In the Eye of the Storm

Have chief financial officers ever mattered more—or been less prepared?

“There is no Armageddon scenario,” said Keith Sherin, the chief financial officer (CFO) of GE in an interview in July with, a website. Two months later, Mr Sherin may have regretted his optimism. As the credit markets froze and investors panicked, he found himself embroiled in a frantic effort to stabilise the huge, triple-A-rated conglomerate. In the space of a few days, GE raised fresh capital from Warren Buffett and other investors; slashed its profit forecast; abandoned a share-repurchase programme; and paid extraordinary interest rates (for GE, at least) to meet its overnight financial needs in the commercial-paper market.

On October 27th GE became the first company to borrow from the Federal Reserve’s new Commercial Paper Funding Facility—not, the firm insists, because it is having difficulty borrowing, but to help get the facility going. Meanwhile, Mr Sherin is trying to reduce GE’s use of commercial paper (it is the world’s largest issuer).

Mr Sherin is not alone in his struggles, and few of his fellow CFOs have the luxury of working for such a financially strong firm as GE. Is there a CFO anywhere who has not been asked the most basic questions by the chief executive in the past few weeks—along the lines of “Have we got enough cash to make it through the night?” and “What are the chances of us going bust?” And now they must oversee the annual budgeting, with the economic outlook for next year anybody’s guess.

Even as they battle to stay afloat, many CFOs are haunted by past errors, thanks to an event almost as unexpected as the collapse of the financial system: the sudden reversal of the dollar’s seemingly permanent decline. A host of American exporters have seen their revenues fall alarmingly as the greenback’s rise revealed hedging policies ranging from the inadequate to the non-existent. More ominously, on October 20th CITIC Pacific, a Chinese steel and property company, revealed losses that could reach $2 billion, stemming in part from a derivative that hedged currency movements within a band that proved too narrow to protect its revenues.

Asian companies are more likely to suffer such derivative-related losses than European and (especially) American firms. These have been more careful about their use of the instruments in recent years because of the “keep-it-simple culture” fostered by the Sarbanes-Oxley act, says Wolfgang Koester, boss of FiREapps, a firm that provides exchange-rate risk-management software. That said, many American firms lack a thorough understanding of their foreign-exchange exposures, having had little incentive to acquire one when the dollar was falling. In the past two months they have increased their hedge ratio from 40% to 55% of revenues earned abroad, but this mostly reflects hedging of rich-country currencies, ignoring the fact that exposure may be greater to more volatile emerging-market currencies, says Mr Koester.

Few of the CFOs grappling with this turmoil have ever experienced anything like it. Not many of them were in their jobs during the previous economic downturn, at the start of the decade. In common with chief executives, CFOs do not last as long as they used to. These days 25-30% of them move on each year, nearly twice the rate in the 1990s. This year, on average, the CFO of a Fortune 1,000 company has been in his job for just 30 months. Mr Sherin, GE’s CFO for a decade, is a rare exception. And though he was promoted from within, a remarkable 40% of CFOs are hired from outside, and so are unlikely to know where the financial bodies are buried.


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