As chief financial officer at Red Robin International Inc., known as restauranteur Red Robin Gourmet Burgers, Katie Scherping had her hands full coping with activist shareholders. Spotlight Capital and Clinton Group teamed up in 2010 to become the third-largest shareholder group in the Greenwood Village, Colo.-based casual dining chain and became a force to be reckoned with.
The investors presented a bucket list of demands — including succession planning, three hand-picked board appointments, cost-cutting and even, according to news reports, Red Robin’s outright sale — asserting that such moves would increase shareholder value.
It all turned into a high-stakes chess match as the burger chain’s top executives had multiple meetings and regular contact for more than a year. “Activist shareholders want to be heard,” says Scherping, who has since left Red Robin. “They wield a significant amount of influence and require more care and feeding than your other investors.”
The dealings with Spotlight and Clinton came at a time when the company was still weathering the effects of the Great Recession, facing higher ground beef and agricultural commodity prices, and the discovery that slashing television advertising budgets had resulted in a “double-digit downturn” in sales that “shocked” even the company’s marketing experts.
They made many demands, Scherping says of the investors, and the board and management spent a lot of time working with them. “We hired outside counsel and an external consulting firm and investment bankers who helped us navigate the whole mess. We accommodated them on some of their requests and put two of their recommended people on the board.”
But to avoid a takeover of the company, she adds, Red Robin had to institute a “poison pill” takeover defense. “We were able to ‘put them in a box,’ so to speak,” she says. “Bottom line, the entire defense of the company cost the company several million dollars.”
Along with being CFO, Scherping had to manage the dual role of investor relations (IR) manager as well. Across corporate America, the CFO generally plays a behind-the-scenes role in investor relations, typically surfacing as a front-line participant in quarterly conference calls with investors and sellside analysts.
The National Investor Relations Institute (NIRI) reports that nearly two-thirds of investor relations managers (65 percent) report to the CFO at their company, according to a 2012 survey of 736 IR executives. That’s a slight increase over the 60 percent of IR managers reporting to the CFO in a smaller 1996 sample.
A January 2013 report by consulting firm McKinsey & Co. notes that the CFO’s role is expanding at many large corporations to the point where he or she is becoming “prominent as the voice of the company in investor relations and in communications to the board.” At small-cap and mid-cap companies — Red Robin, with some $800 million in sales revenues, for example — there is no IR person and the CFO is the person most likely to assume that role.
CFO Role Expanding
But even where there is an IR manager, the CFO is increasingly involved. At Amerco, the parent company of do-it-yourself movers U-Haul, the company’s chief accounting officer, Jason Berg, who handles CFO duties, “is the go-to person” investors really want to see in person, says IR director Jennifer Flachman. “His words carry more weight and he’s excellent at talking to institutional investors in a public forum.”
In the meantime, the proliferation of activist investors is just one of several reasons that the CFO’s role is expanding. Further drawing the CFO into the realm of IR work has been the rise of hedge funds and the growing presence of socially conscious shareholder funds pressing corporations with environmental, social and governance (ESG) concerns.
Add in a full complement of corporate statutes, such as the Sarbanes-Oxley Act and Dodd Frank Wall Street Reform and Consumer Protection Act, as well as regulatory requirements promulgated by the U.S. Securities and Exchange Commission that require CFO input and attention, and there’s no question that the portfolio of tasks has leached into the IR manager’s territory.
Similar to activist investors, “hedge fund managers expect much more direct contact with top management in order to buy or retain stock,” says Marj Charlier, director of IR at RealNetworks Inc., a Seattle-based technology digital entertainment provider. “Sure, they may manage money for other people, but they’ve got their own money on the line,” Charlier says. “A lot of them [hedge funds] won’t make a major investment until they talk to both the CFO and the CEO,” she adds.
And, hedge funds aren’t going away anytime soon. Despite a series of recent global economic shocks — led by Europe’s banking and sovereign debt crises and “austerity,” spiraling worldwide unemployment, the “fiscal cliff” negotiations in the U.S. and slow growth just about everywhere in the world — global hedge funds swelled by $60 billion in the fourth quarter of 2012, reports consulting firm Hedge Fund Research, totaling $2.25 trillion dollars in assets under management in the industry.
Also demanding deeper and ongoing attention from the CFO are energy and environmental issues, social issues involving labor practices and board diversity. Added to the mix are governance issues like “say on pay” — a legal requirement in Dodd Frank legislation that shareholders have a non-binding, up-or-down vote on executive compensation packages at annual meetings.
On many of these sustainability concerns, shareholders are clamoring for attention from the board of directors, whose function is to set longer-term goals and direction. At many companies, the CFO is the main conduit to the board.
As the CFO’s duties expand, the McKinsey report notes, the executive’s job requires a skillset not always associated with a traditional CFO’s role as “the finance expert.” That more traditional CFO, McKinsey consultants note, has logged in “years of experience rotating through multiple roles within the finance function — controlling, treasury, audit, financial planning and analysis or business unit finance.”
Though such experience remains valuable to the CFO’s work, other demands are pressing in. In the 2011 proxy season, reports Ernst & Young, “approximately 40 percent of all shareholder proposals that were voted on focused on social/environmental issues — the largest category of all shareholder resolutions.”
The E&Y report also states: “As environmental, social and governance factors are incorporated into investment analysis, companies have started to view environmental and social initiatives as contributing directly to their economic performance.”
The report adds: “CFOs and other market-facing executives will need to become more familiar with their companies’ most vital ESG issues. They’ll also need to prepare for hard questions from stakeholders.”
Stu Dalheim, vice president of shareholder advocacy at Calvert Investments, a Bethesda, Md.-based mutual fund with $12 billion in assets under management that engages in socially responsible investing and seeks to influence corporate and business practices, says: “We are seeing some increased involvement of the CFO in our dialogues. Growing participation of the CFO is still not the norm,” he adds, “but it’s an emerging trend in our discussions.”
Dalheim adds of CFOs: “We think they ought to know what issues are salient, how good corporate citizenship and sustainability creates long-term value for the company. The CFO needs to understand the risks and companies need to be innovative in investing in opportunities and meeting challenges. Too many are just focused on the next quarter.”
Against the backdrop of a broader range of duties, McKinsey’s consultants note, companies are turning to “the generalist” rather than the “finance expert.” This brand of CFO is highly prized for having “broad experience,” McKinsey reports, and is more likely to hold a master’s in business administration than an accounting degrees.
“The generalist” also reflects the fact that companies are placing “a premium for management and communication skills over deep technical expertise. The generalist has spent the bulk of his or her career outside the finance organization in operations, strategy, marketing or general management.”
Robert Hoglund, senior vice president and CFO since 2005 of New York City-based Consolidated Edison Inc., came to the giant, $13 billion in revenues energy company after 16 years at investment banking firm Morgan Stanley. He says that a hands-on role in investor relations is not new and that his predecessor handled those duties as well. “Our IR staff can talk to investors but they always want to hear from decision-makers,” he says. “It’s helpful for investors to see senior management.”
As CFO he plays a leading role when raising capital in new equity and debt offerings. In addition, he frequently leads presentations on such topics as Con Ed’s alternative energy innovations at investor conferences.
But Hoglund did not have to take a crash course in communications. He majored in English literature as an undergraduate at the University of Virginia, from which he also earned a law degree and an MBA. Over 16 years as an investment banker at Citigroup Inc., Merrill Lynch & Co. Inc. and Morgan Stanley, he learned early on that “communication is essential in every aspect of business.” He adds, “It doesn’t matter whether I’m in a budget meeting, speaking with investors or talking with staff, ultimately I need to be able to persuade people to my point of view.”
For those CFOs who have arrived at the upper echelons of a company — commonly referred to as the C-Suite — with a background in accounting and engineering and a job history of crunching numbers and drawing up budgets, acquiring greater fluency in communications and interpersonal skills is certainly doable, insists Charlier of RealNetworks. (Before IR, she was a national reporter at The Wall Street Journal.)
“Part of the investor relations job is telling the corporate story and some CFOs are not that good at [providing] narrative,” Charlier says. “But they’re smart people,” she adds, in defense of those whose verbal and written communications skills are less-than-stellar. “By working with a good IR person they can learn not just the communications side but the importance of strategy, which is the centerpiece of the overall story.”
To hone her IR and communications skills, Scherping says she benefited much from NIRI educational forums and conferences. It was there that she mastered the panoply of corporate governance rules and procedures and developed an appreciation that “it’s really important to align the board and management on strategy. Investors will try to separate you — like a wolf — from the herd.”
“In so many instances,” says Roger Pondel, chief executive at investor-relations consultancy PondelWilkinson, “the IR officer either reports directly to the CFO or has involvement with the CFO. So it’s important for the CFO to understand the rudiments of investor relations practices. That includes basic disclosure laws, such as Regulation FD [Fair Disclosure] in particular, and it even helps to understand how a wire service like Business Wire works.”
At his Los Angeles consulting firm, Pondel says, “We see more CFOs coming to us for presentation skills. They’re being called on to stand up in front of groups of investors and deliver a message. They shouldn’t have to worry about how to write a press release but being able to stay on point and how to project on quarterly conference calls is critical.”
So valuable are the communications and leadership skills required to perform IR duties, Pondel notes, that the IR office can serve as a springboard to CFO. Among notable examples, he cites Michael Monahan, the CFO at Pitney Bowes Inc., and Hillard C. Terry III, who in 2011 was tapped to become executive vice president and CFO at Textainer Group Holdings Inc., which leases and sells shipping containers.
Their ascent to the C-Suite wouldn’t surprise Con Ed’s Hoglund. “Being articulate about specialized knowledge is a good way to distinguish yourself from your peers,” he says.
Paul Sweeney ([email protected]) is a freelance writer in Austin, Texas, who specializes in business, finance, governance and strategy.
This article first appeared in the March 2013 issue of Financial Executive magazine.