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Europe's best CFOs 2003

Institutional Investor asked fund managers and securities analysts to name the best CFOs among the companies they invest in or cover.

Being a chief financial officer was never easy; it just got a lot harder. European finance directors are under scrutiny as never before because of boardroom scandals and corporate failures on both sides of the Atlantic. No shrinking violet number-crunchers, chief financial officers like Marconi's John Mayo and Enron Corp.'s Andrew Fastow were intimately involved in devising the strategies that led their companies to prominence and then to the verge of, or to outright, collapse. For better or worse (mostly worse), aggressive CFOs certainly helped to raise the profile of finance directors everywhere.

Investors and analysts are today understandably more skeptical about companies' financial reports -- but no less impatient for performance. Meanwhile, the scandals have provoked a rash of regulation and would-be reforms in Europe (the Higgs and Smith Reports in Britain, the Bouton report in France) as well as in the U.S. (where the Sarbanes-Oxley Act affects countless multinational companies).

Reasonable corrective measures, the strict new rules are imposing costly compliance burdens and threatening to divert managers even more from actually managing. To go by estimates about their companies from leading CFOs, the collective cost of meeting Sarbanes-Oxley requirements alone could top $1 billion for major global companies.

The backdrop to harsher scrutiny, moreover, is a no less harsh business environment. A European economy tottering on the brink of recession and the long bear market are making it difficult for companies to rebuild profits and pare down debt acquired during the late-1990s boom. The 12 euro nations are forecast to grow an anemic 1 percent this year. Germany, once Europe's engine, slipped into its second recession in as many years in the first quarter.

Profits of the 545 European companies making up the Financial Times/Standard & Poor's world index have plunged 36 percent over the past two years. Over that same period, Moody's Investors Service has downgraded more than three times as many European corporations as it has upgraded. The rating firm sees scant prospect of improvement this year.

Still, the toughest all-around operating climate in years, if not decades, only makes the best CFOs stand out. Institutional Investor asked fund managers and securities analysts to name the best CFOs among the companies they invest in or cover.

The results are illuminating. The winners include many well-known names at European blue chips: Olli-Pekka Kallasvuo of Nokia Group, the top vote-getter of all CFOs; Douglas Flint of HSBC Holdings; Andrew Higginson of Tesco. But they also showcase some less obvious choices, such as Zeinal Bava of Portugal Telecom and the CFOs of struggling companies, like Jan Hommen of Royal Philips Electronics.

The winners all share a rigorously disciplined approach to the financial demands being made by investors in today's uneasy markets. Hommen, for example, is leading a drive to cut E1 billion from Philips's cost base. Colin Day of Reckitt Benckiser is helping to boost the profits of the household cleaning products maker by ingeniously building a substantial negative working capital balance.

The top finance directors also show commendable skill in communicating their strategies, to maintain credibility with investors. Many report spending as much as one fourth of their time seeing shareholders.

But what really sets these elite executives apart is their breadth of vision. In interviews with II almost all of the top-ranked CFOs stressed that the job today involves much more than being good with numbers. Each has a deep knowledge of his company's business and works closely with its CEO to shape and execute strategy. That added insight and top-level input are what investors and analysts rate as most important.

"Finding economies of scale and knowing what to cut are of course important, but the key quality a CFO must have in good or bad times is versatility," contends Nokia's Kallasvuo. "I've got to remember that there are things other than numbers that can't be quantified, like brand value" (see box, page 60).

Over the past year and a half, the company has eliminated 25 percent of the employees in its network infrastructure business, the hardest-hit segment of the mobile telephone industry. But Kallasvuo has maintained investment levels in handsets, in which Nokia is the dominant player, to protect the brand. The company introduced 34 new models last year alone. "Kallasvuo has convictions about where value lies that go beyond just reading the numbers on sales trends," says Marie Rupp-Laurenco, an analyst at Allianz Dresdner Asset Management in Frankfurt.

Philips's Hommen has had to make tough decisions about where to concentrate the group's straitened resources. They included divesting consumer electronics manufacturing to slash capital demands. The company recognized Hommen's strategic role last year by naming him vice chairman. "The CFO is the conscience of the company," Hommen says. "When the company makes commitments to shareholders, he's the daily monitor who makes sure they are delivered on."

Trust, of course, must be earned. CFOs acknowledge a need to rebuild investor confidence from the top down. "Ensuring that we are following best practice on transparency, timeliness and accounting rules was considered a staff, or even back-office, function before the recent wave of corporate scandals," concedes Portugal Telecom's Bava. "Now it is senior managers who are spending time checking on these things."

Finance directors worry, though, that regulation -- welcome to the extent that it restores trust -- will veer too far in the direction of legalistic, box-ticking measures: check marks for independent directors here, audit committees there. The potential for higher costs and greater bureaucracy without any guarantee of better ethics or performance troubles many. "It starts to distract from what board discussions should be focusing on, which is strategy and the development of the business," says Reckitt Benckiser's Day.

"I support what's been done so far, but I definitely don't believe there is a need to go any further," says Kallasvuo. "At Nokia we are doing the same things we always did, just that senior management is more focused than ever on dealing with issues like how to define independent directors. If we are not careful, we won't have time to run the businesses that the reforms are supposed to safeguard."

The biggest complaints by far center on Sarbanes-Oxley, the U.S. law that requires CEOs and CFOs to certify the accuracy of financial reports. Manfred Gentz of DaimlerChrysler fully supports the aims of the legislation: "We need to restore the capital markets. I see this as a chance."

But he suspects the cost of compliance will be steep. DaimlerChrysler will spend more than $10 million to strengthen the role of its audit committee, tighten risk management controls and provide the additional documentation required by the U.S. law, Gentz estimates. "What's worse is the ongoing burden that we are faced with," he says. "We need additional people to deal with all the new requirements."

HSBC anticipates devoting no fewer than 250 man-years of staff time to setting up an approved audit trail. "That's a lot of people," Flint says. "The trail being required to be tested and audited and proved is a significant additional regulatory burden. The pendulum has swung possibly too far the other way."

Many European countries of course have always held executives responsible for financial statements. Thus, contends Portugal Telecom's Bava, the certification of results required by Sarbanes-Oxley "may only serve to increase the level of bureaucracy and may not improve the overall transparency for shareholders and the financial community."

To restore trust, top CFOs are staying in close touch with key investors. HSBC's Flint focuses on the bank's top 100 shareholders. "It's very much a continuing relationship," he says. He believes that those efforts paid off in shareholders' overwhelming approval of the $13.2 billion Household International acquisition last year, a deal that some analysts have criticized for tarnishing the bank's image and increasing earnings volatility.

DaimlerChrysler's Gentz regards his conversations with investors as a two-way street. "I want to know investors' impressions and questions for all of our business activities," he says. "If there are doubts about volumes in the U.S. or whether sales incentives are sustainable, this is an issue for us."

Ultimately, CFOs are judged these days by their contribution to the bottom line. The weak global economy puts a premium on balance-sheet management and financial discipline. Nowhere is that more true than in the telecommunications sectors, where companies are struggling to work their way out of debt acquired in the frenzy to win third-generation mobile phone licenses at the peak of the technology boom.

"The most difficult challenge facing MmO2 is our approach to investment in and rollout of third-generation mobile telephone networks," says David Finch, CFO of the British mobile operator. "We are adopting a very cautious approach when it comes to spending money on that."

Finch scored a coup earlier this year when he struck a deal to share the cost of building a 3-G network in Germany with T-Mobile, a Deutsche Telekom subsidiary. The move will halve network investment by MmO2's German subsidiary, Viag. "In one go, Finch has taken cost out of the business, balanced that with the need for future investment and given MmO2 a negotiating advantage in any eventual merger of MmO2's German business with [the Netherlands'] E-Plus," says Steven Parr of Credit Suisse Investment Management in London.

Portugal Telecom's aggressive moves to shed employees in its domestic fixed-line business have boosted cash flow by 39 percent, to a little more than E1 billion ($1.08 billion), and helped the company reduce debt by 31 percent, to E3.8 billion. "More equity investors are interested in our debt profile and hedging policies today," says Bava. "Eighteen months ago they did not care. Increasingly, the requirements of fixed-income and equity investors are becoming aligned."

At Reckitt Benckiser, Day continues to seek better terms on payables and receivables. To date, his efforts have helped the company reduce working capital by £67 million ($106 million), to a negative £558 million. In effect, stores pay Reckitt to stock its goods on their shelves. The approach is a foundation of the corporate culture: One third of top management's incentive-based pay is linked to improvements in working capital. Such discipline helped Reckitt Benckiser trim debt and boost profits by 17 percent in the first quarter on a 2 percent uptick in revenues. "A strong balance sheet is a balance sheet that generates cash," declares Day. "It should tell the investor we're doing something right."

But no matter how grim the business climate, companies, like organisms, must find ways to grow. Even at HSBC, known for its miserliness, "nobody's ever created value just by doing everything cheaply," Flint says. 

This feature was compiled by Senior Editor Jane B. Kenney, Assistant Managing Editor for Research Lewis Knox and Researcher Michele Bickford and written by European Editor Tom Buerkle (who wrote this overview), Staff Writer David Lanchner and Contributor Rob Cox, who is assistant editor of
The best CFOs by industry
Listed below are the 27 executives, by industry, who scored the highest when we asked portfolio managers and analysts at major institutional investors, as well as sell-side analysts, to choose the top-performing chief financial officer in their domain.
Aerospace & DefenseAlan ThomsonSmiths Group
Autos & Auto PartsManfred GentzDaimlerChrysler
BanksDouglas FlintHSBC Holdings
BeveragesNicholas RoseDiageo
BiotechnologyPeter AllenCelltech Group
Building & ConstructionH.P. SheridanCRH
ChemicalsMax Dietrich Kley*BASF
Engineering & MachineryHeinz-Joachim NeubürgerSiemens
Food ProducersRudy MarkhamUnilever
Health CarePeter HooleySmith & Nephew
Household & Personal Care ProductsColin DayReckitt Benckiser
InsuranceJohn Fitzpatrick**Swiss Reinsurance Co.
Luxury GoodsRobert SingerGucci Group
MediaMark ArmourReed Elsevier
MediaMartin StewartBritish Sky Broadcasting Group
Metals & MiningGuy ElliottRio Tinto
Oil & GasMarco MangiagalliENI
PharmaceuticalsRaymund BreuNovartis Group
Retailing/Food & DrugAndrew HigginsonTesco
Retailing/GeneralHelen WeirKingfisher
Technology/SemiconductorsJan HommenRoyal Philips Electronics
Technology/SoftwarePaul HarrisonSage Group
Telecommunications EquipmentOlli-Pekka KallasvuoNokia Group
Telecommunications/Wireless ServicesDavid FinchMmO2
Telecommunications/Wireline ServicesZeinal BavaPortugal Telecom
TobaccoRobert DyrbusImperial Tobacco Group
UtilitiesKlaus SturanyRWE Group
*Stepped down 5/6/03.
**Became head of Life & Health Business Group 4/1/03.


Nokia Group


Year named CFO:1992

Company employees:52,000

2003 stock performance:­10.1 percent

Annual salary:E521,000* ($546,000)

Stock options:E39.6 million**

Kallasvuo:"Back in 1994 we became the first large company in the world in which the majority of shareholders were not domestic. That made my job more complex, but globalization helped us change for the better."

One voter:"CFOs tend to do little else than number-crunch. Yet Kallasvuo's huge involvement in corporate strategy and tactics brings real value."

Its closest competitors are either barely profitable or incurring losses, yet mobile phone manufacturer Nokia Group somehow continues to boost its bottom line year in, year out. Much of the credit goes to Olli-Pekka Kallasvuo, who was appointed chief financial officer in 1992 when Nokia was a small, troubled and seemingly confused enterprise making both rubber boots and computers.

Along with CEO Jorma Ollila, Kallasvuo and his colleagues turned Espoo, Finland­based Nokia into the world's leading maker of cell phones, with a worldwide market share of 40 percent. Operating profit margins remain above 20 percent despite declining sales.

Nokia's share price has dropped two thirds in the three years since the bursting of the technology bubble, but the stock has still appreciated 6,418 percent since Kallasvuo became CFO. Today Nokia is one of the largest companies in Europe, with a market capitalization ofE70 billion (equal to 55 percent of the value of all the companies listed on Finland's Helsinki Exchanges).

Kallasvuo wins praise from investors not only for smart cost-cutting but also for bold steps that competitors have been reluctant to embrace, such as outsourcing a good deal of research and development.

"On the cost front his flexibility has been hugely impressive in the downturn," says Thiemo Lang, a portfolio manager at Activest Investmentgesellschaft in Munich. "He acts with the kind of confidence that comes from knowing the operating businesses just as well as the numbers."

Kallasvuo's view on the importance of line experience chimes with that judgment. He discussed what it takes for CFOs to excel, as well as how Nokia is navigating the current environment, in an interview withInstitutional InvestorStaff Writer David Lanchner.

Institutional Investor: What's the secret to managing a company's finances during a huge downshift in growth?

Kallasvuo:Finding economies of scale and knowing what to cut are of course important, but the key quality a CFO must have in good or bad times is versatility. At Nokia I've got to look at issues from a financial angle. But at same time, I've got to remember that there are things other than numbers that can't be quantified, like brand value. Having experience from other areas of the company, particularly in line management, is very useful in this regard. For example, the time I spent in the U.S. from 1996 to 1998 running our Americas' operation was a key event in my evolution as a CFO. More than anywhere else, that's where I learned to relate management issues to more than just the narrow pipe of finance. No matter what type of economy you're in, you've got to have a broad perspective.

What do you think of the melding of international and U.S. accounting standards?

In a world where an ever-increasing number of companies are competing against each other globally, it is extremely important from an accounting point of view to create a level playing field. You've got a never-ending debate about whether U.S. generally accepted accounting principles or international accounting standards are best, when really what's most important is harmonizing them. Although we've historically used U.S. GAAP at Nokia, we have no aversion to IAS. Both U.S. GAAP and IAS are fine, and in practice I think there will eventually be a combination of the two in some way.

Has the wave of global corporate scandals affected the way you approach your job?

In all ways fundamental, not in the least. If you have been doing your job in the right way, there is no need to change your approach. What I will say, however, is there is a lot of energy and time that needs to be spent ensuring compliance with new regulations like the Sarbanes-Oxley Act, as well as with the new corporate governance codes spawned by the scandals. I support what's been done so far, but I definitely don't believe that there is a need to go any further. At Nokia we are doing the same things we always did, just that senior management is more focused than ever on dealing with issues like how to define independent directors. If we are not careful, we won't have time to run the businesses that the reforms are supposed to safeguard.

How large a component of your job is dealing with investors?

Again, the priority needs to be clear. If you don't spend enough time running the business, you don't have anything to communicate to investors. Combined, I spend about ten days a year talking to investors. That's sufficient, considering that our senior managers talk to investors. Additionally, we have a highly efficient investor relations department; and we report our numbers twice, not just once a quarter, and as transparently as possible. That's what the market wants, and that's what we deliver. We do not intend to drop quarterly guidance as some companies have, but we are always sensitive to investor preferences. And if there is a need to change, we will.

What other companies do you most admire?

Speaking generally, the companies that I most admire started out with a vision of something new from day one and then doggedly implemented a strategy, becoming industry leaders in the process. If we don't include Nokia, great examples of companies that I think really managed to succeed in this way are Dell, Intel and SAP. Like us, they created new industries and then set the pace for others.

*For fiscal year ended 12/31/02.

**According to company filings; includes options exercised in last fiscal year plus unexercised options.


HSBC Holdings


Year named CFO:1995

Company employees:184,405

2003 stock performance:­0.05 percent

Annual salary:£960,000 ($1.5 million)

Stock options:£1.82 million

Flint:"If you're seen not to be maximizing [reported earnings] to the ultimate degree, people have an increased confidence that the information they have before them is robust."

One voter:"He's completely on the ball on the macro situation across the world. He was the first person to turn cautious in early 2001. Lending growth has been pretty anemic, but it means they haven't taken big hits."

Since being named group finance director of HSBC Holdings at the age of 40, Douglas Flint has helped spearhead the British bank's expansion into a global retail banking brand to rival Citigroup's. Now, with the acquisition of Household International, based in Prospect Heights, Illinois, HSBC will go head-to-head with Citi on its home turf.

The $13.2 billion deal has raised some eyebrows. Investors worry that the bank's increased reliance on cyclical U.S. consumer lending (an expected 30 percent of HSBC's revenues versus 10 percent now) will reduce the quality and consistency of those earnings. "To a large extent, he's at the mercy of the U.S. consumer,'' contends an investor. Flint insists that the synergies between Household's marketing expertise and 50 million borrowers, on one hand, and HSBC's brand name and low-cost funding base, on the other, will generate good growth.

His bigger concern is the American legal system: Household paid $484 million last year (before the acquisition) to settle charges of predatory lending, and Flint sees U.S. litigation as an ever-present danger. "One has to question where the profit is to sustain the margins to be able to afford the kind of damages that courts in America are inclined to award," he says.

Some analysts question Flint's future at HSBC. He lost out to Stephen Green, former head of corporate and investment banking, for the CEO job this spring. But Flint dismisses talk of rivalry and praises HSBC's team culture: "There is a collective management philosophy that protects us from what almost became a pop-star culture in the States. No one's ever had an ambition to be on the front ofTimemagazine. It's just not the way we are."




Year named CFO:2001

Company employees:80,655

2003 stock performance:­19 percent

Mangiagalli:"There is no easy recipe for success as a chief financial officer, though in general a good degree of good common sense, prudence and the lowest possible contribution of fantasy is what, in the long run, has to be considered as an acceptable mix."

One voter:"The financial structure of ENI is very astute. They respect value investors, which we are, paying a substantial yet manageable dividend and pursuing acquisitions in a timely and prudent way. We give a lot of credit to the top two at ENI for this: CEO Vittorio Mincato and CFO Marco Mangiagalli."

Marco Mangiagalli's experience as an investment banker helps him cope with the complex funding issues faced by a former state-owned energy monopoly dealing in multiple currencies and dozens of emerging markets.

"When you work at a company like ENI, you talk about everything in terms of billions of dollars and projects that take many years," he says. "Spending time at local merchant banks and advising medium-size companies without the skills to approach Euromarkets allowed me to directly grapple with real problems that needed solving."

The Milan native joined Italy's biggest company after receiving a degree in business administration from Italy's renowned training ground for executives and political leaders, Luigi Bocconi University. After seven years at ENI's SNAM gas division, Mangiagalli joined Barclays Bank, where he participated in syndicated lending and export financing. In 1982 he returned to SNAM for two years. He then went back into banking, spending three years in charge of debt instruments and derivatives at the investment banking arm of Banco Ambrosiano, now part of Banca Intesa.

Rejoining ENI in 1988, he capitalized on his market savvy to climb the corporate ranks. Italy's cash-strapped Treasury was preparing its biggest-ever privatization: an initial public offering of ENI, in 1995.

The shares rose, encouraging ordinary Italians to invest in stocks for the first time and setting the stage for the largest-ever sale of assets by a government. Mangiagalli became CFO in 2001.


Portugal Telecom


Year named CFO:2000

Company employees:23,000

2003 stock performance:­0.03 percent

Annual salary:E580,000* ($608,000)

Stock options:E1.76 million**

Bava:"The standard solutions that we thought would revolutionize top-line growth, like third-generation mobile telephony, have not worked. We need to maintain huge discipline on things we can control, like costs, debt and returns on operating businesses."

One voter:"Because of Bava, Portugal Telecom never really fell for the temptation to run the business exclusively for future growth. Bava has never invested too much compared to the real scale of the company."

The Brazilian real's 44 percent tumble against the euro in this year's first quarter might have spelled serious trouble for Portugal Telecom -- 13 million of whose 25 million customers are in Brazil. But in 2002, PT CFO Zeinal Bava, a disciplined cost-cutter, had nearly halved the company's capital expenditures. The result: PT's net profits fell only 5.9 percent in the first quarter, toE85 million, beating the consensus forecast ofE68 million.

Bava's prescient moves have repeatedly saved PT money and even strengthened its market position. He was, notably, responsible for pushing the company to combine its Brazilian mobile assets with those of Spain's Telefónica Móviles in a 50-50 joint venture in October 2002. That deal has allowed PT to take advantage of economies of scale without making further investments and without significantly increasing exposure to the volatile real.

Bava's layoffs in PT's domestic fixed-line business, beginning two years ago, have also helped boost annual cash flow by 39 percent, permitting the telecom to reduce its debt from a peak of¤5.5 billion at the end of 2001 to¤3.8 billion. That nut is more than manageable for PT, whose sales last year were¤5.7 billion. Over the past two and a half years, PT has outperformed the Dow Jones Euro Stoxx telecom index by 28 percentage points.

"In terms of strategy and what PT is going to do, Bava is at least as important as CEO Miguel Horta e Costa," says one buy-side fan.

*Information is not publicly available; this estimate comes from guidance provided by PT's investor relations office.

**According to company filings; options held as of 12/31/02.


Royal Philips Electronics


Year named CFO:1997

Company employees:166,000

2003 stock performance:­10.8 percent

Annual salary:E674,000* ($705,000)

Stock options:E20.2 million**

Hommen:"The CFO is the conscience of the company. When the company makes commitments to shareholders, he's the daily monitor who makes sure they are delivered on."

One voter:"More than anyone at the company, including the CEO, Hommen follows up on our concerns and does the right things. Without him, investors would be a lot more negative on Philips than they are."

The fact that Royal Philips Electronics -- which lost a recordE3.2 billion in 2002 -- has not seen its share price collapse completely owes a lot to CFO Jan Hommen. Since arriving six years ago from Cincinnati-based aluminum producer Alcoa, where he was CF0 for six years, Hommen has been systematically trimming costs and restructuring the sprawling Dutch electronics conglomerate.

He has boiled down Philips's 13 divisions and 150 businesses to five divisions and 40 businesses, from consumer electronics to semiconductors. That wasn't enough to protect Philips entirely from the slump in technology spending last year, but it no doubt mitigated the damage. Excluding restructuring charges and write-downs, Philips would have reported a net profit ofE208 million.

Hommen exerts an unusual degree of influence for a CFO, in part because chairman and CEO Gerard Kleisterlee, though a longtime Philips employee, has been at the helm just two years. Hommen's sway is evident in the types of projects he undertakes. Last year he divested and outsourced most of Philips consumer electronics manufacturing, reducing the company's commitment of capital to that business fromE714 million a year toE150 million.

He also slashed the capital employed in another money-losing business: semiconductors. "Usually, companies would just throw more money at subpar divisions like consumer electronics and semiconductors to gain a leadership position in the industry," says one investor. "He realized that was too hard to do." Philips aims to make both divisions profitable by year-end. Hommen's next goal: to sell off more thanE200 million worth of noncore businesses and return Philips to operating profitability by the end of 2003.

*For fiscal year ended 12/31/02.

**According to company filings; includes options exercised in last fiscal year plus unexercised options.

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