Or How to Be a Stock Market Success Without Losing Your Sanity
The role of a Chief Financial Officer for a Chinese company listed on the U.S. stock market is intensely challenging. While the job of CFO generally has become increasingly complex due to the growth in regulatory oversight and the pressure from institutional shareholders, Chinese CFOs need to also bridge two very different business and legal cultures.
This CFO sits at the intersection of a range internal and external stakeholders, each of whom have very different expectations as to what the priorities and responsibilities of his or her job should be.
He or she is expected to:
- Be expert on all issues related to U.S. GAAP accounting, SEC reporting, corporate governance, industry information and peer performance, Chinese regulatory compliance, business strategy, and the design of internal controls
- Be available 24/7 to engage with large investors on one side of the world and with senior management in China
- Lead a team of top-notch accounting and internal controls professionals in an environment where this talent is often scarce or unavailable
- Provide precise forecasts of revenue and net income by quarter, while also adapting to rapid changes in business strategy from company leaders and a volatile competitive, operating, and regulatory environment in China
- Be able to structure complex transactions, while simultaneously making sure that shareholders’ interests are always protected and all potential conflicts are disclosed
- Act as the primary communication channel for advisors including private equity backers, board members, investment bankers, securities analysts, SEC legal counsel, PRC legal counsel, auditors, accounting advisors, and many others
With those demands in mind, is it any wonder that burnout and turnover is an occupational hazard for CFOs of Chinese companies listed overseas? It is surprising that more of these CFOs don’t collapse from nervous exhaustion!
"Acting as a close business collaborator, while being willing to manage adversarial aspects of your role, is essential to a healthy relationship with your Chair and CEO."
Below I outline 5 key suggestions for how CFOs working at Chinese companies can work effectively with your U.S. independent public auditors, and be more effective in your role in general.
- Get the Resources You Need to Succeed: When a Chinese company is considering listing overseas, every investment banker and private equity firm will tell the Chair that the #1 thing his or her company needs is a great CFO. Capital markets professionals know that having someone competent in the CFO seat is key to being credible with investors and making the listing process run smoothly. Guess what? Great CFOs are in short supply everywhere, but especially so in China. So if you have made the cut to a final candidate, you have significant leverage to negotiate what you need to be successful before you take the job. Outline the budget you will need for your internal team, the outside resources that will be required to get the work done, and the areas where you expect your autonomy and professional standards to be respected. You need to begin the process of educating management on what it takes to be a successful public company before, not after, you accept the job.
- Respect the Independence of Your Auditors: In the heat of trying to complete a deal or get financial results filed with the SEC, it can be tempting to ask your auditors to stretch the limits of what they are allowed to do. For example, asking your auditors to assist in compiling your financial statements is a clear breach of auditor independence and would put both your listing and their license to practice at risk. Don't ask your auditors to do "favors" that will compromise their professional standards. Before engaging your auditors make sure that they fully understand the scope and challenges of your internal capabilities and then talk through the limits of how much they can assist, while remaining compliant with independence rules. Involve your Chair and Audit Committee in these discussions so everyone is clear from the onset and you have the support of the board. Far better to understand everyone's role in advance, then under the pressure of a filing deadline.
- Use Outside Consultants Appropriately: Ultimately the preparation of your financial statements is the responsibility of management. However, there will be times when in the face of a looming capital markets transaction or complex accounting issue that you should make use of external accounting consultants. Qualified accounting consultants can accelerate your path to generate compliant financial statements, reduce errors, and make it easier for your independent auditors to do their work. They are often necessary in the run up to an IPO as you build out the capabilities of your internal team. You will also want to use consultants on an as needed basis for issues related to internal controls design and implementation, valuation, compensation, and tax strategies and compliance. While there is a cost associated with these services, it is often far lower than the consequences of a material misstatement in your financials or missing the window for an IPO or other capital markets transaction.
- Educate Your Chair and Engage Your Audit Committee: Your relationship with your Chair will be one of the most important success factors for your company’s long-term success as a public company. In many Asian business cultures, the Chair’s word is final and the interests of the Chair are viewed as equivalent to those of the enterprise. You need to make sure that your senior leadership understands that once they take the step of becoming a public company that this will change that dynamic forever. Going forward, the interests of all shareholders now need to have equal weight in every strategic decision. Establishing a relationship based on mutual respect may not be easy. Part of your role is to serve as a channel back to the Board for them to understand the views of outside shareholders and how certain actions are likely to be perceived by the market and reflected in stock value. Acting as a close business collaborator, while being willing to manage adversarial aspects of your role, is essential to a healthy relationship with your Chair and CEO. This will be much easier if your company has a qualified and engaged Audit Committee that understands not just the basics of accounting, but is also attuned to global governance norms and the capital markets. Make sure your directors are supported with the information and training they need to be effective, and they can help to backstop you at critical junctures.
- Never Stop Learning. Finally, be prepared to embrace the role of life-long learner and sharer of knowledge. The accounting, tax and regulatory rules change regularly in the U.S. because of the complexity of the various types of capital market transactions. Take full advantage of the training and resources offered by your auditors and keep an eye on publications from other audit firms as well. Follow SEC accounting bulletins. Have your IR officer prepare competitive intelligence briefings on your peers and industry that you can share highlights of with the Board. Approach every meeting with analysts and institutional investors as an opportunity to learn, and not just to market your stock. If you come to be seen as one of the best informed CFOs in the sector, who understands the concerns of investors and is genuinely curious, you will build much deeper relationships that will come in handy the day your company has an operational misstep or an earnings hiccup.
Following these suggestions will not make the job of being CFO of a Chinese company easy. But I suspect you already knew that! It will, however, lead to a more enjoyable and rewarding career for you and much higher chances of lasting success for your company in the public markets.