Linking Governance to Strategy: The Role of the Finance Organization
Busco, Cristiano, Giovannoni, Elena, Riccaboni, Angelo, Franceschi, Davide, Frigo, Mark L., Strategic Finance
The capabilities, skills, and responsibilities required of finance professionals have changed significantly over the last decade. No longer limited to tracking financial results and rigorous financial reporting, finance experts are increasingly required to support strategic decision making, operation efficiency, and value creation and to combine solid accounting skills with knowledge of the business, leadership abilities, and management expertise. And such capabilities still aren't enough.
In 2002, the Sarbanes-Oxley Act (SOX) in the U.S. directly impacted the finance organization (and the CFO) by introducing new responsibilities for the trustworthiness and reliability of financial reports (Section 302) and new requirements for internal controls (Section 404). Such emerging issues and new responsibilities call for a redefinition of the role of the finance organization in the governance process. Using the case of GE Oil & Gas, we suggest that finance professionals can be much more directly involved within the corporate governance framework by playing an active role in translating governance principles into strategic decision making and strategic performance management systems. Although we include examples from GE Oil & Gas to build our argument, many of the issues we discuss are relevant and applicable for the entire GE organization.
LINKING GOVERNANCE TO STRATEGY
Despite the recent proliferation of laws, regulations, and codes of corporate governance, high-profile incidents of corporate failure and managerial misconduct have emphasized that compliance isn't enough for effective governance. Corporate governance should take into account the need to implement effective business policies and long-term objectives that represent the scope of good governance and that should provide the structure through which the company sets objectives, the strategy for attaining those objectives, and the guidelines for monitoring performance. Similarly, boards of directors should be more involved in strategy formulation rather than limiting their role to strategy ratification and monitoring management behavior. From this point of view, corporate governance can influence organizational performance insofar as it influences the strategic management of the organization.
The need for a strategic perspective in corporate governance has also been addressed by several professional accounting bodies. In a 2004 document titled Enterprise Governance: Getting the Balance Right, published by the Chartered Institute of Management Accountants (CIMA) and the International Federation of Accountants (IFAC) and prepared by IFAC's Professional Accountants in Business Committee (PAIB), enterprise governance is defined as "the set of responsibilities and practices exercised by the board and executive management with the goal of providing strategic direction, ensuring that objectives are achieved, ascertaining that risks are managed appropriately, and verifying that the organization's resources are used responsibly." Within the document, conformance to governance rules is described as only one element of overall enterprise governance. Another element is represented by performance based on strategy and value creation. In this context, the focus of the performance dimension is on helping the board make strategic decisions, understand its appetite for risk and its key drivers of performance, and identify its key points of decision making. These two dimensions of governance are deeply related to each other, and both need to be considered when designing an enterprise governance framework.
Similarly, a former president of the Institute of Chartered Accountants of England and Wales (ICAEW) emphasized that governance should be regarded not only in terms of shareholder protection but also as it pertains to business performance. The Institute of Management Accountants (IMA[R]) is leveraging its thought leadership in SOX and enterprise risk management (ERM) by launching a Finance GRC (Governance, Risk, and Compliance) Research Practice, which will further tighten the link between strategy and compliance via research studies and specialized certificates programs. …