The Role of the CFO In Creating Shareholder Value

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In your role as CFO, where do you see the greatest opportunities to create shareholder/stakeholder value in your company/firm and/or industry?

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  • As CFO I oversee all the administrative functions which include Strategic Planning & Business Development, Global Operations & IT, Finance and Human Resources. As CFO's we need to create good communication of our strategy. This will help all stakeholders to take a better view of organization potential performance and valuation.
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  • Investment Opportunities as Real Options: Getting Started on the Numbers Timothy A. Luehrman
  • The Role of the CFO In Creating Shareholder Value

    1. 1. 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
    2. 2. Some Thoughts on Role of CFO… <ul><li>Companies--and their CFOs--may have to adapt more radically to the downturn than they now expect. </li></ul><ul><ul><li>McKinsey Quarterly, 2.24.2009 </li></ul></ul><ul><li>&quot;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,“ </li></ul><ul><ul><li>Mr. William Connell, chairman of IFAC's Financial and Management Accounting Committee. </li></ul></ul>
    3. 3. Value Creation <ul><li>The Theory </li></ul><ul><ul><li>Discounted Cash Flow Analysis </li></ul></ul><ul><ul><li>Sources, Uses, of Cost of Capital </li></ul></ul><ul><li>The Practice </li></ul><ul><ul><li>The Balance Sheet </li></ul></ul><ul><ul><li>Strategic Options </li></ul></ul><ul><ul><li>Risk Management </li></ul></ul><ul><ul><li>Communication </li></ul></ul>
    4. 4. The Theory <ul><li>Value of firm’s operating assets is present value of free cash flow discounted at the firm’s cost of capital. </li></ul><ul><li>Value is created when firm earns more than its cost of capital. </li></ul>
    5. 5. CFO View of B/S Assets (Uses of Capital) Debt Preferred Stock Equity (Sources of Capital) Market Value Balance Sheet
    6. 6. A Summary: Creating Value <ul><li>Cash Flows </li></ul><ul><ul><li>Revenue and Expenses </li></ul></ul><ul><ul><li>Riskiness, Timing, and Size </li></ul></ul><ul><li>Left Hand Side of Balance Sheet </li></ul><ul><ul><li>Management of Assets </li></ul></ul><ul><ul><ul><li>Working Capital </li></ul></ul></ul><ul><ul><ul><li>Inventories </li></ul></ul></ul><ul><ul><ul><li>PPE </li></ul></ul></ul><ul><li>Right Hand Side of Balance Sheet </li></ul><ul><ul><li>Capital Structure </li></ul></ul><ul><ul><li>Distribution of Cash to Shareholders </li></ul></ul><ul><ul><ul><li>Dividend Policy </li></ul></ul></ul><ul><ul><ul><li>Share Repurchases </li></ul></ul></ul><ul><li>Strategic Options </li></ul><ul><li>Risk Management </li></ul><ul><li>Communication </li></ul>
    7. 7. Strategic (Real) Options <ul><li>Many strategic decisions are difficult to value using discounted cash flow analysis. </li></ul><ul><ul><li>The value created is often in the strategic (real) option. </li></ul></ul><ul><li>Examples of Strategic Options… </li></ul><ul><ul><li>Flexibility </li></ul></ul><ul><ul><li>Growth </li></ul></ul><ul><ul><li>Abandonment </li></ul></ul><ul><ul><li>Delay </li></ul></ul><ul><li>How to Value? </li></ul><ul><ul><li>Qualitatively </li></ul></ul><ul><ul><ul><li>Option Value = f (Asset Value, Exercise Price, Volatility, Time, risk-free rate) </li></ul></ul></ul><ul><ul><li>Quantitatively </li></ul></ul><ul><ul><ul><li>Decision Trees </li></ul></ul></ul><ul><ul><ul><li>Black and Scholes Option Pricing Model </li></ul></ul></ul>
    8. 8. Risk Management <ul><li>Internal Controls </li></ul><ul><li>Measuring Risk Exposure </li></ul><ul><ul><li>Interest rate risk </li></ul></ul><ul><ul><li>Credit risk </li></ul></ul><ul><ul><li>Foreign exchange risk </li></ul></ul><ul><ul><li>Legal risks </li></ul></ul><ul><ul><li>Investment risk </li></ul></ul><ul><li>Managing Risk Exposure </li></ul><ul><ul><li>Financial hedging </li></ul></ul><ul><ul><li>Operational hedging </li></ul></ul><ul><ul><li>Diversification </li></ul></ul>
    9. 9. Communications <ul><li>Budgeting and Planning </li></ul><ul><li>Financial Reporting </li></ul><ul><li>Stakeholder Communications </li></ul><ul><ul><li>Capital Providers </li></ul></ul><ul><ul><li>Regulators </li></ul></ul><ul><ul><li>Analysts </li></ul></ul><ul><ul><li>Rating Agencies </li></ul></ul><ul><ul><li>Board of Directors </li></ul></ul><ul><ul><li>Employees </li></ul></ul>
    10. 10. Group Discussion Question <ul><li>In your role as CFO, where do you see the greatest opportunities to create shareholder value in your firm and/ or industry? </li></ul><ul><ul><li>Please take 20 minutes to discuss. </li></ul></ul><ul><ul><li>Each group will have about 5 minutes to share their thoughts. </li></ul></ul>

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