To help their organizations navigate the challenges and complexities of today’s business environment, financial executives must become leadership stewards. Why and how to do that are explained here.
Leadership failures and ethical scandals make headlines nearly every day. Unfortunately, they are not isolated examples. Business today is mired in the scourge of “short-termism.” Some executives engage in “suicide by quarter:” catering to day traders, tapping reserves, manipulating earnings and pulling sales forward from the next quarter — all to make their quarterly numbers. If they don’t, they reason, the stock will tank, bonuses will drop or the C-suite may get cleaned out.
Before the HealthSouth Corp. indictments and multibillion-dollar restatement of financial performance in 2003, the firm had met earnings predictions to the penny for 47 straight quarters. Coincidence? Old news? In a large-scale study of financial executives by Duke University in 2005, 78 percent of the managers surveyed admit to sacrificing long-term value to achieve smoother earnings. What, if anything, can financial executives do about certain unethical and unsustainable practices?
One of the causes is that too many leaders aren’t clear about their ultimate aims and behavioral standards. When they demand results, as they should, it goes unsaid whether there are limits or not on how those results may be achieved. To resolve this, leaders should commit to three aims:
- Excellent: achieving exceptional results;
- Ethical: doing the right thing, even when it is costly and hard; and
- Enduring: standing the test of time, operating sustainably.
These are the building blocks of “triple crown leadership,” and financial executives are critical in practicing and promoting such leadership.
Financial Executives as Leadership Stewards
Financial executives are uniquely positioned to go beyond their functional roles and become leadership stewards, providing the active checks and balances the enterprise needs to be its best, guarding the organization’s values, monitoring its ethics and evaluating both short- and long-term considerations.
Leadership stewards model the desired behavior of the enterprise. They work on the business, not just in it. Stewards actively step outside their functional positions to influence how others behave, reinforcing the shared values and culture. They develop, nurture and protect a culture of character in the organization through their leadership practices.
In a stewardship role, for example, the chief financial officer takes responsibility not just for strategic asset allocation, accurate financial statements and proper capitalization of the firm, but also for building an excellent, ethical, and enduring organization. The director of tax doesn’t just file the tax returns but also builds firewalls around the firm’s culture of character.
Financial executives hold a special place of honor within organizations. They are trusted by their colleagues, the CEO, the board and outside stakeholders with a fiduciary responsibility. Outside stakeholders and board members have unique access to financial executives through audit committees, meetings with outside auditors and shareholders, quarterly conference calls, annual meetings and more.
Financial executives are expected to be independent, ethically bound by their professional obligations and custodians of the tangible and intangible assets of the firm. Decades ago, the vast majority of an organization’s assets were tangible — such as cash, equipment and buildings. Today, intangible assets — including corporate brand and reputation — often predominate.
Financial executives are the essential co-pilots of the firm with the CEO. The CFO needs to be the CEO’s “best friend and worst critic.”
How can financial executives fulfill these stewardship responsibilities, even as they discharge their responsibilities of financial management and reporting? Below are three advanced leadership practices to employ.
1. Steel and Velvet
Financial executives, like other outstanding leaders, must learn when to invoke the hard edge of leadership — the steel — that demands excellent results, insists upon ethical practices and resists the allure of short-term thinking. They should also know when to invoke the soft edge of leadership — the velvet — that patiently builds the culture of character.
They must learn to collaborate and “bite their tongues” to let others lead, getting beyond their natural leadership style, using judgment to flex between the hard and soft edges of leadership, depending on the situation and the people.
Specific instances of this kind of leadership are plentiful. For example, financial executives must sometimes be willing to be a “voice of one,” rejecting the manipulation of earnings or unreasonable compensation plans that tempt unethical behavior through perverse incentives.
Some savvy financial executives today are leading efforts to migrate away from providing quarterly earnings guidance, recognizing that the people asking questions on quarterly calls are often the day traders who are in and out of the stock in a heartbeat. “Research shows that firms issuing earnings guidance invest less in research and development, manipulate earnings more aggressively and report lower long-term growth rates,” according to Lorenzo Patelli, assistant professor, School of Accountancy, Daniels College of Business, University of Denver
In flexing between steel and velvet leadership, sometimes “tilts” are required between the aims of excellent, ethical and enduring. For example, during crises, tilts toward short-term results may be necessary to survive.
In other circumstances, a tilt may be required to fend off pressure from shareholders and make a long-term investment, even at the expense of short-term profits. In any case, however, the financial executive should never allow a tilt away from ethical behavior.
2. Head and Heart
When recruiting and managing, most executives focus almost entirely on “head” issues such as knowledge, skills and experience. Those are necessary, of course, but insufficient. By contrast, savvy financial executives hire, develop and promote people with intangible “heart” qualities (such as integrity, courage, drive and passion) as well as head skills.
They fill their departments with people who have character and emotional intelligence, and who fit with the desired culture of the firm.
Savvy financial executives recognize that unleashing the leadership talent in others is essential. They recruit, develop and promote people for their character, not just their competencies.
When it comes time for performance evaluations, they don’t just look at the numbers. They reward people, not just for performance, but also for upholding and promoting the values and desired culture of the firm. Online retailer Zappos.com bases half of employee performance reviews on those factors. By doing so, executives send an unmistakable message.
Savvy financial executives also refuse to tolerate egomaniacs and destructive achievers in their department. They remove them from the firm, helping them “succeed elsewhere,” before they poison the culture. Savvy financial executives also refuse to be driven by the pressures of stock traders and raiders, focusing instead on longer-term investors interested in building sustainable value.
3. Alignment
To be effective leadership stewards, financial executives must help align their organizations. Unfortunately, many organizations are unaligned and dysfunctional — some only moderately, others pathologically. In many organizations, though people work hard, they accomplish little because they are disconnected and disjointed in their efforts, unclear about how their work fits into the bigger picture.
Employees too often are stymied by lack of clarity, strategy whiplash, conflicting priorities and poor follow-up. As a result, they become cynical mutterers who turn their talents elsewhere.
Dysfunction is both widespread and costly. According to a 2010 Booz and Co. survey of more than 1,800 executives, 64 percent say their biggest frustration factor is “having too many conflicting priorities.” Such organizations pay what Booz calls an “incoherence penalty.”
The benefits of alignment are numerous: clarifying the elements for success, focusing people, inspiring their heartfelt commitment, eliminating unessential work, connecting people and departments, providing continual feedback and more. Alignment can boost revenue, profitability, employee satisfaction and stakeholder engagement.
As leadership stewards, financial executives must not only ensure that their firm is aligned for high performance, but also that it is aligned to be an ethical and enduring organization. This means aligning in discrete steps for different time horizons:
- The long-term elements of achieving the ultimate purpose and vision by the shared values;
- The medium-term elements of reasonable goals, strategy development, people selection and organizational structure; and
- The short-term elements of necessary processes, action plans for “who will do what by when,” and communication loops for the inevitable midcourse corrections.
Each alignment step links with the other steps, cascading and cohering to give the organization what Tyco International Ltd.’s Chairman and CEO Edward Breen calls “operating rhythm,” a cadence of relentless, excellent execution.
Financial executives are uniquely positioned to help align the firm, since they have insight into and oversight of the firm’s vital data and are so influential with important stakeholders. They can also ensure that multifaceted metrics for multiple stakeholders, not just financial targets for shareholders, are developed and transparent to everyone.
Correlating Excellent, Ethical and Enduring
A growing body of evidence suggests a correlation between ethics and excellent results. Corpedia Inc., a compliance and ethics consultancy, found that the average five-year return of companies in its Ethics Index was 102 percent, compared with 26 percent for the S&P 500. According to a 2011 Corporate Executive Board survey, organizations scoring the highest marks for their level of integrity outperformed those with the lowest by more than 16 percentage points in shareholder returns.
Firms on the Ethisphere Institute’s World’s Most Ethical Companies list have outperformed the S&P 500 by an average of 7.3 percent since 2007 in terms of shareholder returns. Ethisphere Executive Director Alex Brigham says, “In addition to increased financial performance, ethical companies benefit from better brand reputation, consumer loyalty and higher employee retention rates.”
Financial executives can deliver even greater value to their enterprises by embracing a larger responsibility beyond financial strategy, innovation and mechanics. They can step up to become leadership stewards, performing the hard work of building an excellent, ethical and enduring organization — and in the process leaving a powerful legacy.
Practical Applications:
- Develop the agility to flex between the hard and soft edges of leadership.
- Recruit and promote for competence, character and cultural fit.
- Collaboratively align.
- Be a leadership steward, working on the company, not just in it.
Bob Vanourek and Gregg Vanourek are coauthors of Triple Crown Leadership, McGraw-Hill, 2012, which draws upon the authors’ interviews with leaders in 61 organizations in 11 countries. Access more information at http://triplecrownleadership.com/.