Building credibility among often-sceptical boards, investors, regulators and independent auditors is the biggest challenge facing the Chief Financial Officers (CFOs) of large corporations since the passage of Sarbanes-Oxley.
According to a new study by Mercer and Russell Reynolds Associates, CFOs face growing pressure to excel at managing the business and controlling risk. But in addition, the new primacy the markets place on accurate reporting makes CFOs personally responsible, in large part, for building and maintaining the public's trust in their companies.
The study, based on more than 60 interviews with CFOs of the largest public companies, primarily in North America and Europe, and their stakeholders, illustrates that a high-performing finance department is more vital to corporations than ever before.
"Accurate reporting is the basis of corporate credibility today and CFOs say that working effectively with external stakeholders who scrutinize the numbers is a primary challenge," said Mercer's Charles Bralver.
"CFOs who succeed in establishing trust-based relationships with investors, the board and regulators have a more influential seat in the corporation."
The study found that, in the wake of recent corporate scandals, market volatility, and regulatory changes, external stakeholders demand more information and accountability from CFOs.
As a result, building and maintaining the trust of investors and bolstering corporate credibility with the board of directors and regulators are among the pressures facing today's CFOs.
CFOs interviewed for the study reported spending more time explaining corporate strategy and the company's business model to investors and analysts, particularly those with a long-term perspective.
Similarly, interactions with the board are more time consuming, rigorous and even adversarial. Directors are more engaged in fiduciary oversight, and CFOs are almost unanimous in reporting that their relationship with the board has changed. For example, Audit Committee meetings are more frequent, longer, require more "rehearsal," and involve more detailed review of financial statements.
CFOs aso told the researchers that they felt under increased pressure to ensure reported results are accurate and expectations about the future performance of the company are realistic.
New regulations like Sarbanes-Oxley and International Financial Reporting Standards palce further demands on the finance department to ensure compliant reporting – as well as on the CFO personally to certify the accuracy of the numbers.
The study also shows that the increasingly complex and global nature of the business environment has made the mandate to mitigate corporate risks, seize growth opportunities and create value more challenging for CFOs.
In response to these market challenges, many CFOs are implementing a "back to basics" agenda to improve the quality of reporting, create a culture of compliance, and strengthen controls.
But this new suite of challenges has created a new job description for CFOs and not all are up to or enjoy the changing environment.
Turnover is on the rise, driven by both promotions and resignations. To fill CFO positions, companies in search of specific skill sets are hiring external candidates as opposed to promoting from within. A greater share of today's CFOs also has an MBA, a CPA, or both.
But while there appears to be less job security for CFOs today, companies are willing to pay more to attract and retain top talent. Total compensation received by CFOs is on the rise and surpasses $2 million for those at the largest companies.
"Holding a financial officer position at a publicly traded company has become more challenging as the CFO is not only responsible for the financial integrity of the company but is also asked to act as business partner while balancing the increasing needs of external stakeholders," said Christopher Langhoff of Russell Reynolds.
"These demands have led to increased compensation as well as an increase in turnover amongst financial officers. Companies need to continually recruit and develop a special breed of executive who can successfully operate in today's stringent regulatory environment."