After 15 years as chief financial officer of $5 billion 3Com Corp., Chris Paisley faced a simple decision last year: take a lucrative job heading finance for the promising Palm Inc. hand-held computer spin-off, or teach school instead. Simple indeed. The 47-year-old starts this winter at Santa Clara University, in 3Com’s California hometown. “I don’t even know what my pay will be,” he says with a shrug. “What I really want is a classroom of bright, energetic people.”
Paisley — whose parents were teachers, and who taught accounting in his early years at 3Com — had been thinking about switching to academia for years. But not because he missed helping people learn about finance. That’s something he believes he did routinely in his corporate role, while 3Com was riding to glory with its computer networking services. “The need for the CFO to be a teacher has always been there,” he says, “but as companies have tried to instill more performance metrics lower in the organization, they have found that some of those metrics are not intuitive, and require instruction.”
While few CFOs take a step as drastic as Paisley’s and leave the corporate ranks entirely, nearly all are finding reasons to add “finance teacher” to their job description. Whether it’s briefing the workforce about economic-profit-based compensation, bringing nonfinance managers up to speed on corporate strategy, interpreting the nuances of an Internet business model for customers, or answering ever-more-sophisticated shareholder questions at the annual meeting, CFOs are being called upon to impart their financial expertise.
“We are missionaries,” is the way former R. R. Donnelley & Sons Co. CFO Cheryl Francis puts it. The place where finance executives often have the greatest value, she adds, is “in the broader context of educating the community.” And that community includes employees, customers, other executives, Wall Street, and the public in general.
How the finance lessons are imparted, however, varies widely. Much formal training is done in-house, of course, including through an increasing number of “corporate universities.” In addition, many finance executives, such as Paisley, are signing on with a business school in their so-called spare time — boosting their companies’ exposure to a valuable pool of young finance employees in the process. But finance executives insist that the bulk of the lessons occur on a daily basis as they try to explain how each individual’s work affects company performance. “You do it in many forms, and very rarely in a training environment,” says Francis.
Breaking the Mold
Finance executives have always been called upon for certain educational functions, such as researching items for the CEO and explaining company maneuvers for Wall Street. Still, they haven’t always enjoyed a stellar reputation for their teaching skills. In fact, says Stern Stewart & Co. senior partner Bennett Stewart, CFOs can sometimes “ruin finance trainings [by] over-engineering them.” Consequently, he says, the lessons they try to pass on to others are sometimes “too technical, and don’t resonate.”
But forces have been emerging to correct this problem. The spread of financial responsibilities throughout the organization, for one, has changed the relationships among CFOs, operating managers, and other employees.
“The idea that you have to ask the CFO or the controller for the information is a thing of the past,” says David Greene, former finance chief of advertising giant Young & Rubicam Inc., and now a professor at Indiana University’s Kelley School of Business. Instead, says Brian Walker, president of Herman Miller Inc. North America, and former CFO of the Zeeland, Michigan, office-furniture manufacturer, “you’ve got to be out there arming people with the techniques you want to use, because you just can’t wait for the finance people to do it all.”
Such assistance can occur on many levels, says Francis, “You’ve just got to be open to the opportunities.” Francis, who once created her own graduate class at the University of Chicago, called “Finance as a Catalyst for Change,” recalls an opportunity she had to spread the finance message while visiting a telephone-directory plant in Dwight, Illinois, early in her tenure as Donnelley CFO. “I was a neophyte, and these people were so excited” at the chance to convince the touring CFO that Dwight needed a new paper-storage facility — one that Francis didn’t want to authorize.
Instead, she inquired of the local management team how many separate types of paper they were storing, to which they proudly answered, 650. “The problem,” she then advised them, “is that you’re not managing your inventory the right way.” Customers care little about the various types of paper that are used. “So your objective should be to keep fewer and fewer paper varieties in the plant.” Soon after, Francis says, employees started sending her notes about their progress: “Cheryl, we’re down to 500; Cheryl, now it’s 250.”
Bob Goldman, CFO of Houston-based energy giant Conoco Inc., adds that finance executives have numerous vehicles at their disposal for communicating such lessons. “Recently, we were announcing the building of a plant, and it was a very well-written press release, but it was very plant-focused,” he says. “It seemed to me that we were missing the boat; we were entering a new product field with tremendous opportunity for the future — and, by the way, we’re building a plant.” He edited the release to that effect.
On a wider scale, “our people down in Venezuela are teaching the operating people daily about how significant finance is to our project,” he says. “These are people who are good at putting up bricks and mortar, and good at drilling.” And now, four years after a landmark $1.45 billion in nonrecourse debt was arranged for the giant Petrozuata oil and gas venture with the South American country, Goldman says they also have “a much greater sensitivity to the role of the bondholders” in a high-risk project that never could have flown without them.
Whatever the venue, says Francis, the very act of having finance executives share their perspective can inject a positive spirit and “remove the confusion and distrust” that sometimes exist. It helps “people feel included,” she adds.
The Power of Credibility
The benefits of having CFOs educate in a formal way cannot be denied, however. And since there’s a finance component to nearly every company training program, including those conducted by the corporate university, more finance executives are finding themselves at the lectern in some form.
Goldman, for example, teaches a course in creating shareholder value at Conoco University’s “Trailblazer” executive program. The course, presented four times a year at the London School of Business, is appreciated for both its style and its substance.
“He talks enthusiastically about his subject,” including such items as the need to integrate exploration and refining, says Don Robertson, general manager for extraction for the upstream group of Conoco UK in Aberdeen, Scotland, who attended Goldman’s Conoco U. class last October. “But more than that, he’s interested in the audience and what they’re getting out of it.”
One essential element that Goldman brings to his lessons is credibility. Robertson recalls how the CFO punctuated his presentation with a promise. “He said, ‘You bring forward the right opportunities, and I will fund them.’ ” This was a striking pledge for a company that had often shied away from such investments before the 1998 initial public offering that made it independent from DuPont Inc. “That stays in the memory,” says Robertson.
In addition, Goldman is blunt with employees about the outside limitations and pressures that exist on his company, a quality that is imperative in teaching finance to people without a finance background, says Harvard Business School professor Samuel Hayes. “They need to understand that the company is a captive of the financial marketplace, answerable to the markets, from both an equity-value point of view and a credit point of view,” Hayes says. “They need to understand the risk of carrying debt in the capital structure, but also to see that equity has a cost and a risk, too. If you fail to use debt, you’re robbing investors of some degree of value added. You’ve left money on the table.”
At Young & Rubicam, says former finance chief Greene, there were 350 business units globally, each with its own balance sheet — and a tendency to be overcapitalized. Managers had the idea, he says, “that capital is free.” To rectify that, Greene had to provide examples of well-designed capital structures among the unit managers. And today, one of the big lessons he imparts in executive education programs at Indiana’s Kelley School is that “equity is the most expensive capital you can have, and leverage is not necessarily a bad thing.”
Harvard’s Hayes suggests that in a more formal setting, especially, finance executives can also increase their impact by “explaining things with visual symbols or pictures that get people thinking in terms of proportions.” In fact, he’s known as “Debt Limb Hayes” because of his fondness for one particular illustration. When depicting a balance sheet, he uses an arboreal metaphor to show how unnatural it can be for companies to become unbalanced.
“If the amount of liabilities gets much larger, compared with net worth, you get further out there on the limb, and it starts to wiggle and sway,” says Hayes. “And if there’s any wind — which I demonstrate as external economic changes — you can get dizzy, and you could fall off.”
Another image he uses in his efforts to make the balance sheet understandable is that of a giant sponge, which can soak up all the elements of assets and deposit them in equal measure in liabilities. And wherever possible, he suggests, CFOs should use ratios to increase understanding of how one accounting component affects another.
“People can get anything, if you get rid of the jargon and break it down into pieces they can understand,” says Francis. And especially if you make the finance lesson relevant to their own work. “Everybody wants to know how what they do affects the performance of the company,” she says. With the growth of sophisticated software, she adds, operating people now have more tools to understand how their specific businesses fit with the whole. But they still need someone in finance to help them make the connections.
Wherever the teaching takes place, says Chris Paisley, the former 3Com CFO, it has benefits for the teachers, too. “It makes you much more self-confident about speaking in front of an audience,” he says, “which is a huge advantage for CFOs,” many of whom have a fear of public speaking. In addition, he asserts, it’s “the best way to learn something yourself. I always found myself taking information away, just from the questions people asked.”
And for those who stand at the head of a classroom either full- or part-time, he says, there is yet another attraction in the teaching profession: “It’s a chance to provide a little bit of community service — some payback, if you will. You get to share with others the things that went right, and some of the things that didn’t go so well.”
Roy Harris is a senior editor at CFO.
The World Is Your Schoolroom
Outside the executive suite and the finance department, here are some audiences for teaching-minded CFOs.
Operating Managers: From sales and marketing to the production line, they need to understand how their department interacts with finance, and how what they do affects overall profitability and stock price.
Employees: More are seeking financial grounding about how incentive programs work for them, and how economic profit reflects their efforts; also, stock options or retirement-account shares make them a special class of worker-owner to be coached.
Wall Street: A longtime CFO audience, analysts and investors often need briefings in both corporate strategy and finance principles.
The Public: The largest stakeholder group, and the press that represents it, often search for positive or negative community impact from corporate actions.
Business Schools: Here can be found a future source of finance or other young managers — along with an educated consumer group that is constantly forming opinions about your company.
Bringing It Home
Some tips from Harvard’s Samuel Hayes for making finance topics more understandable.
Tip #1: Apply financial principles to familiar spheres of reference for the audience; a family’s income, for example, compares with corporate revenues, and a special roof-repair account resembles a depreciation reserve.
Tip #2: Use visual symbols to describe difficult concepts; on the balance sheet, a “giant sponge” soaks up funds, and the sources and applications of those funds are equal.
Tip #3: Concentrate on key ratios and relationships, like compensation-expense-to-revenues or liabilities-to-net-worth, to show how various functions of a corporation affect each other.
Tip #4: Don’t fear tackling great financial myths that pervade the nonfinance world, including the “low cost of equity.”
Tip #5: Despite the availability of sophisticated computer spreadsheets, be able to conceptualize the big picture simply — “on the back of an envelope or on a paper napkin.”