The Role of the Finance Organization
S e p t e m b e r 2 0 0 7 I S T R AT E G I C F I N A N C E 2 3
B Y C R I S T I A N O B U S C O, E L E N A G I O V A N N O N I , A N G E L O R I C C A B O N I , D A V I D E F R A N C E S C H I , A N D M A R K L . F R I G O
The capabilities, skills, and responsibilities required of finance professionals have changed significantly over the last
decade. No longer limited to tracking financial results and rigorous financial reporting, finance experts are increas-
ingly required to support strategic decision making, operation efficiency, and value creation and to combine solid
accounting skills with knowledge of the business, leadership abilities, and management expertise. And such capabili-
ties still aren’t enough.
In 2002, the Sarbanes-Oxley Act (SOX) in the U.S. directly impacted the finance organization (and the CFO) by
introducing new responsibilities for the trustworthiness and reliability of financial reports (Section 302) and new
requirements for internal controls (Section 404). Such emerging issues and new responsibilities call for a redefinition
of the role of the finance organization in the governance process. Using the case of GE Oil & Gas, we suggest that
finance professionals can be much more directly involved within the corporate governance framework by playing an
active role in translating governance principles into strategic decision making and strategic performance manage-
ment systems. Although we include examples from GE Oil & Gas to build our argument, many of the issues we dis-
cuss are relevant and applicable for the entire GE organization.
Cover Story
Linking Governance to Strategy
The Role of the Finance Organization
L I N K I N G G O V E R N A N C E T O S T R AT E G Y Despite the recent proliferation of laws, regulations, and
codes of corporate governance, high-profile incidents of
corporate failure and managerial misconduct have empha-
sized that compliance isn’t enough for effective governance.
Corporate governance should take into account the need
to implement effective business policies and long-term
objectives that represent the scope of good governance and
that should provide the structure through which the com-
pany sets objectives, the strategy for attaining those objec-
tives, and the guidelines for monitoring performance.
Similarly, boards of directors should be more involved in
strategy formulation rather than limiting their role to
strategy ratification and monitoring management behav-
ior. From this point of view, corporate governance can
influence organizational performance insofar as it influ-
ences the strategic management of the organization.
The need for a strategic perspective in corporate gover-
nance has also been addressed by several professional
accounting bodies. In a 2004 document titled Enterprise
Governance: Getting the Balance Right, published by the
Chartered Institute of Management Accountants (CIMA)
and the International Federation of Accountants (IFAC)
and prepared by IFAC’s Professional Accountants in Busi-
ness Committee (PAIB), enterprise governance is defined
as “the set of responsibilities and practices exercised by
the board and executive management with the goal of
providing strategic direction, ensuring that objectives are
achieved, ascertaining that risks are managed appropri-
ately, and verifying that the organization’s resources are
used responsibly.” Within the document, conformance to
governance rules is described as only one element of
overall enterprise governance. Another element is repre-
sented by performance based on strategy and value cre-
ation. In this context, the focus of the performance
dimension is on helping the board make strategic deci-
sions, understand its appetite for risk and its key drivers
of performance, and identify its key points of decision
making. These two dimensions of governance are deeply
related to each other, and both need to be considered
when designing an enterprise governance framework.
Similarly, a former president of the Institute of Char-
tered Accountants of England and Wales (ICAEW)
emphasized that governance should be regarded not only
in terms of shareholder protection but also as it pertains
to business performance. The Institute of Management
Accountants (IMA®) is leveraging its thought leadership
in SOX and enterprise risk management (ERM) by
launching a Finance GRC (Governance, Risk, and Com-
pliance) Research Practice, which will further tighten the
link between strategy and compliance via research studies
and specialized certificates programs.
Moreover, in an August 2005 Strategic Finance article,
“Beyond Compliance: Why Integrated Governance Matters
Today,” the authors highlight the need for an integrated
governance framework that combines: (1) compliance with
internal and external rules, codes, and principles to regulate
the relations among the shareholders, board of directors,
top management, and stakeholders; (2) measurement-based
governance, which aligns processes and activities to organi-
zational strategies to maximize organizational performance
and value creation by using forecasts, analysis, and perfor-
mance measures; (3) knowledge-based governance, which
relies upon knowledge management and learning processes
to align individual values, beliefs, and behaviors to the orga-
nizational mission, principles, and strategies. In addition, in
their May 2007 Strategic Finance article, “Strategic Risk
Management: Creating and Protecting Value,” Mark Beasley
and Mark Frigo present a case for strategic risk manage-
ment that focuses on the upside as well as the downside of
risk.
Despite the increasing recognition of the need for a
stronger link between governance structure and strategy
definition and implementation, there is still a lack of
understanding of the mechanisms through which gover-
nance systems can be translated into strategy. This lack
suggests exploring if and how finance professionals can
play a role in providing top managers and executives with
key information to foster the links between the corporate
governance framework and the strategic direction of the
company. Because finance professionals have been
assigned crucial responsibilities by SOX and other recent
national laws or codes of practices (such as the Italian Law
n. 262 of December 2005 that, among other issues, intro-
duces new roles and responsibilities of the CFO and the
finance organization), they are required to broaden their
understanding of the business by working alongside other
managers (sourcing, production, sales, quality, IT, etc.) to
design and execute new governance mechanisms. This
could be both a spur and an opportunity for the finance
organization to become more directly involved, alongside
other managers, in the governance process. Let’s look at
the case of GE Oil & Gas, which offers evidence of the role
of finance professionals in linking governance to strategy.
G E O I L & G A S With more than 316,000 employees, a variety of businesses
(ranging from aircraft engines and power generation to
2 4 S T R AT E G I C F I N A N C E I S e p t e m b e r 2 0 0 7
financial services, medical imaging, and television pro-
gramming), and operations in more than 130 countries,
GE represents one of the best examples of a multinational
that has grown worldwide via acquisitions. Like other com-
panies, GE relies on key operational mechanisms to pro-
vide directors, top managers, and shareholders with useful
information to identify, execute, and monitor corporate
strategies and the risks that these strategies present. Here
we’ll focus on the links among governance principles,
strategic decision making, and operational mechanisms
and on the role played by finance professionals within the
Oil & Gas business of GE. With its headquarters located in
Italy, GE Oil & Gas is a group of eight companies specializ-
ing in the supply of products and services for the oil and
gas industry and offering integrated solutions for applica-
tions in all segments of the industry from wellhead to con-
sumer. GE Oil & Gas products include gas and steam
turbines; centrifugal and reciprocating compressors; sub-
sea compressors; turbo and hot gas expanders; valves,
pumps, and fuel distribution equipment; and plant design,
installation, and after-market services and solutions that
cover all aspects of pipeline integrity.
The Controllership Initiative Controllership is the core initiative that has helped GE
top management during the last 10 years to establish a
business culture devoted to achieving high levels of per-
formance with integrity. The principles and the require-
ments of Controllership are listed in GE’s integrity
policies booklet, The Spirit & the Letter of Our Commit-
ment. Available in 27 languages, this booklet is delivered
to every single GE employee. Similarly, GE holds consul-
tants, agents, and independent contractors to the same
integrity standards.
The Controllership Initiative plays a key role in imple-
menting corporate governance in GE and in clarifying
and communicating GE’s policies and principles, which
apply to business operations at every level of the organi-
zation. Aiming to ensure greater transparency and accu-
racy in financial management, as well as to enforce senior
management accountability, Controllership goes “beyond
the creation of an environment of corporate responsibili-
ty and seeks to foster a business culture which is nowa-
days fully engrained within GE operating systems,” the
former CFO of GE Oil & Gas says. Accordingly, the key
outputs of the Controllership Initiative should be:
1. Compliance with applicable laws, regulations, and
company policies;
2. Integrity in communications, which shall ensure
timely, complete, fair, understandable, and accurate
reporting of actual and forecasted financial and nonfi-
nancial information within all GE reports;
3. Rigorous processes in terms of performance mea-
surement, communication, and knowledge sharing to
ensure that management decisions are based on accurate
economic analyses that include a prudent consideration
of risks and that sound control procedures are constantly
maintained.
Linking Controllership with Strategy and Budgeting: the GE Operating System “Operationalizing controllership is not an easy task,” sug-
S e p t e m b e r 2 0 0 7 I S T R AT E G I C F I N A N C E 2 5
AUGUSTJUNEFEBRUARY
JANUARY APRIL MAYMARCH JULY
OCTOBER
SEPTEMBER
DECEMBER
NOVEMBER
Session E HSE Review (Ongoing)
Session D Compliance (Quarterly)
Session C (Individual Appraisal)
Growth Playbook (Strategy)
Session II/ Operating Plan/
Session C (Follow-up)
B U S I N E S S P R O C E S S E S
Operating Managers’ Meeting
Corporate Executive Council
(CEC)
CEC
CEC
CEC Corporate Officers’ Meeting
L E A D E R S H I P M E E T I N G S
Figure 1: GE Operating System
gests the former CFO of GE Oil & Gas, who indicates
that “for each business, important issues such as the com-
petitive environment, the customer’s portfolio, as well as
cost/benefit analyses are concerns that must be carefully
interpreted and monitored.” Therefore, even if proper
recording and reporting of financial information are the
foundation of compliance and integrity within GE, Con-
trollership requires a broadened framework that relies on
the ability of Finance and Operations to collaborate in
understanding the risks involved in the business as well as
the potential opportunities that may arise. In this context,
the linkages between Controllership and the GE Operat-
ing System become crucial.
The GE Operating System entails leadership meetings
and business processes (see Figure 1). During leadership
meetings, corporate executives, business CEOs and CFOs,
and senior managers responsible for major corporate ini-
tiatives share views and best practices from across the
company. These meetings include operating managers’
meetings, Corporate Executive Councils, and corporate
officers’ meetings. In parallel, the GE Operating System
relies on an intense sequence of business processes
labelled Growth Playbook (GPB, a strategy review for-
merly known as “Session I”), Session II (budgeting),
Operating Plan, Session C (individual appraisal), Session
D (compliance), and Session E (where health, safety, and
environmental issues are discussed). As emphasized by
the former CFO of GE Oil & Gas, “This pattern of ongo-
ing processes and meetings sets the communication
rhythm of the company, and it lies at the very heart of
our mechanisms of governance.”
The GE annual business planning process is broken
down into three phases: Growth Playbook (GPB), Session
II, and the Operating Plan (see Figure 2). The GPB starts
at the GE corporate level with meetings between execu-
tives and senior teams from the various businesses. The
discussion is led by the GE business leaders and chal-
lenged by corporate officers. The GPB “takes place
between April and July, and it is our strategic roadmap to
drive business planning and decision making,” the former
CFO of GE Oil & Gas indicates, clarifying that “It
involves the assessment of the business’ strategic position
by reviewing the year-to-date results with an emphasis on
the three years ahead.…It is focused on competitors’
activities, new product development, and major invest-
ments, as well as on identifying the key priorities and ini-
tiatives for the coming year.”
Within GE Oil & Gas, each function has a team that
contributes to the definition of GPB supporting evidence
and documents, such as accurate analysis concerning
market trends, competitors’ moves, and customer behav-
ior (see Figure 2). In particular, GPB relies on past trends
of key performance indicators such as orders, revenues,
and contribution margin. As emphasized by a GE Oil &
Gas senior finance manager, “The GPB is all about under-
standing and interpreting the market and its key trends in
terms of existing and potential customers, as well as risks
and opportunities of specific business decisions, so that
strategies can be sketched along with their consequences
in terms of expected financial returns and resource con-
sumption over the next three to four years.”
The GE Oil & Gas business planning process continues
from August until November with Session II, where the
foundation of the following year’s budget is drafted in
terms of project targets as well as sales and contribution
margin estimates. “Session II is a preliminary budget
where the actual orders are converted into sales and used
as a basis to understand the level of the contribution
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Growth Playbook: Assess the business strategic position.
◆ Market trends
◆ Competitors’ moves
◆ Customer behavior
Session II: Review of the expected year-end results and first submission of next year’s targets/budgets.
◆ Projects
◆ Sales—CM (Contribution Margin)
Operating Plan: Budget finalized and tar- get for key performance metrics agreed.
◆ Projects
◆ Sales—CM
◆ Quarter by quarter
◆ Initiatives
ACTION PLAN
Figure 2: Growth Playbook, Session II, Operating Plan
FOUR-YEAR PLAN (April–July)
FIRST DRAFT UPCOMING YEAR’S BUDGET
(September–November)
CURRENT YEAR’S BUDGET (Januar y)
Financial knowledge to complement the expertise
of other organizational players
◆ Share the culture of measurement
◆ Translate technical improvements
in financial terms
margin to be expected during the next year…therefore,
compared to earlier analyses grounded on historical
trends, Session II relies on more accurate data in terms of
lead time [cycle of conversion of orders to revenue] and
offers a better ground to commit with the markets,” the
senior finance manager explains. The final step is the GE
Oil & Gas Operating Plan, which comprises a quarter-by-
quarter revision of Session II and leads to an approved
budget for the new year.
T H E R O L E O F F I N A N C E P R O F E S S I O N A L S The finance organization plays a major role in opera-
tionalizing the Controllership framework within GE Oil
& Gas. Here we focus on the contribution offered by a
section called Financial Planning and Analysis (FP&A)
and by a task force of divisional finance managers. The
GE Oil & Gas finance organization is built around a
series of sections. Beyond FP&A and divisional finance
managers, additional sections such as Manufacturing
Finance—the department traditionally responsible for
cost accounting—and Commercial Finance—the section
that actively participates in the inquiry-to-order phase of
the business—play an important role in executing Con-
trollership in day-to-day operations.
“Within GE, FP&A means planning, communication,
and compliance,” the GE Oil & Gas FP&A manager
explains. FP&A provides the CFO and the CEO with
accurate information to make proper decisions. These
financial professionals plan, monitor, and evaluate contri-
bution margin, operating margin, cash flow, and all other
key financial measures. They estimate major short- and
long-term financing outlays, analyze projects to deter-
mine cost/benefit based on economic return and strategic
considerations, and generate reports that provide a pic-
ture of the company’s current business standing and how
it defines future business risks and opportunities. They
monitor the external environment by applying financial
tools and techniques to assess markets and market
dynamics such as competition, barriers to entry/exit, and
technology. Significantly, through measurement and
planning, the FP&A team is instrumental in ensuring the
integrity of the financial statements that are essential for
Controllership purposes. In particular, the FP&A team
relies on metrics such as contribution margin, operating
margin, cash flow, and all key financial measures to pro-
vide CFOs, CEOs, and the board of directors with accu-
rate information in terms of business risks and
opportunities to make proper strategic and operating
decisions (GPB and Session II) as well as monitor the
execution of current strategies.
Moreover, the FP&A team is responsible for business
segment analyses and closing—i.e., for all financial
reporting and analysis requirements (profit & loss, bal-
ance sheet), including monthly pre-close, quarterly clos-
S e p t e m b e r 2 0 0 7 I S T R AT E G I C F I N A N C E 2 7
Measure and forecast the numbers
◆ Participate up front in business initiatives
◆ Use performance measurement systems to monitor
shareholder value creation
◆ Prepare realistic forecasts
◆ Strategy (GPB) & Budgeting (Session II)
Integrity and compliance
◆ Record transactions properly
◆ Prepare accurate reports
◆ Identify and manage business risks
FP&A team as business partner
Figure 3: Linking Controllership with Strategy: the Role of FP&A
ing, and global segment rollups, as well as the linkages
with corporate processes such as the strategy definition
and the Operating Plan. Finally, FP&A plays a central role
in terms of communication and integration, acting as
liaison among finance, front-end businesses, and head-
quarters. In doing this, FP&A helps to spread a degree of
“financial awareness,” which is perceived as crucial for GE
purposes to keep performing with integrity. “We are the
channel where all the key financial information flows. We
touch almost everything that has to do with financial
data. Being the pulse of what/how the business is doing,
we have to be accurate in order to be trusted,” the FP&A
manager says. As summarized in Figure 3, such a pivotal
position has put FP&A at the forefront of GE mecha-
nisms of Governance and Controllership: FP&A repre-
sents an important partner for helping the different
businesses to achieve and monitor their performance
with integrity as well as to sketch new strategies.
Alongside FP&A, divisional finance managers super-
vise budgeting and reporting within the individual divi-
sions, functions, or businesses. They coordinate business
opportunities, plans, and performance measurements, as
well as ensure consistency, statutory compliance, and
observance of common policies and processes up to the
contribution margin level. Being responsible for business
financial forecasting and variance analysis, finance man-
agers need to be constantly in touch with operation man-
agers; for this reason, they have offices located within the
premises of the specific business they work with. Report-
ing directly to the CFO of GE Oil & Gas, they assist oper-
ation managers with cost analysis and control and
provide strong support to the businesses in following up
year-to-date figures, committed expenses, and estimates.
On one hand, they liaise with FP&A on financial closing
processes, ad hoc analysis, and project reporting; on the
other hand, they work closely with the general manager
to meet the financial and operating goals of the business.
Basically, finance managers represent a decentralized,
front-line “access point” to the finance organization.
M A K I N G G O V E R N A N C E R E A L The case of GE Oil & Gas offers an interesting snapshot of
the processes through which governance is linked to
strategic decision making and strategy implementation.
While governance principles and practices originate from
the top of the organization, linking governance to strategy
requires those principles to be diffused across the organi-
zation and to be enacted through day-to-day operations.
The Controllership Initiative provides the framework
for spreading governance principles within GE operating
systems and business processes. As governance is put into
operation within GE Oil & Gas (see Figure 3), issues of
integrity and adherence to rules, principles, and values
(such as record transactions properly, prepare accurate
reports, and identify and manage business risks) become
integrated with the processes for measuring and managing
business performance and corporate strategies (such as
cost analysis and reporting, budgeting, business planning
and forecasts, and strategy reviews). Such integration takes
place through a shared language of measurement that
fosters communication and information exchange
throughout the organizational structure.
The finance organization can play a pivotal role as an
access point to a shared language of measurement that
draws on accurate financial accounting and reporting to
collect, elaborate, and communicate the relevant perfor-
mance of the business, as well as to ensure that business
operations are aligned with the vision of the board; the
finance organization is central in terms of communication
and knowledge sharing. By being a liaison between front-
end businesses and headquarters, finance professionals
participate in spreading the financial awareness that is
critical for GE Oil & Gas to perform with integrity. ■
Cristiano Busco, Ph.D.; Elena Giovannoni, Ph.D.; and
Angelo Riccaboni, Ph.D., are from the University of Siena in
Italy. Cristiano is an associate professor of management
accounting and chairman of CRESCO, the Center for Eval-
uation and Control. Elena is assistant professor in business
administration, and Angelo is professor of management
accounting and dean of the Faculty of Economics. You can
reach Cristiano at busco@unisi.it, Elena at
giovannoni@dii.unisi.it, and Angelo at riccaboni@unisi.it.
Davide Franceschi is Units Commercial Finance
manager at GE Oil & Gas. You can reach Davide at
davide.franceschi@np.ge.com.
Mark L. Frigo, Ph.D., CMA, CPA, is director of The Center
for Strategy, Execution, and Valuation in the Kellstadt
Graduate School of Business and Ledger & Quill Alumni
Foundation Distinguished Professor of Strategy and Leader-
ship in the School of Accountancy at DePaul University in
Chicago. He is a leading expert in strategy design and
strategic risk management and is a research fellow in the
North Carolina State University ERM Initiative. Mark and
Joel Litman are the co-creators of the Return Driven Strate-
gy framework. You can reach Mark at mfrigo@depaul.edu.
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