Who's Better for Business?

The Flaws In Human Capital Data What Banks Demand from CFO Borrowers

OCTOBER 2016 | WWW.CFO.COM CLINTON v.TRUMP WHO’S BETTER FOR BUSINESS? www.bhspecialty.com

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COVER 28 STORY Clinton v. Trump: Who’s Better for Business? The choice for president is between big change now but few details, and gradual change with deep details. By Russ Banham 36 The Holes In Human Capital Metrics Prodded by investors, some companies are disclosing more data about their workforces. But how much value will that information have? By David McCann

36 40 ›› Special Report: Banking The Rules of Attraction How do corporate borrowers keep their bank lenders happy when there is so little profit to be made by providing lines of credit? By Vincent Ryan

Cover: Getty Images; clockwise from top left: Getty Images, Thinkstock cfo.com | October 2016 | CFO 1 CONTENTS October 2016 Volume 32, No. 8 12 Up Front

4 ›› From the Editor 6 ›› Letters 8 ›› Topline w The SEC wages war on non-GAAP w choosing the optimal CFO w CFO pay rises significantly w money market holdings need more disclosure w specialty drugs spur health benefits cost increase w smartwatch sales sink w and more. 12 14 | RISK MANAGEMENT 22 | ACCOUNTING Will Insurers Embrace The Cash-Flow Clash Innovation? After years of neglect, cash-flow Technology can change the statements get FASB’s attention. w relationship between the insurer By David M. Katz and the insured. w By Vincent Ryan 24 | COMPLIANCE Risk Factors Vex Tech How to Meet the New Cybersecurity, customer loss, and Overtime Pay Rules heightened regulation are among Employers have several things to 22 the top risks facing tech firms. consider to comply with the new w By David McCann Department of Labor regulation. Here are some guidelines. w By Andre Volin

26 | SUPPLY CHAIN Show the Purchasing Department the Door Purchasing department employees must spend more face-to-face time with suppliers to drive true value. 48 18 | TECHNOLOGY w By Christopher Good The Wide Wide World of IoT Think CRM and ERP were trans- Focus on Days of Supply formative? The Internet of Things Freeing up cash in the supply promises to bring far more chain allows a company to dramatic change to business. increase shareholder value. w By Timothy Chou w By Nader Mikhail

By the Numbers 48 ›› The Quiz 44 ›› BUSINESS OUTLOOK 46 ›› FIELD NOTES Reality Check Duke University/CFO Survey Results Perspectives from CFO Research The payments revolution is proceeding at a slow Don’t Tell Me, The Transformers pace in the business-to- How finance leaders are developing business world. Companies are using electronic pay- Show Me the capabilities they need to The third-quarter Duke/CFO ments in customer and implement dramatic change in supplier transactions, but Business Outlook Survey finds CFOs their automation of processes and not as often as you might will slow spending while awaiting use of analytics. think. Take our quiz to find a new president’s policy decisions. By Josh Hyatt out more. By Chris Schmidt

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Vote for Growth ››I’m writing this column on the eve of the first U.S. presidential debates, and the race appears to be tightening. Among CFO readers in an unscientific survey in September, however, the race wasn’t close at all. The survey respondents clearly favored Republican candidate Donald Trump EDITOR’S PICKS over Democratic candidate Hillary a global market in which tariffs are Clinton. slapped on their goods because foreign The choice is hard to fathom, unless companies are forced to retaliate (a) Trump supporters, given their stri- against isolationist U.S. trade policies? dency, were much more motivated to Or find themselves in an economy fill out our survey or (b) chief financial deprived of the stimulus young immi- officers are disgusted with U.S. politics grants bring when they emigrate here and want an outsider, any outsider, and start consuming U.S. goods and to be the next president. There are services? PERFORMANCE many other unsavory possibilities, but The country can do better than the CFO’s Corporate Performance we shudder to think that a person as candidate either major party has nomi- Management Summit takes intelligent as the average CFO would nated. But given a choice between the place in Miami on January 25-26. not vote for Clinton (a) because she is two in November, I hope CFOs vote This year’s theme is “Accelerat- ing CPM.” Speakers include the a woman or (b) because she is not call- for a forward-thinking, highly qualified CFO of Firehouse Subs, the head ing for deportation of immigrants. candidate whose policies will keep the of finance at Swarovski, and the The fact is that Hillary Clinton is economic engine steaming ahead, and vice president of global procure- far from the ideal candidate for U.S. not one trumpeting protectionist poli- ment for the NBA. For more in- president. I’m sure CFOs can easily see cies that would assuredly constrict the formation, go to https://theinno- the contrast between their own highly growth of U.S. businesses inside and vationenterprise.com/summits/ accountable roles as finance chiefs of outside our nation’s borders. A clearer corporate-performance-manage- public companies and Clinton’s lack of choice for president has rarely existed. ment-summit-miami-2017. accountability as U.S. secretary of state for a rogue email server. But a Trump presidency, I think, Vincent Ryan will set U.S. multinational businesses Editor-in-Chief back 40 years or more. Do U.S. companies really want to be penalized by DECISION MAKING the federal government for opening When should you trust your gut? manufacturing sites in Mexico? Or face Almost never, at least when making business decisions, according to Nobel laureate Dan- iel Kahneman and psychologist Gary Klein. Read a McKinsey Quarterly interview with them

CFO, Vol. 32, No. 8 (ISSN 8756-7113) is published 10 times a year and distributed to qualified chief financial officers by CFO Publishing LLC, 295 Devonshire at http://www.mckinsey.com/ St., Suite 310, Boston, MA 02110 (editorial office). Copyright ©2016, CFO Publishing LLC. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, business-functions/strategy-and- without the prior permission of CFO Publishing LLC. Requests for reprints and permissions should be directed to FosteReprints, (866) 879-9144; E-mail: [email protected]; website: www.fostereprints.com. Periodicals postage paid at Boston, MA, and additional mailing offices. POSTMASTER: Send corporate-finance/our-insights/ address changes to CFO, 45 West 45th Street, 12th Floor, New York, NY 10036. CFO is a registered trademark of CFO Publishing LLC. SUBSCRIBER SERVICES: To order a subscription or change your address, write to CFO, 45 West 45th Street, 12th Floor, New York, NY 10036, or call (212) 459-3004; or visit our website strategic-decisions-when-can- at www.cfo.com/subscribe. For questions regarding your subscription, please contact [email protected]. To order back issues, call (212) 459-3004. Back issues are $15 per copy, prepaid, and VISA/MasterCard orders only. Mailing list: We make a portion of our mailing list available to reputable firms. you-trust-your-gut.

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THE ➽ Big buyers may hold most of the article were not impressed, to Perhaps these readers cards over smaller suppliers when it say the least. “B.S.!” cried one. BUZZ were incited by the article’s comes to extending payment terms, “Big fleas have little fleas on headline, which may have but there are ways to mitigate the their backs to bite ’em, and little overstated the author’s case. fallout to the latter, argued postdoc- fleas have smaller fleas and so on ad He posted a comment that defended toral research fellow Spyros Lekkakos infinitum. Just pay up and on time.” the article in several respects. For ex- in “How Delaying Payments Can Help Getting more specific, another ample, he wrote, “The article does not Suppliers” (CFO.com, Aug. 12). reader commented that “the sugges- claim that extending payment terms Lekkakos characterized two ar- tion that efficiencies captured by Uni- to SME suppliers is something good. rangements as workable solutions to lever were passed on to suppliers in On the contrary, it clearly states that cash-hungry suppliers increasingly the form of higher order volumes [and [the] supply chain is always better off getting stuck with extended pay- that this] was, in effect, a win-win … when there is no terms extension.” ment terms by their big customers: is laughable. Anyone with an ounce of (1) buyers, based on the cash efficien- experience [who] is getting the best Correction: cies gained from the extended terms, value out of key supplier relation- The first paragraph of our September reward suppliers with larger volume ships knows that extending payment story on robotic process automation deals (Unilever’s experience was terms through coercion is counterpro- (“Robots, Robots Everywhere”) unwit- given as an example); and (2) “reverse ductive, erodes trust, and promotes tingly transposed a pair of words. It factoring,” where the buyer pays its cheating or guile from suppliers.” defined the “singularity” as the proph- invoices to a bank at the extended Another commenter suggested esied moment when “humans become terms, but the bank pays the supplier that, “maybe the author can tell his smarter than machines.” Actually, the early, charging a fee for the service. employer he can wait 90 to 120 days singularity would occur when ma- A number of suppliers who read the for his paycheck.” chines became smarter than humans.

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6 CFO October 2016 | cfo.com Welcome to Ohio. It’s on. STATS OF THE MONTH Topline

ACCOUNTING SEC Wages War HOMEFRONT On Non-GAAP Metrics 31% The commission is leaving no doubt that misuse of non-GAAP Non-retired persons financial measures is in its crosshairs. in the U.S. who

have no retirement ▼ Companies haven’t wast- nies that included presenta- recent years. The C&DI’s savings or pension ed any time in reacting to tions of two or more non- reflected the SEC’s concern a series of compliance and GAAP financial measures that the way companies are disclosure interpretations plus guidance on at least using such metrics may be (C&DI) on the use of non- one such measure. Among misleading to investors. 42% GAAP metrics that the Secu- these earnings releases, 79 Companies are allowed Households with an rities and Exchange Commis- contained modified disclo- to use non-GAAP metrics. annual income of sion issued on May 17. sures compared with those When they do use them, below $40,000 in the Law firm Debevoise & made in previous earnings however, SEC regulations last 12 months Plimpton analyzed 100 earn- releases. require them to also pro- ings releases issued since The use of non-GAAP vide, “with equal or greater then by Fortune 500 compa- metrics has proliferated in prominence,” a presentation $12,000 Median higher Non-GAAP Presentation Changes education debt % of earnings releases with change for adults with an outstanding student Presentation of GAAP and non-GAAP metric reordered to 36% loan present GAAP metric first

Non-GAAP metric replaced with comparable GAAP metric 29% in same location

46% Augmented/modified non-GAAP reconciliation disclosure 29% Adults who had a major medical Supplemented non-GAAP discussion with GAAP metrics 18% expense in the past Non-GAAP metric no longer discussed or highlighted in year and owe debt 15% from that expense CEO quote

Non-GAAP metric omitted from entire earnings release and/or 10% replaced with a comparable GAAP metric

Source: Federal Reserve Added disclosure indicated that an omitted non-GAAP Report on the Economic 10% Well-Being of U.S. House- reconciliation was not available without “unreasonable efforts” holds, May 2016, based on a survey of 5,695 U.S. adults Source: Debevoise & Plimpton analysis of 100 earnings releases issued by Fortune 500 companies since May 17, 2016

8 CFO October 2016 | cfo.com of the most directly comparable finan- Since issuing the interpretations in and data-protection solutions. cial measures calculated in accordance May, the SEC has continued to turn up In both cases, the misuse of non- with GAAP. They also must provide the heat, sending more than 30 com- GAAP metrics was “egregious,” ac- reconciliation between the non-GAAP ment letters to companies about their cording to Kaplan, involving much measure (adjusted EBITDA or free use of non-GAAP metrics. The com- more than simply the way the metrics cash flow, for example) and the most mission also reportedly conducted a were presented. comparable GAAP measure (net in- sweep of earnings releases that result- But, says Kaplan, companies come or operating cash flow). ed in letters to many other companies. shouldn’t rest easy just because they “The members of the commission In addition, on Sept. 8 the SEC are merely falling short of presenting have been focused on this for more charged the former CFO and former non-GAAP metrics appropriately and than a year,” says Matthew Kaplan, co- chief accounting officer of American not acting with nefarious intent. head of the capital markets group at Realty Capital Properties (now called “Whether a number is inflated or Debevoise & Plimpton. “They’re not VEREIT) with misuse of a non-GAAP the disclosure just fails to comply with saying you can’t highlight non-GAAP measure. SEC guidance, the SEC views either as metrics. They’re saying you can’t give The case is notable because of its problematic.” says Kaplan. them undue prominence.” extreme rarity. Kaplan conducted a A July blog post by Audit Analytics In response to the CD&I’s, compa- search and could find only one prior suggested that if non-GAAP reporting nies have made many different report- such action. That was a 2009 case “isn’t topic number one among regula- ing changes (see table, page 8). against SafeNet, a provider of identity tors, it must be close.” ◗ DAVID McCANN

CAREERS The Optimal CFO? It Depends

▼ Finance chiefs with accounting back- On the other hand, for companies in grounds aren’t well suited for high- low-growth industries whose revenue growth industries, on average, new was increasing, accountant CFOs were research shows. associated with 19% greater cost effi- A paper in the Journal of Accounting ciencies. and Economics documented the re- “Because low-growth industries of- sults of a study of 2,524 and 2,546 “firm fer limited expansion opportunities and years”—one year for one company—in require greater cost efficiency to main- low-growth and high-growth indus- tain a competitive advantage, firms in tries, respectively, between 2000 and 2010. “Accountant those industries may benefit from greater risk aver- CFOs” were identified as those with CPAs or experience sion,” the authors wrote. “In high-growth industries, working as an external or internal auditor or control- however, a more conservative corporate investment ler at some point before their appointment as CFO of a strategy may hinder value creation.” publicly held company. Another research result bore out that last state- During the study period, “high-growth industries” ment. Company value—as measured by Tobin’s Q, or included business services (which incorporates soft- the ratio of the market value of a company’s assets to ware), electronic equipment, and pharmaceuticals, the replacement cost of those assets—was 3.7% high- while transportation, oil/petroleum, and heavy machin- er among low-growth-industry firms with accountant ery were low-growth industries. CFOs. But at high-growth-industry firms with accoun- The results were stark. Accountant CFOs in high- tant CFOs, company value was 4.4% lower. growth industries were associated with 7.4% lower in- The study’s results could have been somewhat dif- vestment expenditure and a 14.6% lower likelihood of ferent if data from recent years were included, Kurt ac- engaging in external financing. “Lower investment in knowledges. risky projects and limited exposure to capital markets “After Sarbanes-Oxley, companies wanted CFOs with are both consistent with greater risk aversion on the stronger accounting backgrounds,” he notes. “Many part of accountant CFOs,” wrote the authors, Rani Hoi- companies may be realizing that’s not working out for tash of Bentley University, Udi Hoitash of Northeastern them, because they’re hiring fewer and fewer accoun- University, and Ahmet Kurt of Suffolk University. tant CFOs.” ◗ D.M.

Thinkstock cfo.com | October 2016 | CFO 9 Topline

COMPENSATION Top CFOs’ Pay Rises 18.7%

▼ The compensation for finance chiefs at America’s top Highest-Paid CFOs, 2015* companies has grown 18.7% over the past five years, with Total performance-based equity significantly increasing its share Compensation† of the pay package, according to a new survey by Equilar. Company CFO (in $mil) The research firm reported that median CFO total compensation in the S&P 500 rose from $2.9 million in 2011 to CBS Joseph Ianniello $26.4 $3.4 million in 2015. That growth outpaced pay for CEOs, which increased 16.9% to $10.4 million during the same Apple Luca Maestri $25.3 period. Total CFO compensation at the 25th percentile saw the most growth, increasing 26.3% from $2.0 million to $2.5 Goldman Sachs Harvey Schwartz $20.5 million. According to Equilar, finance chiefs in a wide variety of Facebook David Weiner $16.8 sectors have benefited from the pay growth, with median compensation increasing more than 9.5% in consumer Yahoo Ken Goldman $15.0 goods, financial, technology, and utilities from 2014 to 2015. * S&P 500 companies On the other hand, health care, industrial goods, and servic- † Includes salary, bonus, grant-date fair value of stock and options es companies reduced pay by more than 4.5% at the median. awards, and other compensation, but excludes pension and deferred compensation As far as pay components, the most notable trend identified in the survey is the growing prominence of equity pay Source: Equilar contingent on performance. “In the wake of Dodd-Frank and the passing of ‘say on Over the past three years, in fact, performance-based pay,’ equity compensation contingent on performance goals equity has pulled away as the most prevalent equity vehicle, has become the primary vehicle in executive pay packages with 78.7% of S&P 500 CFOs receiving these awards as part because it philosophically aligns executive incentives with of their equity package in 2015, compared with 64.1% in 2011. company growth and shareholder value,” Equilar said. ◗ MATTHEW HELLER

TECHNOLOGY Smartwatch Sales Sink

▼ Worldwide sales of smartwatches plummeted in the later this year, effectively stalling existing Apple Watch second quarter of 2016, according to preliminary data sales,” stated Jitesh Ubrani, senior research analyst for from International Data Corporation’s quarterly Wear- IDC Mobile Device Trackers. able Device Tracker report. Vendors shipped 3.5 million IDC does expect the overall smartwatch market to units that quarter, down from 5.1 million one year ago. begin growing again, but it will take some product in- Apple took the biggest hit, with sales of the Apple novation. “Continued platform development, cellular Watch down 55% with 1.6 million units shipped. Apple’s connectivity, and an increasing number of applications market share also slipped, to 47% from 72% one year all point to a smartwatch market that will be constantly ago. No other vendor in the top five saw an annual de- changing,” said Ramon T. Llamas, research manager for cline in sales. Samsung, the market’s distant number IDC’s Wearables team. two player, saw a 51% increase in units shipped, and Vendors must also develop a better use case, says Lenovo, in third place, increased smartwatch ship- the report. In addition, participation by traditional ments 75%. watchmaker brands “is imperative to deliver some of “Consumers have held off on smartwatch purchases the most important qualities of a smartwatch sought since early 2016 in anticipation of a hardware refresh, after by end-users, namely design, fit, and functional- and improvements in WatchOS are not expected until ity.” ◗ VINCENT RYAN

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HEALTH CARE Specialty Drugs Driving Costs

▼ According to reports released in August In this year’s NBGH survey, for the first by the National Business Group on Health time, specialty pharmaceuticals were iden- (NBGH) and Willis Towers Watson, overall tified as the biggest driver of health costs. health benefits costs (the cumulative total Among 133 respondents, 80% placed such borne by employers and passed to workers) drugs as one of the top three cost drivers, for large companies are projected to increase followed by high-cost claimants (73%) and by 5% in 2017. specific diseases and conditions (61%). In ad- That figure incorporates changes to health dition, 31% of the NBGH survey participants plan design that employers are expected to specifically identified specialty drugs as the make to keep health care cost hikes at bay. top culprit in rising costs. As recently as 2014, Without those changes, such costs would rise by 6%, the only 6% of those surveyed did so. two organizations say. Pharmaceutical costs, which on average account for 15% According to NBGH’s annual surveys of large employ- to 20% of employers’ medical spending, are rising twice ers, the expected increase for 2017 is about the same as that as fast (about 10%) as overall health costs, according to experienced in the past few years. Willis Towers Watson multiple published reports. But a majority of that rise is data, on the other hand, shows health cost hikes as having attributable to the specialty drug category. Many drugs hit a nadir since the turn of the century of about 4% from for treating cancer and other severe conditions now cost 2013 to 2015, so the forecasted 5% rise represents an uptick. $10,000 a month or more. ◗ D.M.

CASH MANAGEMENT Deeper Disclosure Needed?

▼ From current financial reports, it’s impossible to tell new regulations. whether companies are parking cash in prime or gov- Nonfinancial corporates ernment money market funds. So, in light of money historically have been big market fund reform, corporations that heavily rely on investors in money funds money funds for cash management may need to en- in absolute terms, holding hance disclosures and risk management, according to $573 billion in money fund a report from Fitch Ratings. investments as of the end of the first quarter of 2016, Regulatory changes to money funds coming into according to Federal Reserve data. effect on October 14 are expected to cause some U.S. Fitch’s analysis of the nonfinancial firms in the For- companies to re-examine their comfort level with prime tune 100 showed that 33 noted investments in money money market funds. That’s because the reforms allow funds and 22 disclosed the amount invested in mon- institutional prime money funds, in particular, to re- ey funds. For the 22 firms that disclosed investments, strict an investor’s liquidity during times of stress. money funds accounted for 26% of their cash and cash The rules, created in response to disruption in mon- equivalents on average. Walgreens, for example, held ey fund markets during the financial crisis, allow a $2.4 billion in money funds in the first quarter, which fund’s board of directors to impose liquidity fees on accounted for as much as 72% of its cash and cash shareholders looking to redeem cash, or to restrict fund equivalents. redemptions altogether, if the fund’s liquidity level falls According to Fitch, however, “it is unclear whether below the required regulatory threshold. [companies] invest in prime funds, government funds, The restrictions are going to cause some treasur- or both. For corporations that continue to rely on mon- ers to shift excess cash into government money market ey funds, enhanced disclosures and risk management funds, which typically hold low-risk government and will be important to appropriately monitor key weekly municipal debt securities. They are not subject to the liquidity measures in prime funds.” ◗ V.R.

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Will Insurers Embrace Innovation? Technology can change the relationship between the insurer and the insured. By Vincent Ryan

At an Advisen insurance industry conference in Beyond the ‘Grudge’ Renewal ›› September, a speaker asked the rhetorical question, In insurance, innovation (as far as it is visible) will be about strengthen- “Is insurance industry innovation an oxymoron?” Certainly ing the connection with the customer, few would argue that insurance never innovates. But few whether a business or a person. In- would also characterize the industry as a hotbed of creativ- surance buyers tend to have very low expectations for the relationships ity and inventiveness. ¶ One problem, according to a new currently. As one corporate risk manager said at the Advisen conference, study, could be the risk- “Everything that makes you select a averse culture. The study carrier depends on the payment of surveyed 500 retail finan- claims. Everything before the claim is cial services and insurance the pre-season. If the claim isn’t fairly industry executives across managed, nothing else matters.” 56 countries to examine the To get the insurer–insured relation- challenges they face in a ship to something more than an annual time of rapid technological renewal—a “grudge” purchase domi- change. The survey was con- nated by price—or the stress point of a ducted on behalf of Pegasys- claim, the Internet of Things (IoT) is go- tems and Cognizant. ing to play, and is currently playing, an Nearly every respondent important role. Of the potential for the (98%) said that insurers, in IoT to change insurance, the Pegasys- order to innovate, need to tems report says the following: “For the “think beyond traditional under-pressure insurance industry, the boundaries” and “identify IoT will undoubtedly be a data shot in new ways of meeting cus- the arm. A sector that has seen margins tomer needs.” But 61% also said their itors would be “massively” or “signifi- shredded by a fire-storm of price-driven governing boards would tolerate a cantly” disruptive to the industry. competition and spiraling claims costs maximum failure rate for innovation And why will they be able to dis- is being presented with a one-time-only pilots of only 30% or less. To cultivate rupt insurance? The reason is the sec- opportunity to reinvent itself.” a culture of innovation, “a 50% failure ond driver, the customer base. Banks That reinvention will be about hav- rate should be the absolute minimum,” and insurance companies will have to ing the capability to capitalize on data says Graham Lloyd, director and in- change their operations significantly flows from sensors embedded in vehi- dustry principal of financial services, over the next five years to keep pace cles, household appliances, buildings, Pegasystems. with young customers. By 2020, the personal fitness trackers, and other The “safety-first” culture seems report says, U.S. millennials will have connected devices. These data inflows deeply rooted. But innovation is com- annual spending power of $1.4 tril- will provide data-driven insights to ing, driven from two directions. The lion. One study found that millennials better manage risk, identify the in- first is digitally savvy new entrants would be more excited by new finan- sured’s unmet needs, offer “dynamic into financial services, the so-called cial services offerings from Google, pricing based on actual customer be- fintech players. More than one-third of Amazon, Apple, PayPal, or Square than havior,” and allow insurers “to finely survey respondents said these compet- from their own banks. calibrate their risk exposure.”

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© 2016 Liberty Mutual Insurance. Insurance underwritten by Liberty Mutual Insurance Co., Boston, MA, or its afﬁ liates or subsidiaries. “By sharing the insights gleaned Beyond IoT, technologies such as from IoT to validate a claim—evidence from a customer’s day-to-day behav- smart contracts (computer protocols of rain damage to a crop—could then iors,” according to the Pegasystems that facilitate, verify, or enforce the ne- auto-trigger the filing of a claim, which report, “insurers will be able to ‘nudge’ gotiation or performance of a contract) is then promptly settled via a smart customers toward behaviors that re- and blockchain (the technology under- contract on the blockchain,” the Pega- duce their daily risks.” For example, an pinning bitcoin) have the potential to systems report explains. insurer could inform a driver that “their transform the costly claims process. Can technology end the eternal favored route to work has black ice and In the survey, 47% of respondents ex- “soft” insurance market that carriers recommend safer alternatives, inform a pected that the settlement of insurance find themselves in? Maybe, maybe not. driver when it is time for an oil change, claims using IoT, the blockchain, and But insurers won’t know unless they or use data from a fitness tracker to ad- smart contracts would be mainstream find the will to experiment with and vise a diabetic to test their blood sugar.” within five years. “Drawing on data embrace new technologies. CFO

Risk Factors Vex Tech the steep rise of goodwill impairment among the most important activities. Cybersecurity, customer as a risk factor in recent years. “You can’t lock up IP with a physical loss, and heightened regu- Another risk factor that became lock and key, and if somebody access- lation are among the top more prominent in 2015 annual reports es it or infringes on it, the company’s risks facing tech firms. was loss of government contracts and value can erode quickly and signifi- incentives, reported by 57 of the 100 cantly,” he notes. Five years is a long time in the technol- largest technology companies, up from Additionally, many tech firms are ogy industry, so perhaps it’s not sur- 47 in 2014. “There is more competition exposed to the risk that their products prising that the risk profiles of major for government contracts, and we have will contribute to breaches suffered by tech firms have changed markedly in observed some cuts in defense-related their customers. “Any cyber incident is that time. spending and other federal budgetary the result of a vulnerability or flaw in In fact, some risk factors have be- constraints,” says Jamil. technology,” says Shahryar Shaghaghi, come significantly greater concerns Two risks—cyber- leader of BDO’s technol- rather suddenly. For example, among security and regula- ogy advisory services the fiscal-year 2015 10-K filings of the tion—were cited by practice. “While the 100 largest U.S. tech firms, 61 reported all 100 companies in onus is partly on the user loss of a major customer as a risk fac- their annual reports. entity to implement ap- tor, according to an analysis by BDO. The former complet- propriate protocols and Just a year earlier, only 44 did so. ed a steady march policies, the technology A leading cause of that shift is accel- upward in recent manufacturer or ser- erating merger-and-acquisition activity years; in 2011 reports, vice provider does share in several technology subsectors—like only 71% of the larg- in the blame—whether the semiconductor business, with Intel, est technology com- warranted or not.” Singapore-based Avago, and NXP all panies reported cyber risk. Regulatory risk, meanwhile, has having completed big deals in 2015. That shift has occurred even though always been of great concern for the For many tech firms, the sale of technology companies were the vic- tech industry. One topic that is cur- components or solutions to other tech tims of only 2.6% of total reported rently on the minds of many industry firms is a primary source of revenue, data breaches since 2010, according to CFOs is the new revenue recognition notes Aftab Jamil, leader of the tech- TrendMicro. While the kind of data rules slated to take effect in 2018. In nology and life sciences practice for tech firms have may be less useful to BDO’s most recent Technology Out- BDO. When a major customer is ac- wrong-doers than that possessed by fi- look Survey, 31% of technology finance quired, that account may be in jeop- nancial services, retail, and health-care chiefs admitted that they’re still trying ardy. “If there is consolidation in your companies, there is still a great focus on to understand the changes. target sector, maybe instead of selling securing internal systems, Jamil says. Jamil characterized that result as to five big customers you now have But other types of cyber risk are far “somewhat disappointing,” because only three left,” Jamil says. greater for tech firms than for others. the new standard was finalized in 2014 The growing presence of M&A in For example, protecting against theft and its effective date was delayed for a the tech industry can also be seen in or misuse of intellectual property is year. ◗ DAVID McCANN

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The Wide Wide World of IoT Think CRM and ERP were transformative? The Internet of Things promises to bring far more dramatic change to business. By Timothy Chou

Many people think the Internet of Things (IoT) is IoP Applications The first generation of enterprise ap- ›› about your toaster talking to your refrigerator. While plication software from SAP, Oracle, there will no doubt one day be very useful consumer IoT Siebel, PeopleSoft, and Microsoft lever- applications, more immediately there are many industrial aged the availability of low-cost, client- server computing to automate key applications, and many more potential ones, to consider. financial, HR, supply chain, and pur- This article constructs a framework for precision technol- chasing processes. The business model was based on licensing the application ogy—that is, an organiza- software, and the purchasing company tion of the technologies was left with the responsibility (and that will enable the build- cost) of managing the software’s secu- ing of precision machines. rity, availability, performance, and any Most first- and second- updates or upgrades. generation enterprise Around 2000 there came the second software was focused on generation of enterprise application us—people, whether indi- software. It was largely differentiated viduals or groups. Appli- by a fundamental shift in the delivery cations were designed to model. The software provider took help people do something on the responsibility of managing the useful, like buy a book, software, and with that change came a issue a purchase order, change to the business model. recruit employees, or Rather than an upfront licensing fee, communicate with others. a software-as-a-service (SaaS) model But things are not people. emerged, which allowed customers to That may seem obvious, purchase the service monthly or annu- but there are at least three ally. Key business suppliers from this fundamental differences that matter for comparison, may have many sensors. A era included Salesforce.com, WebEx, purposes of this discussion. typical cell phone has about 14 of them, Taleo, SuccessFactors, NetSuite, Vo- There are a lot more things than including an accelerometer, a GPS, and cus, Constant Contact, and Workday. people. These days, you can’t be on even a radiation detector. Industrial As a result, most basic corporate the Internet and not see some pro- things like wind turbines, gene se- functions—sales, marketing, purchas- nouncement about how many things quencers, and high-speed inserters can ing, hiring, benefits, accounting—have are going to become connected. John easily have 100 sensors. been automated. You can debate the Chambers, former CEO of Cisco, de- Things can talk constantly. Peo- effectiveness of the automation, but clared there will be 500 billion “things” ple don’t actually enter data all that while the resulting improvements in connected by 2025. That’s about 70 frequently into Internet of People (IoP) operational efficiency through CRM or times the number of people currently applications for e-commerce, human ERP software are good, they’re hardly living on this planet. resources, purchasing, customer rela- transformative. It’s really only in the Things can tell you more than tionship management, or even enter- areas of retail (think Amazon) and people can. The main mechanism peo- prise resource planning. But a utility banking (think eTrade or PayPal) that ple use to communicate with applica- grid power sensor can send data 60 software has transformed businesses. tions is a keyboard, and most applica- times per second, a construction fork- Perhaps now, with the changing tions use some kind of form to collect lift once per minute, and a high-speed economics of computing, the contin- simple data from people. Things, by inserter once every two seconds. ued innovations in communications

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MANAGED SECURITY | MANAGED NETWORK | MANAGED WIFI ©2016 Bright House Networks. Some restrictions apply. Serviceable areas only. Service provided at the discretion of Bright House Networks. technology, and the decreasing cost Moore’s Law, becoming dramatically to learning from data about people. of sensors, we can move to a third less expensive every year. They are As with all layers in the stack, there is generation of enterprise software. It increasingly attached to low-cost com- much room for future innovation. will tackle the challenges of precision puters, which can range from simple Do: As with IoP applications, there agriculture, power, water, health care, microcontrollers to fully featured will be both packaged applications and transportation, and fundamentally CPUs supporting the ARM or Intel (ERP, CRM) and middleware to build reshape businesses and our planet. instruction set architecture. IoT applications. Of course, in the end As you move to more powerful pro- these applications—whether bought IoT Applications cessors, more powerful or built—will have to drive In order to organize the technology software can be sup- business outcomes. of IoT, let’s define a simple five-layer ported—but as power- As machines become framework. The first layer is composed ful as that software is, increasingly complex and of things. We’ll use the words “things” it becomes a point of enabled by software, many and “machines” interchangeably. vulnerability in our hos- of the lessons learned in In the second layer, things are con- tile world. software maintenance and nected to the Internet in many different Connect: Things service will also apply to ways. The third layer consists of tech- can be connected to machine service. As many in nologies that collect the data, which are the Internet in a variety the software industry al- increasingly time-series data being sent of ways. Connecting ready know, the movement Timothy Chou every hour, minute, or second. things requires a di- to delivering SaaS has revo- The fourth layer is about learning. verse set of technolo- lutionized the industry. The Unlike IoP applications, which entice gies based on the amount of data that Internet of Things enables “machines- people to type something, with IoT ap- needs to be transmitted, how far it as-a-service” business models for all plications we will learn constantly in needs to go, and how much power you kinds of other products, potentially settings like hospitals, farms, and mines. have. Furthermore, there are many letting many kinds of companies shift Finally, there’s the question, what’s choices at a higher level around how from selling products to selling servic- all this technology for? What are the to manage the connection and how it’s es based on those products. business outcomes? This layer, the protected and secured. This model can transform large cap- “do” layer, describes both the software Collect: Remember, things aren’t ital expenditures into a pay-by-usage application technologies and the busi- people. The sheer volume of data that operating expense. Examples of this ness models affected by companies that can be generated by things will be trend are emerging. Internet-connected build things, as well as those who use exponentially larger than that of IoP sensors built into products enable tires them to deliver health care, transporta- applications. Data might be collected to be sold by the number of miles driv- tion, or construction services. and stored using SQL, NoSQL, or tra- en, compressors by the amount of air Let’s take a closer look at each of the ditional or next-generation time-series compressed per minute, and coal-min- five layers. collection architectures. ing machinery by the number of cubic Things: Enterprise things, whether Learn: With an increasing amount meters of coal mined. you’re talking about a gene sequencer, a of data coming from things, we’ll need Such services will often be more locomotive, or a water chiller, are be- to apply technology to learn from that profitable than the products they are coming smarter and more connected. If data. Learning and analysis products based on. You may not want to be the you’re going to build or buy next-gener- will include query technology and both first in your industry to do this, but you ation machines, you’ll need to consider supervised and unsupervised machine- certainly don’t want to be the last. CFO sensors, CPU architectures, operating learning technologies. systems, packaging, and security. Most of the technology for learn- Timothy Chou is a lecturer on cloud Sensors are beginning to follow ing from data streams has been applied computing at Stanford University.

Editor’s Cyber Exposure Choice Sixty percent of U.S. companies polled by Ponemon Institute either have cyber insurance (29%) or plan to obtain coverage in the next 12 months (31%). But many companies may be under-covered. Respon- dents said that, on average, only 35% of a loss resulting from a theft of data assets is covered by their company’s current insurance program.

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The Cash-Flow Clash After years of neglect, cash-flow statements get FASB’s attention. By David M. Katz

Pity the poor cash-flow statement. The youngest of tion, the update stipulates how to clas- ›› the three major corporate financial reports, it’s gotten sify payments that have more than one type of cash-flow characteristic (for hardly any of the attention paid by the Financial Accounting example, when parts of the payment Standards Board to income statements and balance sheets. are cash for investing and other parts are cash for financing activities). As a result, CFOs are at sea about whether to classify The update will be effective for many kinds of cash inflows and outflows in the operating, public companies for fiscal years start- ing after December 15, 2017, and for investing, or financ- interim periods within those years. ing sections of the For all other companies, it’s effec- cash-flow statement. tive for fiscal years beginning after Investors, on the other December 15, 2018, and for interim hand, are confused periods within fiscal years beginning about how to compare after December 15, 2019. different companies in terms of how they use Cash-Flow Conundrums their cash. But what about cash-flow reporting Since launching the conundrums that go beyond those cash-flow statement in eight very specific areas? While 1987 under Statement standardizing accounting practice in No. 95 (now dubbed this case seems to have no downside Topic 230), which for companies and investors, is a outlined the three detail-by-detail, incremental approach sections and provided the best way to achieve efficient and general rules and defi- transparent financial reporting? nitions for the state- Not everyone thinks so. “The ment, FASB has provided little in the the objective of reducing the existing upside of such FASB clarifications is way of specific instructions on what diversity in practice.” a certain increase in reporting uni- the statement should comprise. The cash-flow-statement issues formity,” according to Baruch Lev, Thus, finance chiefs have had to rely clarified by the board include where to an accounting and finance professor on their judgments to decide where on record cash flow involved in prepay- at the NYU Stern School of Business. their companies’ cash-flow statement ing or extinguishing debt, settling “The downside: There is no end of to put the cash receipts and expenses zero-coupon bonds and similar debt regulating any transaction and variant already recorded on their income state- instruments in certain situations, con- of transaction.” ments. The result is that, for example, tingent consideration payments (such The co-author of a new book called one company might classify a cash pay- as “earnouts”) made after a merger, The End of Accounting (Wiley), which ment in the operating activities section, and proceeds from insurance claims argues that generally accepted ac- while another might classify the same settlements. counting principles are overly com- item as a financing activity. Other pronouncements cover how plex and fail to reflect the true stra- On August 26, however, FASB to record cash flowing from corporate- tegic and intangible values of today’s took steps to allay the situation by owned life insurance (COLI) policy corporations, Lev wrote in an email issuing an Accounting Standards settlements, distributions of returns on to CFO that the FASB update “is not a Update of Topic 230 that addresses investments in other companies, and game changer,” despite its 49 pages. “eight specific cash flow issues with returns from securitizations. In addi- “It’s a response to very detailed

22 CFO October 2016 | cfo.com Thinkstock (2) questions [from] companies about Zero-coupon bonds are a case in Reducing Diversity the classification of certain cash point. Topic 230 “is very clear” that Instead of relying on their flows in the cash flow statement. The payment of the principle on a loan judgment, CFOs can look transactions are very specific and should be classified as financing to FASB for specific infrequent,” he added. In Lev’s view, cash flow and that interest payments guidance on the following FASB’s attempt to improve cash-flow should be classified as operating cash eight cash-flow issues: accounting by adding rules rather than flow, he notes. creating a system that rests on broad And although the payment of the ◗ Debt prepayment or debt general principles “increases GAAP coupon, or interest, on a zero-coupon extinguishment costs complexity.” bond is by definition zero, Mulford ◗ Settlement of zero-coupon debt Charles Mulford, author of Creative says it’s common knowledge that is- ◗ Contingent consideration Cash Flow Reporting, holds a different suers are paying a form of interest be- payments made after a merger view of the FASB cash-flow ruling. cause they ultimately pay investors the “Clearly, this goes against a principles- full face value of the bond even though ◗ Proceeds from insurance claim based approach,” Mulford says. “There their initial payment was less than that settlements are times when we need rules, we face value. For instance, an investor ◗ Proceeds from corporate-owned need specific guidance.” might invest only $70 at the outset for life insurance policy settlements a $100 zero-coupon bond, but receive ◗ Distributions of returns on “Clearly, this goes the full $100 when the bond matures. investments in other companies against a principles- The $30 a corporate bond issuer might ◗ Beneficial interests in based approach … ultimately pay is effectively an interest securitization transactions payment, and thus should be classified There are times when ◗ Payments that have more than one under operating cash flow, he says. type of cash-flow characteristic we need rules, we need But companies were universally re- Source: Financial Accounting Standards Board specific guidance.” porting the entire amount as financing, ›› Charles Mulford, rather than, as in the example, the $70 accounting professor, Georgia Tech as financing and the $30 as operating, it in recent years, says Mulford. More according to Mulford, who regularly specifically, “the focus for analysts In fact, Mulford, an accounting studies the cash-flow reporting of a has been on operating cash flow and professor at Georgia Tech, declared in wide swath of public companies. “I its very close cousin, free cash flow. an interview with CFO that “you cannot couldn’t find any companies that didn’t They’re interested in what cash flows use a principles-based approach to the do it that way. And that’s incorrect.” are ongoing, recurring, and sustain- statement of cash flow.” As proof of In the update, FASB clarifies that able,” he says. “Cash flows are the that, he noted that while Topic 230 has the “interest” paid on a zero-coupon lifeblood of the company.” long provided general guidance on how bond should be classified by the issuer Mulford thinks the update will help to classify cash flows, companies still as an operating cash outflow. “[The CFOs, too. “They are the ones who are aren’t following it in uniform ways. issue] was begging for clarification by classifying cash flows, facing them all In contrast to Lev’s contention that FASB,” Mulford says. the time. They need to decide how to the eight issues crop up infrequently, Overall, although the update classify that cash,” he said, noting that Mulford’s view is that they are “good represents “a small start,” it’s a move the FASB provisions refer to “common examples of the many items that are “in the right direction” for FASB to events, everyday transactions that getting inconsistent treatment on the pay more attention to the cash-flow need to be reported. This gives them cash flow statement … that are mis- statement because analysts have been advice on how to do that. It makes classified all of the time.” paying a good deal more attention to their lives easier.” CFO

Editor’s Exxon Feels the Heat Choice The Securities and Exchange Commission is probing Exxon Mobil's asset-valuation methods "in a world of increasing climate-change regulations," The Wall Street Journal reported. In August, the SEC sought information and documents from the oil company and its auditor, PricewaterhouseCoopers.

cfo.com | October 2016 | CFO 23

COMPLIANCE

How to Meet the New Overtime Pay Rules Employers have several things to consider to comply with the new Department of Labor regulation. Here are some guidelines. By Andrew Volin

Earlier this year the Labor Department more than Employers must also consider, however, workers who earn slightly ›› doubled the minimum weekly salary threshold under more than the new minimum. There which salaried workers are eligible for overtime pay when are several reasons for this. One is they work more than 40 hours a week. The change will take the ripple effect from compensation changes. If one worker’s compensa- effect on Dec. 1, so companies that aren’t yet prepared need tion is increased because of these new to focus on this now. ¶ That threshold will rise to $913 per regulations, the employer may also want to adjust the compensation of week, or about $47,500 annu- people earning slightly more. ally. The current threshold Also, the new regulations provide is $455 per week, or about for automatic increases in the earn- $24,000 per year. ings threshold every three years. The The change may lead to a increases will be based on statistics further increase in wage and on compensation for salaried work- hour lawsuits, which have ers. For example, the minimum salary already risen dramatically in will be based on the 40th percentile in recent years. They are often the lowest-wage region in the United brought by groups of employ- States. The annual earning threshold ees rather than individuals. for highly compensated employees Double damages and attor- will be based on the 90th percentile ney’s fees are available for and supervise at least two full-time nationally. claims under the Fair Labor Standards workers. “Administrative” workers Planning must take the future Act (FLSA), which provides for the perform duties related to the manage- changes into account as well. Compa- overtime exemption, and defense costs ment or general business operations nies may want to switch their normal are significant as well. Often, these using discretion and independent annual compensation changes to costs exceed the amount of wages in judgment. “Professionals” are divided coincide with the December 1 dates of dispute. into either learned (highly educated) the periodic automatic increases in the or creative (artistic) sub-groups. exemption threshold. Which Workers Are Affected? In addition, there is a second set The first thing employers should do is of “highly compensated employee” How Should Compensation determine which workers are affected exemptions for white-collar workers Be Adjusted? by the new regulation. This group who earn at least $100,000 annually. Companies must decide how to adjust primarily includes those who perform These are employees who perform compensation for the affected work- exempt duties—i.e., executive, admin- duties that may not strictly meet all ers. Of course, total compensation can istrative, and professional employ- of the requirements for an executive, include a discussion of benefits, but ees—and currently earn between the administrative, or professional exemp- just in terms of pay, employers may old minimum and the new minimum. tion, but are so close that the employer have at least five options for most The new regulations do not change worries that it may lose a dispute, if white-collar workers. In summary, the duties requirements for the exemp- one came to pass. they are: tions from the FLSA’s overtime-pay The new regulations increase that 1. Increase the salary level to provisions. Briefly stated, “executives” annual requirement for such workers maintain the exemption. For most must be in charge of part of a business to more than $134,000. companies, only a lucky few should

24 CFO October 2016 | cfo.com Thinkstock (2); courtesy Sherman & Howard expect this outright raise. mit employers to count these toward employment, including compensation. 2. Convert the salaried worker up to 10% of the new minimum salary Therefore, communication strate- to an hourly worker, at a rate de- amount. However, there are special gies must be considered to minimize termined by dividing the current rules about that as well. morale problems (or worse) arising salary by 40 hours. If these em- as a result of, for example, workers ployees work overtime, their overall What Risks Are Involved? being moved from salaried to hourly compensation will rise. Accurate re- As suggested above, companies must positions. Many people attach great cords of time worked are necessary to accurately record all time worked by importance to their status as salaried determine total compensation, for this workers who are moving from exempt exempt workers. option as well as the remaining ones. to non-exempt. 3. Convert the worker to hourly, This requires “Responding to at a rate determined by dividing a system that the current salary by total hours includes develop- email, phone calls, or worked. This is more complex, but on ing and training messages counts as the plus side it might result in no net all hourly workers time worked under the change in compensation. For example, on time tracking, FLSA. In some situa- say Andy has been working 50 hours including work tions, being on call, or per week and paid $40,000 a year. Do that might be per- the math: The hourly rate works out formed outside Andrew traveling, also counts Volin to $14.54, so for 40 hours at straight normal business as time worked.” time, Andy gets $582 per week. The 10 hours and off hours of overtime, at time-and-a-half premises. For example, responding to In addition, depending on the pay, brings him $218, for a weekly total email, phone calls, or messages counts new hourly approach used, formerly of $800. Fifty of those weeks per year as time worked under the FLSA. In exempt workers who worked long equal $40,000. some situations, being on call, or trav- hours (for example, 60 hours a week) 4. Convert the worker from eling, also counts as time worked. may be quite surprised to learn their salaried exempt to salaried non- In addition to having robust track- new hourly rate is lower than they exempt. Companies will pay overtime ing systems, companies should imple- expected. Also, as workers compare after 40 hours but will have to pay ment measures by which both workers notes with each other about their old for 40 hours even for weeks when the and the company can verify hours and new compensation, there is a risk worker puts in less than 40 hours. This worked. This is needed to minimize that people in protected classes (race, option would be useful for workers disputes. An internal complaint mech- color, religion, national origin, gender, who have a consistent number of over- anism is also necessary. The current age, disability) may conclude that their time hours each week. requirements for complaint mecha- pay is unfair or discriminatory. 5. For some workers, consider nisms under a variety of employment These changes create an opportu- whether to use a “fluctuating work laws, such as harassment, could be nity for management to review all of week” salary. In this situation, the used as a model. their company’s payroll practices to weekly salary is for all hours worked, Also, management should expect minimize existing risk as well as future including overtime hours, except that that these new requirements, and risk. CFO a worker receives an extra half-hour’s the changes that will be necessary, worth of pay—rather than time-and-a- will contribute to discussion among Andrew Volin is a partner at the law half—for each hour worked over 40. workers about the changes and how firm Sherman & Howard. He advises One new aspect of compensation the changes impact them. Federal companies in disputes involving em- involves non-discretionary bonuses and state laws permit employees ployment discrimination, wrongful dis- and commissions. The regulations per- to discuss terms and conditions of charge, and wage and hour law.

Editor’s The Cost of Corruption Choice How much is violating the Foreign Corrupt Practices Act costing corporations? According to Stanford Law School’s FCPA Clearinghouse, the average sanction for a company that self-reported a violation of the FCPA (during the period 2006 to 2015) was $35.9 million; violators that didn’t self report paid an average of $108 million.

cfo.com | October 2016 | CFO 25 SUPPLY CHAIN Show the Purchasing Department the Door Purchasing department employees must spend more face-to-face time with suppliers to drive true value. By Christopher Good

During a walk to one of many daily meetings (at a I explained, we would also need to ›› company where I was serving as interim chief pur- spend a little more money on travel in order to save much more in the long chasing officer) our CFO asked me how we could improve run on purchased products. our financials in the procurement area. The budget was un- The CFO was, initially, less than der pressure and the forecast needed added upside to make impressed. But I implored him to think about what informational resources up for recent problems and the probability of more issues to our buyers currently possessed. They come—not uncommon for any had at their disposal supplier quotes, company faced with constant information provided by suppliers external, internal, and competi- over the phone, internal production tive pressures. data, and product-demand forecasts. Like many companies, a Yet, besides comparing data sets and large percentage of costs at this metrics, on what were they basing fi- one was related to purchased nal purchasing decisions? Most impor- goods and services. Typically, tantly, from where were we generating about 60% of costs go toward potential cost-saving ideas? purchased components, with If our buyers never got to see prod- the remainder going to value- ucts being made first-hand, a number added costs, overhead, and of very important questions could not other items necessary to run a be answered: How could they accu- successful enterprise. Reducing rately assess the amount of labor the the costs of purchased compo- supplier was quoting? How could they nents provides dollar-for-dollar im- busy with purchase orders, attend- possibly work to develop product lines provement to any company’s financials. ing meetings, making phone calls, and methods aimed at significantly Fine-tuning purchasing should al- and a host of other purchasing tasks reducing labor costs? How could they ways be at the top of the list for exami- essential to properly supporting an know whether one supplier was better nation when financials need a boost. organization. Then it occurred to me: in quality than another? After my brief conversation with It wasn’t what they were doing when As I next contemplated how best the CFO, I spent some time examin- they were in the office. Rather, it was, to improve our purchasing methods, ing the ins and outs of the company’s what are they doing in the office? I discovered three basic roadblocks purchasing division. I was always on The next day I walked into the to buyers spending more face-to-face the lookout for ways to reduce costs. CFO’s office and said, “We need to time with their suppliers: This time, however, I looked beyond show some of our buyers the door!” He • Management must recognize and the purchase price variance report and looked up and said, “Really? So, how appreciate the potential benefits and material cost percentages ((budgeted many buyers do we let go and what be willing to mobilize buyers to visit manufacturing overhead X 100)/bud- type of SG&A savings can we expect?” their suppliers. If there isn’t buy-in at geted direct material cost). Instead, I I paused and then restated my the top, it simply will not happen. started to really look at the daily ac- original assertion. “Let me rephrase • Many buyers don’t have sig- tivities of the purchasing department. that: We need all of our buyers to nificant technical or manufacturing What was purchasing actually travel to see their suppliers and our backgrounds. They often don’t feel ad- doing during their 8- to 12-hour days other locations. Put simply, we need equately equipped or qualified to visit in the office? They were always very them to literally hit the road.” As such, a supplier. Many organizations also

26 CFO October 2016 | cfo.com Thinkstock (2), courtesy the author “Fine-tuning purchasing should always be at the top of the list for exami- employ processes that support visits changing that dy- nation when financials from quality or production personnel namic? We can start but not from purchasing. One simple by acknowledging need a boost.” solution: have the buyer hit the field that the job is not ›› Christopher Good, managing director, Conway MacKenzie along with a more technical colleague. entirely under their • Buyers often have little to no time control and, from there, gradually to leave the office and visit suppliers. work toward decreasing the reactive off of their list. The key to success The root cause of the lack of time, posture of the buyers, moving instead with this method isn’t the actual list. though, is that purchasing is entirely to a more proactive stance. The success lies in the buyers proac- too reactive. There is always a fire to Yet how, exactly, do we shift from tively planning some of their actions put out, a last-minute purchase order a predominantly short-term, problem- in advance and then feeling—and that needs to be issued or expedited, solving posture to a long-term, money- experiencing—that they have at least or some other crisis to be handled. saving modus operandi? some control over their day. The move from reactive to proac- By controlling a portion of their Managing Time tive starts with a simple list. At the day, buyers start to find time for other Let’s examine time management more end of each day, ask your buyers to things: time they can use to get on the closely. In every purchasing manage- write down five things they want to road to see suppliers, accomplish their ment position I have ever held, I begin get done the next day that do not con- jobs more completely, and save their the engagement by asking the buyers stitute putting out fires. Then monitor company money. Minutes saved can how reactive versus proactive they are how many of the items on their lists translate into many pennies earned. CFO during their daily activities. Typically, are actually accomplished. buyers spend roughly 70% of their Some days it will be zero, and other Christopher Good is a managing direc- day reacting. So, how do we go about days they will be able to check items tor with Conway MacKenzie.

Focus on Days networks; updates in your professional network; real-time stock, weather, and Of Supply traffic conditions. There’s a wealth Freeing up cash in the of information at your fingertips—so supply chain allows a why do the supply chain technologies company to increase that underlie $25 trillion of the global shareholder value. economy still take weeks or months to deliver information? Days of supply is one of those con- Ultimately, the best way to reduce cepts that most people are reluc- days of supply is to utilize the wealth tant to tackle for fear of stock-outs of data at your disposal. Chances and missed sales opportunities, but Hau Lee speaks about the inherent val- are, lackluster technology is shroud- remember: Every dollar of inventory ue of strong partnerships: “Now, when ing much of the chief procurement you can take out of the supply chain Nike develops new products with officer’s operations in the form of equates directly to a dollar of free cash special requirements, instead of look- delayed, self-serving, or miscom- flow. So how do you reduce days of ing to the supplier for only procure- municated updates. Supply chain supply? Two ways. ment, it looks at them as a source of teams need to be organized in a way 1. Supplier Partnerships. Many potential ideas and innovation. These that promotes open, transparent, and companies are reluctant to develop suppliers have quick turnarounds for real-time information sharing, so the products with their suppliers, because prototypes, meaning it’s good for them team can stay up-to-date on both risks they’d rather maintain complete control and for Nike—for the whole inven- and opportunities. And the tools and over their design process. And while tion process.” Co-development means processes need to be in place to trans- that may offer some intellectual prop- specific expertise, shared research and form that communication into swift erty protection advantages, it doesn’t development costs, and, more often decision-making ability. CFO bode well for the partnership. Compa- than not, more bang for the buck. nies that develop parts with their sup- 2. Real-Time Management. Think Nader Mikhail is founder and CEO of pliers actually benefit the most. about the real-time technology you Elementum, a developer of apps for Stanford Business School Professor use every day: new photos on social managing the global supply chain.

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CLINTON Who’s Better for Business? The choice for president is between big change now but few details, and gradual change with deep details. BY RUSS BANHAM

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v. TRUMP As you may be aware, this year’s presiden- impact that Hillary Clinton’s and Donald Trump’s tial election campaign is like no policy proposals could have on business. However, ★ other. We’ve heard a whole lot of buzz a measured look at these plans reveals two starkly about the candidates’ temperaments different visions of the country’s commercial future. and character, about demagoguery and email To analyze these visions, CFO reached out to more servers, about bigotry and speaker fees—not to than a half-dozen economists of wide-ranging po- mention marital fidelity, reality TV, pantsuits, litical leanings. We asked them to contrast the can- and hand size. didates’ positions on corporate taxes, global trade, What we haven’t heard so much about is the health care, immigration, Wall Street, regulation,

cfo.com | October 2016 | CFO 29 ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ and energy. Part of our thinking was that no is- the incentives for companies to relocate over- sue exists in a vacuum; immigration policies, CLINTON v. TRUMP seas but has not provided a broad-based plan for instance, could affect business relations WHO'S BETTER FOR to dramatically lower corporate rates,” says with Mexico, the domestic economy in general, BUSINESS? Jim Pethokoukis, an economic policy analyst at and the labor market in particular. the American Enterprise Institute, a conserva- In addition to offering up pros and cons of the nominees’ tive think tank. stances on the issues, the economists affirmed the difficulty Several economists agreed that the candidates are ex- of one party’s nominee achieving his or her agenda with a ceptionally careful when discussing taxes. “Trump wants to Congress potentially held by the other party. They further sharply cut the corporate tax rate but has not been explicitly noted that there likely would be a delta between what the clear on what sorts of tax deductions he would eliminate or winning candidate says when running for office and does cap,” Pethokoukis says. once in office. Mark Fratrik, chief economist at research and consulting Donald Trump is a tested CEO, but his policy positions firm BIA/Kelsey, says that while Clinton will likely lower are painted in broad brushstrokes rather than fine lines. the corporate tax rate, albeit nowhere near Trump’s planned Hillary Clinton has decades of experience in global and reduction, “she’s not in a position to advocate it. She knows domestic policymaking, and while her positions are highly she needs to satisfy the liberal wing of the party and is being detailed, they’re also more cautious. In other words, Trump very careful.” seeks huge change now, whereas Clinton prefers more nu- Trump, too, is accused of playing politics. “I and many anced and gradual change. others doubt he will stick to 15%, which goes too far,” Still, both candidates have been criticized for abrupt re- Wheelwright says. “Initially he was at 25%, which was Mar- versals in policy. Clinton has veered left on some policies to co Rubio’s plan. That would accomplish the same purpose: appeal to disappointed supporters of Bernie Sanders. Trump sending a message to foreign companies to locate here. My has flip-flopped on taxing the wealthy, the minimum wage, assumption is that it will end up at 25%.” and immigration, although the last appears to be a moving According to another expert, neither candidate is seeing target. clearly on the tax question—although that expert’s objectivi- In no particular order, then, here are the candidates’ re- ty may be questionable. “Given that the country is essentially spective positions: broke, with spending and other entitlement obligations exceeding the present value of projected taxes by $199 trillion, ★ CORPORATE TAXES we need to collect much more in taxes, not less,” says Lau- Both nominees want to halt the trend of corporate inver- rence Kotlikoff, a professor of economics at Boston Univer- sions, whereby a U.S. company merges with a foreign one sity who is running for president as a write-in candidate. in a lower-taxed domicile and reincorporates the business there. The candidates agree that keeping the headquarters ★ GLOBAL TRADE/PROTECTIONISM of U.S. multinationals in the United States would boost job The nominees have extremely divergent views on global opportunities and federal tax coffers. However, they differ trade. Trump has charged that many longstanding trade on how to stem the tide. deals have been detrimental to U.S. industry and the econ- Trump’s plan is to reduce the corporate tax rate from omy, whereas Clinton supports most trade pacts as they 35% to 15%. That would make the U.S. rate lower than that now stand. of most advanced economies. “If we had a 15% corporate tax rate, we would effectively become a tax shelter country, en- Clinton “doesn't want couraging foreign companies to headquarter here,” says Tom to be perceived as a Wheelwright, an adjunct professor in the masters of tax ‘full speed ahead’ free program at Arizona State University and CEO of account- trader, but once in ing firm ProVision. “Ireland is at 12%, so we would be on par office that will likely with them and returning jobs to the U.S.” change.” An influx of operations from overseas companies would — Jim Pethokoukis, spur domestic employment and related tax income, Wheel- American Enterprise Institute wright adds. “This is one area where Trump has a better handle on a critical problem than Clinton does,” he opines. However, she recently changed her position on the Trans- Clinton wants to maintain the current 35% corporate tax Pacific Partnership (TPP), a trade agreement among 12 Pa- rate and crack down on the corporate inversion problem cific Rim countries to lower tariffs and other perceived bar- administratively, penalizing companies that make the mi- riers to trade. While Clinton previously endorsed the TPP grations. and said it could become the “gold standard” of trade deals, “She has talked about adjusting the tax code to get rid of she now sees it curtailing domestic employment. (It may be

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think other countries are simply going to roll over, despite his alleged negotiating prowess,” says Pethokoukis. “He’s also very hung up over currency manipulation by China, but that’s an old story that is no longer accurate.” Fratrik is similarly dubious: “Is there a policy there other than his promise to win a better deal? Not that I can see.” Given the economists’ profession, they take seriously the idea of Clinton or Trump tinker- ing with free trade. “Free trade is the engine of economic growth,” says Kotlikoff. “Every economist I know thinks the TPP is a fantastic deal for the U.S. We give up very little and get back a lot.” David A. Levy, chairman of the Jerome Levy Forecasting Center, is equally alarmed. “The world economy is fragile,” he says. “This is not a good time to cause even more international dissonance by walking away from [the North ➼ Trump and Clinton now both oppose the Trans-Pacific American Free Trade Agreement] or trying to Partnership, a trade agreement change the TPP,” he says. Bernie Sanders says was "written behind closed doors ★ by the corporate world." WALL STREET Both candidates try to appear tough in discus- relevant to note that Clin- sions about Wall Street and banking, given ton’s previous competitor, lingering public resentment over the finan- Bernie Sanders, considered cial crisis that fueled the Great Recession of the TPP “disastrous.”) 2007–2009. Clinton now is having The key difference between them is that second thoughts about an- Trump wants to shred the 2010 Dodd-Frank other big trade deal that Act enacted to address the crisis, whereas she had supported as Secre- Clinton, who praises the law, wants to bolster tary of State: the European it. She would also battle for tough new rules Union’s Transatlantic Trade and Investment Partnership. governing banks. Trump, who blames the regulatory climate “We’re not sure where she stands on these issues anymore,” for inhibiting credit and causing the country’s dour eco- says Dean Baker, co-director of the Center for Economic nomic growth, has yet to unveil specific details of proposed and Policy Research, a progressive, left-leaning think tank. legislation that would replace Dodd-Frank, assuming there “She’s had a different history on trade. Going forward, we would be any. don’t know what will happen.” Trump’s former campaign manager, Paul Manafort, called Pethokoukis predicts that Clinton, as president, ulti- for reinstating the 1933 Glass-Steagall Act, banning banks mately would support the TPP. “She’s a run-of-the-mill from engaging in real estate, securities trading, and insurance Democratic on trade, despite the protectionist stance that brokerage, although Trump has been mum on the subject. has emerged because of Sanders’ skepticism of trade deals,” Trump’s been more vocal in his resolve not to break up he says. “She doesn't want to be perceived as a ‘full speed big banks—even in situations where they pose systemic ahead’ free trader, but once in office that will likely change.” risks, a power granted the president under Dodd-Frank. Trump, on the other hand, has come out strongly against “He’s more or less saying let’s go back to the good old days the TPP. He has also proposed 35% and 45% tariffs on goods when Wall Street did whatever it wanted,” Baker says. from Mexico and China, respectively, and he would harshly Clinton has talked about enacting a financial transaction penalize countries for violations of trade agreements. Most tax (FTT) on high-frequency trades that are part of “unfair clear is his promise to renegotiate all past trade pacts, which and abusive trading strategies,” but it’s unclear what the he charges were “bad deals” for the United States. FTT rate would be. Not that he’d be the victor in those negotiations. “To Several economists feel she is blowing smoke in her Trump, ‘winning’ means a U.S. trade surplus, but I don’t pledge to be tough on Wall Street. “She’s saying she’ll pros-

Top to botom: Getty Images, Wikimedia Commons cfo.com | October 2016 | CFO 31 ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ecute people who break the law, and break up make it better, reducing the cost of some of the the banks if they impose a systemic risk, but CLINTON v. TRUMP insurance policies in the exchanges and making her history has been otherwise,” says Baker. WHO'S BETTER FOR the exchanges work better,” says Baker. “This “She’s gotten a lot of money from people on BUSINESS? is a big issue now that Aetna has pulled out of Wall Street, and … my guess is she will be no most of them.” tougher on Wall Street than President Obama.” Aetna attributed its decision to leave the exchanges to a higher-than-expected volume of ill, costlier policyholders. ★ HEALTH CARE To return to the exchanges, Aetna wants a more balanced The candidates have similarly divisive positions on the Af- risk pool. “I believe Clinton will achieve that administrative- fordable Care Act. As he has made abundantly clear, Trump ly,” Baker adds. would try to repeal the legislation. He would replace the law Others agree. “She’ll tweak the Affordable Care Act to with a mostly undefined, price-transparent universal health bring costs down, cover more people, and give them more care system based on free market principles, in which buy- choice,” says Pethokoukis. “To keep other insurers from leav- ers are provided different plan choices. ing the exchanges, she may need to beef up federal subsidies. She hasn’t talked about that, but I can see it occurring.” Trump is “more On the other hand, Kotlikoff has significant problems or less saying let’s go with Clinton’s health care agenda. “There’s no provision to back to the good old increase competition among health insurers,” he says. “Con- days when Wall Street sequently, insurers will continue to ‘cherry pick’ healthy did whatever individuals, leaving those who are less healthy and poor to it wanted.” fend for themselves.” — Dean Baker, Center for Economic and Policy Research ★ ENERGY The candidates could not be more discordant on the issue He also wants to reduce barriers to the interstate sale of of America’s energy needs. Trump wants to lift restrictions health insurance, break up the health insurer monopolies, on all sources of energy to accelerate employment, increase and provide a full tax deduction to individuals for insurance GDP, and bolster federal and state tax coffers, writing “a premium payments. new chapter in American prosperity,” he has said. But Trump’s lack of specificity could be a problem for Clinton has a very different chapter in mind, wanting the him, according to Fratrik. “He wants to repeal Obamacare United States to become the “clean energy superpower of and replace it with a free market system, but he hasn’t stat- the 21st century,” a future she also promises will lead to mil- ed whether he would provide coverage for individuals with lions of new jobs and the development of new businesses. pre-existing conditions, as well as other elements of the The divergent stances derive from the competitors’ stark- law that everyone now expects,” he says. “Nevertheless, I’m ly different opinions on climate change. Trump stated in a more bullish for the health care marketplace in a Trump ad- tweet that climate change is a hoax cooked up by China to ministration, as it would be more market-based.” de-industrialize the United States. He wants the energy in- Kotlikoff demurs. “Trump’s plan would give the states a dustry to be allowed to drill for oil and gas and mine for coal fixed amount of money and tell them it’s their problem to with much less red tape. insure whomever they want,’” he says. “He also wants to He also supports building the Keystone XL pipeline, lift- allow people who want to be uninsured to be uninsured. Then, when they get sick, they’ll have to spend all their money before they can qualify for Medicaid. His is certainly not a comprehensive plan that will address enormous health care costs.” Clinton would maintain the Affordable Care Act with modest changes, such as enhanc- ing provisions for individuals with ➼ On the Affordable mental health challenges. She fa- Care Act, the vors the creation of a public-option candidates offer a stark contrast: Trump insurance plan in every state and wants to repeal it wants to allow citizens to enroll in immediately; Clinton Medicare when they turn 55. says she will improve the exchanges and “Clinton is a big supporter of the bring down the costs of Affordable Care Act and wants to insurance policies.

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In a CFO survey, finance execs pick Donald Trump to be the next president, but they are not TRUMP GETS THE NOD enthusiastic about the choice.

Who is your choice for How much of an effect will the next president have on the following issues? the next president of the (Percent answering “large” or “moderate” effect) United States? 100% 90.5% 60% 90.5% 54.9% 80 76.6% 73.3% 69.2% 65.3% 60.6% 40 60 34.6% 48.5% 40 20 20 10.6% 0% 0% Global Counter- Tax U.S. Corporate Social Access Income Hillary Donald Other trade terrorism policy economic proﬁts unrest to equality Clinton Trump policy performance capital

Donald Trump is the overwhelming choice for the next mer U.S. senator and secretary of state besting Trump only in ★ president of the United States among finance executives the area of climate change, 40% to 34% (see charts). and other CFO readers, with about 55% of 576 respondents fa- Those who answered the CFO 2016 Presidential Election Sur- voring him compared with about 35% for Hillary Clinton. vey during the week of September 4 preferred Trump to Clinton The real estate businessman was also respondents’ pre- by a huge margin on the issue of corporate taxes, 61% to 23%. ferred choice on eight out of nine selected issues, with the for- The survey respondents, largely senior finance executives but also risk and accounting exec- Which candidate's approach to the following issues do you most agree with? utives, also favored Trump over Clinton by big margins on the Climate 40.3% 34.4% issues of homeland security change 25.3% (56% to 31%), health care (52% to 33%), and energy policy Corporate 22.9 61.3 (52% to 34%). taxes 15.7 Asked to elaborate on their Energy 34.2 answers to the survey, many 52.4 policy 13.4 respondents were less than enthusiastic about the choice Global 31.6 46.8 they’ll make on November 8. trade 21.6 Steve Underhill, treasurer Health 32.8 and controller of Carmel, Ind.- 51.8 based electronics firm R.O. care 15.4 Whitesell & Associates, favors Homeland 31.4 56.2 Trump, but shared a comment security 12.6 that seems to sum up the view 43.8 of many respondents: “I think Immigration 49.7 it’s an absolute shame that in 15.5 a country the size of ours, and Income 30.4 with the history of ours, we’re 42.5 ■ Hillary Clinton equality 27.1 ■ Donald Trump down to these two candidates ■ Neither for president.” Wall Street 23.5% 43.4% The survey did not use sci- regulation 33.1% entific sampling. 0% 10 20 30 40 50 60 70% — DAVID M. KATZ

Note: Numbers may not add to 100%, due to rounding. Source for all charts: CFO survey of 576 finance executives, September 2016

cfo.com | October 2016 | CFO 33 ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ing the ban on crude ➼ Trump's policy on oil exports to for- immigration, including his plan eign markets, and to build a wall abolishing the Envi- separating the Unit- ronmental Protec- ed States and Mex- ico, has been called tion Agency. With "immoral" and regard to sustainable "economically energy sources, he unsound." blames wind-generated power for killing birds and causing sickness, and he calls them “industrial monstrosities.” In effect, when it comes to energy Trump would essentially wind back the clock to the mid-20th century. “He talks about bringing back jobs in the coal industry, which means underground mining, something we haven’t seen since the 1970s,” Baker says. “Do we re- ➼ Clinton opposes grant integra- the Keystone XL oil ally want to do that?” pipeline system, tion. Trump For Kotlikoff, that’s a rhetorical calling it "a distrac- wants to build question. “Trump is discounting tion from the impor- a wall separat- tant work that all the evidence on climate change, has to be done on ing the Unit- the fact that the vast majority of climate change." ed States and scientists around the world concur Mexico—and on the subject,” he says. “He thinks paid for by our southern neighbor, al- he’s smarter than all these people though he hasn’t said how he’ll make but is ignoring a great peril to our that happen. country and our planet.” Clinton seeks less radical means Trump’s rhetoric also indicates of securing the border, although she he would likely reduce or eliminate federal subsidies for so- has not provided detailed plans. Still, her policy proposals lar and wind energy production. Clinton, on the other hand, resonate with most of the economists. wants to end federal subsidies to the oil and gas industry, “Normalizing a path toward citizenship makes sense,” modernize the power grid, and make other moves to tran- says Baker. “Mass deportations and a giant wall would be a sition the energy infrastructure from fossil fuels to cleaner humanitarian and economic disaster.” forms of energy like wind and solar. She has also left the Offers Fratrik: “Trump’s plan is totally populist, bad for door open to discussions of a carbon tax on users of fossil the economy, and just plain wrong. Clinton recognizes that fuels, a key plank in Sanders’ platform. immigration is the hallmark of American industry and eco- “She’s too scared to say she supports a carbon tax out- nomic growth, despite the distributional impact it has on right, given the financial impact it would have on voters us- employment.” ing fossil fuels,” Kotlikoff says. “This is the difference between a leader and a politician. A leader says exactly what is ★ THE BOTTOM LINE wrong with the country and here’s how to fix it. A politician Obviously, the stark differences in the candidates’ policies— sugarcoats the truth.” assuming they’re the real deal and not just smoke and mir- While Trump supports fewer restrictions on hydraulic rors—provide a clear basis for picking one or the other. And fracturing, Clinton is not expected to impose additional con- whether you love ’em or hate ’em (either candidate or both), straints. “I don’t think a Clinton administration would mess the winner’s decisions likely will have a profound impact on with new ways of developing oil and gas, although it might the future of the U.S. economy and business growth. Then tinker with them a bit,” says Fratrik. again, so will myriad geopolitical and macroeconomic factors outside the president’s control. The leader of the free ★ IMMIGRATION world can only do so much. CFO The divide between the nominees on immigration is vast, with Trump favoring mass deportation of illegal immigrants ◗ RUSS BANHAM IS THE AUTHOR OF 24 BOOKS, INCLUDING “HIGH- and Clinton seeking a path toward citizenship and immi- ER,” A HISTORY OF AEROSPACE GIANT BOEING.

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After many years marked by varied, Prodded by investors, mostly unsuccessful initiatives to some companies are prod companies to disclose more disclosing more data information about their human capital, the movement is finally gaining about their workforces. some traction. At least two groups But how much value will of institutional investors represent- that information have? ing trillions of dollars in assets under management (AUM) have piloted BY DAVID McCANN programs in which they’ve engaged directly with companies to elicit information on employee turnover and engagement, and spending on training and development. The institutional investors so far have focused their efforts on large retail companies. One of the groups with a pilot program, Principles for Responsible Investment (PRI), is a United Nations– supported network of about 1,500 institutional investors worldwide. Over the past two years, a subset of 24 PRI members with collective AUM of $1.5 trillion has conducted engagements with 27 global retail enterprises—22 of which have improved their public human capital disclosures as a result, according to Fiona Reynolds, managing director of PRI. The other group, the Human Capital Management Coalition (HCMC), comprises 25 U.S.–based institutional investors totaling $2.5 trillion AUM. The HCMC seeks enhanced disclosure as one of several goals for elevating

36 CFO | October 2016 | cfo.com BY DAVID MCCANN

cfo.com | September 2016 | CFO Thinkstock Getty Images 27 The Holes in Human Capital Metrics human capital management as a key aspect of company per- Observes Jeff Higgins, CEO of the formance. It persuaded 8 U.S. retailers to provide non-public Human Capital Management Institute information on how they address human capital issues. (not to be confused with the similarly The investor groups have publicly divulged no specifics named coalition): “The conversation is changing. I’ve been on the retailers’ additional disclosures and have identified taken by surprise by how many big investors are getting on only a few of the companies they’ve engaged with (none of board and the speed with which momentum is building.” which agreed to speak with CFO for this story). But it’s early days for these efforts, and any disclosure of additional human capital information is a big stride forward. A Question of Value PRI did say it asks for increased disclosure on employee How useful will human capital data prove to be? Reynolds turnover and absentee rates, training programs, and employ- says PRI is pushing for human capital disclosure because ee engagement scores. And active equity firm Martin Currie, metrics on things like turnover, employee engagement, and a PRI member, released a bulletin describing the results of training suggest how well-managed a company is. Tessie an interaction with Russian food retailer Magnit: following Petion, vice president of responsible investment research the engagement, Magnit tasked its investor relations leader at Domini Social Investments, which is looking into joining with improving human capital disclosure and for the first the HCMC, agrees. “It tells you something about priorities time published key performance indicators (KPIs) relating in managing the business and is an indicator for whether we to employee relations, including turnover and training. want to invest in that business,” she says. Meanwhile, the institutional investors are trying to in- But a former finance and marketing executive waves off volve the analyst community in the quest for more human the notion that such data is a good barometer of management capital disclosure. The HCMC, for example, is talking with quality. Tom McGuire, now talent strategy leader at Talent analysts to prepare a guide outlining questions to ask during Growth Advisors, says: “Whether a company is well-run is a earnings calls, says Meredith Miller, chief corporate gover- good question, but a more relevant one is, how do its people nance officer for the UAW Retiree Medical Benefits Trust, impact its value? To understand that, you need to look at the which is leading the coalition. company’s intellectual capital—patents, brands, and propri- etary technologies and methodolo- gies. The only source of any of those People Progress things is people.” In most cases, companies increased disclosure of human capital data For that reason, McGuire also after engaging with institutional investors. quarrels with the idea that disclosure about a company’s entire workforce Number of companies disclosing* has much value. “You want to know about the turnover and engagement Employee 10 of critical talent,” he says. “At a phar- engagement 17 maceutical firm, those are people Access to training/ 9 in the research area. At a consumer development products company, it’s people in con-

disclosed 15 sumer research and marketing, and 13 some innovation areas. You don’t re- data Training expenditure 14 ally care if an accounts payable clerk turned over.”

capital Employer turnover 5 Similarly, Higgins points out, if (by length of service) 7 you lose 20% of management in a year, that’s way too high. Losing 20% human Employee 7

of of your call-center workers is OK. absence 6 It’s also fine if 20% of a retailer’s Type Employee turnover 13 customer-facing staff is lost. But it’s (total annual rate) 9 disastrous if a professional services firm has 20% turnover among 00 5 10 1515 2020 customer-facing professionals. 2013 2015 The metrics that come out of the investor groups’ engagements with * Based on Principles for Responsible Investment’s engagements with 27 retailers in 2013 and 2015. Source: Principles for Responsible Investment retailers may be used to compare the

38 CFO | October 2016 | cfo.com companies with one another, but it’s unknown how granu- Still another potential issue, if the goal is to motivate lar the information is, so therefore it’s unknown how useful such disclosure on a broad scale, is the administrative bur- such comparisons will be. den it might place on companies. For their part—and per- “We still have to go back and huddle with our coalition haps to Higgins’ point—both Reynolds and Miller say the members, so we’re not in a position at this point [to talk information they’re asking companies for can be easily ob- about that],” says Miller. “What we’re trying to do is distill tained. “These are metrics that currently exist and are im- [from] the metrics the kind of information that would re- portant in running a company and planning,” says Miller. “I ally get at drivers of long-term shareholder value and that is don’t think we’re looking at anything that would impose ad- measurable and could be standardized.” ditional costs or reporting.”

“You want to Looking Ahead know about the Why start the disclosure push with retailers? For HCMC, it’s turnover and partly because of the extreme attention focused on the trag- engagement of ic fires at retailers’ factories in Bangladesh and Pakistan in critical talent…. 2012. “We decided it was important to also address the kinds of issues that could come up state-side,” says Miller. “The You don’t really retail industry is so labor-intensive and ripe for these kinds care if an accounts of issues.” As for PRI, Reynolds says retailers are often in payable clerk the headlines with respect to employee relations. turned over.” But both groups are planning to target other industries. PRI has had discussions with mining companies, and HCMC ›› Tom McGuire, Talent Growth Advisors may opt to look next at the health-care industry. Ultimately, the investor groups, as well as other interested observers like Higgins, hope that pressure from in- Lisa Disselkamp, a director in the HR transformation vestors and analysts will result in the emergence of de practice at Deloitte Consulting, is skeptical that companies facto standards for human capital disclosure. “We want to can actually provide the kind of information that would al- identify a suite of important metrics on which we could low such efforts to bear fruit. “I’m not a big fan of KPIs and engage with companies across all industries and sectors,” benchmarks,” she says. “Most employers don’t embrace says Miller. them much, from an actionability standpoint. They may Might de facto standards, if they do come about, evolve have turnover data, but what’s actionable is the root cause of into formal regulation? “Hopefully it won’t need to be regu- something.” lated,” says Reynolds. “Maybe it can be just a norm, as other For example, Disselkamp points out, turnover is a symp- areas have become. We see reporting in different countries tom of many things that go on in an organization, like how around diversity and pay gaps, for example. Some of those flexible schedules are, employees’ satisfaction with super- are engrained in regulation, and some aren’t—there’s just in- visors and management, and what kind of career paths are vestor demand, so companies do it.” available. “Turnover is just the result,” she says. Miller is somewhat more strident. “I do think there is a Even a great advocate for human capital disclosure like clear opportunity to explore with public regulatory agen- Higgins suggests that the investor groups’ approach needs cies,” she says. “[I have] gone through a number of disclo- refinement. “They’re getting what they want—a number for sure movements with the SEC and FASB, [so I know that] turnover and a number for engagement—but then what do once there is a public record we can move toward showing they do with that?” says Higgins, a former CFO. He says he that this is a corporate governance best practice and [that it] has encouraged PRI to at least ask for information segregated helps the market value companies.” by basic job groups, like management vs. non-management, Higgins, too, thinks the climate is right for an accelerat- STEM workers vs. non-STEM, or sales vs. service. “It’s very ing movement toward regulation. One big reason for that much about the context,” he says. is the developing “gig economy,” with more people doing Another problem with disclosure of human capital data is contract work and fewer working for a single employer full that it’s frankly not too difficult to fudge. “The fudge factor is time. “That’s got to prompt a regulatory response,” Higgins consistently a problem for things that aren’t regulated,” says says. “If you’re disaggregating your workforce, you prob- Petion, although she adds that sometimes there are clues as to ably have a responsibility to tell your shareholders about whether a company is shading the truth, such as the changing what you’re doing, who’s an employee and who is not, and of a metric or methodology without explanation. why.” CFO

cfo.com | October 2016 | CFO Courtesy the company 39

Special Banking Report The Rules of Attraction How do corporate borrowers keep their bank lenders happy when there is so little profit to be made by providing lines of credit? By Vincent Ryan

Ann Anthony, vice president and treasurer of South “[Ancillary businesses are the only] Jersey Industries, is fortunate in that, like most oil and way they can justify a long-term relationship.” › gas utilities, hers is a heavy consumer of capital. In other words, it regularly draws on its line of credit. “The ➼ Banks’ Vagaries banks tend to like it, they want to put capital to work. With How do treasurers handle this? Care- fully. Sam Pallotta, vice president and some of the new regulations, they are penalized if they have treasurer of Rockefeller Group Inter- commitments that are not drawn on,” she says. national, says that “now we almost cater as much to the lender as the lenders Although South Jersey Indus- loans. Key debt and leverage levels cater to us.” tries’ banks are willing to accommo- among U.S. corporate entities are at Rockefeller Group knows it has date it with their balance sheets, they record highs, according to an August something to offer banks: in a regula- are “very vocal” about the need to be report from S&P, with aggregate debt tory regime in which non-operating compensated for the service. “That’s levels exceeding those just prior to the deposits are unattractive to financial nothing new, but the time to develop financial crisis. Companies have le- institutions, banks are very interested a relationship with a new bank is com- vered up considerably to fund stock in the company’s excess cash. “Our de- pressed,” Anthony explains. buybacks, dividends, and acquisitions. posits tend to be stable,” Pallotta says. Banks have always expected busi- But ultra-low interest rates, along The real estate development and in- ness in return for credit, but now when with other factors, are complicating vestment company has “a lot of money new banks agree to participate in banking relationships because they set aside for future funding needs and South Jersey’s $400 million revolver, make lending to corporations unprofit- the deposits are not ‘high velocity,’ so they want to know immediately which able. And new regulatory limits that re- they are very valuable to lenders.” He fee-based business they will get, at quire banks to hold more capital against adds, “Our banks have been signaling what price, and when, says Anthony. loan assets increase banks’ costs of to us that they appreciate the business, Welcome to the undisrupted area of providing such credit. (See box, “Banks’ and we always have people looking to financial services: the relationship be- Balance Sheet Constraints.”) get that business.” tween large U.S. corporations and their So banks demand ancillary, fee-based But Pallotta is under no illusion key banking partners. While fintech businesses, like cash management, debt that all of his banks will be with him startups and swiftly moving online pur- capital markets, and derivatives, in ex- through thick and thin. He is very veyors of credit threaten other areas of change for credit facility participation. cognizant of having to protect against banking, commercial banks and corpo- If a bank can’t earn an appropriate risk- banks that “might not be open to ex- rate clients “continue to dance around adjusted return on capital from a busi- tensions and increases in [credit] lines each other to find the right mix of risk, ness customer, it makes little sense to at the point in time [when the compa- reward, and services,” says Bruce Lynn, retain that customer. ny] needs them.” managing partner at The Financial Ex- “If the banks are actually provid- In the wake of stricter regulations, ecutives Consulting Group. ing you with credit, it’s a money-losing Pallotta feels U.S. banks will be “in That’s mostly because financial in- proposition,” says Nadeem Ali, former and out of markets” and “their interest stitutions still have something corpora- treasurer of Greif, a $4 billion in rev- level will wane” due to their own port- tions want: funds in the form of large enue industrial packaging company. folio constraints, appetite or distaste

Thinkstock cfo.com | October 2016 | CFO 41 Special Report Banking

for specific property types, or “feeling varies from year to year, and in many Rotating each of Oracle’s banks into of being over-allocated” in a specific years the upfront fee that corporates the book-running role was no easy area. As a result, Pallotta says he needs pay to banks has been pretty low,” task. “I used to tell them, ‘We have 10 to maintain twice as many bank rela- says Ball. “The banks argue it’s under- banks and we have 3 book runners, so tionships as in the past, even though priced. … The idea is you can expect that ev- he only needs a handful of banks in his that if you are going to ery 2 or 3 years your odds credit line. buy the underpriced of getting a book runner “In the past, I could have said I was product—credit—the deal will be pretty good,” working with just the big three banks,” bank will only sell it to Ball says. But even that he says. “Now I have to delve into mid- you if you give them a wasn’t enough for some tier organizations, work with global crack at an overpriced bankers. Since bankers institutions, and work with insurance [or more profitable] are awarded bonuses on companies so I can be assured of my product.” a yearly basis, “I’d have financing when I need it.” What that does is bankers call me and say force the treasurer to ‘I have to get this piece of ➼ The Bundling Problem bundle services in a business or I am going to The process of rewarding banks that way that’s “inefficient lose my job,’ and I’d say, provide credit is strewn with land- and frustrating,” says “Having to ‘We just hit you last year,” mines. Anthony of South Jersey In- Ball. “As a customer, promise the says Ball. “Then they dustries finds the need to commit to you never want to bun- would lose their jobs.” business upfront equivalent to speed dle, you want to pick business when Ali, former treasurer dating. “Having to promise the busi- the best provider for the bank walks in of Greif, adds, “It’s chal- ness when the bank walks in the door each single product.” the door without lenging to figure out how without having the opportunity to fully With some prod- having the op- to divide the pie, because vet the bank’s capabilities is challeng- ucts, treasurers do try portunity to fully there are often too many ing,” she says. The awarding of business to stick to a best-of- mouths to be fed.” often calls for a full-blown request-for- breed approach. “If vet the bank’s proposal process and “getting down and you’re picking a cash capabilities is ➼A Quid Pro Quo dirty in the weeds with the product spe- management bank, challenging.” There’s another factor cialists,” Anthony adds. “I can’t do that you have to know who ›› Ann Anthony, VP and that requires careful cho- with the relationship manager.” In ad- has the boots on the treasurer, South Jersey reography: the increasing dition, the borrower and lender “don’t ground in the country Industries focus by the borrower’s get an opportunity to get to know one you’re dealing with, upper management on another and each other’s strengths and and little else matters,” says Ball. But which banks are the strongest custom- weaknesses,” she says. for banking products that are, in es- ers for the borrower. “The weighting Eric Ball, who was senior vice sence, commodities—like FX hedging of how much product the bank itself president and treasurer of Oracle for and stock buybacks—treasurers often is buying [from the borrower] is in- 11 years, saw the same thing happen- rotate the business among credit pro- creasingly important,” says Ball, and ing before he left the software giant in viders. the push to include it as a factor be- 2015. Banks used to participate in credit At Oracle, Ball had a carrot to dan- gan three years after the credit crisis. facilities just on the hope of getting an gle in front of bankers: the company “When the banks would pitch me, I audience for the lucrative pieces of the was regularly issuing a few billion dol- would say, ‘Have you talked to your business, Ball says. “I think now credit lars of bonds at a time, and the fees for CIO about his or her purchasing deci- has become even more of a loss leader bond book running were in the tens sions? Are you aware that we have a for the banks, so they don’t want just a of millions of dollars. Even more im- proposal in front of you to sell ‘x’?’” vague promise or a ‘we’ll keep you in portant for the banks, whether or not While a bilateral relationship gives the mix.’ They want more assurance a bank was in on Oracle’s deals could the borrower some leverage, taking than that.” affect league table rankings. “[In some that stance requires tighter coordina- Ball, now a venture capitalist, says years,] it would be really hard to be on tion between the treasurer, as the cus- the issue is the pricing of credit fa- top of the tables if you weren’t part of tomer of the bank, and whoever is in cilities. “The pricing is arbitrary and Oracle’s deal,” he says. charge of selling to the banks. And to

42 CFO October 2016 | cfo.com Courtesy the companies some degree it takes the job of choos- ships we have are “When the banks ing the bank out of the treasurer’s with people who would pitch me, I hands. are patient and who “Now you have introduced deci- realize we only would say, ‘Have sion makers outside of treasury,” Ball have so much vol- you talked to your explains, which can be frustrating to ume to allocate.” A CIO about his or some treasurers. “Before you award a bank that has es- her purchasing piece of business, the CFO or CEO now tablished a rapport asks, ‘How much product have they with Rockefeller decisions? Are you bought in the last year and what might Group is much aware that we have they be buying next quarter?’” But Ball more likely to get a proposal in front calls it “incredibly liberating, because a friendly answer of you to sell ‘x’?’” you are in the loop on the sales cycle, when it calls to say ›› Eric Ball, and you may be able to say ‘I played a it needs a wider former treasurer, Oracle role in closing that contract,’ and that spread on a deal or can be very rewarding.” needs a bit more re- course on a loan, Pallotta says. line of credit, Anthony agrees the deals ➼ Mutual Satisfaction Even on pricing of products and have to work for both parties. “Let’s While having to parcel out business to services, companies may have to face it, there will be times when you lenders can be irritating, many treasur- be willing to bend a little. “Every- need a favor, when things are not going ers have settled into the notion that the one has to be comfortable with the the way you expected, and you have to best approach is to make the relation- terms,” says Anthony. “I never want to be able to call someone [at the bank] ship work for both lender and borrower. squeeze that last half cent out of you— and say ‘I really need you to do x, y, or “For me, it’s about an open dia- you need to be profitable to give me z for me,”’ she says. “And if you have logue and a willingness to work to- good service.” that longstanding relationship cultivat- gether,” says Rockefeller Group’s Even though banks can be demand- ed over time, you’re more likely to get Pallotta. “The strongest bank relation- ing when it comes time to negotiate a a positive response.” CFO

BANKS’ BALANCE SHEET CONSTRAINTS The following banking regulatory requirements contribute to making corporate credit lines less profitable and some deposits less attractive to U.S. financial institutions.

Liquidity Coverage Ratio Tier I Leverage Ratio Requires large banking organizations to hold a minimum amount Measures how leveraged a bank is in relation to its consolidated as- of high-quality liquid assets (HQLA) that can be readily convert- sets. The ratio counts banks’ off-balance-sheet exposures, like loan ed into cash during a 30-day period of financial stress. HQLAs commitments, standby letters of credit, acceptances, and trade let- include cash, Treasury bonds, corporate debt, and some munici- ters of credit. Bank holding companies in the United States with pal securities. more than $700 billion in consolidated total assets must have a Tier I leverage ratio of 5% by January 1, 2018. Net Stable Funding Ratio Measures the amount of longer-term, stable sources of funding Common Equity Tier I Capital Ratio employed by an institution relative to the liquidity profiles of the Measures a bank’s core equity capital compared with its total risk- assets funded. Stable funding sources include customer depos- weighted assets. Shows how well a bank can withstand financial its and long-term wholesale funding. The ratio also measures the stress and remain solvent. This ratio includes common stock, re- potential for contingent calls on funding liquidity arising from off- tained earnings, and other comprehensive income, but excludes all balance sheet commitments and obligations. This ratio is designed kinds of preferred stock and non-controlling interests. to cut down on the use of short-term wholesale funding. Sources: Investopedia, U.S. Federal Reserve System

cfo.com | September 2016 | CFO 43 Business Duke University/CFO Survey Results Outlook Don’t Tell Me, Show Me The third-quarter Duke/CFO Business Outlook Survey finds CFOs will slow spending while awaiting a new president’s policy decisions. By Chris Schmidt

More than a third of U.S. CFOs Trump wins. say political uncertainty will Due in large part to political and 26% › slow their spending plans economic uncertainty, U.S. firms on Percentage of all U.S. beyond the presidential elec- average do not plan to increase capital firms that are already tion, according to the latest Duke investment or research and devel- delaying investment University/CFO Global Business Out- opment spending over the next 12 because of the election look survey of more than 1,200 senior months. This follows an already weak finance executives. The survey, which level of investment. was completed on September 9, finds However, finance executives of U.S. at least 33% of CFOs, regardless of who companies indicate that spending will is elected, say they will hold back on not be affected by moderate interest to grow 1.4% over the next year, and investment after the November elec- rate hikes. Only 1 in 3 firms say that a CFOs plan to hike wages 2.9%, which tion as they wait to see how the new 1% hike in the federal funds rate would is nearly double the expected 1.6% president will govern. cause their firm to reduce capital increase in product prices. Specifically, 40% of CFOs say they spending, and only 12% say the same Still, U.S. CFOs remain upbeat will hold off on investment if Hillary about a 50-basis-point hike. about the domestic economy. On a Clinton is elected, while about 33% Despite uncertainty in the political scale from 0 to 100, financial execu- say the same in the case of a Donald and monetary policy realms, the labor tives rate their optimism at 60.6, up Trump presidency. The survey also market continues to tighten in the from 59.4 last quarter and slightly finds that: U.S. Thirty-six percent of U.S. firms above the long-run average. Besides • About 26% of all U.S. firms say indicate they are having difficulty hir- the aforementioned concerns, U.S. they are already delaying investment ing and retaining qualified employees. finance executives are also worried because of the election. Employment in the U.S. is expected about regulatory requirements, the • Among the 26% cur- cost of employee benefits, rently delaying invest- Economic optimism rises in U.S., Asia, and Europe and weak demand for ment, three-fourths will Finance executives rate their optimism about their products and services. continue to delay invest- domestic or regional economy* They expect health-care ment if Clinton triumphs, costs to rise by 6.8% over versus roughly half if 70 the next year, more than Trump wins. a percentage point above 65.0 • Among the majority what many experts are 60.6 of firms not currently de- 60 predicting. laying investment because 56.3 ■ U.S. Finance executives of the election, about one 49.8 ■ Europe responding to the survey quarter say they would 50 48.0 ■ Asia also project corporate change course and de- ■ Japan earnings will rise by 7.3% 45.7 lay investment plans if ■ Latin over the next 12 months. 40 America Clinton were elected, Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 But they were slightly less and another quarter say ■ Africa optimistic about their own they would do the same if *On a scale of 0–100, with 0 being least optimistic firms’ performance in the Africa LatinSource America for all charts: Duke University/CFO Magazine Global Business Outlook Survey of finance and corporate executives. Responses for the current quarter include 485 from the U.S., 302 from Asia (outside of 44 CFO October 2016 | cfo.com JapanJapan), 32 from Japan, 160 from Europe, 150 from Latin America (including Mexico), and 112 from Africa. Asia same time frame. Confi- Company confidence stronger in Asia, Latin They also think full-time dence in their own com- America, and Europe employment will be flat panies’ financial prospects Finance executives rate their optimism about their across the region. fell to 65.3, from 66.3 in own companies’ financial prospects* In Japan, finance execu- the second quarter. tives are evenly split on

70 66.7 Prime Minister Shinzo THE SPEED OF BREXIT 65.3 Abe’s 7.5 trillion yen stimu- With the United Kingdom 64.6 lus plan, with 46.9% calling set to depart the Euro- 60 63.4 it “good news” and the pean Union, the Outlook ■ U.S. same percentage labeling it 60.2 survey asked U.S. finance ■ Europe “irrelevant.” 54.4 executives how much of 50 ■ Asia Meanwhile, Latin an effect the pace of the ■ Japan American economic opti- U.K.’s withdrawal would ■ Latin mism dipped to 49.8 from 40 America have on their companies. Q3 '15 Q4 '15 Q1 '16 Q2 '16 Q3 '16 52.9 last quarter, though While most said the speed ■ Africa the optimism index varies of Brexit would not affect *On a scale of 0–100, with 0 being least optimistic widely across the region’s their firms, 12% did say Africa individual countries. Op- they prefer the U.K. to proceed slowly. mismLatin Americaindex in Europe increased to 56.3 timism in Chile and Ecuador remains In Europe, predictably, there is more thisJapan quarter, up from 55.3 in June. And below 50, while Brazil rebounded concern. Thirty-one percent of finance since the Brexit vote, European CFOs somewhat to 53. Optimism remains Asia executives at European businesses say have grown more confident about their strong in Mexico (63) and Peru (69). it would be best for their firms if Britain ownEurope companies’ financial prospects, Averaged across Latin America, fi- makes a very gradual exit from the EU. withUS that optimism level hitting 63.4, nance executives expect their capital Thirty percent of European CFOs be- the highest it has been since the fourth spending will rise 2.1% in the next 12 lieve that Britain will complete the exit quarter of 2015. Finance executives in months, with a positive outlook in by the end of 2019; 54% say it will hap- Europe project wages will increase by countries other than Chile. pen by the end of 2020. 1.7% over the next year, and employ- Full-time employment among Latin The reason why European CFOs ment by 1.1%. American companies is expected to want a slow Brexit is simple: 27% of decrease 1.4% overall, but, again, there European firms say their U.K.–based MIXED BAG are wide national variations: Employ- revenues will fall after Brexit. Among In Asia, Latin America, and Africa, ment is expected to increase 3% or these firms, the proportion of revenues economic optimism and business more in Mexico and Peru, but fall in coming from the United Kingdom is confidence were dissimilar. Optimism Brazil, Chile, and Colombia. Eighty- expected to fall to 14% from 22%. And about domestic economies shot up in eight percent of Latin American CFOs some European finance executives Asia, with the index hitting 65, up from indicate that political risk is causing think Brexit is just the beginning of 58.7 in the second quarter. But varia- their firms to be more cautious in trouble in the EU: One in five Euro- tions ranged from 40 in Singapore, 48 business spending. One bright spot is pean CFOs believe that another coun- in Japan, and 55 in Malaysia to 65 in the recent election of President Pedro try will vote to withdraw from the EU India and 70 in China. Pablo Kuczynski in Peru. Ninety-five within two years. The leading candi- Two-thirds of Asian CFOs indicate percent of Peruvian CFOs expect his dates, in order of most mentioned, are they are holding back on investment policies to be helpful to their firms, as Denmark, the Netherlands, Hungary, spending due to political risk in their do 43% of CFOs in Chile. and Greece. countries, though they expect capital Africa was the only region in which The wave of unrest is also affecting spending to rise by an average of about finance executives were less optimis- the political mood in individual Euro- 5.5%. No spending growth is expected tic about their domestic and regional pean countries. Nearly 60% of Euro- in Japan. CFOs think wages will rise economies and their own companies’ pean CFOs say they are holding off on by 4% in Asia (which is modest by financial prospects. Economic opti- investment due to their own country’s historic standards), with growth of less mism there dipped to 45.7 from 47.4 in political uncertainty. Still, the opti- than 3% in Japan versus 5% in India. the second quarter. CFO

cfo.com | October 2016 | CFO 45 Field Perspectives from CFO Research Notes

The Transformers How finance leaders are developing the capabilities they need to implement dramatic change. By Josh Hyatt

At a time when businesses need were asked to choose among three lev- to make better, more timely els of proficiency: basic, intermediate, › decisions, finance executives and advanced capabilities. They were need to lead a technology-driven required to not only assess the current transformation within the finance state of their organizations but also function and across the enterprise. the level they thought their companies Their sense of urgency permeates a would need to achieve in two years’ 34% recent study, “The Finance Function’s time. Among the areas included in the Percentage of finance execu- Readiness for Change,” conducted by study, the one which drew the lowest tives who say that their finance CFO Research in collaboration with number of respondents who ranked function has reached an WNS. In a survey of 156 senior finance their finance function as “advanced” “advanced” level in terms of automation. executives at U.S. companies with an- was also the most dramatic: adoption of nual revenue of more than $1 billion, sophisticated analytics and digitization. respondents revealed how far their Analytics and digitization, in fact, companies have to go before they can are key in broadening the role of CFOs, consider key aspects of their finance who are best-positioned to leverage OPERATING MODEL function worthy of being labeled as big data. The fact that only about one Nearly half of respondents (48%) “advanced.” quarter of respondents (26%) claim to ranked their finance function as “ad- The study asked respondents to rate have reached the highest level in that vanced” in terms of the status of the the current and future states of their realm isn’t necessarily an indication of operating model underlying finance— finance function along four crucial di- where it ranks among finance chiefs’ the highest number, by far, in any of mensions: the finance operating model; many competing priorities. More like- the four categories (see Figure 1). By automation of finance processes and ly, it reveals that finance executives are the study’s own definition, that trans- activities; governance, risk, and control still busy laying the groundwork for lates into centralized control and stan- (GRC) structures and processes; and that transformation, which first re- dardized processes. adoption of sophisticated analytics and quires directing investments into, and Those who chose “intermediate” digitization. gaining mastery over, the other chang- weren’t much fewer in number, com- For each of those areas, respondents es outlined in the survey. prising 40% of respondents. (In the survey, “intermediate” encompasses global FIGURE 1 process owners combined with regional operations and external providers.) Making Progress by Being ‘Advanced’ That number suggests that nearly 90% Percentage of respondents who rank these aspects of their of companies represented in the survey financial function as “advanced” have made significant progress toward increasing flexibility on an organiza- Finance operating model 48% tional and functional level. Still, respondents are cognizant of Automation of finance processes and activities 34% the obstacles ahead of them, including structural complexity, lack of change Structures and processes for 34% governance, risk, and control management capability, and acquisi- Adoption of sophisticated 26% tion-driven growth, which can result analytics and digitization in an assortment of non-standardized 0% 10 20 30 40 50% processes, controls, and systems.

46 CFO October 2016 | cfo.com AUTOMATED PROCESSES The reluctance to FIGURE 2 Finance executives view automation— tackle such a daunting Aiming for ‘Most Improved’—and Soon replacing manual data entry with tech- task may explain why Percentage of respondents who anticipate nology tools—as an important enabler two-thirds of survey reaching the advanced level within two years for finance processes and activities. Ad- respondents classify vanced automation would allow most their own processes data to be generated by digital tools, for ensuring compli- Finance operating model 60% requiring minimal manual intervention. ance as either “in- Structures and processes for By leveraging automation, companies termediate” (61%) or 58% governance, risk, and control can reduce costs through streamlined “basic” (5%), meaning processes and a decrease in errors. that their GRC prac- Automation of finance processes 57% A majority of survey respondents tices either rely on and activities clearly recognize the value of imple- non-standard process- Adoption of sophisticated menting automation to optimize finan- es and individual judg- 53% analytics and digitization cial processes. Nearly 6 in 10 respon- ment-based metrics or dents (57%) believe that, in order for include a mix of both their companies to succeed, they will standardized and non- have to achieve an advanced level of standardized processes. can broaden their corporate roles to automation for managing financial, But a majority of respondents, 58%, become big-picture strategists. Armed process, and performance data within believe that their GRC processes will with data-derived insights, finance the next two years (see Figure 2). But need to progress to an advanced level chiefs can identify future opportunities as committed to that objective as fi- within the next two years. Advanced to hasten growth and fatten profits. nance executives may be, survey re- GRC processes depend on a high de- But among survey respondents, sults suggest that a majority of them gree of standardization, as well as the vast majority have yet to acquire have been slow to rise to the challenge. sophisticated use of technology to or master the technological tools that Only a third of respondents (34%) provide risk-based metrics and dash- will elevate their duties and their com- say that their companies have already boards that define global and function- panies to new heights. In the survey, reached an “advanced” level in terms al standards, allowing management to only about one quarter of respondents of automation. identify exceptions quickly and re- (26%) say their use of technology is As for the perceived benefits of au- spond appropriately. “advanced,” a classification character- tomation, nearly half of respondents The primary benefit to making such ized by a focus on advanced data min- (48%) cite the same two benefits on a transition, according to nearly half ing and predictive analytics as well as their lists of the top three: realizing (48%) of respondents, is in ensuring an integration of financial and opera- efficiency gains in transactional pro- compliance and avoiding personal lia- tional information. And 80% of respon- cesses such as order-to-cash, purchase- bility. (The Sarbanes-Oxley Act of 2002 dents say that the use of spreadsheets to-pay, record-to-report, and cash man- decreed that corporate officers can is still ubiquitous at their companies. agement; and the ability to adopt digital be held personally liable for misstate- Regardless, more than half of respon- performance management tools. In ments and errors in regulatory report- dents (53%) recognize the need to combination with big data, such tools ing.) Other benefits of advanced GRC progress to an advanced state of using would equip finance executives with structures and processes, as chosen technology within two years. valuable insights into the business. by a substantial proportion of respon- Digitization is a crucial link to de- dents, include enhanced process effi- veloping data-analysis capabilities. GRC STRUCTURES AND PROCESSES ciency and effectiveness (42%), a more Indeed, about a third of respondents It’s understandable for finance lead- agile and scalable control environment say that digitization will allow their ers to act hesitantly when it comes to (36%), and ultimately, increased oper- companies to build agile business pro- centralizing GRC activities. Mistaken ating margins (32%). cesses in line with market shifts. Clear- moves, after all, could expose the com- ly, finance executives are aware of the pany to a variety of costly risks, includ- ANALYTICS AND DIGITIZATION technology’s role in enabling them to ing compliance failures and reputation- By successfully leveraging data ana- weave raw data into patterns that form al damage. lytics technology, finance executives the basis of valuable insights. CFO

cfo.com | October 2016 | CFO 47 THE QUIZ Reality Check With all the talk of a revolution in payments and the development of services like Apple Pay, you might be under the impression that 90% of business-to-business transactions are now electronic. But that’s far from true; many accounting departments are still awash in paper. How much do you know about how companies are actually using electronic payments? Take our quiz to find out.

1 What percentage of the typical U.S. 4 What is the top factor influencing organization’s business-to-business companies’ choice of method for payments are received by check? cross-border payments?

A. 50% A. Contract requirements B. 38% B. Currency risk C. 25% C. Size and purpose of transaction D. 44% D. Transaction cost

5 Which of the following benefits that What percentage of the typical U.S. 2 companies gain from sending or re- organization’s business-to-business ceiving electronic payments (ACH, payments are made by check? cards, wires) is NOT one of the top A. 44% three cited by finance executives? B. 34% A. Speed of settlement C. 51% B. Working capital improvement D. 56% C. Cost savings D. Improved cash forecasting 3 After checks, what is the most popular method of paying major suppliers, used for 34% of payments? 6 What is the most common barrier companies face when trying to convert A. ACH credits to electronic payments? B. Wire transfers A. Lack of integration between C. Purchasing cards electronic payments and D. Single-use accounts

accounting systems Source: B. Shortage of IT resources for

implementation AFP’s C. Absence of standard formats for 2016 remittance information D. Difficulty convincing customers Electronic to accept electronic payments Payments

Survey

6–D 5–B; 4–A; 3–A; 2–C; 1–D; Answers:

48 CFO October 2016 | cfo.com Thinkstock Bridging Financial Control, Technology, Strategy and Performance

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