Coatings and chemicals manufacturer PPG Industries is a company with a history that goes back more than 120 years. It's a dynamic player in world markets, with operations in Australia, Europe, Latin America and Asia. Business Finance editor John Cummings talked with William H. Hernandez, senior vice president of finance and CFO, about the challenges and rewards of guiding the finance operations of a highly diverse organization.
John Cummings: Every industry poses unique challenges for finance leaders. What are they in yours?
William H. Hernandez: The challenges have to do with the fact that we're a large, established manufacturing company -- almost like a conglomerate, with the number of operations we have -- with a very long heritage. We have to contend with some different issues. One is pensions and benefits. When you're an older company you're dealing with defined-benefit plans and other kinds of benefits that you need to be competitive for a certain segment of your business. And you're also dealing with very different kinds of defined-contribution plans that you need for your younger workforce. You have to appeal to a much broader array of workers and ages and years of experience.
What's happening in these areas, too, is there's an evolving complexity of financial reporting and governmental requirements -- reference the most recent passage of the Pension Protection Act -- that you have to deal with.
Another factor is that, as a company that's over 120 years old, and even though we're very well-managed, legacy issues occur from time to time. We just took a charge in the third quarter that really emanated from a business that we operated about 50 years ago and haven't operated since that time. These are things you have to keep track of and make sure that they're being well-handled and properly disclosed to your investors.
We're a global company, so there's a plethora of global issues as we and our major customers and suppliers continue to expand worldwide. And we're in so many different businesses -- some that are growing fast, some that are growing slow, and some that are declining -- and each one takes a very different approach and metrics, both financial and management.
JC: PPG Industries has made some purchases recently, for example in China, and extended its ownership of operations in South Korea. What special skills do these kinds of deals call for?
WHH: They call for being very nimble and able to adjust to local cultures very quickly. Simultaneously, they also call for being very patient. We had been in discussions with our Korean partner for years. We knew the end objective; we all knew where we wanted to go. But the timing often depends on knowledge of tax positions for both partners and other regulatory considerations within those countries that change over time, and the economic conditions, and where you are in the cycle, as well as personalities and trust among all the parties.
Over the years, PPG has built a reputation as a good partner to have, as being very honest and fair, and that's helped us grow as rapidly as we have in Asia. The way we treat our operations and people post-acquisition is pretty well-known; we're not heavy-handed in implementing change. We do demand performance.
So you have to be able to adjust to those cultures and what makes people feel comfortable, and be able to move quickly when they feel the time is right. For example the Korean deal came together over a long period of time, but the final discussions all occurred very rapidly once the partner felt comfortable moving with our proposal. So the skills are: being patient; understanding the local situation; and then, when the window of opportunity comes, being able to move very quickly. You need to have all your spadework done beforehand with the acquiring company, with your board of directors, and with your management stateside as well.
JC: How do corporate finance leaders handle the deep complexity of global risk management?
WHH: Enterprise risk management is a really important discipline for a well-run company. We update our own status annually; one way is by interviewing several rungs of the management of the company to ensure that we're always able to address an ever-evolving set of risks to the corporation.
There are several paradigms to look at when you talk about global risk management. The first is the one most people historically thought of -- a risk premium that you need to assign to investments that are outside your home country. You can think about it as just the simple risk of doing business in that country for your internal rate of return, your payback and your other financial metrics.
The second thing a lot of companies look at -- and some do it better than others, frankly -- is what risk you're putting your entire company at when you make some of these expansions globally. What you're really doing is changing the nature of your supply chain. I was talking to a person in the financial services business who mentioned that he had found a way of saving a lot of money by offshoring a major piece of his production, which was manipulation of data, but his fear was that [the country] he was looking at could be a target for disruption that could basically shut down his business. You have to be very careful as you source a share of your manufacturing footprint that you don't do something that's going to be a material danger to your company.
Lastly, a more long-range aspect of ERM is protection of technology, as well as the future development of technology. We will source different things to different parts of the world depending not only on the cost of manufacturing, being close to the customer and so forth, but also on where we know our technology can be protected and where it can grow fast.
JC: What really excites you about your work at PPG?
WHH: I've got the best job in the world! Great people who work for me, a great management team to work with, and the company's got really exciting prospects no matter how you look at it.
Because of the type of company we are, I really get to touch all areas of finance. I'm dealing with all types of cultures around the world and all types of people. And the nice thing about it is that we're a well-run company, so there are no crises in any of these areas. Everything I'm dealing with is progressive kinds of issues on how to make things better. And every day can be completely different.