Know-how for CFO
In the beginning of the summer, Almaty city hosted the Caspian CFO Summit, organized by Adam Smith Conferences. The event attracted the finance executives from Kazakhstan, Azerbaijan and Turkmenistan to discuss how the CFOs can increase the effectiveness of their companies in the face of global economic instability.
Opening the first session of the Summit, the Board member of the Kazakhstan Petroleum Association Andrew Large highlighted that nowadays, the economies of many developed countries show a very weak performance. There has been a decline in the OECD countries such as Portugal, Spain and even the Netherlands, in the background of fairly conservative growth in the UK (2%) and the United States (3%). When the problem of leaders become a trigger for the deterioration of the situation in the developing economies, the main challenge for financial directors (CFO) becomes if not growth, but at least, the survival of a company.
If previously the finance executives traditionally “focused on the past", preparing the financial and tax reporting, examining the indicators of balance for the previous periods, now they all have to pay more attention to forecasting the future events. Therefore, the scope of their responsibility is growing, primarily through the mobilization of resources and the selection of financial instruments for the further business development. In these conditions, the finance professional shall clearly see the company's strategy: what are the goals and objectives, set by the CEO, Board of Directors and the shareholders. Are the dividend payment, long-term growth expected, if there a high risk strategy and etc. Hence, it results in creating such function, as searching the opportunities to reduce the costs and to control the expenses. In addition, the CFO shall ensure the quality managerial accounting, track the KPIs, propose the initiatives in the area of corporate governance, policies and standards, delegation of authorities and etc.
And yet, according to Mr. Large, risk management remains a key area, which impacts all the aspects of the Financial Director’s activities. Moreover, those risks which are urgent for the companies in present, can be of a more profound nature and, consequently, they might have the far-reaching consequences. "Risk appetite can be treated with fears and concerns. However, we would not be in business, without accepting the risks. We are rewarded, when we meet these challenges thoughtfully."
Once more: identifying risks and assessing their impact, the CFO shall understand the attitudes of top management and after that, it is required to proceed with actions. And it's a closed cycle that requires the constant attention. For example, the country risks are usually associated with the legal and legislative changes, which, in turn, result in transformation of the tax and legislative framework.
As a result, the Chief Financial Officer should be part of the management of the company, taking part in the adoption of management decisions. "For example, there is a very fine line between the concept of tax optimization and tax exemptions. The first one is allowed, the second one is not. And the CFO is responsible to control that the company avoids overstepping this line,”- summarized the expert.
In his turn, Galym Dauletbakov, CFO of Ratiopharm Kazakhstan believes that in the current conditions, the CFO'S role is shifting from being an observer to the role of an adviser or a business partner of the CEO. It concerns not only the financial and analytical support, but also the areas like sales, human resources, regulation and so on.
"When communicating, it is very important to understand what wants the Chief Executive, that’s why I give an advice, when needed. If I see a risk, I would raise the red flag. " It is very important to be near the CEO when he really needs me, and I try to adapt my entire communication process in the most suitable manner.
According to Mr. Dauletbakov, the Financial Director needs the new competences to obtain, including, for example, knowledge of compliance issues, information technology, due diligence control in order to fit the new role.
However, this type of business partnership within the company means more time expenditures from the part of the CFO. To break free from routine duties, the speaker recommended a fellow delegate accounting and other standard processes in the common services centres.
People are the decisive factor
Another way to ensure the resource availability for the CFO is to delegate the duties. Sergei Zuev, Finance Director of AES group of companies in Kazakhstan, to ensure it, the CFO shall find and reserve about 30 per cent of his time for development of the employees. "In my experience, nothing gives the same effect as developing the people. Only when you have a good team and confidence in what they do, you can feel sure, you can do your tasks and to bring a balance into the personal life. Probably, an ideal picture of a good financial manager is when he can have 1 month vacation and to be sure that the company works even better."
As to recruitment process, Mr. Zuev is confident that 70% of the candidates shall be selected from the company’s personnel. Therefore, it is important to ensure the growth of the employees, including the trainee students and the experienced employees. "It's hard to avoid hiring new people, since "fresh blood", ideas and knowledge are required. However, in terms of retention and costs, it is much more profitable to develop their own personnel. Knowing a company from the inside, the employees will become more successful and loyal sooner or later".
Alibek Yessov, Chief Financial Officer of L'Oréal in Kazakhstan, Central Asia and Mongolia, highlights four main phases in working with the human resources: recruitment, experience and knowledge development, career development and retention. "I spend the least amount of time to read a CV, since it gives only a general information about the previous experience ... In fact, you need to focus on the way of thinking and the potential of a candidate, to develop the right specialist and a leader in a particular niche".
According to Mr. Yessov, it is possible to evaluate the required capacities during a job interview. This allows to understand how the candidate behaved in different situations, what aspects of professional activity are the most important to him or her, what was achieved so far and what he or she is proud of. “Next, you need to ask the situational questions or to arrange a role-playing game, for example, to set the budget and figures. Seeing how deeply the candidate researches the issue, what is the way of thinking, you will understand soon of this person is suitable for you".
The next step is to gain experience and knowledge. "If you want to grow the Finance Director, then you need to understand what competences are required in accordance with the business specifics. To do this, you must plan the career development for 3, 5 and 10 years, if the company's capacities allow it. So, the candidate would understand how the rotation will be done, as well as the future goals and tasks".
Talking about the methods of retaining the employees, Mr. Yessov emphasized three main aspects: presence of career growth, opportunity to gain new knowledge and only after that, a competitive and smoothly growing salary.
Continuing the same issue, Altyn Shakirkhanova, representative of the Association of Chartered Certified Accountants (ACCA), announced the results of the Y-generation study project. These are the people, born in 80-90s, which today form the basis of the management of middle and junior level. "They are now 25-30 years and the most difficult issue is to retain them, since this generation has the other priorities. If our values were based on money and career, they appreciate the social status and image of the company they work for".
According to research of ACCA, in the first phase, it is important to have a mentor to retain the Y- generation people, whose task is to ensure the quick adaptation of a new employee and to facilitate understanding the organizational structure, formal and informal company culture.
In addition, Ms. Shakirkhanova advised creating the internal knowledge base, in addition to conducting the training sessions. As it turned out, the Y-generation youth prefers to have an access to the specialized literature, professional magazines and reviews.
Banks and CFO
Another issue, directly related to the CFO activities is the situation at the baking service market. According to Davlatbek Abdavaliyev, Finance and Operational Director of Aura Kazakhstan, a big advantage for Kazakhstan was the fact that during the crisis of 2008 and devaluation, the Government took the actions to save the banks. From this viewpoint, our banking system can be described as unique. Another issue is that the ‘band-aid approach’ with spending billions of dollars is ensured at the expense of the taxpayers. Another negative trend he highlights is the National Bank’s policy on consolidating the second-tier banks and the withdrawal of the international financial institutions from the Kazakhstan’s market.
"Probably, it was required to maintain a balance between the local small, medium and large banks, as well as the foreign ones. It’s not good that the international banks leave, since they brought all the innovations. The local players did not have such convenient services, as offered by ABN Amro, which gave an opportunity to ensure the monetary operations easily. The international banks have introduced the Bank-client, risk management and financial analysis services".
According to the speaker, the local banks often lack flexibility in provision of services, since they are too obsessed with meeting the legal and regulatory requirements. "Sometimes, a payment may not pass if you make a mistake, even with a single letter, and it leads to time-consuming delays under the contracts for millions and the consequent costs can reach a large amount".
In his turn, Alibek Yessov determines the geopolitical factor as a reason for the international second-tier banks to leave the Kazakhstan’s market. He cited the opinion of the experts that the role of banks as HSBC, is to provide a global money transfers between “the big people” and large businesses. Therefore, it is possible that the international players left because of the Russian lobby on controlling the currencies in the region.
It's hard to say to what extent this assumption is true. Another thing is that the increasing activities of Russian banks raises an issue of that risks, faced by their clients in conditions of the Western economic sanctions against Russia.
Bayan Saduakassova, Financial Director of Petrokazakhstan, urged her colleagues to diversify the cash flows, distributing them among several reliable foreign and local banks as a counter-action. At the same time,she describes the activities of the Russian players, operating in our market, as passive, and it is related to uncertainty of their strategy in the corporate sector.
The opposite opinion was expressed by Davlatbek Abdavaliev: "Based on the experienced, shared by my colleagues, we didn’t observe such risks. Moreover, Sberbank works very well in the sphere of cross-border transactions, having the wide connections in the Eastern Europe, Turkey and Kazakhstan”.
Growth and risk factors
The Summit participants discussed separately the issues of economic growth in the region, since the success of the business of each company is highly dependant on this factor. In particular, Sergey Zuev underlined that the market of Central Asia has tripled over the past few years, with the greatest prospects for the development of consumer segment.
At the same time, when assessing the growth potential, the strengths and weaknesses of each individual country shall be taken into consideration. "In some States, there is a political stability and the economic potential, in other the human capital is a strong point. And in this respect, the development is unequal: somewhere it is slower or faster, in particular, due to the natural resources".
As to Kazakhstan, he thinks that the main driver could be a "huge economic and human potential”, as well as the geographical location between the large and promising markets, such as China and Russia. However, there are a number of unresolved problems in the field of legislation, which "is not the best in the world".
Andrew Large believes that all the successes of Kazakhstan continue to depend on the natural resources: "I would disagree that the banking system, tourism, services and real estate may be the driving force of the economy. Not only because their bubbles are burst, but their development is a mere consequence of the growth in oil&gas and agricultural sectors".
And the oil industry is not the problem-free. In the opinion of the expert, in recent years, a consolidation trend was shown: the market is dominated by the big players only, with less independent oil companies. At the same time, most of them were sold to the Chinese business.
Among other systemic problems, Mr. Large mentioned a shortage of skilled labour resources, threat to the stability of the business as a result of "shock" devaluation, as well as the fact that the official inflation rate is twice smaller than the actual one.
Among the new risks, the biggest concern is our country's participation in the Customs Union: "as I understand, the oil sector is not directly affected by the CU, but I was told that Kazakhstan shows quite low performance in the frameworks of this Union. Therefore, I believe that this aspect, as well as political stability and a smooth transfer of power shall be the number one factor that will affect the country and its attractiveness to potential investors ".