How CFOs Orchestrate a Resilient Business at a Time of Peak Uncertainty

Chief financial officers (CFOs) are the fortune-tellers of business, using the current state and an array of signals to inform their companies’ choices. But what if the current state renders all previous models useless? On what should leaders base their decisions?

Altimeter Group Senior Analyst Susan Etlinger spoke with former Autodesk CFO R. Scott Herren to discuss managing risk in uncertain times, why His Royal Highness Prince Charles believes finance leaders are key to business and environmental resilience, and the imperative for increased disclosure around sustainability.

Let’s start by talking a bit about the impact of COVID-19 on the business and how that has affected your priorities.
It’s changed everything. It’s remarkable how suddenly the pandemic set in and how massive the impact has been. No one was fully prepared for what has transpired over the past six months.

It’s changed the way and the frequency with which I need to communicate to my team. And by that, I mean there’s always a certain amount they need to know about the business and the linkage with other groups—that has not changed. But the stress levels and the mental impact it’s had on everyone, including me, has increased both the need for and frequency of communication and connection.

The stress is somewhat invisible to a lot of us because we’re feeling the work stress of timelines and analysis that we have to get done. And we become very goal oriented and don’t recognize that we’re working a lot of extra hours on top of what we already had—especially parents of young kids. So, from a leadership perspective, it means more frequent communication, expressing empathy, and highlighting to people that, even if you can’t leave your house, taking a day off is just a huge mental-health break that we all need.

As a CFO, it’s also changed everything. Part of what CFOs get paid for is to predict where the business is headed and use that prediction to optimize stakeholder value—not just investor value. Of course, investors are stakeholders, but so are our employees, our boards, and the communities we work in.

The future has never been more challenging to predict than it has been for the past six months. Even in the global financial crisis, it was easier to understand what the next three to six months might look like, once you got through the initial shock. But right now, the dimensions of variability of what can happen are quite different by country, by customer size, by industry. If you’re in hospitality, you’ve had a very different impact than if you’re in technology.

The signals I’m used to looking at to understand how the future is going to play out—and to predict what the shape of the recovery is going to look like along all those dimensions—need to be evaluated in entirely new ways. So it’s created a world where uncertainty is higher than it’s ever been. Therefore, the need to be nimble is higher than it’s ever been for us as an organization.

Given that your job is to predict and the usual indicators are behaving differently, how are you making decisions about where to focus in the business?
Well, we’re doing a lot of scenario analysis. When you get to a point, as we’re in right now, where historical trends don’t really inform what the next six months look like, you have to run scenarios. So, since mid-March, we’ve been running scenarios on three different tracks: a best-case scenario, a most-likely scenario based on what we know, and a worst-case scenario.

We run these three cases every month. It started off as an Excel spreadsheet when I got here six years ago. Every quarter, we’d see something, and we’d say: “Oh, look at that. We should have predicted that. Let’s build a little model to predict that.” The number of assumptions that go into it is more than 100, of which there are probably 30 that make most of the difference. So we’ll lay those out in all three cases and then see what the model produces. We’ve been constantly doing scenario planning and updating it on a pretty regular basis or monthly as we get new actual data.

What that’s meant is that those things change. And as they change, we’ve got to quickly make decisions around investment, product pricing, research and development, and sales and marketing capacity—where we want to add capacity, where we want to ramp it down.

The good news is, we have a really well-connected and close-knit team of strong leaders who are balanced as we make those decisions and make those changes. Decision-making is done much more frequently.

Let’s switch tack for a moment and talk about your work with Accounting for Sustainability [A4S]. What is that like? What are you focused on?
Accounting for Sustainability was established by His Royal Highness the Prince of Wales in 2004 to focus on making sustainable decision-making part of business as usual. It’s a very robust group. Prince Charles is delightful—not just in his eloquence, because that’s what you’d expect, but in his energy and his impatience for change.

The last discussion we had was terrific. He talked a lot about the Great Reset: the idea that this black-swan event that we’re all living through with the pandemic has changed a lot of the core activities that every country and every company is focused on. His impatience was around the idea that we have an opportunity to make significant change that we won’t have again until there’s another reset.

One of those changes is to recognize that climate change is a reality and that there are things each of us can do inside our companies to improve the future. That was his message: It’s a great reset—don’t waste it.

The other big moment for me has been the three forces of change that we’re all dealing with right now: reckoning with racism and equity, the pandemic, and climate change. All three of those forces disproportionately impact the poorest members of our population, and they are also interrelated. For example, given the pandemic, we need affordable housing that can allow separation of people for COVID-19 safety and stand up to some of volatile weather patterns like those we’re experiencing in the Gulf Coast of the US. Solutions to problems like these need to have a common thread; that was an insight that hadn’t landed on me in quite that way until I heard it expressed in the A4S meeting. And that’s something I think we all have to step up to.

Predicting the outcomes from these crises is challenging. That’s why standards such as the Task Force on Climate-related Financial Disclosures [TCFD] recommend using scenario analysis so companies can evaluate how different climate-change pathways will affect their businesses—so they can be ready with the right strategies depending on which future path we take.

“The signals I’m used to looking at to understand how the future is going to play out—and to predict what the shape of the recovery is going to look like along several dimensions—need to be evaluated in entirely new ways.”—R. Scott Herren, Autodesk CFO

Let’s talk about your customers’ CFOs. How are they thinking about all of this?
It depends on the industry, of course, but I think all of us CFOs are wrestling with a handful of very similar problems. And the first is what we already talked about: One of the things we get paid for is to predict where things are headed and help make good decisions. And that’s just never been harder to do than it is today.

There are a number of other factors that have complicated all of our lives. Trade tariffs: What are the implications to my supply chain and to my cost structure? The fragmentation of data: It’s going to make all of our lives more difficult, and you’re seeing it happen already. The impact of trying to reengineer supply chains while maintaining profitability. Tax planning: Every tax jurisdiction that we do business in is looking at a way to optimize their revenue for their income because they’ve got to pay for the government programs that were put in place to help manage the pandemic. So tax planning has gotten significantly more difficult.

I think all CFOs are struggling with that same set of issues. As a result, we spend a lot more time talking to each other about issues that have cropped up in our companies and trying to figure out if we are seeing the same things; if we’re reaching the same conclusions; and, if so, what we’re doing about it.

We’ve talked about the pandemic and sustainability. Let’s talk about racial equity.
I mentioned the three significant issues that we’re dealing with as a country right now, and racial inequality is a big part of it. It’s been more than 70 years since the beginning of the civil rights movement, and we just haven’t made the progress we need to make as a country since then. It’s very frustrating, but I’m actually hopeful. It feels like it’s different this time. I think we, as a society, are finally headed in a good direction.

This is something that we’ve spent an enormous amount of time on at CEO staff meetings. It’s one thing to say, “The world needs to change.” It’s another thing to say, “Here’s what I’m doing about it.” And what I see in Autodesk now is us stepping up and saying that we have to have a hand in this. We have to have an individual responsibility to make change in the areas that we can affect, and we’re going to do that.

The other thing that I’ve taken on personally is that, in the past, we didn’t have a supplier diversity program. How can we be almost 40 years old at our scale and not have a specific focus on supplier diversity? So now we are investing in putting in place a supplier diversity program. Everyone has to take a personal responsibility.

I’m optimistic that we are seeing the beginning of real change. And it’s now incumbent on everyone at every company to say what they’re personally going to do and step up and do it.

The last question I wanted to ask you is about the work you’re doing around standardizing financial disclosures related to sustainability. Can you talk about where you think standardized disclosures, such as those with the TCFD, are going?
This is an area where I’ve got some pretty strong opinions, so fair warning. In a nutshell, the TCFD was created to develop voluntary, consistent climate-related financial-risk disclosures for companies to communicate to investors, lenders, insurers, and other stakeholders. We currently follow the Climate Disclosure Standards Board [CDSB] in our filings, which was the precursor to TCFD, to report on climate risk, opportunities, and performance. We are actively determining how to implement TCFD and know we still have work to do.

I think the only way we make it as a society—I’ll just focus on the US now, but you can generalize it globally—is with standardized mandatory disclosure about the impact our businesses have on climate. When you don’t have disclosure standards, people will cherry-pick the metrics they want to talk about because they may look good. Or people will say, “I’m not going to do it at all because it’s not part of what the SEC makes me talk about.”

The TCFD is an industry attempt to drive for standardized disclosure and get it to a level of momentum so that disclosing your climate-related initiatives is expected. I think TCFD is the best approach we can get until the SEC gets in this game and starts to mandate environmental, social, and governance [ESG] requirements, because at that point, you can really compare across industries, company size, regions of the world, product lines, and product focus areas.

What bolsters my belief that this has to happen is the wealth that’s going to be transferred from baby boomers to the next generation. The way that next generation is going to make investment decisions is not going to be the same way the baby boomers did.

It’s not only about making money—it’s about the fact that no one wants to invest and lose money. But it’s also going to be about doing it in a way that is responsible to the planet and stakeholders and has strong governance processes in place.

I love what the TCFD is doing. The best answer is to have mandatory government requirements that drive disclosure. The next best thing to that would be an investment rating like Moody’s, though they have recently expanded what they offer for ESG evaluation. The advantage of a standardized rating is that, for an investor, whether a company is in software or oil and gas, they know exactly the level of risk they’re taking on if they buy that debt. Shouldn’t you be able to do that in a consistent way across industries and across companies and company size for ESG initiatives? That’s what’s really going to drive investment decisions, and it’s starting now. The best outcome would be mandated disclosure to the SEC or other regulatory body, and the next best thing would be a consistent rating. What we have today is not where we need to be. I’m encouraged that we’re seeing some progress—I just wish it were faster.

It makes me wonder, if something like this were to happen, whether we would even need a B Corporation designation if there’s enough momentum behind responsible business practices.
I totally agree. It’s been proven that a higher ESG score or a lower-risk rating score is a strong predictor of outsized financial performance. Having that consistently across the board across industries and company size is going to allow responsible investors to make responsible decisions.