,

5 qualities every public-company CFO needs

I have seen a wide range of public-company CFOs in my work at RoseRyan and I’ve been one myself, having spent 13 years at Nasdaq-listed companies between 1997 and 2009. So when a RoseRyan client considering an IPO recently asked me what qualities are vital for a public-company CFO, I came up with the following list:

Experience. Nothing beats it. Having a CFO who has gone through the demands of public-company life is so important. This type of CFO knows what he’s getting into and will have the confidence to get started from day one. I don’t mind admitting now that when I first became a CFO of a public company, it was a huge step up. I had been the corporate controller of the company, so I knew the underlying accounting well, but nothing I had done previously could help me with the new experiences of strategic direction, public-company investors, and public-company boards and committees. It was the same company but a new world. It took me a year to get comfortable handling the new responsibilities. The bottom line was that I let the company drive me in that first year as opposed to me helping drive it. In my view, I did not add anything close to the value that a more experienced CFO would have done. I am all for training, but for this key role, you always want someone with experience.

The ability to multi-task. Most of my CFO roles have involved managing finance, IT, HR, operations, investor relations, and legal. You need someone who can juggle many balls in the air at the same time. If your CFO can’t easily switch gears between the different business areas and give a fair amount of attention to her many roles, she will sink and be ineffective – and your business will feel the consequence.

The resourcefulness to work constructively with the CEO. Most chief executives are very driven individuals, with a flair for marketing or product development but not finance. It’s up to CFOs to work closely with the CEO and get their viewpoints heard and inserted into the decision-making process. If they can’t do this, they will fail, critical decisions will not take place, and problems will arise. When I was CFO, I liked to think of the CEO as a peer, not as my boss. I preferred to think of the audit committee chair as my boss.

The resilience for handling investor relations. One key role of the CFO is the ability to market the company. They have to be salesmen, notably when they are on a roadshow or an investor call, but they can’t oversell at the same time. Finding the right balance is a fine art. Investors rely on a CFO’s every word and how it’s said, and they expect a lot. So the CFO has to fully understand the company’s products, market opportunity, and direction, and be able to handle a tough audience. More than any other executive, CFOs get grief when the stock price falls, or executives sell stock, or the company doesn’t meet investors’ expectations or preferences. When this happens, CFOs have to be professional and move on. They should not take it personally – it just comes with the territory. If your CFO cannot market or handle the tough calls, you have the wrong CFO.

The desire to manage the finance function. I have seen CEOs bring in CFOs who want to concentrate only on investor relations–related matters and ignore the finances of the company, the finance team, and the internal controls. That is the worst type of CFO. Finance chiefs are ultimately responsible for the financial integrity of the entire organization, and they should never forget it. Thus, they need to continually understand the numbers and actively manage their finance team. So often you see companies that have to restate their financials or that get dinged for internal control weaknesses because the CFO did not consider either to be important until it was too late. Don’t let that be your company.

Stephen Ambler is a director at RoseRyan, where he manages the development of the firm’s “dream team” of consultants. His interim CFO stints at RoseRyan have included a social media company and the management of the financial integration process at a company acquired by Oracle. He previously held the CFO position for 13 years at Nasdaq-listed companies.

/by
, , , ,

Tough love in finance: how to deliver bad news

When you work in finance and accounting, tough conversations go with the territory. At some point, you may have to tell someone their numbers are off, that they need to rethink a corporate strategy or a new hire, or that some part of a project or the company itself isn’t doing well.

While it’s understandably tempting to avoid awkward talks, your best bet is always to be honest and say what’s on your mind even when dealing with difficult topics. It’s a practice we regard highly at RoseRyan, where honest communication is a major part of the values we have embedded in the firm (Trustworthy, Excel, Advocate and Team).

The next time you have bad news to share with someone else, whether it’s your boss, a client, an employee, or an investor, I suggest you take a deep breath and keep the following tips in mind:

Pipe up early: As soon as you notice an issue, bring it up. If the people involved find out on their own, they may be surprised and upset, and less open to listening to what you say. During a RoseRyan engagement where a client had gradually expanded the scope of our work and the project had become more complicated, our project manager sat down with the client as soon as we realized the project was heading toward over-budget territory. Other service providers could have waited until billing time to spring this news on the client, but we don’t work that way. By proactively telling the full story and not waiting until the end of the project, RoseRyan was able to get the new budget approved and the client could plan accordingly.

Don’t hold back: If you’re tasked with helping others do their job better, you sometimes need to tell them something that they don’t want to hear or that they don’t even realize is happening. This scenario can happen at fast-growing companies when key people’s skill sets are not able to keep up with the more complex business’s needs. For example, a controller who has limited experience with complex revenue issues may be fine for a small startup in the development stages but may be in over his head as the company grows and starts to ship product. Supervisors and advisors may need to step in and alert the CEO that a change is necessary. While such conversations should be done in an honest and sensitive way, these issues are best dealt with as soon as possible before they affect the business.

Tread lightly: The topic of an under-skilled  team member is a highly sensitive one, of course. Whenever you’re dealing with personnel issues, it’s best to focus on the skills and talents required – and not get personal. In the finance department, this topic comes up all the time as new skills become needed and roles are expanded. If the situation requires bringing on board a more highly skilled professional for a particular role, it is best to communicate the specific requirements needed for the job to the individual getting reassigned, rather than dwelling on a list of failures in the past.

Keep the message brief: Rambling on about why something happened doesn’t do anyone any good and may make the situation worse. The person on the other end may even think the news is worse than it is. Take the time to plan out what you will say – I usually make an outline of the key points I want to make – so that you stay on message and don’t take all day to say it. Get to the point, and deliver the bad news clearly and quickly.

Suggest a solution: The communication process often provides an opportunity for turning a negative situation into a positive one. This is another reason to think carefully about what you’re going to say. Whatever happened, happened. Focus on the next steps and provide some options for resolving the problem. The recipient of your message will be grateful for the creative solutions.

Theresa Eng is a member of RoseRyan’s dream team. Her areas of expertise include financial planning and budgeting, finance operations, and SOX.

/1 Comment/by
, , ,

3 quick tips for streamlining your stock-based pay plans

Keep your employees motivated with stock-based compensation, the thinking goes, and you will be rewarded with high productivity and gains in your company’s growth track. What managers often fail to consider is that if they make mistakes along the way—and we’ve seen many when it comes to equity-based compensation plans—they could actually end up with low employee morale, putting a crimp in the pace of the performance-aligned goals they have set up.

Whenever a company has to amend awards previously made or restate their financial statements because of adjustments in equity-based comp, employees will naturally have concerns—even when the change has little, if any, financial impact on them.

The risk of dents in morale is just one of many consequences RoseRyan has observed while helping clients with issues in their equity-based pay strategies. You’d be amazed at the range of problems we have seen—many of them due to honest mistakes. In our experience, 9 out of 10 companies have had some issue with their underlying stock data that affects their stock-based compensation expense.

To prevent such problems at your company, consider these three tips the next time you evaluate your stock-based compensation strategy (we’ll get into more detail about this topic at our February 26 luncheon called Compensation for Private Companies: The Ins and Outs of Equity, which will be held at BayBio with Kyle Holm, associate partner at compensation consulting firm Radford).

Be obsessive about looking for modifications: Some modifications are obvious (say, repricing a stock option); some modifications are less so (say, allowing a consultant to keep options after you hire that person as an employee). Keep an eye out not only for board decisions but also for management decisions, material transactions, and liquidity events. The rule is, any change to the award or the award holder’s status should trigger consideration of accounting modifications.

Identifying that you have a modification is just the first challenge; the accounting can be tricky as well. How you account for the modification will depend on the type of modification. Variations include measuring the incremental value only, accelerating the expense, or valuing the new award and reversing the value associated with the original award. You also need to be sure you’re entering the modification in your equity system in a way that captures the appropriate modification accounting.

Make sure performance-based awards are on everyone’s radar: Performance-based awards are great tools for both retaining employees and motivating goal-driven behavior. But there is accounting risk here as well. With performance-based awards, companies must assess the probability of achieving the metrics at each reporting date and adjust the expense accordingly. This step often doesn’t happen. Maybe the board minutes lay out the performance goals associated with an award, but the stock administrator gets only a spreadsheet of grants to administer, with no indication that vesting is contingent. Or maybe the stock administrator is aware of the performance targets but doesn’t flag performance-based grants in the equity system, so the accounting team doesn’t know they exist. Such miscommunication can lead to overstated stock-based compensation expense.

Tie your 409A valuations to major grant dates: For private companies, the rule of thumb is to obtain a 409A valuation of your stock at least once a year, and in conjunction with major events such as financings, significant transactions, or material changes to the business. Some companies instead tend to do their 409A at the end of the year, just because they’re doing other valuations and financial decompressions at the same time. But think about this example, from one of our clients that approved a major grant to executives and employees in June 2011, six months after valuing its common stock at $1.25 per share for its annual 409A. By that point, the value of the stock had increased significantly—to $3—based on several design wins and other economic factors. While that’s a nice problem to have, they suddenly faced additional stock-based compensation expense and time-consuming updates to their equity system, among other issues.

It’s easy to think your equity-based compensation is under control; however, we have found time and again that it’s an ever-evolving tool that needs tending to, as your headcount grows, the complexity of your company expands, and situations evolve.

Get in the mode of reevaluating your pay strategy during the RoseRyan February 26 Lunch & Learn seminar about equity in South San Francisco. It will be geared toward private companies. Click here to register. And for more details about these best practices as well as some others to consider, also check out the RoseRyan intelligence report I wrote called Stock options: do you have a problem?.

Kelley Wall leads RoseRyan’s Technical Accounting Group, which provides technical accounting and SEC expertise to public and private companies on complex accounting matters and implementation of new accounting pronouncements. 

/by