Creating Value Through Finance Competency Modeling

One of the defining characteristics of Caruso’s 12-year tenure as CFO of J&J has been to reorient the finance team around a specific standard of excellence and core principles. Rather than relying on Key Performance Indicators (KPIs) or other performance measures, Caruso redefined the baseline of business proficiency he expected of the finance team. He calls it the finance competency model.

The model has three components—performance, leadership, and integrity. For Caruso, each component forms one side of a pyramid with value in the middle. Lose one side of the pyramid and value escapes. Ultimately the model is designed to evolve the finance team from a group of forecasters and monitors into a group of business leaders. To drive value within J&J, the finance team is expected to deliver superior financial performance by finding solutions that enable business growth, increase shareholder value, and address the needs of its ecosystem stakeholders.

The model is also designed to develop talent within the finance team. If the team is operating with integrity and delivering performance, clear leaders should emerge. Those leaders are prepared to become the next generation of CFOs, and beyond that, company presidents and even the CEO. When the model is working well, the finance team is the front line for company innovation and future leadership.

Allocating Capital to Maximize Value

In Caruso’s view, any CFO can create top line growth. However, creating top- and bottom-line growth consistently, year after year, takes real skill and muscle memory. CFOs that are good at this have a few key attributes including strategic vision, a principles-based stewardship of finance, objectivity, and credibility. It falls to the CFO to be a data-driven arbiter of business decisions and to ensure that those decisions will ultimately drive business growth. Maintaining credibility is critical— - it’s not just about making the decisions, it’s also about communicating them back to the organization with transparency and candor.

These attributes also serve as a foundation for how Caruso and his team crafted the competency model. If future CFOs are to come from within the finance team, it was important for them to start developing the skills and abilities necessary for the role early on. Once he had reoriented the finance team around the competency model, Caruso set specific deliverables with the goal of allocating capital to maximize shareholder value.

As a publicly traded company, J&J is very focused on the level of cash returned for earnings generated. The result of this focus has meant that shareholders have seen dividends go up each year for the last consecutive 56 years—a track record few companies can claim. J&J achieved this by articulating very specifically what value creation and superior financial performance really mean within J&J. In addition to risk management, financial modeling and forecasting, the finance team is also tasked with keeping track of receivables, inventory billed, and payables in order to ensure that they are making informed decisions about how to achieve sustainable cash flow and superior financial performance. Getting specific has driven results. J&J is one of only two AAA- credit- rated companies in the world at the time of the Summit (as of May 18, 2018). (The other is Microsoft.)

By having a finance team focused on performance, J&J not only creates shareholder value, but also helps to maintain market share. In all, J&J’s 27- billion-dollar brands are consistently in the top one or two slots for their market segments. This standing puts the company in a powerful position when it comes to mergers and acquisitions. Acquiring top companies to add value is in J&J’s DNA. At the same time, the company is just as aggressive about divesting businesses that no longer fit. Altogether, over the past six years, J&J has increased its market capitalization by $175 billion.

A New Pricing Model Emerges

No matter how much work a finance team does in the present to guarantee value in the future, the future always seems to have something unexpected in store. At its roots, J&J is a broad-based healthcare business and the future of healthcare is increasingly defined by a new pricing model. Rather than collecting a blanket fee for products like medical devices or medication, companies like J&J will be paid on outcomes.

Another way to think about outcomes-based pricing is: How much value did a medication, or a medical device create for the consumer? Were they aided? Cured? How do companies track something like that without violating patient privacy? In order to survive, J&J will have to rethink how it tracks consumer interactions with its products. According to Caruso, the Credo and the financial competency model are designed to be responsive to major paradigm shifts like outcomes-based pricing. The key is for finance teams to define their ecosystem of stakeholders and use the guardrails of competency to find solutions that work for everyone.

Conclusion

When organizations talk about ecosystems, they are often thinking about new technologies, new products, or new ways to carve out a niche in the market. However, that model will only take an organization so far. J&J has stayed relevant and in control of its market segments for more than one hundred years by staying true to the ecosystem of people that keep the organization going. J&J focuses on the future by staying firmly rooted in what never changes—customers, employees, communities and shareholders. From there, business leaders can leverage new technologies and new ways of thinking in a way that benefits the whole ecosystem over the long-term.

This type of big-picture thinking will be necessary for the CFO of the future. Business models change and evolve, technologies come and go, but people are forever. By taking the time to build a team that can handle both the basics of financial management and the forward-thinking required of business management, the CFO can consistently drive superior financial performance—and ultimately growth.