Hands On The Reign And Reins

Popularity versus profitability could be a battle of wits. Understanding the relationship between the big global companies and the capital markets is what is needed in communicating with the masses. By Kannan Chandran

Excerpts from STORM’s interview with Douglas Skinner, Deputy Dean for Faculty; Eric J. Gleacher Distinguished Service Professor of Accounting.

Has the role of the Chief Financial Officer changed with the onset of the information age?

DOUGLAS SKINNER: A big concern of CFOs is how they manage the capital of their companies. How much cash should the business hold versus distributing back to the shareholders. Apple, for instance, holds in excess of US$230 billion in cash, but this could be due to Steve Jobs running out of cash in the early days of Apple.

The other issue to manage is that of transparency and that’s become increasingly important. As accounting rules are complex and people don’t understand them, CFOs have to understand the business, make decisions about the business, and then communicate this information in a credible way to the capital markets.

It’s hard for investors to know for sure what the value of the business is. So, there’s an element of trust that comes into play. You have to trust the management. Over a period of years, management has to make decisions that enhance the reputation of the management team. At times there will be problems, then shareholders are inclined to trust management rather than a hedge fund that wants to drive the stock price down for its own profit.

How have global coverage and the social media affected businesses?

SKINNER: Now, with intense media coverage, damage can be done quite quickly. Social media has enabled people to make claims and have gone viral and threaten of the viability of a company.

We have more information, and you’d think we’d be better off. But investors have to be able to process that information. There’s only so much they can process. If there’s an overwhelming amount of information to process, they look at very simple signals they can understand.

One signal is the company’s earnings relative to expectations. Disney’s earnings had increased relative to the previous year. Business had improved but they were a few cents short of what analysts had expected and so the stock price went down by 5%. You have a lot of positive information but one signal was the one that people latched on to.

How do you maximize the long-term value of a company?

SKINNER: If you run a pharmaceuticals company, and you want to develop a portfolio of drugs, you need to engage in research and development over a period of time. But you also need to deliver earnings per share for investors, otherwise the stock price will go down. And investors will then ask if you’re doing a good job.

This is a horizon problem. As a manager of a public company, my first call is to keep my job, and avoid investors being unhappy. To do that, I’m going to have to deliver on short-term objectives.

If you think about Facebook, it has a dual class structure, which allows its founder Mark Zuckerberg to control the company. He has the majority of the voting shares but he doesn’t have the majority of shares. This enables him to make decisions that he thinks are good for the long run value of Facebook, without being concerned that shareholders are going to be unhappy with a short term poor performance. And they can’t replace him.

How do the members of the C-Suite function ideally?

SKINNER: They have to be a team. They all have different roles. They must have a shared vision for what the long run strategy of the company is, and what has to be done to execute on that strategy.

The CEO’s role is to develop that strategy and motivate everyone to execute it. We have increasingly specialised aspects of the business. The business at the end of the day is simple. You have to have a vision. You have to develop products that are going to appeal to customers, and you have to figure out how to execute all of that. That involves managing technology, financial reporting, cash flow, communicating, and coordinating among all of these people is not a trivial thing. Public companies are very complex, and getting everyone coordinated and working to the same end is in fact not that easy.

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