G100 NATIONAL CONGRESS CFOs—The Momentum Towards Greater Leadership Chris Figgis & Kokkong Chan Egon Zehnder International Wednesday 27 September 2006

Constituents of leadership The EZI framework Do CFOs measure up? Today’s discussion Leadership trends Constituents of leadership The EZI framework Do CFOs measure up? What next?

The good old days . . . The original computer!! Delete Print

Highly technical “scorekeeping” function Not represented on the Board The CFO of the past Highly technical “scorekeeping” function Not represented on the Board Strategic planning was a financial projection Expenditure and administrative control function

A review of job descriptions . . . 2006 “major emphasis on cash management” “ability to be an active thought partner of CEO and be capable of influencing outcomes in the strategic agenda” “profit improvement responsibility . . . control of cash, inventories and capital expenditure” “hit targets through drive and ability to change processes to deliver improvements to performance” “introduce professional financial management planning to cover banking relationships and insurance” “able to delegate appropriately, and empower direct reports to perform at a higher level” Called Group Financial Controller, GM Finance and Administration Called CFO, Finance Director

More sophisticated financial markets Drivers of change Capabilities of CFOs More sophisticated financial markets Size, complexity, internationalization More focus on governance/risk and compliance Increase in capability of technology

On breadth of leadership … “Because the CFO puts together the information necessary to manage the company, he naturally becomes a cornerstone in all projects, whether the question at hand is the strategic evolution of business units or identifying takeover targets.” —Emmanuel Babeau CFO, Pernod Ricard

On taking on “business” leadership roles . . . “A good CFO must be able to stand in for the General Manager of any business unit since he shadows every operation through reporting and accounting.” —Jean-Marc Huet CFO, Royal Numico

Why is leadership important anyway? Impact

Research on the value of top management The leader effect accounts for up to 40% of the variance in value Leader effect Company effect Industry effect Year effect Company value Source: “When Does Leadership Matter?” ; Wasserman, Nohria and Anand; Harvard Business School working paper no. 01-063, April 2001

Our own analyses confirm these findings EBITDA Impact of management quality EBITDA margin 0.3 to 1% improvement in EBITDA margin 0.1 improvement in MQI Major reservations Some reservations Good Outstanding -1 1 2 Management quality index (MQI) Correlation : 0.6 to 0.8 Source: Egon Zehnder International

How have CFOs responded? Broadening exposure, eg COO roles Additional training in skills, eg IT Formal courses, eg AICD, MBA Aim: Build new technical skill sets and expand experience

Technical skills and experience Leadership competence But . . . û Technical skills and experience Leadership competence

To summarise our proposition . . . The CFO’s continuous momentum towards leadership generates . . . NOT a need for an increase in Experience BUT an increase in Competencies

Some common competencies!

The EZI philosophy in leadership assessment Leadership abilities can be described by certain behaviours Behaviours can be categorised into competencies Almost all senior management roles can be defined by 7–9 competencies

What distinguishes leadership? Business leadership Thought leadership People and organisation leadership Collaboration People development Team leadership Change leadership Customer focus Market knowledge Strategic orientation Functional capability Results orientation

Competencies—what are they? A measurable characteristic of a person that is related to success at work. It may be a behavioural skill, a technical skill, knowledge, or ability. For example: Results orientation Each competency has a set of behavioural indicators. For example: Works on assigned roles and tasks, works to complete tasks Introduces a new model that successfully transforms an existing business We order these behavioural indicators by relative difficulty and sophistication thereby scaling each competency

Measuring people against role requirements Results orientation 1 2 3 4 5 6 7 These become targets against which individuals can be as assessed Transforms business model Redesigns business practices Improves business practices EGM Drives to exceed goals GGM-GM GGM-GM Driven by goals Front-line manager Manager Would like to make things better Individual contributor Fulfills assigned tasks

Better leaders demonstrate increasing levels of proactivity Competencies are defined by behavioural indicators ordered by relative difficulty 7 6 Lower 5 4 3 2 Higher 1 Understand Try Interact Willing Make no mistakes Respond Apply Meet Collaborate Doing Take on ownership Be involved Improve Exceed Inspire Getting others to do it Take risks Proactive 

EZI research and analysis Early findings of analysis selected from a database of several thousand assessments done globally, all at senior manager to CEO levels Focus specifically on: How CFOs rate against CEOs How the next rung rate in leadership

Findings from ongoing research on the CFO function All EZI database Rating All finance executives 15% Outstanding 23% 51% Good 55% 28% Some reservations 19% ü 6% Major reservations 3% Finance people rate highly against peers overall

Outstanding CFOs compared with outstanding CEOs Results orientation Market knowledge Functional capabilities Strategic orientation Collaboration People development Team leadership Change leadership Customer focus

Why don’t more CFOs become CEOs? Motivation Company structure Opportunity Not knowing WGLL

How are you tracking according to these leadership competencies? Reflection How are you tracking according to these leadership competencies? Do you have a plan for getting there?

CFOs vs Finance leaders who report into CFOs Report to CFOs Report to CEOs Results orientation Market knowledge Functional capabilities Strategic orientation Collaboration People development Team leadership Change leadership Customer focus Significant Development Gap = 4.4 Mainly on “business management” competencies

CFOs vs Finance leaders who report into CFOs Report to CFOs Report to CEOs Results orientation Market knowledge Functional capabilities Strategic orientation Collaboration People development Team leadership Change leadership Customer focus But even on “finance function” competencies, There are sizeable differences

Outstanding CFOs vs Good CFOs Results orientation Market knowledge Functional capabilities Strategic orientation Collaboration People development Team leadership Change leadership Customer focus Development Gap = 9 Key Differentiators: Functional strength, and ability to change a direction through personal influence and people

Next rung down is not ready Good news about CFOs’ leadership capabilities ends at the next level down Both when viewed by seniority, or by level of capability The gap to the next level down is too wide

Solution before diagnosis “Ad-hoc” development plans Why is this? Not identifying WGLL Solution before diagnosis “Ad-hoc” development plans Inertia in opportunity creation

Do you know their individual and collective development gap? Reflection on team Do you know their individual and collective development gap? Are you spending your training and development funds effectively? Are you taking risks with leadership development? Are you hiring correctly and getting the right advice?

Yet the development of future CFO leaders have lagged behind Summary The CFO of today and the future is a “business leader” in his/her organisation Yet the development of future CFO leaders have lagged behind CFOs need to do better in both Their own leadership competency development; and That of their team Overall improvement in top management competencies has strong correlation with shareholder returns