Financial Daily from THE HINDU group of publications
Sunday, Apr 21, 2002
`Good corporate governance requires forward-looking CFOs'
KOLKATA, April 20
INVESTMENT income in a non-investment company's financial statements is no longer a positive element; it is viewed not as "management topping up earnings through prudent use of surpluses," but as "management digressing from its business and increasing the risk profile." This lies at the core of an assessment of the `Changing role of CFOs' (chief finance officers) by Advantage India Consulting.
The review has analysed the attributes of the "forward-looking CFO," beginning with disclosure of critical information. Quarterly reporting of financial information, it is noted, has knocked off the end-of-the-year routine. Early completion of audit and reporting of the results have become a test of effectiveness and transparency. Some even re-work their accounts based on the US GAAP.
The character of balance sheets, too, has changed with a lot of stress on intangible assets (and not merely on the physical ones). Valuation of intellectual property is now a critical issue for companies. Valuations of such components as brands and human resources, too, are important considerations.
"Corporate governance measures have ensured outside participation in board meetings. Sub-committees of the board get to a level of detail that was traditionally considered out of bounds," Mr Sundar Sankaran of Advantage India Consulting has maintained.
The CFO's role till a few years ago was limited to three main areas: accounting and the related statutory audit, resource mobilisation and investments, it is pointed out. As for the first, organisations would often wait till the statutory last date so that adjustments could be made till the very end.
While resource mobilisation in Corporate India generally meant approaching FIs, the CFO had an occasional interaction with a consortium of bankers for meeting his working capital need. And, for a public issue of shares, a merchant banker was mandated.
On the investment front, the CFO of a cash-rich company had to manage its investments - typically inter-corporate deposits or ready forward deals in government securities or the US-64 scheme of Unit Trust of India. There would be some investments in stocks as well.
According to Mr Sankaran, FIs today are quite often a company's safety net for the purpose of mobilising funds, rather than preferred sources. Borrowers these days prefer the benefits of direct access to financiers, both domestic and international.
Today, there are fewer concerns about placing large chunks of equity with outside investors. And the latter could even seek a berth on the board.
The CFO has to maintain two-way communication with such investors (and analysts). Disclosure of unusual events and trends has become the mark of transparency - an issue that can impact on a company's stock price.
For CFOs, a surplus-cash situation has become a source of concern, not comfort.
Will this cash, invested in low-yielding T-bills, pull down return on equity? Will it lead to a hostile bid by a potential acquirer? Should the surplus be given back to shareholders? These are questions that CFOs always try to answer.
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