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The economic crisis, which has hit the world in its full extent since September
2008, has raised some questions about the role of the board of several companies
and institutions. The speed at which the crisis rolled out over all continents raises
questions about the ability of the management of companies to adapt their strategy
when things go bad, moreover it questions the level of anticipation of management
teams to changing external and internal circumstances. Also questions have come
up about integrity and honesty of board members and connected to that the way
risks have been handled. And last but not least, people have begun doubting the
current economic system in which shareholder value seems to be the driving force.

In this article I will first try to find the answers to the questions as posed and then
I will focus on especially the role of the Chief Financial Officer (CFO) being the
financial conscience of a company. How can CFO’s play their role? What are their
boundaries? How can CFO’s adapt effectively to changing circumstances?


Mid 2007 things were radically changing. For analysts they were the signs of the
crises coming up. In September 2007, the UK Bank Northern Rock suffered from
severe liquidity problems. This was caused by liquidity shortage on the market for
short commercial financing on which Northern Rock financed its mortgage loans.
People lost trust in Northern Rock and withdrew their cash from the bank. The
Bank of England had to provide extra loans to Northern Rock in order to calm
things down. But this was just the visible opening of the crisis.

It probably started on September 11, 2001 when terrorists launched attacks on the
World Trade Centre in New York and the Pentagon in Washington, USA. This was
followed by the threat of a potential recession. The Federal Reserve (FED) reacted
by decreasing the official interest rate in a number of steps to a historical low
percentage of 0,25%. It made mortgages with variable interest rates significantly
cheaper. On top of that the financial system was injected with a large flow of capital
from central and Asian banks. A lot of capital came available which was relatively
cheap. New mortgage constructions were developed in which the verification
income was less strict, it was possible to lend more money in comparison with
the property value, step up interest constructions were offered, and it was even
possible to postpone part of the interest payments for the first year. Also, a lot

     of buyer’s chose for variable interest rates. All these changes made the prices of
     property increase due to more demand for private real estate.

     As long as this process continued, it was it possible for owners to sell their house
     and buy a bigger one with a bigger mortgage. At the beginning of 2006 this
     process stagnated because of the increase of the official interest rate by the FED,
     which caused increased interest on mortgages and the fact that property was
     hardly affordable anymore for large groups of potential buyers. Also, the increase
     of the official interest rate caused trouble for owners who had closed mortgages
     on variable interest or who were at the end of a fixed interest period. This led to
     delay of mortgage payments. In combination with top level financed property and
     decrease of execution values, the first mortgage banks got into trouble.

     A lot of mortgage banks did not finance the mortgages themselves but sold
     mortgages relatively fast to other parties. By selling bonds (by creating mortgage
     backed securities – MBS) and by packaging these bonds into collateral debt
     obligations (CDO’s), it became unclear for buyers what the underlying value of these
     CDO’s was. For accounting purposes, value was determined by statistical models
     because CDO’s were not listed on stock exchanges. These models used the rate
     of comparable state obligations on the stock exchange and were adjusted for the
     general difference in credit rating (the so-called credit spread) and a quantification
     of the chance of bad debt. This technique is called ‘marking to model’ and is
     comparable to ‘marking to market’ 1for stock listed obligations. The disadvantage
     of using a model is that it provides a false security and that it only works as long as
     state obligations are traded and used as a reference.

     Gradually, concerns about this type of valuation were raised as a delay of mortgage
     payments increased rapidly and due to that, consumer trust decreased. On top of
     that, credit ratings as provided by for example Standard & Poor and Moody’s for
     these products were no longer taken to be true. In June 2007, Bear Stearns Bank
     reported that two of its hedge funds were in trouble. These funds, whose assets
     consisted for a large part of CDO’s, had to write off large sums and Bear Stearns
     had to save both hedge funds from bankruptcy.

     Because a lot of financial institutions all over the world had bought these ‘infected
     financial products’ or derivatives the insolvency of American property owners at
     the end of the day affected the global economy. What started with Northern Rock
     in 2007 escalated in the weekend of September 13th and 14th 2008 with the
     collapse of Lehman Brothers and the sale of Merrill Lynch. After that, AIG as well as
     Fanny Mae, Freddy Mack, Washington Mutual and Wachovia in the USA followed.

     1   Settling or reconciling changes in the value of futures contracts on a daily basis. Also refers to the practice of
         reporting the value of assets on a market rather than book value basis.

Later on Fortis Bank went down and nowadays ABN Amro, Aegon and SNS bank
are still there because of participation or capital injection by the Dutch Government.
All because of the fact that they had to write off on doubtful financial products.


Reading the analyzes of the credit crunch the main question is how did it get so
far? Of course there were a number of economical factors like declining property
prices together with increasing interest rates. But this happens more often. The fact
that this brought many home owners into trouble also has something to do with the
way in which financial institutions approached their clients. Apparently, there were
too little restrictions on obtaining a mortgage and the financial institutions did not
care very much about bad debt as they were speculating on increasing property
prices. But one may suppose that there was some form of risk management within
these institutions.

Why did it not ring any bells? Or were the bells ignored? What was the role of the
CFO? Of course there were risk management systems present in these companies
if only forced by law and the supervising role of the USA FED. But there were
apparently other forces that overruled the warnings from these systems. The
strongest opposing force was the hunger for money. This force was formed by the
emphasis on shareholder value.

Theoretically, the concept of shareholder value drives wealth creation of companies
and thereby of its shareholders in a sustainable form. That means that shareholders
value to focus on long-term growth of revenue and profit. In the way the concept
is presented in literature it is obvious that the longer term is the most important
goal. Examples of shareholder value destruction are built up out of cases in which
short term oriented decisions, especially in case of an economic downturn, ruin
the fortune of the company on the long run. Also, in the current economic crisis
these mistakes are made. For instance, cost cutting on marketing in a firm with
a weak brand, cost cutting of out of pocket education in a people business and
cost cutting of R&D in a pharmaceutical firm. It is probably because of the word
‘shareholder’ that outsiders began to think that the share price is the best reflection
of shareholder value. I suspect that especially financial analysts employed at stock
exchanges were the ones that made this translation. But shareholder value is not
measured from the outcomes of stock exchange but from the net present value
of future cash flows (including an assumption for perpetual cash flow) minus debt.

Because of the behavior of financial analysts, companies are measured on short-
term revenue, profit growth, and by this, company leadership is acting accordingly.
It is wrong because stock pricing includes disturbing factors like emotion, hysteria,

     speculations and herd behavior. The best example is the current economic crisis
     in which, within a period of three months, stock prices declined dramatically also
     for companies that were not likely to be hit by the crisis. Was the value of these
     companies suddenly 30% lower? I don’t think so. Just look at their expected future
     cash flows and their current earning capacity.

     Nonetheless the share price has become a leading indicator in boardrooms and
     is also part of incentive programs for board members. This means that part of the
     bonus package depends on the increase of the share price during the year. The
     other part is probably related to revenue and profit growth and is measured over
     a one year period. No wonder that most public owned companies have this short
     time focus.

     Returning to the financial institutions in the USA it is obvious that the same
     short time focus has driven the behavior of the board and thereby all executing
     operational levels. Also for these levels, bonus is part of the remuneration and
     revenue growth strategies are stimulated by incentive programs. It is a known fact
     that one could earn large sums based on the transaction volumes. No wonder
     that financial institution employees were not that cautious in providing doubtful
     mortgages. And of course the boundary systems (Simons: four levels of control2)
     in these companies did not prevent that from happening or internal controls fell
     short in putting these facts on the table for the management. On the other hand it
     is also conceivable that it was reported but that the signals were ignored in search
     for more revenue and profit.

     Regarding packaging mortgages including the very bad ones, it is obvious that
     this is close to fraud or at least economic non-ethical behavior. So, we end up
     with destructive and unacceptable behavior that was not detected and stopped by
     company leadership. As said before, either because their risk management system
     did not flag it, or it did flag but they did not understand the product and thereby the
     impact or they just ignored the signals driven by growth of share price objectives.

     A lot of foreign financial institutions bought CDO’s (without knowing the risk) and
     so the whole financial system got infected. At the end of the day shareholders
     worldwide are paying now for losses through decrease of their financial assets,
     governments through lower tax income and rescue operations of financial
     institutions, and employees even by losing their jobs and decrease of pension
     rights. It is cynical that no government body in the USA offered apologies for the
     mess that was created.

     2   “Setting Your Arms Around Risk And Your Hands on The Levers of Control, R.Simons, 2002.


The governmental reaction to the financial crisis so far has been one of nationalizing
financial institutions and/or providing them with loans. This did not really change
management behavior. Especially in the USA, banks kept on paying extraordinary
bonuses. Also in the Netherlands employees started procedures against ABN
Amro bank in which they claimed bonus payments. And the civil court could not
do anything but confirm the arrangements made between ABN Amro and their
employees. What does this tell us? It provides evidence for the assumption that
there is a huge lack of sensibility towards what is acceptable within society and
that bankers are not willing to cut back on their variable income. Even if de rest of
the world is suffering from an economic downturn due to the effects of their bad
behavior. So the G-20 started to develop rules to control bonuses for bankers
in which long term granted bonuses, bonuses related to short term speculative
behavior, and bonuses paid in a loss situation are forbidden. Only an agreement
about a maximum bonus amount could not be reached.

Politicians seem to think that rulings on bonuses will solve the problem. They
underestimate the creativity in finding solutions for financial problems. Bankers
are masters in financial engineering. The best evidence for this is probably the
origin of the credit crunch itself in which they constructed bonds which nobody
understood but nevertheless bought. Obtaining control over bad behavior cannot
be established by controlling the output but has to start at the beginning of the

In the first place this means that when banks acquire new hires they should be
tested for their ability to distinguish ethical from non-ethical behavior. During their
career there is a constant need for training and education on this part of the brain.
Clear boundaries for what is and what is not acceptable needs to be developed
and educated. Moreover a corporate culture has to be founded in which more
social awareness and responsibility needs to be embedded. I am not so optimistic
about this, it may take a few decades to build up values and norms and moreover
to get rid of the bad apples.

Secondly, corporate governance of banks need to change. It starts with the
remuneration of the board. When we keep on linking variable income to the
development of the stock price of financial institutions we have not eliminated one
of the main causes of short-term oriented behavior. Also demanding unrealistic
short-term growth figures is one of the causes of crossing the line by company
leadership and their subordinates.

Thirdly, the Board of Directors and especially audit committees need to be
staffed with professionals who understand the business and are educated and

     experienced in risk management and internal control. Especially the COSO Internal
     Control3 and Enterprise Risk Management Frameworks (ERMF) are suitable as
     a reference for this purpose. This also means that financial institutions need to
     have proper risk systems in place in which the signals are a subject of constant
     review by the management board and lower management levels. Part of this risk
     system should be, to closely monitor the development of new commercial products
     and of the purchase of such products. A lesson of the credit crunch is that most
     financial institutions did not have a clue of what they bought with the purchase of
     CDO’s. This requires stricter internal approval procedures. My book “In Control,
     theorie en praktijk”4, descrbies the way risk management can be implemented and
     applied and provides a solid overview of the means managers have to control their
     organization if they structurally implement risk management.

     Of course it is easy to postulate statements such as “the board needs to focus
     on the longer term” on paper. Imagine yourself in the position of a Chief Executive
     Officer (CEO) or of a CFO of a large financial institution. How far does their playing
     field stretch? On one hand they experience pressure from shareholders and from
     the Board of Directors. They will be constantly confronted with stock exchange
     information and hungry analysts who are waiting to advise lower ratings or pose
     nasty questions at shareholder meetings or quarterly press conferences. On the
     other hand it is the government who has spent lots of money to save the financial
     system from collapsing and will come up with stricter rules. Furthermore, we have
     the auditors who will be watching closer than before the risk system outcomes and
     will be much stricter with the valuation of financial assets. We also have the public
     opinion which is simply against financial institutions and claims that their money
     and sometimes their future has been stolen by the effects of the credit crunch.
     And last but not least, there are the white collars within the organization who still
     think that money grows on trees. The high potentials or very successful salesmen
     will threaten to leave the organization if their remuneration comes under pressure.

     So in the end, being an executive is not a routine job. You need to decide on
     subjects you might not always be familiar with and often solutions do not point in
     a single direction. Of course doing this is what they are well paid for so let’s not
     feel sorry for them. Executives are constantly challenged by dilemmas they need
     to solve. Looking at the current playing field they need to balance the pressure of
     the market on one hand and on the other hand the call for more transparency and
     reliability of their institutions as a whole. Within a board they can experience a lack
     of consensus. That is quite natural as board members react driven by their own
     background and interests. A Chief Operations Officer (COO) might judge differently
     than a Chief Information Officer (CIO) or a CEO. A commercial oriented member

     3   “Enterprise Risk Management Integrated Framework”, COSO, 2004.
     4   “In Control, theorie en praktijk” Rob Uiterlinden 2009.

might experience risk differently than a CFO. CEOs and CFOs normally work closely
together but they might find themselves confronted with differences of opinion in
certain circumstances, especially when times are tough.

For the root causes of the crisis the behavior of the CFO is especially interesting as
the CFO should be last in the line of defense for the preservation of the continuity
of the company. The question is how does the CFO hold his position without being
obstructive? The CFO is the one who is responsible for the integrity of financial
information and might feel a lot of attacks from inside the company. He is always
the one who spoils the game by taking into account for example ‘Sarbanes &
Oxley’ Act (SOx), IFRS and Basel II regulations. He could even be accused of being
a bad team player especially by the commercial people in the management team.
So how should he balance these dilemmas?


The financial crisis is not the first time that CFOs have been at the centre of
turbulence. The bookkeeping scandals at the beginning of this century like Enron,
WorldCom, Ahold and Parmalat has shown that the CFO is immediately pointed to
when something seems to be wrong with figures. It was that trigger that created the
US corporate governance code SOx and the Dutch corporate governance code
‘Tabaksblat’. Key in these codes is that the CFO is to be held accountable for the
design, implementation and effectiveness of internal control systems. In the USA
he might even end up in jail if it is proved that defects in the internal control system
caused substantial damage to the stakeholders. This puts the CFO in an awkward
position. On one hand he is the safeguard for the reliability of externally presented
financial information and on the other hand he has to take risks to let the company
grow and meet the financial objectives. This is a playing field of opposing forces.
The CFO who understands this force field will be able to handle these kinds of
situations better. In the book “Het speelveld van de CFO, omgaan met dilemma’s”5
is shown how the CFO can balance the different interests he is confronted with.
This article is partly inspired on this book.

5.1 The force fields
For the explanation of the force field a CFO is confronted with, two main dilemmas
are taken as a starting point. A dilemma is a situation in which two propositions
seem to exclude each other because they are built on opposite values, for example,
predictability versus improvisation. For a successful organization both predictability
and improvisation are needed and the dilemma never disappears. This is the
nature of a real dilemma. Fons Trompenaars and Charles Hampden-Turner (THT

5   “Het speelveld van de CFO, omgaan met dilemma’s” A.Everts, F.Conijn, E.Koops and R.Uiterlinden 2005.

     Consulting, 1997)6 performed scientific research on the dilemma phenomena. They
     discovered that there are seven dilemmas that together form the “Seven Dimensions
     of Culture Model”. Until now approximately 6000 responses form the basis for their
     theory. The most common dilemma is the one that describes the tension between
     “following universally accepted rules and allowing exceptions to these rules in given
     circumstances”. The second in line is “focus on the short-term versus focus on the
     long-term”. The third is “focus on the main issues versus focus on the total picture”.
     With special focus on financial leadership, a search was made in the database to
     discover what dilemmas financial officers are dealing with. Some 500 responses
     were found. It turned out that all three dilemmas scored high and that especially
     the first and third dilemma correlated. This combination was translated into a more
     commonly understandable form “In control versus in business”. This means that for
     CFOs there are two main dilemmas “In control versus in business” and “Focus on
     the short-term versus focus on the long-term”.

     5.2 Key dilemma one: “In control versus In business”
     On the one hand, shareholders and other stakeholders demand from companies
     that they are in control; on the other hand, there is a lot of pressure from outside
     the company for profit and growth. This pushes the CFO into the business partner
     seat which might conflict with the principles of control.

     For example, a new bonus system that is meant to strongly stimulate sales
     is introduced in a company. The board is in favor of this new system because
     it expects that it will boost profit, growth and the share price. But the CFO has
     analyzed the system and discovers that it also stimulates taking highly undesirable
     risks and is subject to gaming. He might oppose his other board members. The
     question then is should he go along with the majority or stick to his position?

     Another example is a cosmetic firm that is putting a new product on the market.
     The time to market period is very short. The commercial team is screaming that this
     is the moment to introduce the product. The CFO finds out that the test phase of
     the product was very short and fears huge claims when it turns out that the product
     damages the skin of women instead of preserving it. Again what should he do?

     Last example: The current systems of the company cannot cope with new
     commercial offerings invented by marketing and sales. They require workarounds
     or bypassing IT systems to be able to sell their products. The financial department
     and the IT department are forced to implement these alterations and fear chaos.
     The CFO studies the possibilities agreed with them and opposes the changes
     that need to be made in the board meeting. The commercial board members get
     furious. What should the CFO do? Go along with the proposal and accept the risk

     6   Riding the waves of culture” (THT Consulting) , F.Trompenaars, C. Hampden-Turner, 1997.

of an out of control situation or stick to his point of view and be accused of ruining
commercial opportunities?

5.3 Key dilemma two: “Short-term versus long term”
Companies that are listed on stock exchanges particularly face this dilemma. There
is this constant pressure from outside to meet the quarterly expectations. Negative
deviations are interpreted as bad news and signals that the management does not
control the company. Positive deviations will raise the expectations for the next
quarter. And the stock market has a natural tendency towards hysteria, reflected
in up and downwards stock price movements. Especially if the board owns stock
and their incentive program contains appraisal by means of stock or options their
behavior will be predictable. They will press the company for short-term results also
knowing that their position in the board has a limited horizon.

This means that lower management layers are also pressurized to perform. This
is stimulated by short-term oriented bonus systems. Given the knowledge that
nowadays managers move to a new position every three to five years they will not
be very much in favor of investments that influence results negatively. Especially in
the current economic crisis you see this happening. Easy cost-cutting is chosen:
reduction of marketing spend, reduction on staff development costs, reduction of
R&D efforts, reduction of back-office spend, and investment reduction. This certainly
might help to show nice quarterly results but might also jeopardize the future.

How should the CFO react? Should he oppose sacrificing R&D effort for short-term
profit or should he persist in his opinion that this will ruin the company’s future.
Being in a board room surrounded by nervous managers who fear for their job
when the next quarterly results go down the drain might not be easy for a CFO who
wants to hold his own position. He might also be pressed to play with the rules and
present better figures. Managers often know where to find the weak spots in his
defense like discussions about impairment tests on immaterial assets: “Come on,
we do not have to write off on these product development costs, look at the bright
predictions for the future”.

5.4 How to balance on dilemmas?
The nature of a dilemma is that it seems to hold two positions that cannot be
united. Can you be in control and in business at the same time? Can you serve
short-term goals and at the same time act in longer-term interests? Is it possible
to grant large bonuses and at the same time establish a situation that people keep
acting honestly and ethically even if very large sums of money are at stake? This all
seems hard to imagine.

But dilemmas are less conflicting than we might think if you know how to manage
them. The most common thing to do is to compromise both positions. That is what

     often happens in politics. We try to grind the sharp edges and come to solutions
     that satisfy both parties. But is there real satisfaction? Parties agree because they
     know that there is not more to gain. Often these kinds of solutions do not lead to
     the best results.

     There are ways to solve dilemmas and that is by means of reconciliation. That is
     an approach in which we try to find the factors that lead to empowerment of both
     positions. We take the best of both worlds and try to put them into a new solution.
     We call this a win-win situation. THT Consulting (1997) states that management
     teams and executives within these teams that understand the nature of dilemmas
     and the way to handle them are more successful. How does this work?
     When we explore the dilemma “In control versus in business” we can typify both
     positions with sweet and sour descriptions. Fully focusing on control means that
     you will never be able to exploit changes but you will simply reject them at a first
     glance out of fear of risk. This position is called “sure without any opportunity”.
     Looking at the “in business side’ it looks like you chase every rabbit that crosses the
     road without even looking whether a car is coming. Risk is totally ignored because
     the focus is fully on the possible gains of an opportunity. This position is called “the
     death or the flowers” (figure 1).

     Finding the win-win situation we have to circle around the dilemma whilst using
     the best parts of them. “We have to be in control to be sure, but control must not
     lead to miss opportunities. We must take risks otherwise we do not grow, but we
     cannot jeopardize continuity of the organization’. This way of spiral thinking might
     drive some people crazy. The solution is to find the answer on every statement
     that does not lead to the next question. The answer in this case is to explore
     opportunities within the risk profile of the organization and that contributes to the
     control competences.

     Applied in real life this means that in pursuing business opportunities, CFOs have
     to be aware of the fact that there needs to be some form of mechanism in which
     the organization sets their boundaries towards risk acceptance up-front and that
     this is a commonly accepted set of rules. The same mechanism is applied in
     COSO ERMF where it is strongly recommended to define risk appetite and risk
     tolerance, to broadly communicate about these boundaries and to put mechanisms
     (procedures) in place by which risks are assessed, control measures are designed
     and the effectiveness of these measures is periodically assessed. ERMF built upon
     strong integrated IT systems is a very powerful package to contribute to effective
     risk management. It seems that in the financial world this was not completely
     understood or taken seriously enough.

     The second thing a CFO must be aware of is that new opportunities might even
     enforce control e.g. an acquisition of a company that has a state of the risk system

and competences that can be applied in the own organization. In such an acquisition
the strongest points of the business deal can be combined with the strongest part
of the control aspects of the same deal.
 In control

                   (1,10)                                              (10,10)
               Sure without                                     Reinforcing business
              any opportunity                                        bij control


                   (1,1)                                               (10,1)
                No vision,                                           The death
                No control                                        or the flowers...

                                                                              In business

Figure 1: Reconciliation In control versus In business

When we look at the second dilemma “Short-term versus long-term” we can
apply a similar approach. By looking at the cynical attributes that characterize
both positions we get a better understanding of the things that make the dilemma
irreconcilable at first sight. For short-term behavior of profit oriented organizations,
this article already explained that this orientation was mainly meant to please
shareholders (figure 2).

However, many shareholders do not have an intimate relation with a company. They
are by nature opportunists who will sell their shares when a better profit and share
price is expected at another company. And deep down they do not really trust the
company they have invested in. So focusing on short-term profit is pleasing people
or institutions who really don’t care about the well-being of the organization. In
other cynical words, creating profit for those who do not share.

Exploring the opposing long-term aspect, we have to deal with an unshakeable
belief in the future that bears big risks inside. When organizations are only looking at
the long-term they are facing a road with many uncertainties of which the outcome
is totally unpredictable. Who had expected terrorist attacks on September 11,
2001? Who predicted the tsunami during Christmas 2004? Who suspected a

     total collapse of the financial and economical system within a 3 month period in
     2008? Betting on the long-run is a dangerous game. Cynically spoken: ‘Tomorrow
     everything will be OK’.

     Circling around the dilemmas we come to: It is important to show more profit to
     our shareholder, but this must not jeopardize the future, so we must invest, but
     we cannot afford to alienate our shareholders. Again a nice circle that cannot be
     broken if we do not share a common objective: build a future with vision and show
     sustainable profits to shareholders by involving them.

     This means that by communicating more with shareholders, involving them, sharing
     problems, and expectations, organizations should be able to bind shareholders to
     the company and build on trust.
     This is called transparency. Companies are not served by shareholders who act
     like grasshoppers only going for the short-term hit. When organizations are able
     to establish long-term relationships with their investors it is to be expected that
     outrageous bonus systems will disappear because shareholders understand that
     they are introducing more risk into a company when they go for the short-term.
     The financial crisis has shown what happens if money becomes the only driver.
     Managers then cross the line.
      Short term

                        (1,10)                                         (10,10)
                   Profit for those                                  Binding by
                   who don’t share                                keeping promises

                                               No anticyclical

                         (1,1)                                          (10,1)
                      Afraid of                                  Tomorrow everything
                       vision                                         will be ok

                                                                               Long term

     Figure 2: Reconciliation Short-term versus Long-term


We have shown that dilemmas can be solved by looking for the win-win situation
instead of the compromise. That way of thinking is very powerful when you
encounter these kinds of prisoner’s dilemmas but it needs to be said that it requires
a lot of practice. Research by THT Consulting (1997) proved that for CFOs two
dilemmas were dominant: “short-term versus long-term” and “in control versus in
Therefore we created a model for CFOs which defines different roles for CFOs in
different situations illustrated in figure 3.

We did this by combining these two dilemmas into a matrix and that created the
playing field for the CFO: controlling the business, predicting the business, improving
the business, and building the business. Each role has its own characteristics. The
roles describe the focus of the CFO and the financial function that is supporting
the company in a specific situation. Per role, specific characteristics are given:
the context of the organization, governance, processes, information technology,
people and culture, personal skills, competences, and the kind of dilemmas CFOs
will encounter7.

This model will help CFOs to be aware of the situation a company is in and to
act upon that accordingly by looking at the role that fits the situation best. The
assumption behind the model is that CFOs and their financial function never
operate solely in one of the four roles. There is always one dominant role with the
other roles more or less present. The model helps the CFO to determine current
and future priorities based upon his analyzes about the direction the company is
developing in. By knowing the current position and the future position the CFO can
create a roadmap for himself, his financial function and IT systems that are serving
finance. And furthermore it deals with dilemmas.

7   Het speelveld van de CFO, omgaan met dilemma’s” A.Everts, F.Conijn, E.Koops and R.Uiterlinden 2005.

                                                    Short term

                         Controlling the business                Improving the business

                       In control                                               In business

                         Predicting the business                 Building the business

                                                    Long term

     Figure 3: Various roles of the CFO

     Each role possesses its own characteristics:
     Controlling the business relates to organizations that are out of control or are in
     the middle of large change processes, e.g. reorganizations or mergers. In this
     situation, the CFO and his financial function have to focus on establishing structure,
     discipline, accounting rules, undisturbed processes, internal controls, and reliability
     of financial reporting. There is no fancy reporting and there are probably no state-of-
     the-art information systems. The main focus is to control the financial reporting risks
     and steer the organization through the period when uncertainties tend to threaten
     control. Thus do the financial basics right. Focus is on controlling the short-term.
     Predicting the business has to do with situations in which the organizations are solid
     and stable but innovative and constantly in search of new fast executable opportunities.
     This requires a CFO and a financial function that are able to act quickly on the constantly
     changing information demands of the business. The information flow is strongly
     business-oriented and a mix of financial, non-financial, internal and external data.
     Improving the business relates to a situation where there is a solid control structure
     but the organization encounters problems in maintaining growth and profit levels
     because of, for instance, increased competition, market saturation, and increasing
     cost levels. The focus of the CFO and his financial function is on supporting the
     business with planning activities, investigations on cost reduction or revenue
     growth alternatives. The financial function has, compared to the first role, a stronger
     business focus and is oriented on controlling the long-term.
     Building the business relates to situations in which organizations focus on strong
     growth scenarios with a long-term orientation. Often new product and/or market
     strategies are applied. The CFO and his financial function is able to investigate,
     judge, support and integrate acquisitions, and new business initiatives. The focus
     is on long-term business. IT and processes are strongly standardized and suitable
     to integrate or disentangle parts of the business. IT is a true part of the competitive
     package of the organization.

6.1 The role model applied
Applying the model a snapshot can be made of the role a CFO is playing in
organizations in different circumstances. For example, the CFO who is operating
in a company that suffers from liquidity problems will focus on control of the short-
term to reduce working capital as shown in figure 4. Also short-term cost-cutting
(improving results in the short-term) will help to cope with the liquidity shortage. In
the current economic crisis that is exactly how we see companies act. Cash-flow
has become more important than EBIT (earnings before tax and interest). In this
situation the emphasis on a building role will be minimal. Predicting the business
will stay important and having the early-warning instruments in place to be able to
tune to the direction in which the company is heading.

                                               Short term
                    Controlling the business                Improving the business

                  In control                                               In business

                    Predicting the business                 Building the business
                                               Long term
Figure 4: Focus on controlling the business

In a company that has planned to go for an IPO (Initial Public Offering) the CFO
plays a totally different role. His focus is on showing sustainable and moreover
predictable results. He has been in a process of polishing the company so that
it looks bright and shines to the outside world. Bad apples have been removed
and the company shows at least profit that is conformity to the market combined
with a healthy balance sheet. There is not much attention for building or for result
improvement as presented in figure 5. The latter phase has already passed. The
focus is on control. No surprises are presented and especially no scandals. Internal
control is top of the mind with the CFO in this situation.

                                                   Short term
                        Controlling the business                Improving the business

                       In control                                              In business

                         Predicting the business                Building the business
                                                   Long term

     Figure 5: Focus on predicting the business

     The unfortunate CFO who is confronted with skeletons in the closet, has a totally
     different approach. His attention almost goes completely to controlling the company
     on the short-term and keeping results predictable. He has to try, as fast a he can,
     to stop the bleeding and take his package of measurements that guaranties
     that surprises will not happen (figure 6). This might not be an easy task. Often
     the companies in this situation have to cope with either outdated IT systems that
     when put together form a spaghetti landscape that is furthermore not documented.
     Also, actual process descriptions and risk and control frameworks are missing or
     inadequate. In a lot of cases there is something wrong with authorities and corporate
     culture. Besides controlling and predicting the business he has to make sure that
     gaps that occurred between the expectation of shareholders and the actual results
     are closed at short notice. That means that actions that need to be taken should
     emphasize on short-term profit improvement. In this situation building activities are
     hardly on the agenda of the CFO. He has to contribute to controlling the crisis.

                                                   Short term
                        Controlling the business                Improving the business

                       In control                                              In business

                         Predicting the business                Building the business
                                                   Long term

     Figure 6: Focus on improving the business

When we look at the credit crunch, the CFO playing field that was most likely
applicable was the focus of the financial institutions in the USA on growth and
extreme profit creation. There was a feeling of being unconquerable that meant
that internal control and moreover risk management was almost totally ignored as
depicted in figure 7. Especially externally oriented risk management, i.e. closely
watching changes in the outside world and assessing one’s playing field, was not
taken seriously enough.

If there had been more emphasis on this aspect of risk management one could
have noticed that financial institutions were part of a property financing system that
had to explode someday.

Further internal oriented risk management and internal control must have also been
bad in these institutions. That the organization was trading in bad mortgage debt
should have been noticed if there had been more attention for product development
and related risk. Next, the corporate governance in these organizations is subject
to questions. Was there enough knowledge within the supervisory board to
understand what was going on and did these members take their role seriously

But at the end of the day it is probably a bad culture and lack of business ethics that
did the job. Overemphasis on creating profit fuelled by outrageous bonus systems
was the reason that both the board and their subordinates acted only in their own
interests and forgot that they were serving a company whose long-term interests
were damaged by their actions. I wonder whether CFOs in these situations would
have been strong enough to row against the stream given the large financial
interests that were at stake. But I would have demanded from them that they stood
up and at least tried to stop the machine. Apparently, that did not happen.

                                              Short term
                   Controlling the business                Improving the business

                  In control                                              In business

                    Predicting the business                Building the business
                                              Long term

Figure 7: Focus on building the business


     After the analysis of the causes of the crisis, the learning points and the exploration
     of dilemmas, my last but most definitely not least item is a look at the role IT can
     play to make organizations more predictable, reliable, and especially trustworthy.
     The soft factors in particular have my special interest. It seems odd to combine the
     binary world of IT with the soft world of culture and ethics but yet I believe there are
     reinforcing factors in IT.

     First of all, IT systems are able to create the environment for the implementation
     of controls. IT can help to create boundaries that cannot be crossed simply
     because IT systems surrounded by solid procedures can prevent certain unwanted
     transactions. In an IT application environment that is closed, users get the feeling
     that it is not possible to play with the organization they are working in. Therefore,
     they will not attempt to do so. In environments that are not completely closed (e.g.
     Barings and Societé Generale), it is obvious that people with bad intentions will take
     their chance. So, IT works like a high metal fence with sharp pins and connected
     to a 10.000 volt circuit around a prison. Inmates will not even attempt to cross the

     Secondly, IT can help in monitoring weak spots in the lines of defense of an
     organization by means of IT support of risk systems. Systems that draw a picture
     of the strength of controls cumulating in one A4 on the board table in which material
     weak spots are flagged to act upon. Governance, Risk and Compliance (GRC)
     solutions are examples of that. Also this should help early detection of unwanted
     behavior and/or risks.

     Thirdly, the integration of internal structured information with unstructured external
     information can help to present views of the position the organization is in,
     compared to the outside world and the competition. It reveals the uncertainties and
     challenges that organizations are facing. Top management can use this information
     to stimulate and challenge lower management levels and to interact with them on
     the future of the company. This is something more than just putting the desired
     growth figures on the table and to say: make a budget of this. Especially this
     interaction (Simons calls this: interactive control systems) helps top managers to
     educate lower management levels on the desired behavior and can motivate them
     to be creative without being corrupt.

     Fourthly, IT systems can play a role in the education of management levels. A lot of
     companies nowadays use the intranet to provide E-learning courses through which
     managers can practice. Also, they force management to run through courses and
     do exams so that at least the organization knows that certain messages have
     reached the brains of its key players.


I would say that knowing what dilemmas are and knowing that there is a way
to handle them is probably the most important part of my message. Also, I am
convinced that there must be other ways to deal with shareholders interests that
will lead to better results. The precondition for that is that shareholders too can
count on honesty and integrity from the people who are playing with ‘their money’.
They will discover that if they stimulate longer-term thinking and relieve some of the
short-term pressure they will get better results. For doing that shareholders need
safeguards. IT particularly can provide these.


“In Control, theorie en praktijk” (In Control, theory and practice), R. Uiterlinden,

“Het speelveld van de CFO, omgaan met dilemma’s” (The playing field of the CFO,
handling dilemmas), A.Everts, F.Conijn, E.Koops and R.Uiterlinden 2005.

“Enterprise Risk Management Integrated Framework”, COSO, 2004.

“Setting Your Arms Around Risk And Your Hands on The Levers of Control,
R.Simons, 2002.

“Riding the waves of culture” (THT Consulting) , F.Trompenaars, C. Hampden-
Turner, 1997.