In this part of the series on stakeholder management for HR leaders, I write about the relationship between the CFO and the HR director.
“The most important thing for a CFO or CHRO is that they
think broadly and have credibility and strategic vision. That
requires them to look beyond their functional roles.” Bruce Besanko
Two different worlds
The functioning of finance and HR roles has been characterized by isolation for many decades. These functions were deemed to be institutionally divided and no strategic cooperation was in place. In many organizations, this is still the case. This approach can be traced back to several reasons. While financial leaders deal with quantifiable, tangible issues, HR leaders focus on the development of the human side which does not always have quantifiable characteristics and a measurable impact. Both finance and HR leaders can often feel that the other leader is interfering in their work, such as when implementing policies or cutting costs, which can lead to potential tensions between them. And their different time horizons can lead to inevitable battles (just one example: HR tends to focus on long-term programs having only a few quantifiable short-term benefits). They are not always familiar with each other’s knowledge, skills, challenges, and impact on business. Finance and human resources professionals often have different personalities, resulting in some sort of dissension.
However, they also have many things in common. They are responsible for the two most important business resources - money and people -, and their relationship and use. Both play an important role in planning and implementing corporate strategy. Neither is a direct revenue-generating function, but each play a key role in the organization’s performance management.
As a result of the dynamic change in the economy, the gap between the financial and HR functions has narrowed in recent years. Responsible leaders have understood and changed the traditional approach and previous routine that defines their role and affects their collaboration in order to increase corporate performance, efficiency and profitability. The scarcity of talent and its high cost, as well as changes in strategy, the business model and the products and services have also led to closer collaboration.
The Chief Financial Officer’s traditionally conservative, risk-averse profile, focusing on the skillful management of corporate assets and returns, performing financial and tax reporting, and working in the background is a thing of the past.
Finance came into prominence when the size of the business became a competitive force and managers began to see the company as an investment rather than a production system. The fundamental lack of financial capital has become the biggest barrier to business growth. During this period, alternative forms of accessing to financial capital and financing projects became widespread, requiring more sophisticated financial decision-making. The financial situation, which depended on the specific situation and goals of the company, lead to a significant transformation of the CFO’s role, which required strategic thinking.
Thanks to the transformation of the role of finance, the CFO has now become a steering, influential and recognized business leader who deserves a place at the table of the company’s top management. In addition to supervising traditional financial functions (e.g. accounting, controlling, financial reporting/analysis, budget planning) and special finances (e.g. financing and cash flow operations, audit, tax, investor relations), the CFO spends a significant amount of time on other activities, as well. As one of the engines and catalysts of business transformation, the CFO’s role is extended to new topics such as strategic leadership, customer management, digitalization/artificial intelligence/technology, business/organizational transformation, investment/capital allocation, risk management, mergers & acquisitions, increasing efficiency and performance management.
The modern CFO is gaining more and more prominence in company management and supervisory board meetings. Undoubtedly, their biggest challenge is to adopt a forward-looking, investment-oriented approach; on the one hand, identifying and exploring market opportunities for business growth together with co-leaders, developing business concepts, and on the other hand, putting the benefits of investments in a broader perspective (e.g. developing people, applying new technology) that ultimately results in achieving long-term corporate goals.
The professional/leadership requirements for the CFO are diverse, complex and comprehensive. In addition to their function-specific knowledge (which is fundamental), it is key to their effectiveness that they have business knowledge, strategic thinking, relationship management and communication skills, innovativeness, team building skills and leadership qualities like presence, credibility, reliability, influence.
Two worlds converge
Most HR professionals are less passionate about financial topics, their relationship with finance is rather superficial and occasional. Yet finance is one of HR’s key partners in business. The most important joint responsibility of the two functions is value creation and performance enhancement.
For maximising value creation, they need to understand and answer 3 essential questions:
- Measuring the value created
- Understanding what drives value
- Minimizing the leakage of value
There are 5 critical areas where the combined efforts of CFOs and HR directors can most effectively increase a company’s performance (and their own credibility):
Joint participation in strategic planning: Rising above the functional aspects, they recognize and agree on how the company intends to add value and whether they have enough resources to achieve these goals. Their combined opinion is much more worthy of consideration and convincing for business leaders.
Linking operational and workforce planning: They jointly lead the business planning process with the involvement of other co-leaders, with a special regard to estimating resource risks, identifying potential barriers, and achieving the accountability of co-leaders.
Aligning performance indicators with corporate goals: They define key performance indicators (KPIs) for measuring business performance together with business co-leaders and incorporate these in a system (balanced scorecard) and regularly update and review the indicators.
Aligning employee income, benefits, and incentive programs with corporate goals: They recognize what employee skills, competencies, value-creating and profitability-increasing activities and performance are required to implement the strategy and they adjust the elements of the incentive and make suggestions to senior management accordingly.
Organizing the review of business results and proactively participating in the process: On the occasion of regular business meetings, they understand market movements, challenges and their impact on finance and human capital, to which they can then respond flexibly or develop preventive measures and have such measures approved.
Obviously, they also have several connection points (e.g. commercial and talent challenges, predictive data analysis).
Ideally, the CEO should be driving collaboration between the two leaders. Otherwise, the CFO and the HR director need to engage the CEO in order to drive alignment with senior leadership.
From a CFO perspective, an HR director can play a much bigger role in boosting business growth than before. So, let’s forget about the comfort zone provided by the HR function – this is the biggest barrier to our professional and leadership development – and let’s be open to accepting new skills and to partnering with the CFO and achieving joint success!
Philosophy, instead of teaching a lesson
Companies where the relationship between the two functions has become much more collaborative over the past three years report an average EBITDA growth (reflecting the company’s current business performance) and a stronger performance improvement. In contrast, companies where there is no cooperation or the cooperation is sporadic between the two leaders are experiencing deteriorating corporate performance, pointing fingers, the isolation of functions and the exacerbation of differences between them.
A significant proportion of HR leaders have not yet experienced the important benefits of cooperating with CFOs. An effective alliance between the two has huge potential for the business.
“When executives elevate their focus beyond their functions and toward strategy and then partner in key areas, they can quickly elevate their own impact and credibility.” People say that a story does not have a lesson but a philosophy. May this be the philosophy you have now taken with you.
Inspiring sources: CFO vs. CHRO: Five areas to fix and one thing each must do by Scott Engler and The Master CFO Collection: Partnering for performance II. by EY