CFO Financial Leadership Essay

Question:

Discuss about the CFO Financial Leadership.

Answer:

Introduction

The present report aims to examine and analyze the general areas of responsibility for a Chief Financial Officer (CFO). For this purpose, the report demonstrates the prime areas of responsibilities for CFO of AGL Energy Limited. The impact of the identified responsibilities of CFO on the ultimate objective of the company is also analyzed in detail in the report. This report also shows the impact of market hypothesis on the selection of stocks or bonds in case of pension fund. There will be discussion of roles and responsibilities of pension fund manager while making decision of stocks in pension fund.

General areas of responsibility for a chief financial officer (CFO) of AGL Energy Limited

Chief Financial Officer is the person who has the responsibility to look after the company financial statements and all the finance related matter. CFO ranks equal to the executive manager and holds all the responsibilities that CEO of the company holds but related to all accounts and finance matter. CFO must be at the elbow to the CEO and he must be ready to help in leading the company effectively. CFO must act as the good communicator to the board of directors to share the problems faced by the company (Moyer McGuigan and Rao, 2014). CFO of the company holds the responsibility of demonstrating ethical leadership and integrity in all the business activities. The CFO of the company is entitled to fulfill stewardship responsibilities through complying with the all the regulatory requirements in all its operational areas including financial reporting, capital requirements and corporate responsibility. CFO of the company holds the responsibility of strategic decision-making in participation with the CEO (Karaian, 2014). As such, the duties and responsibilities of CFO can be stated as follows:

Monitoring and Controlling: CFO is obliged to depict accurate and timely information relating to the financial position of the company. This is necessary for protecting well-being of employees such as shareholders, analysts, creditors, employees and other members directly or indirectly related with the operations of the company. The financial information presented by the company should be correct because it governs the decision-making process (Biery, 2015).

Treasury Duties: CFO possesses the responsibility to present the appropriate financial condition of the company in its annual report to facilitate investors whether or not to invest in the company. CFO overviews the capital structure of the company and determines the composition of debt, equity and internal financing. Thus, appropriate maintenance of financial capital structure is the significant duty of the CFO.

Strategy thinking and forecasting: CFO is also responsible for maintaining the past and present financial information of the company for decision-making process. The information is utilized the areas of improvement for the company and designing appropriate strategies for overcoming the loopholes identified. In addition to this, CFO is also responsible for economic forecasting of the company for predicting the best strategy for ensuring its success in the future context.

Brett Redman is the Chief Financial Officer (CFO) of AGL Energy Limited. It is a public-listed company in Australia involved in production of energy products and services to the economy of the country (Who We Are Executive Team, 2015). The duties and responsibilities of Chief Financial Officer (CFO) are changing in power utilities sector. This is due to rapid change in the energy transformation sector that is rapidly shifting the technological, market and customer context for the companies operating in the respective sector. The rapid changes in the energy sector such as technological innovation are posing great challenge for the power companies. As such, CFO’s role is dynamically changing due to the increasing threat from the technological measures and new competitors. The CFO of AGL Energy Limited has to undertake new responsibilities in order to stay competitive in the energy sector. The role of CFO is more to be strategically-focused instead of traditional stewardship for effectively meeting the new challenges existing in the external market (Sutcliff and Donnellan, 2006). The three general areas of responsibility for CFO of AGL can be stated as follows:


Value Creation and Optimization:
The rapid change in the energy sectors is causing the companies to strategically design new and effective strategies for achieving sustainability. Thus, in this context, CFO of AGL Energy Limited is entitled to implement new strategic perspectives in order to create a win-win situation in the market. Although, CFO does not hold the responsibility of designing and implementing the corporate strategy, the direction provided by a CFO at the time of strategy designing will enable the company to enhance its profit maximization. The CFO of the company is entitled to create a strategic fit by matching the strategies developed with the financial resources of the firm. Strategic success of a firm depends on the presence of key financial resources that facilitates in practical implementation of the designed strategy. CFO, in this regard, should ensure the presence of financial stability in the company for strengthening its strategic, financial and market positioning (The changing role of the CFO: How energy transformation is shifting the CFO focus, 2015).

Aligning Cost to Value: The next strategic focus of the CFO of AGL Energy Limited is to establishing a connection with the strategies designed with the positioning outcomes. CFO of the company should ensure the development of common purpose that defines the process of its value proposition. This can be achieved by distinguishing the processes that supports the strategic objectives of the company with those that only results in utilization of resources. CFO of the company should allocate the capital by emphasizing more on the business practices that are entitled to generate more value and should not invest in the business processes that can create financial constraints. Managing of capital structure is essential for CFO to create maximum value for the company’ stakeholders. The strategic outcomes of the company should be forecasted by the CFO by selecting an appropriate capital deployment option (Lapovsky and McKeown-Moak, 2010).

Gaining capital through appropriate risk allocation: The energy sector has to implement appropriate risk management system as it heavily invest in global capital such as large infrastructure projects and has to comply with government rules and regulations for ensuring environment and community protection. Thus, adopting a sound and effective risk controlling mechanism is necessary for AGL Energy Limited. CFO of the company should ensure the adoption of a proper risk management system for minimizing the volatility and uncertainty existing in the energy sector. The main challenges for the CFO that exist in the regard are prioritizing the future capital investments for optimizing financial outcomes. CFO should appropriate allocate risk by gaining an understanding of risks related to capital projects of the company. CFO should ensure adequate management of the capital structure in accordance with the internal risks identified through the adoption of risk management system. Thus, appropriate risk allocation will facilitate the company to maximize return on its capital projects and thus enhance its profitability (Fuhr and McDonagh, 2012).

Impact of the CFO responsibilities on ultimate objective of the company

CFO of the company is designated as senior most position in the company that is directly responsible for over-viewing all its accounting and financial issues. As stated above, the roles and responsibilities of CFO in energy sectors are becoming more strategically oriented. CFO of AGL Energy Limited should emphasize on value creation for all its stakeholders as identified above in the strategic roles and responsibilities of CFO. Energy sectors is facing increasing threat from new and existing legislative requirements and technological innovations that can have a major impact on the long-term growth of the companies present in the sector. As such, CFO of the company should hold the responsibility of creating value for all its stakeholders through achieving congruence between financial resources and value chain process (Bragg, 2010).

Thus, CFO of the company need to properly allocate the capital structure by investing in business processes that results in value creation with those that lead to wastage of financial resources. The company by investing in value creating activities can enhance its profit generation largely. At last, the CFO of the company should design and establishing risk controlling strategy for identifying the risks in advance that can negatively impact its value chain process. The significant identification of the risks will enable the company to take prevention strategies and thus maximize its profitability through achieving sustainability in the value chain processes. All these CFO responsibilities play a significant role in designing and establishing strategic objectives by identifying the priorities and eliminating the wasteful activities. Also, the company can ensure the achievement of its strategic objectives of attaining sustainability through active participation of CFO in the strategy design thinking of the company (Eeden, 2014).

“If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin”

Pension fund manager has various duties that have to be carried out carefully while selecting or investing in the portfolio. Pension fund manager has the certain target of return comprise of certain risk and controls goals. All these have to be to kept in mind while selecting the stock to create the diversified portfolio even in the case of efficient market hypothesis. Let the resulting portfolio not well diversified means throwing darts on the stock that has same or highly correlated risk, it will make fund ends with unique risk (Moyer, McGuigan and Rao, 2014). Therefore, it can be concluded that above statement is false as efficient market hypothesis does not be considered while deciding the stocks for the portfolio. There are several reasons for not selecting the stocks for the portfolio in case of efficient market conditions. The pension fund manager has to look and make sure that portfolio must be well diversified but this does not mean that selecting large number of stocks to make the portfolio well diversified. Selection of portfolio can be in similar industry if the resulting portfolio contains maximum rewards and risk that is compensated with the future rewards (Moyer, McGuigan and Rao, 2014).

Another major duty of pension fund manager is to looks after the risk associated with the portfolio so that resulting portfolio must be appropriate as per client needs. It is not true that high risk portfolio will always give high return and low risk portfolio will provide with lower return. So, stocks in portfolio must be selected wisely as per requirement of the clients. In case of pension fund, pension fund manager has to invest in stocks that are safe and results in appropriate rewards. Basically pension fund are made for the long term period so that clients can get better rewards after their retirement age. Pension fund managers have liability to choose investments typically stocks or bonds to develop a portfolio having lower beta among all. In case individuals (clients) have additional that can be invest in the riskless stocks than it is not case of concern for pension fund manager but when clients have no additional wealth and want specific rewards with lower risk that pension fund manager should invest in stocks that have lower beta with good returns. Along with risk and return, pension fund manager has also to look on the tax consequences on the clients when returns on portfolio funds are claimed. A good pension fund manager always cares for all the aspects related to pension fund selection while making investment in stocks or bonds (Comley, 2012).

Conclusion

Thus, it can be summarized from the discussion held in the overall report that CFO of an organization is largely responsible for managing and controlling the financial operations. The CFO responsibilities are extremely important for AGL Energy limited as it a renowned company in the Australian energy sector. The rapidly changes regarding technological innovation is causing huge pressure on energy companies to discover new business processes for ensuring their sustainability. Thus, the role of CFO in AGL Energy Limited becomes more important for creating a strategic fit between financial resources and the company’s strategic objectives. In addition to this, the report also inferred that Pension fund manager has to invest in stocks or bonds that bear lower beta and better rewards even when there is situation of efficient-market hypothesis.

References

Biery, M.E. 2015. 4 Key Functions of a Chief Financial Officer. [Online]. Available at: [Accessed on: 13 September 2016].

Bragg, S.M. 2010. The New CFO Financial Leadership Manual. John Wiley & Sons.

Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P. 2012. Principles of Corporate Finance. McGraw-Hill Education.

Comley, P. 2012. Monkey with a Pin:: Why you may be missing 6% a year from your investment returns. Pete Comley.

Eeden, D.V. 2014. The Role of the Chief Human Resources Officer: Perspectives, Challenges, Realities and Experiences. Knowres Publishing.

Fuhr, E.A. and McDonagh, C.W. 2012. The Risk Manager. FTI Journal.

Karaian, J. 2014. The Economist: The Chief Financial Officer: What CFOs Do, the Influence they Have, and Why it Matters. Perseus Books Group.

Lapovsky, L. and McKeown-Moak, M.P. 2010. Roles and Responsibilities of the Chief Financial Officer: New Directions for Higher Education, Number 107. John Wiley & Sons.

Moyer, R.C., McGuigan, J.R. and Rao, R.P. 2014. Contemporary Financial Management. Cengage Learning.

Sutcliff, M. R. and Donnellan, M. 2006. CFO Insights: Delivering High Performance. John Wiley & Sons.

The changing role of the CFO: How energy transformation is shifting the CFO focus. 2015. [Online]. Available at: [Accessed on: 13 September 2016].

Who We Are Executive Team. 2015. [Online]. Available at: Accessed on: 13 September 2016].

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