By Brad Monterio

The role of the chief financial officer (CFO) continues to evolve, particularly in the area of creating value for organizations. I put together these Q&As to discuss a few ways CFOs can pursue organizational value, the CFO’s most important role in creating that value, best practices for communicating strategic information to executives, and more.

To create organizational value, CFOs need to know what the parameters of “value” are so they can build strategies to increase it. What are some ways CFOs can go about making sure they are on the right path?

Today’s CFOs need to look beyond the traditional measures. They also need to look off the balance sheet at nonfinancial measures, such as those that track environmental, social, and governance (ESG) performance, or those that take into account the flows of other “capitals” – or resources – such as human, natural, manufactured, intellectual, and social/relationship capitals. Beginning in the 1970s, Ocean Tomo found that value was increasingly being found outside of financial statements, in areas that we might call ESG or sustainability-related practices. More recently, Ocean Tomo has determined that more than 84% of value was found ‘off the balance sheet.’

The London-based International Integrated Reporting Council (IIRC) created an integrated reporting framework that helps companies tell a new value-creation story about their business. The IIRC framework takes into account various capitals and looks at how they flow and change throughout a company’s business model. It helps companies focus on outcomes and impacts on the markets and communities they serve to better understand value creation. For example, a pharmaceutical company that develops a vaccine ultimately wants to know the outcome of that vaccine being used on the population and the impact it has on eradicating a disease. It also wants to know how the public has become aware of the vaccine, that they have access to good health care, and that doctors are engaged in conversations with them about the vaccine and its benefits. Each of these contribute to better understanding how the pharmaceutical company creates value in society. This is not without its challenges, though.

Reliable, trustworthy, nonfinancial/ESG/sustainability-related information is essential for determining value, which means it must have effective internal controls and good data governance around that information. The business community is making progress on these issues, but more effort is required to bring the reliability of nonfinancial data into equilibrium with financial data.

How can a CFO provide strategic information to executives on creating value with employees and external contacts?

As data stewards, CFOs protect vital information assets; ensure data integrity, utility, and reusability; and manage the data lifecycle throughout the authoring, gathering, analysis, reporting, and decision-making process. The data flows within an organization include financial and nonfinancial information, structured and unstructured data, and narrative and numeric information. Communicating value shouldn’t be limited to financial capital or a simple report on business operations, revenue, and margins. Nonfinancial measures need to be considered, as well as the outcomes of the business model and impacts on society. CFOs need to understand the different types of nonfinancial information relevant to their business and their stakeholders, how to ensure the integrity of that information through effective internal controls, how to aggregate and analyze all of that information, and how to tell a story that conveys the company’s unique journey to value creation. CFOs have internal (management) and external (shareholders, regulators, the public) audiences for the stories they tell, so they need to know when to shift the message within the story so it is most relevant to that audience. They must also ensure they have the proper systems, processes, and controls in place to guarantee the flow of information to the right place, at the right time, and in the right format for the users of that information so they can make effective decisions. The CFO’s stories take the form of internal digital reports and dashboards for internal audiences, and external communications (e.g., annual reports, integrated reports) accessed through interactive websites/portals, digital environments, and social media.

How does a CFO ideally carry out value creation activities?

The concept of CFOs evolving into chief value officers is something that visionaries like Mervyn King from South Africa have written extensively about. As part of the value creation duties, I believe CFOs will serve essentially as chief data stewards, responsible for data governing strategies and policies to ensure that business-critical information maintains its integrity and value as a crucial business asset. Many will take on the role of chief data scientists to help the organization gain more insight from its information and to convert that insight into strategy, tactics, and value. CFOs are the chief storytellers – they explain how the company creates value to the stakeholders they serve, including employees, shareholders, regulators, media, partners, and customers. Finally, they are conveners and chief collaborators, bringing together business units to share information and insight, work together to achieve goals, and drive value. This helps bring more of a single line of sight across the organization, notwithstanding that these same business units also need to go about their own day-to-day operations as needed.

What are CSR programs, how can they be measured, and where do CFOs come into play when measuring the success of organizational implementation?

Corporate social responsibility (CSR) is a management process whereby companies integrate social and environmental measures into their business operations and interactions with their stakeholders. Over the past few decades, as awareness has grown among companies and their customers, regulators, investors, the media, and society about the positive impact of good CSR practices on the company and society, there has been an evolution in what the markets and society see as good corporate citizenship. CSR has had many names over the years – most recently sustainability – and it focuses on activities, measures, and disclosures around nonfinancial/ESG performance in the form of integrated reports, sustainability reports, annual reports, and others. With more value being found off the balance sheet in nonfinancial measures, CFOs play the central role to bring this information into alignment with financial data to ensure its integrity for reporting, analysis, and decision making. Organizations that produce CSR or sustainability reports outside of the CFO’s team have not yet seen or realized the linkage between creating value and nonfinancial performance measures (and the activities that drive them). In contrast, organizations that produce these reports either within the CFO’s team – or in close collaboration with them – have identified the close linkage to value creation. Numerous examples of companies who have embraced these activities include SAP, Novo Nordisk, Coca Cola, Prudential, and many more. The CFO team works closely with other teams to find the information that matters to their business and stakeholders, and communicates in such a way that tells a unique value creation story. No two stories will be alike, but the underlying concepts within a framework like the integrated reporting framework, as well as relevant standards on what to measure/disclose (from SASB, GRI, and others), guide these companies in the elements of the stories they craft for the market. CFOs sit at the center of the process.

Brad Monterio is chief learning officer, vice president of member competency and learning, at CalCPA/CalCPA Education Foundation and a member of the Institute of Management Accountants (IMA) Global Board of Directors. He can be reached at brad.monterio@calcpa.org.

For more on issues affecting corporate accounting and finance professionals, check out PICPA’s Changing Role of the CFO and Controller resource page. 

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