Coronavirus: 15 emerging themes for boards and executive teams

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Board directors and executives can pool their wisdom to help companies grapple with the challenge of a lifetime.

As Winston Churchill said, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” We are seeing some faint signs of progress in the struggle to contain the pandemic. But the risk of resurgence is real, and if the virus does prove to be seasonal, the effect will probably be muted. It is likely never more important than now for boards of directors and executive management teams to tackle the right questions and jointly guide their organizations toward the next normal.

Recently, we spoke with a group of leading nonexecutive chairs and directors at companies around the world who serve on the McKinsey Resilience Advisory Council. They generously shared the personal insights and experiences gained from their organizations’ efforts to manage through the crisis and resume work. The 15 themes that emerged offer a guide to boards and executive teams everywhere. Together, they can debate these issues and set an effective context for the difficult decisions now coming up as companies plan their return to full activity.

Managing through the crisis

1. Boards must strike the right balance between hope for the future and the realism that organizations need to hear. There are many prognostications on what comes after COVID-19. Many will be helpful. Some will be right. Boards and managers may have some hopes and dreams of their own. Creating value and finding pockets of growth are possible. It is important to have these aspirations, because they form the core of an inner optimism and confidence that organizations need. However, leaders should not conflate aspirations with a prescience about the future.

2. The unknown portion of the crisis may be beyond anything we’ve seen in our professional lives. Boards and managers feel like they might be grappling with only 5 percent of the issues, while the vast majority are still lurking, unknown. Executives are incredibly busy, fighting fires in cash management and other areas. But boards need to add to their burden and ask them to prepare for a “next normal” strategy discussion. Managers need to do their best to find out what these issues are, and then work with boards to ensure that the organization can navigate them. The point isn’t to have a better answer. The point is to build the organizational capability to learn quickly why your answer is wrong, and pivot faster than your peers do. Resilience comes through speed. This may be a new capability that very few organizations have now, and they will likely need to spend real time building it.

3. Beware of a gulf between executives and the rank and file. Top managers are easily adapting to working from home and to flexible, ill-defined processes and ways of working, and they see it as being very effective and also the wave of the future. Many people in the trenches think it is the worst thing to happen to them (even those that are used to working remotely). Remote working is raising the divide between elites and the common man and woman. There is a real risk of serious tension in the social fabric of organizations and in local and national communities.

4. Don’t overlook the risks faced by self-employed professionals, informal workers, and small businesses. These groups are often not receiving sufficient support. But their role in the economy is vital, and they may be noticed only later, when it is too late.

5. Certain industries and sectors are truly struggling and require support. Several disrupted industries and many organizations in higher education, the arts, and sports are severely struggling and require support to safeguard their survival.

Return to work—the path ahead

6. Mid- to long-term implications and scenarios vary considerably. It’s important to differentiate between industries and regions. Some industries may never come back to pre-COVID-19 levels.

7. What went wrong? Boards and executives, but also academics, need to debate the question. Where should we have been focusing? Take three examples. Why did companies ignore the issue of inadequate resilience in their supply chain? The risks of single sourcing were well known and transparent. Also, why did we move headlong toward greater specialization in the workforce, when we knew that no single skill was permanently valuable? Finally, why did we refuse to evolve our business models, although we knew that technology and shifts in societal preferences were forcing us down a treadmill of ever decreasing value-creation potential?

8. How can we prevent a backlash to globalization? The tendency toward nationalism was already strong and is growing during the crisis. The ramifications will be challenging. For example, in pharmaceutical development, residents of the country where a pharma company has its headquarters may expect to get the drug first. Global companies, despite their experience, may find it harder to address and engage directly with diverse, volatile, and potentially conflicting stakeholders. In such times, societies may need someone to mediate between the private sector and some of these stakeholders.

9. Companies need help with government relations. Strong government interventions are occurring on the back of a serious loss of confidence in free-market mechanisms. There is little question that different governments will land on different answers to the debate around how free markets really ought to be structured. The corporate community has been thrust into a new relationship with government, and it is struggling. The government landscape is fragmented, with highly varied approaches and competencies. Companies are looking for a playbook; no one has an infrastructure to manage this complexity.

10. Where will the equity come from, and with what strings attached? Governments are propping up various sectors with new capital. What will they receive in return? Will they distort markets? How can companies manage this process carefully to emerge from the crisis with a stronger balance sheet? Further, much more capital is likely needed; presumably some of it will come from the private sector. Will capital markets be effective and trusted in such times? Who governs this overall process, and what role should the government play? Is it the time for more state funds?

11. The balance between profits and cash flow is tricky, and essential to get right. Many companies are caught right now and are sacrificing their bottom line in order to pay for their financing. That’s not sustainable; companies will need guidance on how to balance the two.

12. It may be time for responsible acquisitions, including to help restructure certain industries. Many “resilients” have “kept their powder dry,” and are now ready to acquire. But they need to be sensitive and allow sellers a good path to exit. We need guidelines for responsible acquisitions.

13. Cyberrisk is growing. Remote working increases the “attack surface” for criminals and state actors. Both are more active. Chief information officers and chief information security officers are grappling with the overwhelming demand for work-from-home technology and the need for stringent cybersecurity.

14. Innovation may never have been so important. Innovation has always been essential to solving big problems. The world is looking not just for new things but also for new ways of doing things (especially on the people side, where we need new behaviors, long-term rather than short-term), capabilities, and work ethics.

15. The path ahead will surely have ups and downs and will require resilience. As lockdowns are relaxed, and segments of the economy reopen, viral resurgences and unforeseen events will keep growth from being a straight line going up. It will likely be a lengthy process of preserving “lives and livelihoods” over several months, if not years. The reality is that many or even most business leaders made choices over the past decades that traded resilience for a perceived increase in shareholder value. Now may be the moment to consider that the era of chipping away at organizational resilience in the name of greater efficiency may have reached its limits. This is not to say that there are no efficiencies to be sought or found, but more that the trade-off between efficiency and resiliency needs to be defined far more clearly than it has been in recent years.


It is the board’s responsibility to coach and advise its management team, especially when the terrain is trickier than usual. However, boards should not mistake the need for vigorous debate with the need for consensus. More than ever, a bias to action is essential, which will frequently mean getting comfortable with disagreement. Apart from all the operational focus needed for the return to work, it is even more important that boards and management teams take a step back to reflect upon these 15 core themes. In summary:

  1. Take the time to recognize how the people who (directly or indirectly) depend on the company feel.
  2. Have aspirations about the post-COVID world, but build the resilience to make them a reality.
  3. Strengthen your capability to engage and work with regulators and the government.
  4. Watch out for non-COVID risks, and make sure to carve out time to dedicate to familiar risks that have never gone away.
  5. Find out what went wrong, and answer the uncomfortable truths that investigation uncovers.

 

 

 

The new CFO mandate: Prioritize, transform, repeat

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-new-cfo-mandate-prioritize-transform-repeat

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Amid a raft of new duties for CFOs, our survey suggests that finance leaders are well positioned to lead the C-suite agenda by championing transformations, digitization, and capability building.
If you wanted to validate the old adage that the only constant in life is change, the results from our newest McKinsey Global Survey suggest you need not look any further than the CFO role.1 In the two years since our previous survey on the topic, CFOs say the number of functions reporting to them has risen from about four to more than six. What’s more, the share of CFOs saying they oversee their companies’ digital activities has doubled during that time. And many finance leaders say they are being asked to resolve issues in areas that are relatively new to them while continuing to mind traditional responsibilities, such as risk management, that remain business priorities.

Responses indicate that the opportunity for CFOs to establish the finance function as both a leading change agent and a source of competitive advantage has never been greater. Yet they also show a clear perception gap that must be bridged if CFOs are to break down silos and foster the collaboration necessary to succeed in a broader role. While CFOs believe they are beginning to create financial value through nontraditional tasks, they also say that a plurality of their time is still devoted to traditional tasks versus newer initiatives. Meanwhile, leaders outside the finance function believe their CFOs are still primarily focused on and create the most value through traditional finance tasks.

How can CFOs parlay their increasing responsibility and traditional finance expertise to resolve these differing points of view and lead substantive change for their companies? The survey results point to three ways that CFOs are uniquely positioned to do so: actively heading up transformations, leading the charge toward digitization, and building the talent and capabilities required to sustain complex transformations within and outside the finance function.

Changing responsibilities, unchanged perceptions

The latest survey results confirm that the CFO’s role is broader and more complex than it was even two years ago. The number of functional areas reporting to CFOs has increased from 4.5 in 2016 to an average of 6.2 today. The most notable increases since the previous survey are changes in the CFO’s responsibilities for board engagement and for digitization (that is, the enablement of business-process automation, cloud computing, data visualization, and advanced analytics). The share of CFOs saying they are responsible for board-engagement activities has increased from 24 percent in 2016 to 42 percent today; for digital activities, the share has doubled.

The most commonly cited activity that reports to the CFO this year is risk management, as it was in 2016. In addition, more than half of respondents say their companies’ CFOs oversee internal-audit processes and corporate strategy. Yet CFOs report that they have spent most of their time—about 60 percent of it, in the past year—on traditional and specialty finance roles, which was also true in the 2016 survey.

Also unchanged are the diverging views, between CFOs and their peers, about where finance leaders create the most value for their companies. Four in ten CFOs say that in the past year, they have created the most value through strategic leadership and performance management—for example, setting incentives linked to the company’s strategy. By contrast, all other respondents tend to believe their CFOs have created the most value by spending time on traditional finance activities (for example, accounting and controlling) and on cost and productivity management across the organization.

Finance leaders also disagree with nonfinance respondents about the CFO’s involvement in strategy decisions. CFOs are more likely than their peers to say they have been involved in a range of strategy-related activities—for instance, setting overall corporate strategy, pricing a company’s products and services, or collaborating with others to devise strategies for digitization, analytics, and talent-management initiatives.

Guiding and sustaining change

Our latest survey, along with previous McKinsey research,2 confirms that large-scale organizational change is ubiquitous: 91 percent of respondents say their organizations have undergone at least one transformation in the past three years.3 The results also suggest that CFOs are already playing an active role in transformations. The CFO is the second-most-common leader, after the CEO, identified as initiating a transformation. Furthermore, 44 percent of CFO respondents say that the leaders of a transformation, whether it takes place within finance or across the organization, report directly to them—and more than half of all respondents say the CFO has been actively involved in developing transformation strategy.

Respondents agree that, during transformations, the CFO’s most common responsibilities are measuring the performance of change initiatives, overseeing margin and cash-flow improvements, and establishing key performance indicators and a performance baseline before the transformation begins. These are the same three activities that respondents identify as being the most valuable actions that CFOs could take in future transformations.

Beyond these three activities, though, respondents are split on the finance chief’s most critical responsibilities in a change effort. CFOs are more likely than peers to say they play a strategic role in transformations: nearly half say they are responsible for setting high-level goals, while only one-third of non-CFOs say their CFOs were involved in objective setting. Additionally, finance leaders are nearly twice as likely as others are to say that CFOs helped design a transformation’s road map.

Other results confirm that finance chiefs have substantial room to grow as change leaders—not only within the finance function but also across their companies. For instance, the responses indicate that half of the transformations initiated by CFOs in recent years were within the finance function, while fewer than one-quarter of respondents say their companies’ CFOs kicked off enterprise-wide transformations.

Leading the charge toward digitization and automation

The results indicate that digitization and strategy making are increasingly important responsibilities for the CFO and that most finance chiefs are involved in informing and guiding the development of corporate strategy. All of this suggests that CFOs are well positioned to lead the way—within their finance functions and even at the organization level—toward greater digitization and automation of processes.

Currently, though, few finance organizations are taking advantage of digitization and automation. Two-thirds of finance respondents say 25 percent or less of their functions’ work has been digitized or automated in the past year, and the adoption of technology tools is low overall.

The survey asked about four digital technologies for the finance function: advanced analytics for finance operations,5 advanced analytics for overall business operations,6 data visualization (used, for instance, to generate user-friendly dynamic dashboards and graphics tailored to internal customer needs), and automation and robotics (for example, to enable planning and budgeting platforms in cloud-based solutions). Yet only one-third of finance respondents say they are using advanced analytics for finance tasks, and just 14 percent report the use of robotics and artificial-intelligence tools, such as robotic process automation (RPA).7 This may be because of what respondents describe as considerable challenges of implementing new technologies. When asked about the biggest obstacles to digitizing or automating finance work, finance respondents most often cite a lack of understanding about where the opportunities are, followed by a lack of financial resources to implement changes and a need for a clear vision for using new technologies; only 3 percent say they face no challenges.

At the finance organizations that have digitized more than one-quarter of their work, respondents report notable gains from the effort. Of these respondents, 70 percent say their organizations have realized modest or substantial returns on investment—much higher than the 38 percent of their peers whose finance functions have digitized less than one-quarter of the work.

Unlocking the power of talent

The survey results also suggest that CFOs have important roles to play in their companies’ talent strategy and capability building. Since the previous survey, the share of respondents saying CFOs spend most of their time on finance capabilities (that is, building the finance talent pipeline and developing financial literacy throughout the organization) has doubled. Respondents are also much more likely than in 2016 to cite capability building as one of the CFO’s most value-adding activities.

Still, relative to their other responsibilities, talent and capabilities don’t rank especially high—and there are opportunities for CFOs to do much more at the company level. Just 16 percent of all respondents (and only 22 percent of CFOs themselves) describe their finance leaders’ role as developing top talent across the company, as opposed to developing talent within business units or helping with talent-related decision making. And only one-quarter of respondents say CFOs have been responsible for capability building during a recent transformation.

But among the highest-performing finance functions, the CFO has a much greater impact. Respondents who rate their finance organization as somewhat or very effective are nearly twice as likely as all others to say their CFOs develop top talent organization-wide (20 percent, compared with 11 percent). Among those reporting a very effective finance function, 38 percent say so.

Looking ahead

It’s clear from the numbers that CFOs face increased workloads and expectations, but they also face increased opportunities. In our experience, a focus on several core principles can help CFOs take advantage of these opportunities and strike the right balance:

  • Make a fundamental shift in how to spend time. To be more effective in their new, ever-expanding roles, CFOs must carefully consider where to spend their time and energy. They should explore new technologies, methodologies, and management approaches that can help them decide how and where to make necessary trade-offs. It’s not enough for them to become only marginally more effective in traditional areas of finance; they must ensure that the finance organization is contributing more and more to the company’s most value-adding activities. It’s especially important, therefore, that CFOs are proactive in looking for ways to enhance processes and operations rather than waiting for turnaround situations or for their IT or marketing colleagues to take the lead.
  • Embrace digital technologies. The results indicate that the CFO’s responsibilities for digital are quickly increasing. We also know from experience that finance organizations are increasingly becoming critical owners of company data—sometimes referred to as the “single source of truth” for their organizations—and, therefore, important enablers of organizational transformations. Finance leaders thus need to take better advantage and ownership of digital technology and the benefits it can bring to their functions and their overall organizations. But they cannot do so in a vacuum. Making even incremental improvements in efficiency using digital technologies (business intelligence and data-visualization tools, among many others) requires organizational will, a significant investment of time and resources, and collaboration with fellow business leaders. So, to start, CFOs should prioritize quick wins while developing long-term plans for how digitization can transform their organizations. They may need to prioritize value-adding activities explicitly and delegate or automate other tasks. But they should always actively promote the successes of the finance organization, with help from senior leadership.
  • Put talent front and center. Since the previous survey, CFOs have already begun to expand their roles and increase their value through capability building and talent development. But the share of CFOs who spend meaningful, valuable time on building capabilities remains small, and the opportunity for further impact is significant. Finance leaders can do more, for instance, by coaching nonfinance managers on finance topics to help foster a culture of transparency, self-sufficiency, and value creation.