Creating CFO Value Leaning out t by fjwuxn



              Notes for an Address

             “Creating CFO Value:
           Leaning Out the CFO Role”


                  Mark Emery
             Chief Executive Officer
            Northstar Aerospace Inc.

Career Management for Senior Financial Executives
        Financial Executives International
                Chicago Chapter

           Lincolnshire Marriott Hotel

                  June 11, 2004

      Thank you John. It is my               I recently heard this story

privilege to be here with you today.   which illustrates the point.

These are interesting times and

the topic at hand - Creating CFO       The CFO was in his first day in the

Value - is a relevant one.             job at a Fortune 500 company. He

                                       opened the top right hand draw of

      A recent edition of CFO          his desk. Inside there were 3

magazine had an article headed         envelopes and a note.

`Hello, I must be going‘. It is

referring to the typical Fortune       The note was from his predecessor

500 CFO. Only 25% remain with          and it read: good luck in the role. I

their organizations 5 years and        want to help you succeed. Inside

less than 10% stay for 10 years.       each envelope you will find a

                                       nugget of wisdom which will help

      These statistics paint a         you succeed. Open them in turn as

picture for CFOs, very much in line    and when you experience big

with the prospects for NFL             problems.

coaches. The picture is of

revolving doors! As the public has     Well thing went so well the first

lost trust in corporate America in     month and then the honeymoon was

recent years, it takes courage &       over and the first crisis hit. The

considerable wisdom to hold on to      CFO went to the top right hand

a CFO role.                            drawer and opened the first


                                      Then bang 3 months in he hit his

It read: `Blame it on the previous    third crisis.

management‘. So he followed the

advice and blamed the problem on      Back to the top right hand drawer

his predecessor and everyone          and the third envelope. He opened

seemed pleased with this              it and inside it read:

explanation and normality

returned. Things went so well for a   Take 3 envelopes; place them in

month he almost forgot about the      the top right hand drawer.

envelopes then slam. He ran into

his second crisis.                           Yes, courage is definitely

                                      required during these tough times

Back to the top right hand drawer     for finance executives. CFOs have

and the second envelope. It read:     been on the hook for downsizing

`Restructure‘                         decisions, becoming results-driven

So he again followed the advice       not process-driven, while working

and introduced a new organization     with pressures and challenges in a

chart and laid off half the finance   tough regulatory and economic

department. Again his colleagues      environment. Along with meeting

seemed pleased and impressed by       government regulations, CFOs are

his bold actions and the crisis was   now expected to renew confidence

over.                                 while improving profitability and

                                      competitive advantage. Where‘s

For a few weeks things were so        the Superman costume, you may

good that he felt he would never      ask?

need to open the third envelope.

      While I can‘t supply the       large equities. There are good

costume, hopefully I can provide     reasons why the small company

some insight from a CEOs             perspective matters.

perspective on how you as CFOs

can add value in this volatile              Before I pass on any further

environment.                         comment, let me provide

                                     background on the company I work

      My perspective is based on a   for.

small company perspective. The              Northstar Aerospace is a

business media tends to              publicly quoted company that

concentrate on leadership in a       supplies flight critical aerospace

large company environment. The       components. We are proud to serve

leadership challenges in small       the US Army, GE, Rolls-Royce and

companies are at least as            Boeing. We supply gears and

important. For one thing there are   transmissions for the Chinook, and

many more CFOs working for small     Apache helicopters, the F22

companies than large. Secondly, in   Raptor on the military side. And

terms of their performance the       gearboxes for the regional jets on

small companies generate better      the commercial side. Our products

returns in the long term. A $1       include gears, full assembled

invested in 1970 in a large cap      transmissions, accessory gearbox

equity stock would today be worth    assemblies, rotorcraft drive

$31. The same $1 invested in a       systems, and other machined and

small or mid cap stock would be      fabricated parts. We also provide

worth $125. Small/mid cap equities   maintenance, repair and overhaul

have generated 4x the returns of     capabilities.

                                       level & in May this year had

      Northstar is the number one      achieve a milestone: 100% delivery

independent manufacturer of            performance to Boeing. We are

precision gears and transmissions      very proud of the value we have

in North America. In fact, we are      added to this plant.

one of the few companies in the

world with the capabilities to               In total, Northstar operates

manufacture complex, flight            out of seven sites in the US and

critical precision gears. We are       Canada and we also source

the best in the world at what we       products from China and Taiwan.

do. Our performance and has been

demonstrated in recent months                We have annual sales of

with the US Military.                  $140m. As this picture shows, we

                                       have experienced growth to our

      Our Chicago plant was            current size over the last ten

previously owned by Litton             years, but have reached a plateau

Industries and Boeing. We              since 2001. This, in part, reflects

acquired it in 2000 and have           weak financial control of the

turned the red ink to black: today     parent company. Up until 2001, the

it is a significant profit generator   company‘s financial control could

for the company. Four years ago        be likened to drunken sailors:

Northstar purchased the facility.      there was a buying binge and

Since then, headcount has been         companies were purchased willy

reduced by 50% and sales               nilly, destroying shareholder value

increased by over 30%. We have         and reducing the capital to invest

taken customer service to a new        in the core business. The result

was a mess and our share price              We have a pipeline of

dropped to $1. We did not have        opportunities ahead of us that will

the resources to invest & grow the    drive our growth. We are seeing

business                              increasing benefits from the

                                      implementation of lean

      Today it is $2.60. Our EBIT     manufacturing principles.

as percent of sales is 10% and

more importantly in constant                Northstar is a company

dollars is 15%. We believe we         where shareholders in recent

remain undervalued based on our       years have benefited directly from

performance against comparable        the value of stronger CFO value.

aerospace companies. So buy our       We have moved from being

stock our ticker is NAS!              drunken sailors to moving towards

                                      best practice in our financial

      We have delivered 2 years       management.

of steady progress and a record of

meeting our commitments to                  I would now like to move on

shareholders. Our strategy is         to share with you thoughts on CFO

winning for us with our focus on      value. I can do this as a CEO who

the US military, outsourcing to       recently recruited a CFO.

OEMs, focusing on stable

programs, driving lean in all we do         I will talk about the

and bonusing the organization         attributes that I looked for in a

based on EVA principles.              CFO & I will do so using the

                                      language of lean because it applies

as much to the finance process as

it does to manufacturing.                  This one gets a lot of press

                                        nowadays and there are few CFO

      Value in lean terms has a         job specs out there where the

specific definition: value is defined   terms ‗impeccable integrity‘ or

by the customer. For the CFO, this      words to that effect are not

means the external customer,            included. Integrity and ethics

shareholder or employee. Value is       today are essential to do be in the

created when companies provide a        frame to win business. In other

product or service at the right         words, if companies are lacking

time for an appropriate price.          these then they simply will not be

                                        considered for business however

   What are the elements of value       attractive their product offering

for a CFO? I would like to talk         or pricing.

about 4 areas:

                                           I am sure many of you have

   1. Instilling Integrity & Ethics     heard this one: the CEO asks his

   2. Ensuring Accuracy,                new CFO what‘s one plus one. The

      Timeliness & aligned              CFO quickly replies whatever you

      expectations                      want it to be! Make the numbers

   3. Raising the performance of        fit the story we want to

      the line                          communicate. I have heard similar

   4. Building the team                 conversations in the past but such

                                        values can no longer be tolerated.

   1. Instilling Integrity & Ethics

      Forbes – a journal not known       surprised me to hear that at the

for its spirituality- had an editorial   time. Today in light of recent

on April 26 entitled ‗The Age of         corporate scandals I would be less

Meaning‘. In the article, it was         surprised to hear that employees

pointed out that 2 huge successes        look to company which prize

of the past year –the movie              integrity.

‗Passion of the Christ‘ and the less

well-known the ‗Purpose Driven                 At Northstar, the standards

Life‘, which to date has sold 15m        have to be of the highest order.

copies, reflect the increasing           Speaking as someone who has

focus on values. The article argues      worked in Europe, Asia, Canada and

that to be successful, companies         the US, the US, has the highest

have to bring meaning & this is          standards in integrity and ethics.

true for company culture.                Despite the recent scandals. The

Customers, employees &                   regulatory environment here is the

shareholders want to be                  toughest, the rules and regulation

associated with a company which          on treatment of minorities is the

brings meaning to their lives.           most effective. The US has the

                                         more women in senior management

      In one company I ran, I            than any other country and that is

made integrity a core value for the      a huge advantage that the US

company—this was pre- Enron,             enjoys.

before such statements were

fashionable—and the CFO I                      As a US Government

recruited said this was one of the       contractor Northstar must be

reasons he joined the company. It        spotless. All senior managers have

annual training in ethics, and ethics   2. Ensuring Accuracy, Timeliness &

is a key element of the annual          Aligned Expectations

appraisal process. We operate an

ethics hotline where employees are            Let me turn to my second

invited to leave messages               area of CFO Value. This covers

anonymously regarding ethics            the basics of the CFO job: getting

compliance issues they have seen.       the numbers out accurately, in a

                                        timely manner and ensuring from

          The CFO has a highly          the plant department up to the

prominent role in setting the           shareholder that there is aligned

standards for integrity and ethics      expectations of results. I have

–from the controls he establishes       lumped these together since they

on expenditures to the way he           represent the basic building blocks

spends the company money to the         for the CFO role.

manner in which he treats his                 Many factors go into the

people to the internet sites he         mix of achieving these goals but

visits.                                 let me highlight 2: focus on the

                                        vital few and strong processes:

          For me, the standard of

integrity & ethics of a CFO is                Firstly, to deliver value the

probably the most important             CFO must be able to discern the

factor influencing my hiring            `vital few‘ issues.

decision.                                  Sarbanes- Oxley. There I have

                                        said it. I imagine that for many of

                                        you today the 2 words, Sarbanes-

                                        Oxley, send shivers down your

spine. I apologize for mentioning       have high curiosity and to probe by

these words so early in the             sticking fingers into holes, probing

morning. I have to say for us as a      the issues and seeing if your arm

small company Sarbanes-Oxley has        disappears!

created a mountain of work &

delivered limited value to the                The second success factor

shareholder. One of the downside        is strong processes. To deliver

of the act is that it risks             accurate timely reporting requires

bureaucracying the finance area         strong processes. Too often, I

and reducing the CFO to an              have heard finance leaders blame

administrator role; filling in forms,   the IT system. In fact, rarely have

spreadsheets to ensure all the          I been in a company where finance

boxes are ticked.                       does not blame IT. They see

                                        themselves in a strait jacket

      To bring value the CFO has        because of the IT.

to be able to discern the wheat

from the chaff and by that I mean             I say to you today without

to determine the issues that are        any shadow of doubt. It‘s not the

most material to the company, that      IT, it‘s the processes. This is my

impact results to the greatest          experience. The way we cost

extent and to be into the detail.       product, allocate overhead, how we

Like all leaders, the CFO has to        calculate sales, close the books.

maintain a 30,000 ft view of the        These are the factors that have a

business, but be into the detail of     significant impact on accuracy and

the key risk areas. To do this the      timeliness.

CFO has to be a problem-solver, to

       The principles of Lean apply         As I said, timely and

to finance. Can I see a show of       accurate reporting is part of the

hands on this one? Please raise       basic value a CFO provides.

your hand if you have been part of    Beating investor expectations is

a Kaizen event run in the finance     another key source of CFO value.

department focused on

strengthening finance processes?            The article in CFO Magazine

Yes, Kaizen, the two syllable word.   that I referred to earlier

Kai means change and Zen means        suggested this as one of the keys

for the better. A change for the      to long CFO tenure. The CFO of

better capturing the idea of          the Fortune 500 group who had

continual improvement, eliminating    been in place the longest - 17 years

waste. Waste is defined as            - was Paul Coghlan of Linear

anything that consumes materials      Technologies. The company has

or labor and does not add value to    met or exceeded Wall Street

the final end customer.               forecasts for 45 straight

       Lean requires you to           quarters.

continually look for improvements

to the corporate finance function.          To be good at this, the CFO

Map out the processes, simplify &     has to understand the drivers of

eliminate non-value-added             business performance and be into

activities.                           the detail. It is not sufficient to

       Establish the key metrics.     simply take the line‘s assumptions

       You get what you measure &     as a given. Too often the line

this is true in finance as in all     leader is new in the role and lacks

other areas of the company.           the experience to weigh the key

issues. The CFO must probe and        ensuring accountability for

independently assess the risks and    delivering the results.

upsides to latest internal

projections and use these to drive          The budget review cycle is

final internal projections that are   the backbone of delivery. The best

used with senior management and       review cycle using the language of

investors.                            lean focuses on enablers – the

                                      factors driving future

       Keeping investor               performance - & current results.

expectations below internal           Current results reflect yesterday‘s

projections is much easier in a       performance & therefore the CFO

business with positive earnings       must ensure there is focus on the

trends. When there is bad news to     drivers of future performance.

tell, it is key that it is given

straight and the actions to                  I have a saying that happy

address issues are spelled out.       employees= happy

Delayed bad news undermines the       customers=happy shareholders. In

reputation of the company, the        simple terms, employee

management and the CFO. When          satisfaction is a leading indicator

there is bad news to deliver, take    of customer satisfaction, which is

it on the chin is my advice.          the best leading indicator of

                                      future performance.

       Managing the external

expectations is part of the                 The review cycle needs to

challenge. The other aspect is        focus on all aspects of business

performance to ensure future             As a CEO, the CFO is my

success.                              partner and the person I rely on as

                                      my right hand to drive business

      Ensuring that expectations      performance.

are met is a combination of              I recently appointed a CFO

managing internal delivery and        here in Chicago and the impact on

aligning it with external             my performance has been tangible.

expectations.                         He has freed me up to focus more

                                      on the customer, on the direction

   To be clear, delivering            of the business, ensuring that

accurate, timely and aligned          direction is understood down the

expectations are necessary, but       line. The results in financial terms

not sufficient to be a great CFO in   can be quantified: the order book

my view.                              has grown within months; and we

                                      have signed 2 major alliances with

                                      Rolls Royce and Sikorsky this

   3. Raising the performance of      month.

   the line

                                         To me, this is the importance of

   CFOs that stop at the first 2      a CFO who raises the performance

sources of value will be at best      of the line.

average. The great CFOs do the

next 2: drive performance of the         Good CFOs identify the key

line; and build their teams.          issues; communicate with the CEO

                                      and the line to bring them to their

attention and to raise their          a couple of seconds to review and

performance.                          absorb. Behinds it there is detail

                                      available on the cash position by

   Let me give an example of how a    site. A simple targeted daily

CFO can influence the line            report.

performance in a small company

environment by focusing on the           The impact since we initiated it

vital few.                            has been dramatic. Our cash flow

                                      in the first quarter was $4m

   For Northstar, cash is king and    higher than the same quarter last

we have a sizeable debt burden to     year. How did we do it? With a

service. Since joining the company    thousand actions related to

in December the new CFO               working capital, expenditures! Has

implemented a daily cash report.      this raised the performance of the

We had a daily cash report before     line? Absolutely! And it also

but it was an excel spreadsheet       delivered cash flow which frankly

understandable to an exclusive        we did not think was achievable.

small group in the finance

department. The new report               To raise the performance of

graphically shows the position for    the line, CFOs must be able to

the day, the trend for the month &    think like a generalist—this is a

the position by location. You can     characteristic at McKinsey that

see here 2 lines the green is our     was called the `T‘ shaped profile.

cash position, the pink the net       Broad generalist perspectives with

position taking account of Letters    deep functional expertise. Not a

of Credit we hold. This graph takes   general manager with an interest in

finance, but a strong finance          spending. By doing this CFO

professional with a generalist         broaden their understanding of

perspective. This is what I look for   the business and are better able

in a CFO. I need someone who is        to raise the performance of the

curious about the business outside     line.

the finance area.

   One great way of assessing this     4. Build the team

in an interview is to listen to the

questions a CFO candidate asks.                This, I believe, is the

Are they narrowly focused on the       greatest source of untapped value

finance area? Or, is there broader     for the CFO. Einstein, when told he

questioning of the business            was a genius, replied ―I stand on

fundamentals. Questions asked at       giants‘ shoulders‖.

an interview are telling.

                                               By this he meant that he

   Whatever sector you are in, get     had talented motivated people

to know your business. MBWA -          working for him and his

Manage by Wanderering Around.          performance reflected their

If you‘re working in manufacturing     contribution. Isn‘t that true for all

every CFO should have safety           of us in leadership roles?

glasses and steel-toed shoes.

Walk the plant. It is important to             This poses a particular

get an accurate picture about the      challenge for the CFO. I do not

impact of materials management,        apologize for talking in greater

labor routings, and overhead           detail on this topic—what for many

of you might be considered a           the bench strength you inherit on

softer topic. CFOs tend to focus       joining a company, you will have to

on the harder stuff. Most CFOs         make changes and hire from the

are burdened by time pressures,        outside. However, over time, the

focused on the task at hand with       most successful CFOs will develop

no time remaining to dedicate to       their own talent pool.

people issues. As a result too often

they end up on the bottom of the             Many of you will have read

list of priorities well behind         ‗Good to Great‘, the book by Jim

getting the month end numbers          Collins. This book explores the way

out. Yet, this is your greatest        good organizations can be turned

untapped source of value.              into ones that produced great,

                                       sustained results. The ‗Good to

      For a new CFO in his or her      Great‘ companies generated 7X the

first year of the budget cycle you     average returns to shareholders.

are particularly reliant on those      One of the key differentiating

around you. You have to rely on        characteristics of the ‗Good to

their judgment on many issues -to      Great‘ companies was a corporate

determining the vital few issues to    culture that found and promoted

the robustness of internal             its own talent. At the CEO level,

forecasts                              there were 2 outside CEOs

                                       appointed to ‗Good to Great‘

      Are you a leader, manager or     companies and for the comparator

an individual contributor? The         company group there were 20.

leader is different in that he         Great companies grow their own.

develops his talent. Depending on      Great CFOs grow their own, too.

And coaching is the best way to do    group how many top sportsmen

this to build your teams.             such as Michael Jordan and Tiger

                                      Woods had coaches? All of them.

      I am a big fan of coaching.     There is learning here from the

Coaching provides an independent      sports world where top performers

assessment of an individual‘s         invariably use coaches.

performance and a development               I have had the good fortune

plan for their growth.                to have worked at 2 companies -

                                      Mobil and Mckinsey - that were

      So, what is the role of         passionate about leadership

coaching in leadership                development.

development? It‘s by far the best

form of development and in my               I have worked in companies

view greatly underestimated.          that thought that people

                                      development was too expensive,

      For example, I sit on a panel   had no time for it.   I was

of local Chicago business leaders     appointed to be President of a

and we were talking about coaches.    manufacturing company that did

It turned out that I was in the       not have any HR resources at all.

minority of one as a business         All they had was a monthly

leader using a coach. The other       retainer with a local lawyer to deal

leaders did not see the value. In     with HR issues. They figured out

fact, they looked at me as if I       that HR and leadership

have something wrong with me that     development was an overhead cost

required fixing. The outside          that could be saved without any

speaker asked the question of the

bottom-line impact. Well, my                reverse. That the more I

experience suggests otherwise.              connected with my

                                            reports, the more I got

      Put another way, my                   out of them and could be

experience suggests that if anyone          straight with them about

feels leadership development is             their performance.

too expensive, then try the                 Counterintuitive perhaps,

opposite. Try getting by without it.        but that‘s the way it

                                            worked and I shifted my

I have used coaches personally for          paradigm through

the best part of ten years and the          coaching.

benefits have been very                    Coaching deals in reality

significant:                                and cuts through the

         It gets to root cause             bravado that we can all

          drivers. An example. I            exhibit

          have been told in                I find coaching to be the

          feedback that I was not           best method to take a

          holding my reports                development issue and

          accountable enough. My            translate it into

          initial reaction was that I       actionable steps. This is

          needed to get more task           because it deals at the

          focused and spend less            root cause of leadership,

          time treating them as             not the symptoms as I

          human beings!! Over time,         hope my example

          particularly through              illustrated

          coaching, I learned the

           And I find it that much       company interviewed, I know I

            easier to work with an        interviewed over 20 candidates.

            external coach. There is

            an issue of payback here.     During the interview process I saw

            That only in the largest      many candidates who met my first

            companies could there be      two criteria: who could instill

            a logic to employing a full   integrity and ethics & ensure

            time specialist coach in-     accuracy, timeliness and aligned

            house.                        expectations. There were very few

                                          that demonstrated a capability to

We need to update our view of             raise the performance of the line

coaching as an offensive,                 and even fewer that demonstrated

performance based process driven          a capability to build the team

from the top and used to develop

the talent of the organization. So              My advice to all CFOs is to

build your teams this is the area of      focus on the people issues. In my

greatest value creation for CFOs.         experience CFOs typically are

                                          dogged by having a weak team

In closi     '                            supporting them. The monkey ends

• -                                       up on their back, their hours of

 ••<÷¥     E .§?     @ õA3ÿjÜú ý Pð       work grow and their families often

ÉáùÕ       XMVPÿÿ„of 2003               suffer. My message to you is that

working with a top search company         it starts with the people. Get the

to find my CFO. My search took 9          right crew on the bus. Coach them

months to complete- I am not sure         to become a superior executive

how many CFOs the search

team. Then together you can drive

the path to greatness.

      Thank you

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