CFOs who exert influence and lead their organizations to quickly let go of lower-performing legacy business lines are more likely to add value to their companies' bottom lines. Gartner data shows that finance chiefs who exhibit "capital responsiveness" — acting fast to shift money toward more productive investments — can add up to 2.5 percentage points of economic value.
In a fast-moving, disruptive economic environment exacerbated by the COVID-19 pandemic, one of Gartner's conclusions was to compare such nimble CFOs to activist investors. The analysis was based in part on interviews with 100 CFOs in July 2021. That research assessed capital allocation strategies and the organizations' abilities to:
- Quickly shift capital to new, high-value uses.
- Quickly shift capital away from low-value uses.
- Make significant, rather than incremental, changes to where capital is allocated.
Just 17% of organizations consistently exhibited all three characteristics of capital responsiveness, according to the data, and at most 38% of organizations consistently were able to meet one of the characteristics.
"Most organizations have not yet achieved a high level of capital responsiveness that a disruptive environment like today requires," Emily Riley, research director in Gartner's Finance practice, said in a news release. "The best way to achieve capital responsiveness is for CFOs to take a 'capital activist' approach to their allocation strategy and actively challenge long-held attachments that impede meaningful capital pivots."
Even before the pandemic, C-suite leaders understood the need to act quickly. The opening page of KPMG's 2019 Global CEO Outlook carried the title "Agile or Irrelevant." In that survey of 1,300 CEOs, 67% said that "acting with agility is the new currency of business; if we're too slow, we will be bankrupt."
A continued role shift
Gartner said that the most certain path to consistent capital responsiveness is "through CFOs transforming their posture from their traditional reviewer and advisor roles to that of an activist." This means that CFOs must steer their organizations toward a portfolio of investments that will maximize long-term value.
"Being an activist CFO does not mean taking investment decisions out of business partners' hands, but rather exerting influence on how investments are evaluated to ensure that enterprisewide value creation is put first, rather than short-term or siloed objectives," Riley said.
Capital responsiveness, Gartner said, can extend to other finance leadership roles that involve setting or communicating strategy, approving or blocking resource allocation, providing analytics to business leaders related to investments, or interacting directly with business leaders.
Riley said that finance teams can actively drive capital responsiveness in their organization in several ways, including:
- Intervening earlier in investments' lifecycle to reduce resource intensity.
- Aligning funding to priorities, not individual projects.
- Monitoring operating resource uses on the basis of activities, not line items, to create the visibility required to realign people, technology, and other capabilities as multiyear investment priorities change.
— To comment on this article or to suggest an idea for another article, contact Neil Amato at Neil.Amato@aicpa-cima.com.