Accounting and Management
To be an effective leader, women must "face facts and fears,” Blythe McGarvie, senior lecturer at Harvard Business School, told Network of Executive Women members at the NEW Executive Leaders Forum, Aug. 1, 2012 in Los Angeles.
Accomplished leaders courageously face their fears and take action, McGarvie told more than 250 cpg/retail industry executives in her opening address, "Take on the World: Building Your Courage Quotient.”
The former chief financial officer for BIC told the crowd of mostly women there are four types of leaders: Conventional leaders who are pleasant, but don’t make a difference; compliant leaders who do not participate with passion; challengers who are willing to question but are often ignored; and courageous leaders, who are not afraid to stand out and speak up.
The first step toward building courage and taking action, McGarvie said, is reading. "Examine how others have done it,” she advised. "It’s that simple. John F. Kennedy was always reading a book, and was notorious for stealing magazines.”
McGarvie recommended two books: Man’s Search for Meaning, a story of survival in Auschwitz by Victor Frankel, and Drive by Daniel Pink, which explores autonomy, purpose and mastery.
Having and working toward a dream is important, too. Blythe related how she once imagined a castle in the sky in Italy or France and read about other women who had the dream life she imagined. When she ended up working in Paris, her husband got a job in Buffalo, N.Y. "I’ll come visit you,” she negotiated.When acting on her fears, Blythe adheres to four principles: Be fair, be firm, be friendly and be frank. For example, when her Paris job didn’t turn out to be the growth opportunity she expected and presented a host of problems, she couldn’t sugarcoat the circumstances. She was frank about cutting dividends in half – a necessary measure.
Wrapping up her rousing address, Blythe quoted Winston Churchill. "Courage is standing up and speaking. Courage is also sitting down and listening.”
Eric J. McNulty
The financial health of a company is the first concern of any chief executive and the board. Yet not all of these individuals are experts at reading financial statements and other related documents. Blythe McGarvie, senior lecturer at Harvard Business School, a board member at Accenture, Viacom, Wawa, and LKQ, and a former Fortune 500 chief financial officer, uses a Three Circles framework when teaching general managers how to become savvier about the financials. We recently sat down with her and asked her to share her insights.
Why are financial statements so vexing for executives?
First of all, they are complicated. You can't just look at the balance sheet and get the full picture; you have to know how to look more deeply and may even need to dive into the footnotes. This is especially true in large organizations that may have lines of business at different levels of maturity and facing a range of opportunities and challenges in different parts of the world. It's hard, complex work. It's also an area in which senior executives can be afraid to ask for help. They may not want to reveal the limits of their knowledge -- and that can be dangerous for them and the firm.
What is your Three Circles framework and how does it help?
The Three Circles help an executive get a more rounded view of the financial picture and spot trouble early. The idea is to choose three relevant metrics that offer balance because their functions are complementary rather than duplicative. Think of a Venn diagram which shows 3 overlapping circles to view competitiveness, accounting, and funding. As the company increases competitiveness (measured through growing market share), accurately reflects and improves its accounting results (e.g. revenue recognition and growth) and funding (e.g., measured through net cash flow improvement), all three circles are positive The overlap of the 3 metrics is the sweet spot: in this case, the “growth engine.” When all three circles are positive, the growth engine is going strong; when one or more is negative, the growth engine may stall.
Are there other benefits to the Three Circle approach?
So, for example, the three most important metrics for many retail/manufacturing companies are growth in net revenue, cash flow, and market share. If I look at the financials of such a company and see declining net revenue, am I concerned? Perhaps, and perhaps not. You have to look at the strategy as well as the numbers. If the company is investing to grow market share, a temporary decline in net revenue can be expected. If net revenue is growing, is it attributed to price increases, new customer acquisition, or larger purchases from existing customers? How well does the explanation align with the story about cash flow and market share? When the explanations don't align, it is a signal that you should dig deeper.
Are the Three Circles different for each industry?
Yes, and this is why they can be particularly challenging to an executive who moves from one industry to another until they have enough time to get a deeper feel for which numbers matter most and the critical interdepencies.
You can start with a generic set: use one Circle for volume metrics such as sales per square meter in retail or production output. For example, one large Canadian timber company was rated a "buy" across the board by analysts until a short-seller released a report alleging that the firm had over-valued its timber and land assets in China. You might not question that valuation unless you looked deeper to see that while the Canadian firm claimed to have bought the rights to 200,000 hectares of forest, the company selling the timber rights reported that it had only sold the rights to 14,000 hectares.
The second generic Circle is used to test the numbers for return on equity. If it looks too good to be true, it probably is. For example, a foundation recently conducted research on investment return claims made on the Internet. More that 80% of people in the survey believed that a daily return of 2-3.4% was plausible. However when you do the math, a 2% daily return is equivalent to a 377% annual return. That is not plausible at all. Do the math before you accept the numbers.
Use third generic Circle for human capital metrics, such as management evaluation and employee turnover. Who are the people behind the numbers? Does a division president have a history of being overly optimistic with her forecasts? Does the CEO have enough experience and data to confirm not just correlation but causation for that jump in sales after the new pricing strategy was initiated? If an executive is long-tenured and uses his influence to emphasize making the quarterly numbers "at any cost," there may be reputational issues of concern as Wal-Mart recently discovered in its bribery scandal in Mexico.
One great advantage is being able to look beyond financial metrics. For example, in a labor-intensive industry such as consulting or call centers, the Circles I would use are pricing, with particular attention to where it places the company in its competitive set; productivity, which is often expressed as a utilization rate; and employee turnover, the human capital metric. If prices are in decline, is the firm struggling to use its employees' time at any cost? Is the firm discounting and, if so, what are the pressures causing it? If turnover is high, what is the impact of the associated recruitment and training costs on net income?
Look at how online retailer Zappos used its initiative to value differently its customer service agents as a path to powerful competitive advantage. They chose to increase pay and training in positions that others considered a cost to be managed as low as possible. Employee turnover is an essential measure in that model. You won't find any of these measures in standard financial metrics, but I believe they are critical to understanding firm performance.
How does an executive best develop his or her Three Circles?
Talk to lots of people to see what key numbers they watch: Talk to others at the firm, their peers at other firms where possible, analysts, and suppliers. Talk to people in operational roles at the company as well as those in finance. Ask a lot of questions. Call an old business school professor with specialized knowledge. The Three Circles won't be handed to you. As you do this work, you'll find that you learn a lot. The process is as valuable as the end product – you’ll learn a lot about the business.
Do you have any other advice?
Don't assume that the Three Circles remain static over time. As the business changes, you may need to reevaluate the Circles you are using. Once you become used to using a Three Circles approach, it becomes a natural part of how you run the business and evaluate others. They can be particularly useful with merger and acquisition activities, investment decisions, and honing operational processes as well as in financial evaluation.
When major economies are constrained, business leaders find their growth engines stuck in low gear. At times like these, financial leaders need to collaborate more closley with their operations counterparts and drive precision in performance management.
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Blythe J. McGarvie
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