Cyber Vigilant

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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

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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.

In The Pressure Cooker

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As Seen in CFO Studio Magazine Q3 2015 Issue Cover Story

A SUCCESSFUL IPO, AN UNSOLICITED TAKEOVER OFFER, AND A $163 MILLION WINDFALL YIELDED A VERY MEMORABLE YEAR FOR PINNACLE FOODS’ CFO

-BY JULIE BARKER — PHOTOGRAPHY BY MATT FURMAN-Screenshot (74)

For anyone who works at Pinnacle Foods, the six weeks that began on May 12, 2014, are unforgettable. During this stretch, the future of the company hung in the balance, as the fate of the Parsippany, NJ–based producer, marketer, and distributor of such American dining staples as Birds Eye frozen vegetables, Duncan Hines baking products, and Log Cabin syrup was kicked around far off in Chicago. It started with an unsolicited offer from Hillshire Brands, a Chicago-based food company, to acquire Pinnacle. “That was a really dark day in Pinnacle history,” says Craig Steeneck, Pinnacle’s 57-year-old chief financial officer. Fourteen months earlier, Steeneck and his finance team had borne the lead role in taking Pinnacle public. The takeover news ate at his sense of accomplishment. “It felt a bit like being a victim of our own success,” he says.

Now asked to lead the integration with Hillshire (whose brands include Jimmy Dean sausage and Ball Park franks), Steeneck believed that would be his last act for Pinnacle Foods. Conventional wisdom has it that CEOs and CFOs don’t usually hang around after an acquisition. “The prospect of leaving behind all that the Pinnacle team built was unsettling,” he says. For nine years, he’d put his considerable talent into helping shape, grow, and define the business. Disheartened, he made the trip to Chicago to “lay out the shell of what the integration plan would look like.”

Two weeks later, everything changed. Pilgrim’s Pride (a chicken producer, processor, marketer, and distributor) announced a bid to buy Hillshire. A couple of days after that, another shift occurred, when Tyson Foods (a global chicken, beef, and pork producer) topped Pilgrim’s offer for Hillshire—and a bidding war ensued. It soon became clear that the sausage maker, Hillshire, would be bought out by the highest bidder, which ended up being Tyson, and that Hillshire would not acquire Pinnacle.

Still, Pinnacle had accepted a legally binding offer that had not been officially withdrawn by the Hillshire Board, so the company was bound to the deal and continued to play along, so as not to jeopardize a significant break-up fee. “It was very disruptive,” says Steeneck. “We had to keep people focused on continuing to deliver the business. We carved out all the Hillshire activity and noise to a small group of people, so we weren’t distracting the rest of the team.” But the Wall Street Journal, the Star-Ledger, and CNBC, not to mention online news sources, kept the story alive throughout the six-week period.

Steeneck says that it wasn’t until July 1, 2014, when the Hillshire board voted in favor of taking the Tyson offer, and jettisoned plans to pursue acquiring Pinnacle, that the over 4,000 employees could raise a cheer for their independence and return to business as usual. Also, Pinnacle could then collect the $163 million break-up fee.

Why Pinnacle Was a Target

Pinnacle Foods manufactures products at 13 plants that it owns. Its brands hold the No. 1 or No. 2 market position in 10 of the 14 major categories where they compete. And, Pinnacle generates significant cash flow. “Our cash-to-earnings ratio is enormously high,” says Steeneck: 90 percent at year-end 2014. “That’s one of the characteristics of the Pinnacle portfolio that differentiates us from our peers. We’re able to convert earnings into cash at a very high percentage,” he says.

The Pinnacle business was created from a number of acquisitions (see Sidebar, this page). And the company continued to grow by buying brands that the nation’s large food companies deemed to be non-strategic. As a mid-cap company, with lower overhead, Pinnacle was able to put more attention into the brands it acquired, says Steeneck. Importantly, the brands were charged lower overhead than they’d been saddled with under prior owners.

In order to make those acquisitions and get solid returns from them, Pinnacle relied on tight financial controls and Steeneck’s oversight. In 2007, Pinnacle was acquired by The Blackstone Group and the focus shifted to building a company that could someday go public. Toward that end, in 2009 Pinnacle recruited Bob Gamgort as CEO and made its most significant acquisition, purchasing Birds Eye Foods. “That transaction was transformative for Pinnacle, as it virtually doubled our size,” says Steeneck.

When Pinnacle Foods created the prospectus, the S-1, that was filed with the SEC in connection with its March 2013 IPO, it was Steeneck’s finance team that took the lead, coordinating the efforts of in-house counsel and outside banking and legal advisors, to navigate the organization through this process. This grueling effort included compiling “a 250-page document containing extensive financial data, along with strategic and operational information that needed to be cleared by the SEC,” says Steeneck. Once cleared and with a compelling investor presentation in hand, he, Gamgort and Maria Sceppaguercio, who was brought in at that time to head up a new Investor Relations function, then articulated the story for investors during a 10-day investor road show.

Creating value by “Reinvigorating Iconic Brands” became the company’s mission, with a focus on prioritizing investment spending across the portfolio, expanding margins through productivity, maintaining a lean and efficient organization structure, and driving strong cash flow to create significant shareholder returns. Pinnacle emphasized during the IPO that acquisitions represented upside to the value creation the base business would generate.

“We operate in an industry and categories that are low-growth, but we’re able to create value by investing differentially in the highest-return brands in our portfolio, continuing to reduce our supply chain costs, and maintaining very lean SG&A overhead that minimizes the tax on our brands,” says Steeneck.

Investors responded well. The company priced the IPO at $20 per share. On March 28, 2013, the first day of trading, the stock (NYSE: PF) opened above that price and ended the day up more than 11 percent. Blackstone didn’t sell any of its shares at the IPO, instead choosing to hold for the significant value-creation potential it believed the company would — and ultimately did — realize.

A CFO With Good Chops

Until Blackstone became Pinnacle’s owner in 2007, Steeneck had spent considerable time fixing non-performing areas of the company with better systems and talent. In 2007, the focus changed to investing in the business so as to build a world-class food company.

His prior experience was extremely useful. Early in his career, he worked 13 years at Reckitt & Colman (now Reckitt Benckiser), becoming CFO of its North American operations. There he was involved in acquisitions of such brands as Woolite and Lysol to grow the company’s portfolio (and it was there that he met his wife, Sandra). He held his first public company CFO position at International Home Foods (Chef Boyardee, Gulden’s Mustard, Bumble Bee) and later joined Pinnacle Foods as executive vice president of finance, overseeing supply chain and IT.

Pinnacle had bought Aurora Foods a year prior, and was experiencing problems with customer service. Also, the logistics network was costing significantly more than industry benchmarks indicated necessary. “We had to put much better tools and processes in place, which we ultimately did,” he says. These tools and processes were critical in 2009 as the company embarked on the integration of the Birds Eye Foods acquisition, and in 2013 integrating the Wish-Bone business. “We fully integrated Birds Eye within six months and exceeded the acquisition plan on all key metrics. We had similar success with Wish-Bone.”

Today, two years after proving the company’s value with its successful IPO, Steeneck is still excited by the position he holds and the issues that come up. “I think the best part of my job is being a trusted advisor to the management team and having to be on my game day in and day out,” he says. “We are fighting for market share, we’re fighting for share of shelf, we’re fighting for quality employees, and we’re fighting for investor dollars. So there’s not much room for error. But we’re faster, we’re nimbler, we’re less bureaucratic. By making decisions faster in this world, we’re able to outmaneuver our competition.” Screenshot (75)

Looking Forward

When Pinnacle received the $163 million break-up fee, the company used most of that money to pay down debt. It also needed to ensure retention, so the company sweetened its bonus plan for the year and granted stock to all salaried employees who did not receive equity as part of their compensation. “One important lesson from the Hillshire event was how important it is for employees to be owners and have a direct stake in the company’s future,” says Steeneck.

The acquisitions that defined Pinnacle Foods’ growth over the course of the company’s first decade are harder to come by now. But it’s possible to improve margins by reinvigorating, for example, the male-focused TV dinner Hungry-Man with new flavors and combinations that can raise the price point: Fried Chicken and Waffles, anyone?

Steeneck’s finance team plays an active role in this sort of product innovation. Senior-level finance staff members are integrated into the business units in sales, marketing, and supply chain, with dual reporting responsibilities. Beyond costing out and evaluating new products, says Steeneck, “They’re involved in the development of the marketing and sales plans, and linking those plans to the supply chain.”

Finance team members are thus in a position to influence the brand teams to make better decisions, whether it’s forecasting sales or determining a future path. “You don’t want your finance team just looking in the rearview mirror. You want them working as cross-functional business partners to support better decision-making,” he says.

And Steeneck’s choice of people to support the commercial side of the business and help in the decision-making process gives him a maestro’s role in Reinvigorating Iconic Brands.

Copyright 2017