Evolving Role of CFO: Newer Dimensions Newer Challenges

1. Platform for Innovators Evolving Role of CFO: Newer Dimensions Newer Challenges Rakesh Mistry CFO | Elitecore Technologies (P) Ltd. & Group

2. Understanding the change in DNA of the CFO’s work profile • Gaining insights into new dimensions of financial leadership • Understanding of • The scope of responsibilities • New skills and dimensions needed for the evolving role • How to deal with new challenges in an uncertain economic condition Focus Agenda October 19, 2012 All Gujarat CFO Workshop - Baroda, 2012 2

3. The “New” CFO: Enduring the Economic Turmoil • Starting from the set-back of 2008 to the recent crisis in Europe the world is becoming more financially and economically “insecure” and “uncertain”, with tangible effects on each and every business entity. • The persisting situation has tested the skills of the CFOs across the globe including India and in turn has defined as well as enriched the role of the CFO. • The role, the style, the orientation and the skills of the CFO have all undergone a sea change over the past few years. • The CFO’s role has changed from that of Book keeper to Controller to a Business Analysts with a change in style, which has become more consultative. All Gujarat CFO Workshop - Baroda, 2012

4. The Present Global Business Scenario • Economic challenges across the globe have reshaped the Global business environment, and in turn, the CFO’s role • Uncertainty prevails due to: • Lack of political unanimity • Technology shift • High level of: • Nationalism • Protectionism • Government regulations

5. The Evolving Role of The CFO The CFO’s role has become dynamic and expects changes in functional areas to meet dynamic challenges, through major focus on Supporting, Managing & Mitigating Enterprise Risk

6. Supporting/Managing Enterprise Risks 6 Strategic Risk Operational Risk Legal and Compliance Risk Financial Risk Understanding the risk of business as usual

7. 1. Strategic Risk • Strategic objectives are high level goals, aligned with and supporting its mission. These are core to any organization’s strategy. The main objective of any strategy risk management objective is to “Add to shareholder’s value and not destroy the shareholder’s value? • Any internal or external events and scenarios that can inhibit an organization’s ability to achieve its strategic objectives are called strategic risks which become the focus of strategic risk management. All Gujarat CFO Workshop - Baroda, 2012

8. Strategic Risk Management • CFO has to have a detailed knowledge of the business, equivalent to that of the CEO, to combine the financial and the business aspects and guide the organization • Strategy Execution – The CFO can lead • It is not sufficient to just flag a problem. It is needed to influence the change and this would require soft skills and hard work. • Each element of strategy should have dashboard to monitor • Do not ignore the small thing

9. Strategic Risk: Example A Retailer’s Experience • One retailer in USA had strategy to open many stores across the country. Stores used to display their merchandise in store parking lot even though it was not legal as per local municipal laws. Due to this, municipality stopped giving permission till the time they display compliances with law over a period of time. This has delayed the opening of new stores and in turn business. • Lesson is we can’t ignore the small thing.

10. 2. Operational Risk • Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. • Do not ignore even smaller breach of trust; it can take bigger shape in the future. Satyam episode must have been started from small • For example, a loan exposure turning bad can point to irregularities or failures at credit appraisal, sanction, documentation or lapses in post-disbursement review. • There’s a persistent need to identify and measure operational risks.

11. 2. Operational Risk 11 • Operational Risk Management: • CFO has to be more diligent in terms of various internal controls in the organizations. • He has to be COO within and CFO from outside. • Have through understanding of business and its drivers • Understand and track internal and external environment at all times • Be master of details. Both devils and innovation lie there. • Need to take support from auditors, audit committee and independent directors

12. 3. Legal & Compliance Risk Management • Zero tolerance in the light of changing nature of regulations like FCPA, anti-bribery, export regulations etc. • Example: CISCO (USA) has cut ties with ZTE after its sales to Iran, as per legal policies followed by US companies. • Legal risk always comes out in the long term. CFO needs be aware each and every document that Company is signing. Various clauses like indemnification, maximum liability, jurisdiction, IPR, termination, assignment etc.

13. 3. Legal & Compliance Risk Management (cont). Building a Globally Local approach: • There is a prevalent environment of Nationalism and Protectionism. It is characterized by increased level of unemployment in most countries • The CFO needs to develop an awareness and knowledge of the local laws and regulations • Boundaries are shrinking: Global workforce is to be integrated into the organization

14. 4. Financial Risk • Leveraging, particularly “over leveraging” in good times can make you bankrupt in bad time. So always draw a worst case scenario. • Example: Kingfisher Airlines’ present crisis can be attributed to overleveraging itself in the Aviation sector through purchase of Air Deccan, 5-star certifications, expensive fleet purchases and other unnecessary credit burdens

15. 4. Financial Risk 15 • Focus specially on treasury risk management • on currencies- keep objective of risk mitigation rather than objective to earn • commodities, interest rate and liquidity management is also of prime importance • There is a need to have stringent credit policy • Raise the funds when time is good

16. Understanding The Risk of Business as Usual • Business means risk and business continuity is the aspect • Business Continuity Planning is all about anticipating, preventing and responding to incidents which could affect critical business functions in planned manner. • How to continue operating if head office is damaged by disaster? • How to maintain production if one or more plants are out of operation? • What happens if sales and marketing systems are shut down for a week? • Where to source raw materials if the existing supply is interrupted? • What is the action plan if senior managers are suddenly unable to work?

17. Balance Between Safety & Growth: • Every CFO must be facing such choice on day to day management • The CFO needs to make decision based on long term sustainability • Now the demand of the stakeholders is sustainability over long period of time rather than quarterly profits. • CFO need to strike balance between profit, people and fair practices • More transparency than required by regulations

18. What should be Focused Upon … ? Competition is going to increase in each and every business going forward. Three things are very important when moving forward for any organization: • Differentiated services and/or products • Management of Risk levels • Talent: enough investment required to build talent

19. The New CFO’s Guide: Few Facts To Be Remembered The CFO has to be part of the main stream and be an enabler.

20. Corporate Governance & Ethics Fiction: Corporate governance and ethics are valued by the capital market and the financiers. • Investors are more worried about performance and results. • The bottom line is performance and performance of CFO is adding value to the organization through management of costs, funds, capital employed, tax and Foreign Exchange and Working Capital management. • If CFO gets 100 out of 100 for corporate governance and in compliance but fails to add value to the organization he will exit very fast.

21. Fact 2: Against Corruption & Malpractices 21 Friction: There has been a paradigm shift in the value system due to SOX, Bribery Act and Clause 49. Factually it is more lip service than shift. Corruptions, criminal and political pressures have increased exponentially and so greed and ambitious and cash economy too. CFO have to content with penalties of both. If CFO does not take recourse to few corrupt practices, business may die and yet if he does not follow regulations and compliance norms, business is also going to be dead. This is the biggest challenge.

22. A Guide to Thrive & Survive • Have thorough understanding of business and its drivers • Understand and track internal and external environment at all times • Be a master of details. Both devils and innovation lie there. • Give high Weightage to robustness in the business model in order to withstand change & uncertainty • Do not outsource understanding of anything including even changing laws and regulations • Add value to every one • Have courage of conviction and communication. • Be with a promoter/owner house whose source of wealth is the market cap who has long term goals.

23. When egg is broken from outside, a life comes to an end. But when the egg breaks from within, a new life begins. Great things and a great CFO always begin from within and do not wait for a knock from outside. Thank You!!