Corporate IT Security Audit Compliance

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

2 6 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

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 [email protected], Elena at

[email protected], and Angelo at [email protected]

Davide Franceschi is Units Commercial Finance

manager at GE Oil & Gas. You can reach Davide at

[email protected]

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 [email protected]

2 8 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

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