Revamping CEO - CFO relationships

As banks are continuing to adapt their business models in order to remain competitive in the changing business landscape, a new breed of Chief Financial Officer (CFO) is emerging to play a leading role, says Bertrand Lavayssière, managing partner at international financial management consultancy, zeb.

Here Bertrand Lavayssière discusses the forces that are reshaping c-suite relationships in banks and financial institutions, and the new responsibilities of the CFO in taking their organisation forward.

The finance departments of banks have been facing significant challenges over recent years – meeting the ever-rising tide of regulatory requirements, managing capital and liquidity bottlenecks and addressing increased information requirements of investors and supervisory authorities, to name but a few. CFOs have responsibility for actively monitoring the bank’s performance in an ever-changing financial environment – notably with historically low interest rates – and, of course, all this against the backdrop of a constant drive to reduce costs.

These extraordinary changes have transformed the traditional CFO role, which one could potentially fulfil as a standalone activity, into a completely new ‘normal’ state of affairs. Not only has the depth and breadth of the job scope evolved, but also compulsory joint working with colleagues has now become the norm. The main ‘co-workers’ are the business leaders, with close collaboration with the risk function and the CEO the most common requirements for today’s CFOs.

In short, the traditional balance sheet management and capital management by the CFO can no longer be isolated from wider business operations and risk decisions. One of the key drivers behind this shift has been a number of new regulations that are forcing this dialogue. For example, the Risk Appetite Framework (RAF) and the capital and liquidity adequacy assessments (ICAAP and ILAAP) are processes to be run jointly by the CFO with the Chief Risk Officer (CRO) and the business leaders. The trade-off to be made in order to maximize the stability of the cash flows, the liquidity management and the profitability of the entire bank is for the CEO to present to the board of directors after a thorough alignment process with the different stakeholders, including the CFO. That’s the spirit of the new regulation (aka CRD IV or Basel III).

In practice, many banks are now deploying the tools created to manage such regulatory items in wider strategic decision-making. Hence, the CFO is involved more and more in a series of dialogues favouring the integration of all the dimensions of the bank’s performance management. Those changes have, of course, also led to a rethinking of the bank’s governance structures and responsibilities, resulting in clearer definitions of what is shared and what is of the individual departmental responsibilities.

One interesting case, for example, is the new data management regulation known as BCBS 239. Its origin lies in the desire of the regulators to have one unique set of data whatever the purpose – be that statutory accounting, risk reporting, financial accounting or internal financial monitoring.

Previously, these sets of numbers may not always have been coherent. One consequence of this regulation is that there is no longer a ‘pure finance’ set of data. In addition, there is only one data ‘owner’ for the entire bank per type of data recording, and this person can potentially be outside the CFO remit.

Nowadays, the CFO and the CRO are aiming – with the business leaders and the CEO – to be part of a series of joint and integrated processes where everyone plays his/her part in a harmonised and consistent process to run the bank operations and financial performance. The CFO is also – newly for some institutions – at the heart of the decision making on strategic and forward-looking topics, such as equity allocation for the best future sustainable cash flows and a high level of profitability.

Incidentally, when running an international benchmarking study of the roles and responsibilities of the CFO (and their colleagues) within banks, surprisingly no one rule emerges. The study showed, in fact, that the history and the culture of the bank and the background of the people have a large part to play in the different models currently adopted, with transitions of some responsibilities harder than others to achieve. Nonetheless, all the same activities and processes are being carried out, albeit in a wide variety of set-ups.

Whatever the management structure of a financial organisation, CFOs have, in the ideal new ‘normal’ state, a very enhanced and dynamic role to play in the new banking and regulatory context. Beyond their financial expertise, CEOs are increasingly looking for a CFO who can help them manage the business and complement their skills. Together they define the commercial, strategic, operational and financial blueprints to ensure the business maximises its opportunities. This close collaboration is now an essential part of the CEO’s – and the bank’s – future success.