Outlook 2003: More Changes, Greater Challenges

Caught between corporate scandals and a difficult economy, CFOs are entering 2003 focused on improving internal practices, strengthening their balance sheets and looking abroad for better markets.

It's been a bad year, and things may not get much better in 2003. Economic growth is weak, consumer spending is flat, and business spending is falling. The trade deficit is huge, and the federal surplus is gone. Corporate fraud has destroyed investor and public confidence, incited stiff regulatory changes, and slashed stock prices.

CFOs at all public companies have been diverted from the critical task of managing through the downturn. Now their focus is on shoring up governance and disclosure practices and driving compliance with the Sarbanes-Oxley Act. As the new year dawns, these issues will continue to draw top priority for most CFOs, followed closely by the need to guide their company through the brutal external economic environment. At many businesses, the top line is so ugly that the focus has shifted down the page to cash flow, profitability and return on capital invested. Of the relatively few companies making decent money, many are making it abroad, and they are determined to continue foreign growth despite higher levels of risk in almost every region.

In this sobering business climate, CFOs face three key challenges heading into 2003: improving governance and disclosure, strengthening the balance sheet despite the ongoing downturn, and pushing ahead with global expansion. The eight CFOs at large corporations whom we interviewed for this story have fared better than most. Still, they anticipate the need to make many changes to steer through what is likely to be another tough year.

Governance and Disclosure

Airgas Inc., the Radnor, Pa.-based industrial gases distributor with $1.6 billion in fiscal 2002 revenues, has always had strong governance and reporting provisions in place, but "given the current environment, we felt we needed to review the entire landscape," says Roger Millay, senior vice president and CFO. The process began in March, when the company conducted a review of current business issues. Then management convened a special meeting of the audit committee.

"The audit committee reviewed the whole gamut of issues and asked for everything that could be relevant," Millay says. "We were confident with the review and had no problems with the recent legislative and regulatory reforms; they were mostly in place at Airgas already. From the outside in, the committee looked at everything we're doing. This represented a more formal approach to the involvement of the audit committee, which will now meet in a special extra meeting every year specifically to address these kinds of external issues," says Millay.

Although Airgas has always required representation letters from its business units, in July it expanded the requirement to key functional leaders. The letters from these leaders are combined with the letters from the business units and presented to a newly established compliance committee, which was activated in August. The compliance committee consists of the vice president-general counsel, vice president-controller, vice president-taxes and director of internal audit. The committee meets independently to review all representations from the business units and key leaders, then reports on those documents to the CEO and the CFO.