The CFO’s new work frontiers

Finance leaders in Brazil are increasingly becoming the CEO’s right-hand person, but they need to be more engaged in ESG and demonstrate the value creation of digital

What does a CFO do? The answer to this question has changed quite a bit over time, and today it is even broader and more diverse – the finance leader’s scope of responsibilities is ever-more extensive. With the growing adoption of digital technologies, disruptions caused by the COVID-19 pandemic and a wave of geopolitical and economic uncertainties, CFOs are even closer to their CEOs and taking a more central role in the strategic and value-creation agenda of their organizations. The role is undergoing accelerated changes all over the world and, although it is no different in Brazil, we do have some particularities here.

For more than ten years, McKinsey has conducted a biannual global survey with CFOs, their peers, finance managers and other C-level executives from listed companies and not. In July 2022, for the first time, the survey also evaluated Brazil’s specific context, with a total of 60 executives interviewed across eight sectors.

When compared to their global peers, the work scope of CFOs in Brazil is more restricted and more focused on the long term, they face greater resistance in implementing digital tools and greater governance challenges to lead major transformations. Let´s look into each of these points in more detail.

1. The work scope of CFOs in Brazil is more restricted and more focused on the long term

When we compare the number of functional areas reporting to a finance leader in Brazil, CFOs are more focused on investor relations, M&A, cybersecurity and pricing. While much of the responsibilities of CFOs in Brazil are equivalent to those of their global peers, in the areas of ESG, audit and compliance, Brazilian CFOs participate much less and have less interference.

In the survey conducted in middle of this year, CFOs in Brazil spend less time compared to the global average on activities with a short-term focus, such as costs and productivity, dedicating more time to activities with a long-term focus, like strategic leadership with the executive team, post-M&A integration and capital allocation.

CFOs in Brazil also invest less time on capability building (such as training and skill building), organizational transformation and digitization/analytics application in their areas. Hence, significant improvement opportunities exist, as these activities tend to improve the future operational performance of their areas and, consequently, of their companies as a whole. With more dedication directed at the areas of this tripod, Brazilian CFOs can find an opportunity to set their organizations apart from their local peers.

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In the last 12 months, CFO-CEO interactions only increased in Brazil, both in terms of frequency and number of activities, regardless of theme considered. This shows that the role of CFOs in Brazil is becoming more and more relevant, with greater emphasis on strategic planning, organizational transformations and cost reduction activities.

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In a period marked by volatility on account of inflation, war and elections, it’s clear that the CFO is the CEO’s most trusted partner. The global survey identified a significant increase in CFO & CEO interaction, which seems to be a consequence of the behavior observed during the COVID-19 pandemic. The data shows that CFO engagement adds significant value – when CFOs help develop ESG programs, for example, the results suggest greater alignment with the company’s critical objectives.

On the other hand, a CFO’s role can become very demanding and require a bifurcation of the finance function into two fronts: the first focused exclusively on accounting, with a number two or three dedicated to just that; the other, focused on providing critical foundations for decision-making where the head of Financial Planning and Analysis, for example, acts as a counselor to business units.

2. The time for digitization in finance is now, but CFOs in Brazil face greater resistance to implement digital tools in their area

Many companies are doing fundamental reviews of their business models, and finance leaders are exploring ways to accelerate the pace of change. In this movement, the importance of digitizing functions in the finance area only grows. Roughly half of companies turn to digital for transactional activities, but the overall level of digitization is still low – most planning, budgeting and forecasting processes still rely on spreadsheets and traditional enterprise solutions.

In other words, there are major opportunities out there, both to implement as well as to improve the use of digital technologies. With investments in the area, especially in inventory management, performance monitoring and management, budgeting and forecasting (including scenario development), CFOs in Brazil can lead decision-making processes based on insights, facts and data in a broader, more efficient and effective manner.

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For Brazilian companies, the biggest changes were better spend analytics and faster month-end close processes. In turn, global companies prioritize other processes, such as improving insights in data analytics, improving forecast accuracy, and improving scenario development and planning.

This indicates the expected sequence in extracting intelligence from data: you must first digitize processes and allow for the proper identification, collection and treatment of strategic financial information, in order to then apply technologies and tools to extract strategic insights from it. Survey evidence suggests that, globally, CFOs may be at a more advanced stage of data usage, while in Brazil we see efforts at an earlier stage of digitization.

For such advancements to materialize into insights, data scientists and related professionals become great potential partners of CFOs, and here capability building is paramount - both to provide financial professionals with a minimum understanding of statistics and data-science fundamentals, and to elucidate the economic-financial concepts that are fundamental for data professionals. Thus, the creation of multidisciplinary teams to work together on projects that aim to generate intelligence insights seems to be an important factor for the success of CFOs.

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To invest in digitization, the main challenges CFOs will have to face are the low perceived impact of previous digitization efforts in finance and the lack of internal capacity to assess the real value of this transformation. This shows that the appropriate dissemination of successful digitization cases in Brazil can be a key lever in this effort.

Despite improvements in previous years, roughly 30% of Brazilian respondents still consider the financial process to be generally ineffective and more than 30% reported a negative ROI. Compared to global enterprises, Brazilian companies had the highest number of negative ROI cases due to investments in IT and digital last year.

3. Next areas for the CFOs to lead: transformations and ESG

Brazilian companies have focused on large-scale transformations (67%) that affect the entire company, with the objective of modernizing IT systems, reducing costs and improving customer experience – these three reasons account for 64% of all transformations carried out.

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However, even though efforts in fact have led to a perception of improvement both in the short and long term for more than half of the respondents in Brazil, results are lower than those observed globally. Even prioritizing a broader scope, Brazilian companies have had less success in their transformations than global enterprises – they lag several points in terms of achieving improvements and sustaining improved performance after transformations.

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Additionally, the survey shows that CFOs in Brazil take less initiative to lead transformations than global peers. Although CEOs, both here and abroad, are the main minds behind such projects – around 64% of Brazilian transformations are initiated by the company CEO, versus 62% abroad – Brazilian CFOs are considerably less proactive and lose share to other C-level executives, such as the Chief of Operations, Technology or Human Resources.

When investigating the reasons behind this less-proactive attitude in Brazil, one fact stands out: lack of governance necessary for fundamental change is considered the biggest obstacle for Brazilian CFOs to initiate or become more involved in transformations. This theme was already evident and emerged in CFO roundtables we held or participated in recent years, and survey results corroborate this aspect.

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CFOs in Brazil engage less in transformation activities than the global average. They believe the main way to add value to a transformation program is to establish general targets, set performance benchmarks (KPIs) and improve financial performance. This CFO vision of what it means to engage in a transformation is clearly not in line with the perspective of other executives.

In the global average, CFOs consider themselves to be very engaged in governance programs, with Brazilian CFOs presenting slightly less optimistic views. But other executives perceive CFOs to be significantly less involved in these topics.

In relation to environmental programs, Brazilian CFOs consider themselves personally involved in their development and training, but other executives perceive CFOs to be more involved in setting performance indicators. On the social side, the optimism of Brazilian CFOs regarding their performance in social programs is also not confirmed by other executives. While Brazilian CFOs consider themselves personally involved in program development, allocating funds to social programs, their peers are less aware of their involvement in these topics.

This dichotomy of views suggests that the dialogue between CFOs and their peers clearly shows room for improvement, which will certainly result in more coordinated and coherent action in the definition and execution of ESG agendas. Furthermore, CFOs in Brazil agree that ESG programs have gained even more investor interest – the time invested today in managing environmental and social issues does currently satisfy investor demands. This only reinforces that there is internal alignment work to be done and with potential to be captured.

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The pandemic played an important role in preparing companies to deal with future crises, and with the growing interest of investors in ESG, CxOs have spent more time communicating and preparing to talk about it. CFOs also need to prepare. They can play an important role in shaping their company’s stance on difficult topics like climate, social inequality and diversity.

Dealing with the complex problems currently faced by organizations requires the engagement of everyone in the organization, and those once-clear limits of work functions and scope, which clearly defined the “little boxes” of responsibility in each area, are now not so obvious. It’s no wonder that for years the World Economic Forum has emphasized the need for certain skills on the part of professionals of the future – such as analytical thinking, the ability to solve complex problems, creativity and flexibility, among others. They apply to all professionals, including C-levels of functions considered more technical, such as the finance executive.

The volatility moment we are experiencing represents an opportunity for CFOs to gain more impact and practically become the business co-pilot together with the CEO – perhaps it’s no coincidence that, in the alphabet soup of C-level positions, the F comes right after the E.

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