Davos offers little help for finance chiefs

The 2012 World Economic Forum's annual meeting ended in Davos on 29 January with more questions than answers. The annual pow-wow of the rich and powerful struggled to find solutions to the euro zone crisis, growing global protectionism and the rise of the anti-capitalism movement among other pressing global concerns.

The mood was summed up as "more down than positive" but "business people were optimistic," Kris Gopalakrishnan, chairman of IT consultancy Infosys who attended the gathering, says.

Whether their optimism turns out to be well founded or is simply whistling in the dark to keep their spirits up remains to be seen. But the WEF charted a landscape full of uncertainty for the world's leading chief financial officers.

"In some ways, today seems to be worse than the post Lehman shock recession – because I believe uncertainty is subtly different, and worse than a recession," says Mahendra Negi, CFO at tech business Trend Micro.

"At least a recession has some known outcomes, and a playbook that can be used to deal with it."

Negi underscores the problems of uncertainty by citing the conundrum facing the CFO of a manufacturing company planning to build a factory. "How would I take the decision if I did not know how the labour cost, exchange rate, tax rate, and interest rates were going to play out in the next 12 months? So the easier decision would be: do not do anything until such time as there is more clarity. But that would lead to even more uncertainty as investment flows dry up," says the CFO who oversees the finances at the $1 billion-turnover company quoted on the Tokyo Stock Exchange.

Uncertainty results from two main issues at his company, he adds. The first is uncertainty over customers' budgets. "Are they going to cut budgets? Move people from one location to other? Reduce users?"

The second is what happens to the company's own investments. "We cannot influence the first, but for the second we are taking a more conservative estimate, following a similar logic for the CFO faced with taking the decision about the manufacturing plant," Negi says.

Euro zone doubts

"At the same time we are taking some bets on the direction of the security market, but we can afford to do that since we are cash rich and, therefore, insulated from the volatility of the credit markets. However, being cash rich has its own downside – I also need to make sure that our cash is protected, especially if it is in euros, where there is increasing speculation of some countries exiting the euro zone, or – a cataclysmic scenario – the euro itself unravelling. So we are putting our cash in financial institutions we think are best insulated from such turbulence."

One message from Davos is that prolonged turmoil in the world's financial system is going to pile fresh pressures on CFOs. Cagla Bekbolet, global leader of the financial officers practice at headhunters Egon Zehnder International sees the pressures coming in two areas. "One is on the balance sheet - re-financing," she says.

"Another is P&L specific - namely business development – there's only so much you can do on the cost side to deliver growth so businesses also want CFOs to look at ways to develop their revenue stream. The CFO is very much a partner for CEOs in this - above and beyond providing data and insight to inform planning.

She adds that while strategically-minded finance chiefs can be a great asset in looking at innovative ways of unlocking value from property assets or corporate tax, for instance what lots of struggling businesses need now is a CFO who is focused on detail. A steady hand

CFO positions have become much harder to fill "because companies want financial leaders who are highly capable all-rounders".

"In general, companies are looking for CFOs who are good under pressure - steady performers with lots of experience, notably in tough times. That counts for much more in this climate than having strong potential," Bekbolet adds.

Robust risk management is vital in the current climate, cautions Gopalakrishnan. "You need to make sure that what you've learnt during the last three or four years is incorporated into your risk processes."

Cost cutting is critical part of the top finance job at present, he adds, especially discretionary spending, but it is equally important to start investing for future growth, which will happen in two or three years' time.

"There are growth opportunities around the world whether they be in emerging markets or in areas such as sustainability, health care and so on," he adds.

One of the big themes of this year's WEF was "the great transformation" – finding new models for world business. Klaus Schwab, founder and executive chairman of the WEF, says:

"Capitalism, in its current form, no longer fits the world around us. We have failed to learn the lessons from the financial crisis of 2009. A global transformation is urgently needed and it must start with reinstating a global sense of social responsibility."

It's a theme that is beginning to resonate with some of the more thoughtful CFOs.

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Eric Hutchinson, CFO of FTSE 250 business Spirent Communications, says: "What we are seeing is that the pace of technological innovation is moving faster than human society and political structures can adapt."

"We are seeing that primary production activities - agriculture, extractive industries, material processing - require less and less human labour. Distribution and manufacturing are becoming fully automated, and now software development is being undertaken by computers and not humans."

This presents the world with a new challenge – to ensure that everyone receives an equitable share of wealth and an acceptable level of welfare, Hutchinson says.

"The answer is that we need to foster the development of service economies worldwide. Education is a critical path to autonomy and the economics of education is critical. The new economics needs to provide and price the enjoyment of culture, intellectual stimulation and interpersonal interactions in order to break the emphasis on demand for increasing volumes of material goods and throw-away, instant gratification."

But transforming business operating models is fraught with pitfalls, notes Richard Goold, executive director at transformation consultancy Moorhouse. "Many transformation projects fail because of poor leadership," he says.

"Executives and CFOs, in particular, need to be visible, loud proponents of change, and present a very compelling case to the rest of the business as to why transformation is so badly needed – perhaps not difficult in the current climate." But, as Goold warns, managing any kind of transformation is never easy – let alone the seismic changes that are affecting the current world's economy. It means coordinating work going on in different places and with people who may not see the solution in exactly the same way.

"A holistic approach is needed, with closely-fused work streams in areas such as business and functional design, governance and decision-making."

In fact, the key message of this year's WEF seemed to be a general agreement that things across the world's economy need to change. Unfortunately, not everybody agrees on what they need to change into. It's a conundrum that chief financial officers will need to help solve.

Goold adds: "The risks are great, but many CFOs realise that to survive, the status quo is simply not an option – else competitors better able to adapt will leapfrog ahead."