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Team leadership: a key ingredient in the CFO sauce

I’ve read a number of articles lately regarding what makes a great CFO. They list key attributes, such as business acumen and the ability to lead the business with the management team, but one attribute that’s consistently missed is that a great CFO needs to be a strong leader of her team.

At Ernst & Young’s Northern California Entrepreneur of the Year Award gala event, each award nominee said that the honor would not have been possible without the dedication and support of his or her team. The same applies to a CFO: in today’s world, a CFO’s responsibilities go beyond the debits and credits to include oversight, regulatory filings, HR and IT, as well as being a key member of the management team. Obviously, a CFO needs to hire and retain top-notch performers in order to meet all of her responsibilities.

So how does a CFO build an outstanding team?

First, understand—and acknowledge—your strengths and weaknesses, and hire people whose skills complement yours. In fact, hire people who are more talented than you. We recently worked with a CFO whose strengths lay in M&A and business operations, so he hired a VP of finance with strong technical accounting and operations experience. He also brought in others to handle work that his team was either too stretched to handle or lacked the skill set to complete.

Second, be a mentor. Sharing your knowledge and experience can give valuable insights to key players on your team and increase productivity. In my business, I know where the landmines are. Sharing this knowledge with my team helps them be more productive and make better decisions, which is a win-win for everyone. In addition, don’t underestimate the insight you can gain from those working for you. Younger employees can teach us old-timers how to operate effectively in today’s social media environment, for instance—and though their work styles can be quite different, we could learn a lot from them about teamwork.

As your company grows, it’s important for you and your team to keep learning. Keeping up on today’s ever-changing rules is a no-brainer, but it’s also critically important to stay on top of the context for business operations, like the changing global economy, market shifts and technology advances. This is key: increasingly, CFOs and their accounting teams are moving away from being mere gatekeepers and scorekeepers. Ongoing learning is essential for taking on a more strategic role in a company. And applying critical thinking to decisions and their impact on the business—not just the impact to the financial statements—can be both challenging and rewarding.

Third, remember that communication is important. Everyone says this, but I’m amazed at how often CFOs don’t practice it. Keeping everyone in the know about where the business is heading, your vision for the finance function and how the team can add value helps build a stronger team, among other things.

Last but not least, give credit where credit is due. I’ve seen great teams fall apart largely because they felt undervalued. Openly rewarding top performers not only gives recognition to the person or team, but also sets standards by example and inspires loyalty and a desire to go the extra mile (or miles) when required.

A great CFO needs a great team supporting her. Creating a learning environment, encouraging team members to stretch and grow, recognizing success and communicating your vision will go a long way in helping you be a great CFO.

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Stock compensation rules mask true operating performance

The other day a client asked which current accounting requirement is the worst from a U.S. GAAP standpoint. There are a few poor standards out there, but to me the answer is easy: FAS123R, now known as ASC 718, accounting for stock compensation. It’s been around eight years, and it’s not getting any better with age!

The idea of FAS123R, which replaced stock compensation rules under APB 25, is that all stock grants have a value to the employee, and that should be accounted for as compensation. Consequently, on each stock option grant, there’s a charge to expenses over the vesting period of the grant. Under APB 25, a charge arose only when the fair value of the grant was greater than the grant price, so most grants did not give rise to a charge. Under FAS123R, the expense varies depending on a number of factors, the two most important of which are the fair value of the stock at the time of grant and the volatility of the stock.

Here’s why I think the FAS123R is a bad accounting standard:

Inconsistent and arbitrary outcomes. Take two similar companies: Company A’s stock price is $10 and Company B’s is $5. Both grant an employee 1,000 stock options vesting over 4 years. All else being equal (stock price volatility, expected life of the stock, dividend yield and risk aspects), under the current methods, Company A’s amortized stock charge is double the charge for Company B. That makes no sense. Why does a higher stock price at the time of grant give rise to a bigger charge? If anything, the grant in Company B should result in a bigger gain, as any gain will be a higher percentage of its stock price than for Company A.

The bottom line: the charge is misleading and arbitrary no matter how you look at it. If the stock price rises, that is the real compensation, but the true gain is not reflected anywhere.

In the same vein, if the stock price stays flat or decreases, the employee would have no gain and would not exercise the option. In effect, the grant recipient is not receiving any compensation, so there shouldn’t be a charge to the accounts as FAS123R requires.

Sticker shock. The inclusion of the charge can make a good operating performance look average or poor, and the charge can vary a lot from period to period based on what is happening with the company’s stock price.

Doesn’t reflect reality. You have to ignore the charge to get a good view of the underlying business. Analysts back the actual and expected charges out of their models so they can look at them on a cash basis. If they don’t need to see the charges, why do we? More and more companies are presenting adjusted EBITDA in their earnings press releases. These calculations back out the FAS123R charge for exactly the same reason analysts do—it’s a meaningless charge that mathematicians like but that users of accounts don’t need.

Most private companies ignore it. Who can blame them? There is no value added in accounting for it, and all it does is cost money in systems, review of the numbers and so on. An audit adds even more expense.

It makes budgeting hard. Have you ever put together an annual plan with FAS123R charges in it and then tried to hold people accountable to their budgets? It’s not easy, and most people won’t do it.

If you do want to do it (and it makes sense to have budgets that align to your financial accounts), to estimate the charge you need a crystal ball to estimate your future stock price at the time of the future grant, which you then need to combine with your estimated stock grants and headcount changes, as well as the residual charge from previous grants that are still vesting.

As a CFO, if someone asked you what your stock price will be in 6 months’ time you’d never answer (unless you enjoy SEC investigations), so why make this prediction internally to calculate the expected charge? And it’s impossible to hold managers accountable for their actual charges against the budgets for that expense. It’s also not wise to tie compensation to managing budgets if you have FAS123R in the compensation—at the end of the year the manager will be very happy or very unhappy, depending on which way the variance goes based on events totally out of their control.

So what’s the solution?

I believe FAS123R in its current form should be scrapped, and that only real gains, at the time of exercise, should be accounted for, and only in the notes to the accounts. By removing that expense from the accounts, you can then analyze, assess and compare companies based on their true operating performance, not some arbitrary performance.

Unfortunately, I don’t see any changes taking place soon—but the fact that more and more companies produce numbers that exclude FAS123R charges says that the FASB has gone too far in the accounting requirements, and that accounts are becoming more meaningless when presented under GAAP. Getting rid of FAS123R charges from the income statement would be a good first step to more meaningful accounts.

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RoseRyan keeps on growing with new gurus

If our experience is any indication, the recession may be waning (knock on wood). We’re excited to announce the arrival of new consultants, all ace finance and accounting gurus whose experience ranges from top-level IPO and M&A work to deep technical accounting and compliance, plus a good dose of nuts-and-bolts accounting.

Susan Alves: Susan really knows how to roll up her sleeves and get down to business in areas like general accounting, payroll, year-end close, revenue and SOX. She thrives in a start-up environment, and is diving right in with three clients in our emerging growth practice.

Stephen Ambler: Stephen has deep technical and compliance experience, and he knows the business of cleantech, high tech, medical, manufacturing and e-commerce inside and out. Formerly a chartered accountant with PwC and a large regional UK firm, Stephen’s strengths include SEC, FAS123R, IFRS, rev rec and M&A work, plus he’s lived through and helped engineer two IPOs.

Amy Lockyer: Amy recently spent a year in London working on IFRS F1 registration statements, and technical, complex accounting is what makes her get up in the morning. She’s been a CPA with PwC, and her expertise includes 10-K/10-Q, audit, SOX, debt restructuring and M&A work. And industries? Technology, health care, retail and entertainment, for starters. Her first RoseRyan gig is with a life sciences company.

Sandy White: Sandy, a finance pro with deep experience at technology companies, joins RoseRyan to focus on our rapidly growing XBRL practice. Her expertise includes fixed assets, payroll, corporate accounting, accounts receivable and treasury for companies such as NetApp and Sun. Sandy also gets into systems work: she has rolled up her sleeves with Oracle and is an Excel super user, so watch your step.

Sophie Yu: Sophie, an alum of EY in San Jose, most recently was a senior financial analyst at NetApp and a manager for SEC and revenue with PDF Solutions. She also has experience in SOX, rev rec, stock-based compensation and purchase accounting, among other areas. Sophie’s first RoseRyan gigs were in FAS123R and warrant work.

Meet the rest of the RoseRyan dream team.

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Entrepreneurs: success comes with teamwork and taking risks

Congratulations to the 2012 Northern California Entrepreneur of the Year® Award winners!

The nine honorees were announced Saturday in San Francisco, and I was fortunate to join some of my RoseRyan colleagues at the awards gala at the Fairmont. The Ernst & Young program, now in its 26th year, celebrates the belief that “a community of entrepreneurs is a powerful force that can transform economies, address large, complex problems, drive innovation and improve our communities.”

The winners’ companies are diverse, from those that seem like they’ve been with us forever, such as Wyse Technology (founded in 1981) and Sleep Train (founded in 1985), to relatively young companies like GoPro, which brings us the GoPro camera.

While they all differ, over the years that RoseRyan has been involved with this program I’ve noticed that these people of vision share elements critical to their success. Some years the focus is on finding disruptive technologies; others, company culture takes the stage as the essential element of success. Here are a few themes from this year:

Embrace risk. Believe in yourself enough to take a risk. If you aren’t failing, you aren’t stretching enough or challenging yourself to take a big enough risk.

Be driven to make things better. When you walk into a room, look around and ask how you can make things better. Focus on things that are really inefficient.

Teamwork leads to success. Many CEOs said they are part of a team and the dedication, hard work, energy and passion of their employees was key to making the company successful. And a number of the CEOs spoke about the strong support from their family that enables them to take the risks, put in the hours and devote their talents to their business.

During the celebration, it was said that that an entrepreneur is someone who asks a simple question and changes the world. Entrepreneurs are visionaries, innovators and leaders. They are imbued with inspiration, imagination and vision.

RoseRyan has been a proud sponsor of this program for a number of years, and it is a privilege to be able to participate in nominating, selecting and celebrating these entrepreneurs. We share their spirit.

The 2012 Northern California winners are Geoffrey Barker, RPX; Tom Bedecarre, AKQA; Lawrence Blatt, Alios BioPharma; Dale Carlsen, Sleep Train; Lisa Im, Performant Financial; Tarkan Maner, Wyse Technology; Matthew Monahan and Brian Monahan, Inflection; and Nicholas Woodman, GoPro. The national winner will be announced in November.

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