The Role of the CFO In Creating Shareholder Value

The Role of the CFO in Creating Shareholder Value John B. McDermott, Ph.D. Dolan School of Business, Fairfield University CFO Alliance - Connecticut Breakfast Roundtable 10 June 2009

Some Thoughts on Role of CFO…
Companies--and their CFOs--may have to adapt more radically to the downturn than they now expect.
McKinsey Quarterly, 2.24.2009
"As a result of the demands placed on companies by shareholders, regulators and the public at large for increasing financial information, the CFO's role is shifting dramatically from one of transaction manager to communicator and strategist,“
Mr. William Connell, chairman of IFAC's Financial and Management Accounting Committee.

Value Creation
The Theory
Discounted Cash Flow Analysis
Sources, Uses, of Cost of Capital
The Practice
The Balance Sheet
Strategic Options
Risk Management
Communication

The Theory
Value of firm’s operating assets is present value of free cash flow discounted at the firm’s cost of capital.
Value is created when firm earns more than its cost of capital.

CFO View of B/S Assets (Uses of Capital) Debt Preferred Stock Equity (Sources of Capital) Market Value Balance Sheet

A Summary: Creating Value
Cash Flows
Revenue and Expenses
Riskiness, Timing, and Size
Left Hand Side of Balance Sheet
Management of Assets
Working Capital
Inventories
PPE
Right Hand Side of Balance Sheet
Capital Structure
Distribution of Cash to Shareholders
Dividend Policy
Share Repurchases
Strategic Options
Risk Management
Communication

Strategic (Real) Options
Many strategic decisions are difficult to value using discounted cash flow analysis.
The value created is often in the strategic (real) option.
Examples of Strategic Options…
Flexibility
Growth
Abandonment
Delay
How to Value?
Qualitatively
Option Value = f (Asset Value, Exercise Price, Volatility, Time, risk-free rate)
Quantitatively
Decision Trees
Black and Scholes Option Pricing Model

Risk Management
Internal Controls
Measuring Risk Exposure
Interest rate risk
Credit risk
Foreign exchange risk
Legal risks
Investment risk
Managing Risk Exposure
Financial hedging
Operational hedging
Diversification

Communications
Budgeting and Planning
Financial Reporting
Stakeholder Communications
Capital Providers
Regulators
Analysts
Rating Agencies
Board of Directors
Employees

Group Discussion Question
In your role as CFO, where do you see the greatest opportunities to create shareholder value in your firm and/ or industry?
Please take 20 minutes to discuss.
Each group will have about 5 minutes to share their thoughts.

The Role of the CFO In Creating Shareholder Value

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