Dealing with the rising profile of the finance director
In the aftermath of the credit crunch, an ever-growing regulatory burden has fallen squarely on the shoulders of that organisational lynchpin – the finance director.
Wayne Dewsnap of Exact explores the rising profile and expanding remit of the finance director and assesses the best way to manage the often conflicting new demands of this role.
Since the high-profile corporate failures of recent years drove up corporate risk aversion to unprecedented levels, the eagle eye of the regulator has fallen on organisations of all shapes and sizes. The UK’s business landscape is now scarred by widespread nervousness over the pressure to achieve – and demonstrate – regulatory compliance not only to the regulators themselves, but also to clients, shareholders and suppliers.
Much of this responsibility has fallen to the finance director, whose role is changing as fast as the regulatory landscape itself.
Over the years, it has evolved from a procedural, inward-looking position to a very strategic role and in larger companies the pendulum has swung back again to a balancing act where finance directors have to switch between an entrepreneurial, strategic role and a monitoring and control function role, as well as acting as a guardian of regulatory principles.
These days, finance directors are seen almost as second-in-command, wearing a different hat for each part of the business that now falls under their spreading remit.
For larger companies, globalisation is only adding to the pressure on this role. A firm with its headquarters in the US and regional offices in the UK and Europe could have to juggle local and international compliance requirements such as Sarbanes-Oxley, IFRS, US GAAP and Solvency II.
Organisations will look to their finance director as an expert in compliance for each country in which the company operates to ensure consistent reporting across all jurisdictions.
For international businesses, applying the necessary controls and processes across borders creates a raft of cultural and linguistic challenges. It also highlights the need for organisation-wide visibility so that regulatory compliance can be easily validated and demonstrated from a top-down perspective. Business management software is playing a crucial role in creating this level of transparency. Finance directors now have to take on group-level responsibility for all subsidiaries, rather than relying on each geographical division to take control of its own compliance considerations.
Inevitably, tighter regulatory scrutiny is hitting the smaller companies the hardest. A survey by the UK’s Federation of Small Business showed that one-third of small business owners believed regulation was the biggest barrier to growth in 2009. And the costs associated with managing this plethora of regulatory requirements will continue to escalate, holding back smaller, entrepreneurial companies with fewer resources than their larger counterparts. At this end of the scale, few companies have separate departments to manage regulatory requirements, and, more often than not, a finance director who is dealing with them all singlehandedly.
However, moves are afoot to alleviate the regulatory burden on businesses. In the UK, the new coalition government has launched its ‘Your Freedom’ website, where organisations can nominate for removal of regulations that are acting as a barrier to their business. Such initiatives are likely to be welcomed by the business community if successful, but will take some time to make a tangible impact on companies that are currently operating with one hand tied behind their backs.
In the meantime, finance directors remain under pressure as their remit continues to broaden with each new regulatory requirement. Organisations are beginning to recognise that there will come a tipping point when their finance directors are devoting so much time to demonstrating compliance that their core strategic role will become sidelined.
Left unchecked, this unsustainable approach could lead to paralysis by regulation, where the finance director’s ability to drive the business forward is seriously compromised. Growing pressure on this role could force businesses to reinforce their organisational structure by slotting in additional layers of management. This structure itself is also likely to mutate as the expansion of the finance director function trickles down through the management hierarchy to raise the profile of roles like the financial controller.
The finance director cannot – and should not – be all things to all people. Expecting one person to manage an overarching compliance strategy for an entire organisation, on top of the day-to-day operational requirements and reporting, is unrealistic, and something has to give. In an ideal world, larger organisations would split this ever-expanding role into two: a strategic finance director and a compliance and control finance director. However, few companies will be in a position to have it both ways.
Ongoing jitters over risk among investors and customers mean that the pressure is unlikely to ease in the near future; nor is the remit of the finance director likely to contract any time soon. There is a consensus among the global business community that tighter regulation is critical to controlling systemic risk and supporting economic recovery.
History has proven time and again that businesses that cope well with recessionary periods emerge stronger and better positioned for growth than their peers when the recovery comes.
In the short term, finance directors can expect to come under greater pressure as they try to strike a balance between growth and security. Tomorrow’s finance directors will need to be flexible and adaptable enough to deal with the elasticity of their changing role, with an aptitude for learning skill sets that were never part of the original job description. They are also poised to play a crucial part in providing the strategic thinking that will drive their businesses forward as the economy picks itself up from recession.