CFO Studio | Monthly Archives: December 2016December 2016

Principles for Growth

As Seen in CFO Studio Magazine Q1 2017 Issue

THE CFO OF JOHNSON & JOHNSON LINKS ETHICAL DECISION-MAKING WITH STEADY, STRONG RETURNS

Dominic Caruso, CFO of Johnson & Johnson, told CFOs gathered at a recent CFO Studio Reception held in his honor that the company bases all its important decisions on the Credo that General Robert Wood Johnson II wrote in 1943. But he said he realized that the audience might be a little bit skeptical. They might wonder “How stringent are you? Do you ever bend? Do you ever flex?”

“We do flex these principles,” he said. “We constantly challenge ourselves. We go to Credo challenge sessions to make sure we understand what [the Credo’s wording] means in the new environment.…But we generally stay pretty close to those principles.”

He noted that the Credo is “not an aspirational statement,” but a set of responsibilities by which “we live our lives at Johnson & Johnson and make business decisions.”

Each of its four paragraphs talks about “what we must do for each of our constituencies.” First, for patients; then for employees — their welfare and careers; next for the communities where the company lives and works around the world; lastly, for shareholders. General Johnson was a shareholder, “and he placed himself last.”

Mr. Caruso said that the 32 consecutive years of adjusted earnings growth that J&J has returned is “the proof in the pudding” that the company’s firm principles are properly guiding J&J through turbulent times and changes in economic circumstances.

An attentive group of around 60 finance leaders from New Jersey and the tri-state area formed the audience at the Heldrich Hotel in New Brunswick, NJ. CFO Studio Publisher Andrew Zezas introduced Mr. Caruso, who was profiled in the Q4 2016 cover story, stating that under Caruso’s stewardship, Johnson & Johnson has strengthened and built upon its position as the world’s largest and most diversified health care company.

“During his 10-year tenure as CFO, Johnson & Johnson’s share price has appreciated over 90 percent,” said Mr. Zezas. “Speaking as a shareholder, thank you, Dominic.”

Finance’s Pillars

In his remarks, Mr. Caruso said, “I owe a lot of credit to my predecessors. I’m fortunate to be in a long line of previous CFOs at Johnson & Johnson who have done outstanding work.”

He went on to enumerate the four principles by which J&J’s Finance organization operates. These are: to drive competitive profitable growth, generate sustainable cash flow, allocate capital to maximize shareholder value, and manage enterprise risk.

Regarding that third principle, allocating capital to maximize shareholder value, Mr. Caruso said, “We have very strict principles by which we do this. We have a set of hurdle rates and analysis that we use to ensure that each decision we’re making is maximizing the value that we set for the deployment of our capital.”

Mr. Caruso runs a global finance team of 5,000. He spent part of his time at the microphone discussing the role of “the great financial people at Johnson & Johnson.”

Finance professionals at J&J “are asked to do three things,” he said: “To drive sustainable, superior financial performance. And, I say that very clearly: to drive it, not to monitor it, or to measure it, or to report on it. To actually drive it. They’re also asked to develop great leaders,” he said. “And they’re asked to do one more thing, which is without compromise the most important thing that they do: To assure the financial integrity and compliance in what we do as a finance organization for Johnson & Johnson.”

Mr. Caruso and the finance leaders at J&J have assured the company’s financial integrity such that Johnson & Johnson remains one of two companies in the world with a AAA credit rating. The CFOs in attendance gave him rousing applause for that accomplishment.

Cyber Vigilant

As Seen in CFO Studio Magazine Q1 2017 Issue

CYBERSECURITY CONTINUES TO BE A TOP CONCERN AMONG CFOS

Fran Shammo was prepared to talk about digital media and corporate communications in a virtual world that is rife with cyber criminals, and found the roomful of financial executives a more-than-willing audience. “I am very interested in knowing if CFOs at other companies are experiencing the same kind of apprehension and worry,” explained Mr. Shammo, who stepped down as Verizon’s CFO at the end of October in anticipation of his retirement at the end of the year. Less than a week after he spoke, Yahoo, which, two months earlier, Verizon announced it had plans to acquire, revealed that half a billion user accounts had been compromised.

Mr. Shammo spoke on “Delivering Your Company’s Message in a Digitally Risky World—Communications and Media from the CFO’s View,” at a World-Class Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at The Bernards Inn in Bernardsville, NJ. CFOs from select New Jersey–area companies attended the invitation-only dinner. Mr. Shammo said the intense discussion that followed his opening remarks on the cybersecurity concerns that plague him proved that “As CFOs, we’re all in this together when it comes to dealing with the very real and constant threats posed by cyber-attacks.”

Mr. Shammo cited statistics from Verizon’s recent Data Breach Investigations Report, which shows that, among other things, passwords are still the weakest link in the chain. “Sixty-three percent of confirmed data breaches involve using weak, default, or stolen passwords,” he said. This resonated with dinner participants who said they do, indeed, take the issue of passwords very seriously, and noted that password-enforcement programs are in place at each of their respective companies. Mr. Shammo mentioned that Verizon forces automatic password changes on its corporate network every 30 days, which elicited several nods of agreement around the table.

Participants expressed curiosity about the kinds of attacks that have taken place at Verizon. “Given the scope of service Verizon provides,” Mr. Shammo said, “we see almost every kind of attack on a regular basis, and we’re constantly trying to find ways to educate employees to be ever-wary of phishing scams and ransomware.” The group was familiar with the more common phishing scams in which a fraudulent email, appearing to come from a legitimate source, requests personal information. However, ransomware needed a bit of an explanation, which Mr. Shammo provided: “It’s a type of malicious software, or ‘malware,’ that prevents users from accessing their system until a sum of money is paid.”

This caught the attention of Greg Douglas, Vice President of Sales for Eatontown-based Yorktel, a video-communications and managed services provider, and a CFO Studio Business Development Partner. “It’s so important that everyone be informed and trained on cybersecurity. It’s not just for the people in Information Technology (IT), as the threat is huge.” He continued, “Financial executives are choice targets for hackers because of their authority to control company funds. They need to be particularly vigilant in their actions to avoid being compromised.”

Mr. Shammo agreed, and offered his fellow finance execs a sobering reality: “There is a high probability that every one of your companies has been hacked.” He added, “Most of you just don’t know about it, nor do you have any idea about who has been in your system, when they were there, or for how long.” In order to combat such cyberattacks, Mr. Shammo recommended long-term contracts with security firms.

Does Privacy Still Exist?

The conversation then shifted to mobile devices: “Years ago, we were all issued a company device that was for business purposes only, and secure. Then, we started bringing our own devices to work,” Mr. Shammo said, acknowledging that this resulted in a whole host of security concerns and problems for the IT department.

“I see things coming full circle,” he opined, “with a return to company-issued devices.” Attendees were in agreement; just about everyone in the room had a personal phone and a work phone in their pocket. “This is actually a good sign,” said Mr. Shammo, recognizing that “we are simply becoming more mindful about keeping personal stuff personal, and business strictly business.”

Mr. Shammo predicted that the next wave in security is going to be triple authentication procedures. “Double authentication,” he explained, “in which you log in to a website and receive an access code to enter will no longer be sufficient.” He continued, “It’s going to come to a point where, in order to get into a site, you’re going to have to allow location services to be enabled on your phone for an extra layer of protection.” This led to a consensus that, as years have gone by, there is simply no privacy anymore.

A Rock and a Hard Place

The evening was coming to a close as Mr. Shammo finally addressed digital media. “Verizon is a network company as well as a digital media company,” he said, “so there are different regulations that apply to different parts of our business, and different regulatory agencies that apply them. As a company, we are very focused on protecting our customers’ privacy across the entire company. From a regulatory perspective, however, it doesn’t make a lot of sense for consumers to have different rules and different regulators dealing with different parts of the Internet ecosystem.”

Mr. Shammo concluded that it’s a “fascinating world” right now. “Things are converging, and our ability to regulate or control privacy is just not keeping pace. We must be extremely careful about protecting the work we do.”

All Together Now

As Seen in CFO Studio Magazine Q1 2017 Issue

THE CFO CAN BE THE DRIVING FORCE BEHIND COMPANY ALIGNMENT, EVEN WHEN ONE AREA OUTPERFORMS ANOTHER

Keeping everyone in an organization on the same page with all eyes on a common prize can be quite an undertaking. But it’s an even heftier effort when running a business with two similar, but very distinct, high-end products that are directed toward separate consumer markets with similar characteristics, but varying demands. “This has been a challenge at every organization I’ve ever worked for,” says David Chambers, Vice President Finance and CFO of Jaguar Land Rover, North America.

Mr. Chambers, who appeared in the cover story of the Q3 2016 issue of CFO Studio magazine, spoke on “Driving Growth: Two Luxury Brands at a Time!” at a World-Class Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at Blue Morel in Morristown. CFOs from select New Jersey–area companies attended the invitation-only dinner.

Mr. Chambers began the discussion with a rhetorical question: “How do you manage growth vs. profitability with two luxury brands that could be somewhat divergent in terms of their targets and performance?” Interviewed later, Mr. Chambers said, “There was a pretty strong view in the room that margin comes first, and you should always manage to profitability instead of volume at any expense.”

Although this “refusal to sacrifice profitability” was the answer he expected from his fellow CFOs, Mr. Chambers noted that it often results in ongoing tensions within an operating organization. “The sales guys are going to have numbers they’re trying to hit, while the finance folks are attempting to keep some level of credibility in the system.”

In other words, he explained, “There are pressures in the system to hit sales, but at the end of the day, it’s your job as CFO to put the right data in front of people, and ensure that that data is discussed so that only the best sales decisions are made.”

And that’s why “things naturally get tense when you say, ‘Yeah, I know you want to do this, but it may not be the best thing for us to do,’ ” he acknowledged.

Along similar lines, the group then had a question for him: “They asked me about my process for evaluating the potential of a product, and how resources are allocated,” recalled Mr. Chambers. “I explained how we weigh the cost of what we’re willing to put into the product vs. the revenue we think we can get out of it. We then consider whether or not that generates an acceptable margin for us.”

Law and Order

The discussion then naturally morphed into an examination of how to keep discipline and control in an organization if there is rapid growth in one area, but not the other. “We have seen a tremendous amount of growth with Land Rover, and although we’re preparing for an uptick in Jaguar sales with two new models on the road, we’d been losing people out of that sales funnel,” said Mr. Chambers.

So about three years ago, Mr. Chambers and his CEO adopted what he referred to as “a new system to help us manage at the rate we’ve been growing.” He described it to the group as an organization within the organization. “We call it the executive review board, and it’s composed of the CEO, CFO, and the heads of marketing, sales, operations, HR, and customer service.” All major decisions go through that committee, he said, which “allows us to have an aligned view, and a fully vetted approach in terms of how we allocate our resources.”

In addition, Mr. Chambers noted, the system prevents a couple of things: “It avoids moves outside of the process, which tend to occur as you’re growing.” And, he added, it presents a very disciplined and unified approach within the organization. “It allows you to exert a level of control and discipline in the company without being too bureaucratic, because once something’s come through this organization, and it’s been reviewed and approved, it moves forward. There’s no further discussion.”

Mr. Chambers said the new process has been “highly successful” because it’s forced that “alignment” within the company.

This resonated with Jacob Buchanan, Senior Manager, Private Company Services at PwC, and a CFO Studio Business Development Partner, who noted that, “It can be very difficult to achieve organizational alignment to a goal across functional areas of management.” He continued, “For example, marketing and finance may have the same overall goal; however, aligning on the path to reach that goal requires strategic thinking.”

Mr. Chambers responded by noting that such “organizational alignment to a goal” can be accomplished in one of two ways: “You can either have a CEO that’s very strong in forcing that, or you can come up with your own process working with your CEO and heads of operations to put something in place that everyone will align upon.” This, he said, has been the key at Jaguar Land Rover, North America. “It’s the big difference in how we’ve tried to manage the brands because they sit in two different positions.”

Mr. Chambers added, “It’s all about having the right parties in the room and then having the discussions.” He pointed out that everyone gets a voice in the process, and then, once a decision is made, “it’s not about whether you like it or not, it’s about execution, plain and simple.” And an outcome reached by that method should go a long way, he said, toward keeping everyone in the company in the fast lane to success.