Interview with Gerald Kochanski
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio interview between Andrew Zezas, CEO of New Jersey based Real Estate Strategies Corporation and finance executive, Gerald Kochanski, CFO & Treasurer of Nephros Inc.
Visit www.CFOStudio.com to read about this interview and to watch the entire on-camera interview.
Dynamics of the Mid-Cap CFO
Zezas: Hi this is Andrew Zezas, your host at CFO Studio. I am joined today by Mr. Gerald Kochanski, CFO and Treasurer of Nephros Inc and adjunct professor of the school of business at LaSalle University. Mr. Kochanski has more than 30 years’ experience in finance, having gotten his start in public accounting at Price Waterhouse. He’s been CFO of two publicly held companies and has a background in Life Sciences and Computer Software. Gerry is here to talk to us today about the Dynamics of the Mid-Cap CFO. Gerry it’s wonderful to have you here on CFO Studio.
Kochanski: Andrew, thank you very much, it’s a pleasure to be here.
Zezas: Gerry, mid-cap CFOs are facing a lot of change and the industry as whole has undergone a lot of change in the last few years, let me start off by asking you what would you say is the greatest single challenge that a mid-cap CFO faces today?
Kochanksi: Well I would say that the largest challenge, greatest single challenge, would be the area of compliance. And compliance would be compliance with the various regulations proposed by the government agencies such as the FCC and various legislation such as Sarbanes Oxley.
Zezas: Right, well you mentioned Sarbanes Oxley, how does that play into how compliance is making demands on the CFO?
Kochanski: Well as result of the financial irregularities that came about earlier in the 2000’s, Congress passed a legislation called the Sarbanes Oxley Act of 2002. That basically requires the CFO to ensure to the shareholders and other readers of the financial segment, that the internal controls that they put in place are adequate to ensure that the financial statements that are produced are materially correct. And even though we had that responsibility in the past, Congress saw fit to make it a little more compelling in that we are personally responsible upon signing these certifications on each quarterly and annual report.
Zezas: So as a CFO, signing public documents if they’re incorrect or if there are inaccuracies you’re personally liable?
Kochanski: That’s correct. We are personally on the hook if you will if there are material misstatements, that we could be responsible for fairly large fines or jail time depending on the severity of that misstatement.
Zezas: Fines and jail time. Jail time’s ugly. Ok, so, we make sure there are no mistakes. Let’s talk about, in light of those comments, let’s talk about the role of the CFO and how it differs in large-cap versus mid-cap companies?
Kochanski: Okay, well, the irony is that the Sarbanes Oxley Act makes very little distinction between large-cap and mid-cap as to FCC regulations, there are some areas where they do give us a little bit of a change in regulations, but for the most part even though your numbers are smaller, you still have all the same responsibilities.
Zezas: And you’re still personally liable?
Kochanski: Yes, we’re still personally liable. So, the difference between a large-cap and mid-cap company is – it really comes down to the amount of resources that you have available to you. With large-cap companies, obviously most of the internal resources are used to validate and ensure that financial statements are accurate, whereas in mid-cap we don’t really have a very large staff under our control. Therefore we’re more reliant on external services and services providers. You know, the SEC regulations have required not only to have our statements EDGARized, but now we have XBRL introduced, they require external service providers. The Sarbanes Oxley Act requires an external organization to come in and do a review of your internal controls. These are all in addition to the traditional external auditors who still come in to do an audit of your statements.
Zezas: So it sounds like they didn’t set about to make it easier, the results of it have been much more complicated.
Kochanski: This is true. Nothing has gotten easier, it’s much more complex and it really requires you to utilize your time more effectively because you need to coordinate all these external service providers, which they did not extend the amount of time dramatically in that you need to get all this work done. Now for mid-cap companies, we do have a little extra time than large-cap companies on issuing the reports but compared to the amount of effort, it’s not that dramatically different.
Zezas: Right, right. Now how does that differ with public versus private because most of the regulations address publicly held companies, so how is the role for a CFO between public and private different?
Kochanski: Well the role of a CFO in a public company is most geared towards compliance with regulations of government bodies and legislation, whereas the private company CFO doesn’t have those burdens. Therefore they can spend a lot of their time on the operations of that particular company.
Zezas: So, with a privately held company you’re probably having a lot more fun?
Kochanski: I don’t know if I would call it fun, but you could be a lot more focused.
Zezas: A lot of more focused, alright, I’ll accept that. So, let’s now move on to the role of CFO, and I would coin this as being across all fronts; public, private, mid-cap, large-cap but the role of the CFO as it relates to his relationship with the CEO and how those 2 roles need to be aligned in order to run the company well. What are the thoughts on that?
Kochanski: Well the CEO and CFO, particularly in a public company, have to be very much in alignment. That’s a partnership basically that goes on because the certifications that I previously mentioned as required by the Sarbanes Oxley Act, the CEO is also compelled to sign the same certifications, so whereas prior to the Sarbanes Oxley Act perhaps the CEO used to think of the financial statements as being the responsibility of the CFO, they now have a personal stake in the same statements, so therefore the two of them are really in a partnership, and they are dependent upon on each other in order to be mutually successful.
Zezas: And in knowing what it tends to be a common belief now that a CFO in a mid-cap company, whether it’s public or private, that CFO tends to be more like a COO so it makes all the sense in the world that having that CFO/COO aligned with the CEO makes the company run that much better?
Kochanski: That’s true, the CFO in a mid-cap company often wears many hats, and beyond just the accounting, and financial reporting, and treasury, and tax. Often he is involved in other operations such as HR, IT, manufacturing, what have you, and it’s important to do so because then again you don’t have the staffing you typically have in a large-cap company.
Zezas: Right, right. And a CFO of that ilk brings tremendous value to a CEO, especially when you say that they are aligned.
Kochanski: Absolutely, and as I said before, it’s a partnership. The CFO is usually the number 2 to the CEO, the CEO is often outward focused; that is to shareholders, markets, and customers. Whereas the CFO is inward focused making sure the operations and financial reporting is supporting the CFOs message to the outside world.
Zezas: That makes a lot of sense, so given the relationship between CEO and CFO, is the CFO still considered just the numbers guy?
Kochanski: Oh no, you know the days when the CFO could basically just sit in their room and just crunch numbers, as often as referred to in the past, are long gone. An effective CFO, a good CFO, a great CFO has to be involved in the operations. They need to get out of their office, and they need to find out what is going on in the rest of the company, so that ultimately when things come across their desk in form of financial reports, they can make sense of those and validate them
Zezas: Sure, and continue to provide that support to the CEO?
Zezas: Okay, I agree with that. So in light of that, in light of the fact that the best mid-cap CFOs are now COOs and one of their primary roles are to act and support of the CEO toward the betterment of the company, how can mid-cap CFOs develop the specialized skills they need, especially given that they are more diverse? What steps should they take to develop those skills?
Kochanski: Well as you see now, the companies particularly in mid-cap are looking for a little bit of a different background in the CFO candidate; potentially they are looking for people who have had a diverse experience particularly starting with their education. Most of them would require what was traditionally a CPA, but now in addition they look for a MBA so you’ve been exposed to a lot more areas of business, and also they would look for diverse experience within the business; have you been exposed to operations or sales or any of these other areas? And especially once you’re involved in being a CFO, you know, you do have to get involved in these other operation areas and develop those skills.
Zezas: And I’ve heard you make commentary about how CFOs need to get out of the office, get out on the shop floor, and actually engrain themselves in the operations?
Kochanski: That is absolutely true. You know you could no longer sit at your corner office and just get the results; you need to be involved so you can help formulate the results. Companies now are looking at the CFO to be more of a collaborator and more of a business partner, and you can’t do that by just sitting in the back office crunching numbers. You must be out there talking to people, adding your expertise to planning and forecasting, and then being able to evaluate the results.
Zezas: Excellent, excellent. Gerry let me ask you a personal question, when you are not being CFO what are you doing with your time?
Kochanski: Well I like to take advantage of some of the down time. I’m an avid sports fan, so I do like to take in football, baseball, and hockey. They’re my favorite sports, and I try to take advantage of those whenever I have the opportunity.
Zezas: Whenever you have time?
Kochanski: Whenever I have the time, which is not all that often.
Zezas: Well Gerry, this has been great. I truly appreciate you joining us here on CFO Studio. I hope you’ll come back and see us again.
Kochanski: Andrew, thank you so much it’s been a pleasure.
Zezas: This has been great. This is Andrew Zezas, your host at CFO Studio, with Gerald Kochanski saying thank you very much for watching we’ll see you again.