm of the law, extending to the arenas of ethics, morals and just plain proper behaviour. It condones hurtful, disrespectful and fraudulent conduct - especially if the perpetrator gets away with it.

Golden parachutes, large salaries and, in the case of Enron, bringing down a company are practices that leave the general population asking, "Tell me again why a chief executive gets a bonus for failure?"

If the underlying motivations for such conduct are greed, hubris and rampant self-delusion, then whistleblowers may well be the new corporate heroes of the latter half of this decade.

Given the roasting Catherine Walter received from the media and her colleagues for shaking up the NAB board in 2004, her return to the speakers' circuit indicates that she is seen in retrospect as a boardroom reformer rather than a boardroom maverick. Only history and its sidekick, hindsight, could have shaped this perception of her. Walter's return to the corporate fold, and to audiences prepared to pay to hear her experiences, can only occur as shareholders, the media and the general public lose patience with corporate misbehaviour.

It was only stunning naivety that saw ASIC spectacularly misread public interest in the Vizard case, coming second only to Vizard's own mistake - despite his experience of media celebrity - of being on holidays when the news broke.

Australians have little patience for such nonsense. A dog is a dog is a dog. Anything else is just quackery.

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FEATURE: What's your story.

There is more to being a good communicator than making yourself understood. It can help you think more creatively about your business.

In the world of finance, numbers matter, but so does the story behind the numbers. The language of finance may be universal but it won't explain the reasons why a set of figures looks the way it does. And while a picture paints a thousand words, numbers offer little more than a thumbnail sketch if their meaning is unclear.

This is the quandary faced by chief financial officers who must be both mathematics whiz kids in the office and charismatic speakers in the boardroom. Moving easily between left and right brain activity by explaining a financial statement with flair and pizazz is the mark of a CFO with ambitions for higher office.

Being a compelling storyteller may sound incongruous to a numbers man but being able to spin a good yarn will be the difference between explaining the market value of a piece of property and influencing the board of directors to make the acquisition.

"The ability to communicate effectively is key in distinguishing between effective managers and ineffective managers," says Dr Kathleen Kelley Reardon, an associate professor at the University of Southern California's Business School. "The effective manager recognises that people differ not only in how they view the world but in how they view assignments, rewards, reprimands, promotions and their day-to-day responsibilities. The effective manager knows that his or her task is to manage employee perceptions. Doing so requires the ability to communicate and to persuade."

A 2002 report on employability skills by the Business Council of Australia and the Australian Chamber of Commerce and Industry found that employers wanted candidates to express a combination of relevant technical skills for a job as well as a range of "soft skills". These included communication skills, problem solving, initiative and enterprise, planning and organisation, self-management and learning.

Employers are increasingly examining a candidate's extracurricular activities as well as their academic achievements in order to hire employees who are well-rounded, adaptable and self-motivated. Yet management school curriculums are criticised regularly for not providing students with skills they can apply to be effective managers.

The trouble is that many of the "soft skills" required to be an "effective" manager are paradoxical: managers need to be good decision-makers as well as being open to ideas; they need to be good listeners as well as good presenters of information.

"It's very difficult to find these skills in the one person," Dr Paul Nesbit, of the Macquarie Graduate School of Management in Sydney, says. "Effective managers are highly skilled in emotional intelligence: they are reflective and they understand their weakness."

For example, "big-picture managers" will understand that they are unlikely to identify the details but will ensure there is someone on the team to oversee that aspect of a project.

Despite rating "people-management skills" as important, managers and management students aren't always prepared to invest the time to learn these soft skills, focusing instead on the technical, day-to-day tasks.

This tendency is reflected in MBA students, too. "The students are looking for people-management skills but often this is more rhetoric than reality," Nesbit says.

"People-management skills are much less tangible than technical knowledge and therefore more difficult to apply. Management students don't know how to operationalise these soft skills, thereby missing the point entirely."

The mistake that many managers still make is thinking that "communicating effectively" means giving a prepared speech, often committing the sin of reading it aloud as they speak. And if a CFO is "unaccustomed as I am" to public speaking, broadening the view of effective communication to the ability to persuade in all situations can be even more daunting. Yet this is exactly what CFOs are expected to achieve in today's workplace.

As John Stanhope, CFO of Telstra and immediate past president of the CFO lobbyists Group of 100, told CFO recently: "You are unlikely to be a major corporation CFO if you can't communicate effectively.

"The CFO has to be able to communicate to the board and to the people in the community as well as to all the external stakeholders. If you're not a good communicator and you're aspiring to be a CFO, you had better do something about it."

There is no doubt that business presentation must include important financial data and statistics, but it is how this information is woven into a story that sells the message. Author and academic Peg Neuhauser tested this theory with MBA students who are vaunted as being trained to understand a business primarily by first analysing its financial position. The students were divided into three groups and asked to report on the same winery business. One group was given statistics related only to the potential success of the winery.

The second group was given statistics and a story. The third group received only the story. The story ended with "... and my father would be so proud to sip this wine".

Most students in the third group believed the winery would be successful, while the other two groups were sceptical. The story, not the statistics, convinced the students that the winery was a viable, thriving enterprise.

"Although business people are often suspicious of stories, the fact is that statistics are used to tell 'lies, lies and damn lies' while accounting reports are often 'BS in a ball gown' - look at Enron and WorldCom," Dr Robert McKee, a world-renowned screenwriter, director and educator, told the Harvard Business Review. "Business people not only have to understand their company's past, but also how to project this understanding into the future. And how do you imagine a future? By telling a story."

Another key role for the CFO today is risk management, taking into account both financial and non-financial risk. Not only does this include identifying current risks, but also imagining all the risks the company may face in the future. To do this, the CFO must determine the risks, report these to the board then convey the message about how the risk will be managed to the board and to the organisation as a whole. For a CFO, this means what Stanhope describes as moving from being a "number cruncher" to a "number explainer". The CFO who is a "number explainer" uses numerical skills combined with storytelling methodology to prepare the company for possible risks by becoming the consummate scenario planner.

In his influential book, The Art of the Long View: Planning for the Future in an Uncertain World, Peter Schwartz outlines the concept of scenario planning, explaining it as a useful tool for alleviating uncertainty. For any CFO who is party to the strategic planning process, being able to use scenario planning helps identify the less obvious risks - the hidden, unconsidered risks that will cause the most damage. For example, damage to a company's reputation.

"Scenarios are not in-depth predictions about the future," Schwartz writes. "Rather, in the scenario process, managers invent and then consider in-depth several varied stories of equally plausible futures. These stories are carefully researched, full of relevant detail, oriented towards real-life decisions and designed (one hopes) to bring forward surprises and unexpected leaps of understanding."

Scenario planning is a powerful method for exploring risks and opportunities facing the organisation and its industry. When used in this way, the questions asked will be broader: "What is the office of the future?" "What is the impact of more women in the workforce?" Even the clichéd question, "What keeps you awake at night?", can elicit a cascade of ideas that would never appear on a forecaster's spreadsheet.

"To be an effective planning tool, scenarios should be written in the form of absorbing, convincing stories that describe a broad range of futures relevant to an organisation's success," Schwartz says.

"Thoughtfully constructed, believable plots help managers to become deeply involved in the scenarios and perhaps gain new understanding of how their organisations can manage change as a result of this experience." Scenarios with engrossing plots can be communicated swiftly throughout an organisation and will be emembered more easily by decision-makers at all levels of management.

It helps at this point to think back to childhood when a parent or grandparent read you a bedtime story. Anyone who has had this experience will remember how engrossing it was to listen to these tales. Writers such as McKee promote storytelling as a tool of management for the same reason: storytelling works.

The archetypal plots of "winners and losers", "crisis and response", "good news/bad news" and "evolutionary change" are reworked time and again by scriptwriters making Hollywood movies, speechwriters creating well-loved historic moments for presidents and prime ministers and any manager who knows what it takes to motivate a workforce.

"A big part of the CEO's job is to motivate people to reach certain goals," McKee says. "To do that, he or she must engage with their emotions, and the key to their hearts is a story. Any intelligent person can sit down and make lists. It takes rationality but little creativity to design an argument using conventional rhetoric. But it demands vivid insight and storytelling skills to present an idea that packs enough emotional power to be memorable ... and get people rising to their feet amid thunderous applause."

Stories anchor the past in the present. They provide a sense of community and common values. And they explain the practices and behaviours of organisational life. They answer the simple question, "Why do we do things like this?"

Stories engage employees and other stakeholders, support change management projects and establish connections with the community and other stakeholders. However, for a story to be effective, it must be related well. And storytelling is one way a manager can learn to communicate well and therefore manage effectively.

"Even though it's very hard to quantify, most people understand the costs involved when a workforce isn't managed well," Nesbit says. "Poor managers are a terrible burden to an organisation, whereas the self-aware manager is a good manager because they are a good communicator - displaying empathy, good decision-making skills and good problem-solving skills."

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COVER STORY: Down by the law.

As corporate law develops, more CFOs are asking: 'can these numbers send me to jail?'

The life of a senior finance executive used to be just about numbers: cash flow, profit and loss, assets and liabilities, forward budgeting. In this quiet existence, wrapped by the certitude of mathematical formulas, the satisfaction of a good day's work lay in the balance and form of a beautiful set of numbers.

Fast forward to 2006 and this same executive is analysing the same spreadsheet from a different perspective, asking not just whether there is balance, but rather, "Can these numbers send me to jail?"

The question relates to financial disclosure and transparency, and the answer will depend upon the jurisdiction in which the company operates. The sign-off regime will be even more onerous for dual-listed companies. And if the government's investigation into corporate responsibility is also included in a company's bailiwick, the role of the chief financial officer will become even more focused on compliance.

However, this is only half the story. As a company officer, the CFO holds statutory obligations, which, if breached, may incur individual penalties ranging from jail terms to stiff fines. "If we're potentially asking the CFO to manage and to sign off on risk management from a non-financial perspective, we're broadening the role of the CFO beyond what many CFOs have control over - and that's an unfortunate development," says Tom Honan, national president of CFO lobby group the Group of 100. "We've almost become a 'sign-off officer' rather than a 'financial officer'. "

Under the Corporations Act 2001, the CFO is defined as being an officer of the company and this carries responsibilities almost equal to that of a director. An officer is a director, a secretary or a person "who makes, who participates in making, decisions that affect the whole, or a substantial part of the business of the corporation; or who has the capacity to affect significantly the corporation's financial standing".

The role of an officer and the role of the CFO is more closely entwined following the judgement of Justice Austin in the Australian Securities and Investments Commission v Vines. This focused in part on the role of the former CFO of the GIO Group, Geoffrey Vines, who was found to have breached his statutory duty to exercise reasonable care and diligence in discharging his duties as an officer of the corporation.

"It would be very unusual for the CFO not to be an officer of the company," says corporate law specialist professor Bob Baxt.

"The recent decision of Justice Austin in the Vines case makes it quite clear that a person would be an officer - and certainly involved in the management of a company in the manner described in that case.

"The day-to-day implications of being an officer of a company mean that you have all the statutory obligations of the Corporations Act that are quite significant. The one lovely safeguard is that you are no longer liable for insolvent trading."

A recent addition to these obligations is the potential for a CFO to be responsible for a wider range of stakeholders' interests through the expansion of directors' and officers' duties to include corporate liability for environmental and social harm.

The federal government's joint committee of corporations and financial services has received upwards of 100 submissions from companies, unions, community groups and academics regarding the potential mandating of social responsibility reporting.

Companies have overwhelmingly rejected the proposals. "It is fundamentally difficult to mandate good, values-based business behaviour through legislation or regulation," stated Westpac's submission, for example.

In parallel, the Corporations and Markets Advisory Committee is examining the extent to which the duties of directors and officers under the Corporations Act should include corporate social responsibilities or explicit obligations to take account of the interests of certain classes of stakeholders other than shareholders.

Professor Michael Adams of the Centre for Corporate Governance at the University of Technology, Sydney, says: "Without doubt, I think what we're seeing is a convergence of what various parliaments around the world and also the courts are thinking, [that there] should be a raising of the standards expected of senior executives within the corporate world and in particular of financial executives.

"Since the AWA case in 1992, there has been a slow incline of expectations of what senior executives should do and what their responsibilities are - both from the community and from the courts, which are now truly reflecting that mood. And this is probably best expressed in the case of ASIC v Vines." In the AWA case, directors were found to have been unaware that their foreign exchange manager was taking big risks that all but sank the company.

The trickier issue for CFOs is not so much whether they are excused from breaches of section 588G of the Corporations Act (which deals, among other things, with directors' liabilities) or even whether they might be caught out for not properly addressing potential environmental or social harm, but whether the expansion of the responsibilities of their role as a company officer are unwarranted distractions from the purpose of their job.

This is certainly one of the arguments posed by the G100, which is concerned about these additional responsibilities of financial disclosure and transparency, and especially about accountability for corporate social responsibility (CSR) resting too much with the CFO.

"The role of the CFO is about a balance between the stewardship role and the strategist role," says Honan, who is also the CFO of ComputerShare. "If one of those roles is emphasised, then the other one suffers because not enough rigour is being taken to the financial strategy of the business.

The CFO will not be able to give appropriate assistance to the CEO in running the business because he or she will be distracted by the various governance related sign-off processes they are required to do.

"Yet if we're being required to sign off on CSR or non-financial risks, I think it's emphasising the stewardship role at the expense of the strategist role. Less attention will be paid to growth strategies and creating shareholder wealth in the long term, which is really what shareholders are interested in - and I don't think that's in anyone's best interest. It's about value-add versus 'ticking the box'. "

This is a view shared by Richard Goyder, the new chief executive of Wesfarmers and the third CEO in succession to have served as the company's CFO. "The challenge is to fulfil your role and the expectations of the company while also fulfilling the statutory obligations you have as CFO and as an officer of the company," he says.

"The two roles should never be in conflict. But what could happen these days - particularly with more and more prescriptive law - is that you can sometimes lose sight of what you're meant to be doing in order to fulfil those prescriptive obligations."

Goyder, who served as CFO from mid 2002 until his appointment as CEO, says the obligations on people involved in the financial management of a company - including the external auditors - are keenly felt. "Everyone has noticed an increase in those responsibilities. And it's understandable but also frustrating - because a lot of the time of talented people is taken up, internally and externally, on ensuring compliance above and beyond the letter of the law."

To combat the distraction and the potential to become too focused on compliance-based activities, Goyder advises his colleagues and subordinates to "apply the test of reasonableness".

"If it's sensible, if it's good business practice, if it's ethical and if it's legally responsible, then you're probably on the right track. Sometimes you have to step back from it and say, 'Hang on, where are we at? Anyone looking at this sensibly would say this is the right thing to do so, let's just move on and not tie ourselves in a knot over particular issues'. One of the things we guard very jealously in Wesfarmers is our reputation.

The flip side of that is that you take all this stuff very seriously."

Nonetheless, CFOs must ensure the integrity of the information upon which they base their final reports and, even more importantly, to which they put their signature.

At ComputerShare and at Wesfarmers, the culture of the company is not so much to push responsibility away but to create an awareness of accountability through the layers of the organisation. "With annual accounts, for example, we have very good management systems within the company which give us a transparent view of what's happening financially across the business," says Goyder.

"We've got a good internal audit program and we've got an autonomous structure in terms of our divisions.

The divisional chiefs have a lot of autonomy and with that flows accountability. So as business units and divisions sign off on their accounts, the CFOs in each of the businesses in fact sign off to the same extent with their businesses, as does the group CFO. So there are a lot of layers of control and that gives us a bit more comfort."

Wesfarmers manages its cash centrally and is looking at more ways in which to ensure control while acknowledging that this will increase compliance costs.

"One of the things that we're looking at doing is having someone at a group level spending a bit more time working with each of the divisions on best practice in financial reporting, particularly on financial accounts, making sure that we're not missing anything or doing something better in one division than in another."

At ComputerShare, which has operations in Australia and around the world, Honan employs a concept of a "cascading sign-off".

"We've made it a 'whole of governance' issue for the layers of people. If there are particular issues that I'm concerned with in an acquisition then I make sure that everyone recognises that they're going to have to sign off on those issues on a half-yearly basis to me and my staff but also to the business unit heads as well. I think that has been a welcome attribute that has come from the process. So it's not just a 'tick-the-box' thing; we are getting something out of it.

"The company is quite diversified geographically with 15 per cent of our business in Australia and 85 per cent in about 16 countries all around the world, and for me to get any sort of comfort [about the integrity of our financial reporting] means that I either spend 48 weeks a year on the road or I have an appropriate, tiered sign-off process in place. And as I'm interested in staying happily married and with my children still knowing who I am, it's the tiered sign-off process that wins out."

The strategies that CFOs can use to ensure full and proper disclosure extend to their personal conduct. For example, Chris Skilton, CFO of Suncorp, believes that the legal obligations of an officer are so similar to that of a director, that for a CFO to be also on the board is an idea that holds much merit.

"The significant increase in the responsibility of CFOs as a result of a much greater focus on corporate governance requirements, means, in my view, that it would be increasingly difficult for the CFO to make the required representations without being a member of the board," he says. "The reason is that these representations require full knowledge of the company's activities, which cannot be guaranteed unless one is a full board director."

Skilton's approach is regarded as controversial by his colleagues, who argue that the time a CFO spends attending board meetings amounts to the same level of representation.

"I'm not on the board at ComputerShare, yet I attend every board meeting," Honan says. "The only parts of the board meeting that I miss are the ones that are discussing things which are frankly none of my business, such as the remuneration of my peers.

"Personally, I find it difficult to see how there could be more than one executive director on most boards. If boards are meant to be equal in stature, apart from the chairman, I think it would be awkward for my boss to be my superior one day and my peer the next."

Goyder offers an alternative view. "Most CFOs I know who aren't a director of the company attend board meetings. When I'm talking about succession planning or executive salaries, then the two other executive directors of our board are excused from the board meetings.

"In terms of board structure, you've just got to stand back and ask, 'What's the best way for the group to operate?' And from our point of view we think it's valuable having the finance director on the board because they add value to the board discussions. And if you're going to be there, why not be on the board, I think."

If CFOs are to be directors, should they restructure their personal finances to protect themselves from breaches of their statutory duties?

"It would be prudent, in moving to the position of CFO, to carefully consider their financial position and where their assets are held," says Michael Adams, who is also the Perpetual Trustees chairman of financial services law and a professor of law at UTS.

"This is not specifically to avoid the law, because the law does have ways of piercing such veils - particularly where there's an attempt to avoid an obligation.

''But in terms of anyone holding a senior position to review their financial position and how they structure their personal assets, it is a wise thing to do. And the most sensible approach is to seek professional, independent advice and to ask about the most effective method of holding personal assets."

Interestingly, this view isn't necessarily shared by practising CFOs. "I would like to think that CFOs have better things to do than worry about organising their private finances to keep the wolves from the door," Honan says.

"If they spend their time ensuring that the business is running appropriately and proper practices are all in place, then they don't need to spend the same amount of time protecting themselves."

Says Goyder: "The best thing you can do to protect yourself is to have good people working for you, to ensure you have good processes and systems in place, to ensure you're making appropriate inquiries, and you're acting responsibly and ethically. I personally think that if everyone felt they had to [carefully structure their private finances] because their obligations had reached such a point it would be sad. I'm not a great one for shifting all your assets out of your name, because it's a bit of a fatalist attitude."

Adds Baxt: "The main protection in avoiding liability is to a) make sure you do your job properly and don't take short cuts; b) to note areas where there is concern and dissent, and identify those points and make a special point of bringing it to the attention of someone within the company framework.

"I think a CFO would want to be genuinely concerned that what they were doing was being done properly and in accordance with the way they believe they should conduct their lives. But there's nothing to be afraid of - it's only those people who want to be sloppy and want to get around making decisions in a proper way who I think run the risk of falling foul."

Overall, however, Adams says the best advice for a CFO to operate effectively within a more onerous regime is to simply "do the right thing" and to encourage this culture throughout the organisation. And in particular throughout the finance function - encompassing treasury, control and other finance-team officers.

"I think in reality there should be no actual change to what people are doing - in the sense of, if you are working for an organisation which sets for itself a high standard of corporate governance, due diligence and compliance within the organisation and takes these issues seriously, then you're already doing the job.

"The most important issue for the CFO is whether they feel confident that their colleagues and people reporting to them are doing their job up to the appropriate standard. "We've always had a high standard of expectations of professionals but the issue is much more about, 'Am I confident that all layers of the organisation are giving me the correct data and are doing their jobs correctly without conflicts of interest?' 'Can I prove that information is reliable?' 'If I were asked by a regulator, can I show that this is the way I go about finding information and verifying that information?' "This is the great challenge for the CFO and you need a variety of strategies to make sure that people both understand your corporate culture and what it means to have a culture of compliance; to show that it's not just about 'ticking boxes' and that there is a general investment from the senior management - not just from the CFO.

"This message needs to say, 'This is important.

We understand it comes at a cost, but it's talking about the long-term sustainability of an organisation and, with that, a reduction in risk management."

Rather than ask whether creating such a corporate culture then ensuring adherence to its principles is difficult, Adams says it's better to simply make it a "conscious effort".

"It means actually having systems in place, reviewing those systems and then being willing to challenge - either by bringing in external experts to review, or working closely with the auditors and from time to time doing things differently and just seeing the consequences."

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