KEYNOTE ADDRESS BY MR LOW KWOK MUN,
EXECUTIVE DIRECTOR (INSURANCE SUPERVISION), MAS
AT THE 2ND ASIAN INSURANCE CFO SUMMIT, 8TH MAY 2008

Ladies and gentlemen, good morning and to our foreign guests, a warm welcome to Singapore.  I would like to thank the Asia Insurance Review for inviting me to address you today.  This is the 2nd Asian Insurance CFO Summit, following a very successful inaugural summit in Taipei last year.  I would like to congratulate AIR for launching the CFO Summit alongside the successful annual CEO Summit, in recognition of the important role of Chief Financial Officers (CFOs) in an increasingly complex corporate world.

2. What exactly is the role of the CFO within the corporate structure?  According to Wikipedia, the CFO of a company is the corporate officer primarily responsible for managing the financial risks of the business.  He is responsible for financial planning and record-keeping, as well as financial reporting to higher management.  The CFO typically reports to the Chief Executive Officer and is usually a member of the board of directors.  In other words, the CFO is the head of finance in a company.

3. On the surface, this suggests that the CFO spends most of his time pouring over financial statements and accounting records.  Unless you are a hard-core accountant, who lives and breathes debits and credits, revenue ratios and the like, this doesn’t sound very interesting.  This may be the case for the chief accountant of years gone by, but in today’s world, the CFO has many more responsibilities and faces significantly more complex challenges.

4. We are all well aware of the financial scandals that brought an end to Enron, WorldCom and others, as well as the recent sub-prime crisis that has resulted in significant losses to many well regarded financial institutions.  All these episodes have caused heightened investor scrutiny and the call for stronger corporate governance in ensuring the financial soundness of corporations.  This has focused the spotlight on the role of CFOs, bringing them into a new position of responsibility alongside the CEOs.  The CFO is seen as the CEO’s “sidekick”, playing an important role as his right-hand man to support him in the day-to-day management of the business.  Therefore, CFOs of today must possess an array of skills to contribute effectively instead of just being the “accounting experts” of the organisation.  Coupled with the responsibility for financial soundness, CFOs also face pressure to manage costs and efficiency, while maintaining sound financial controls, and often have to shoulder the responsibility for the organisation’s financial mistakes. 

5. With all these demands placed on the CFO, it is heartening to note that there are still so many of you willing to step up to the plate.  The role of the CFO is indeed a challenging one.  According to audit and consulting firm Deloitte, the CFO has four critical roles, namely steward, operator, strategist and catalyst.

6. The CFO’s role as a “steward” is probably the most obvious.  As a steward, the CFO is responsible for accounting, financial control, risk management and asset preservation.  He must also ensure the company’s compliance with financial and regulatory reporting requirements.  This important role of the CFO is borne out by the recent volatility in the financial markets where companies have had to contend with significant write-downs in the value of their investments.  With the use of fair value or marked-to-market valuations as the international accounting standard, companies have to be mindful of the impact of market movements on the valuation of their assets and hence their solvency positions.  In this regard, the CFO would have to provide professional advice to the company’s Board on the potential implications of such risks when deciding on the company’s risk tolerance.  In addition, for insurance companies, there is a greater need to manage asset-liability mismatch risks as liability and asset values are closely inter-related. 

7. The second critical role of the CFO is the “operator”.  This means that the CFO is responsible for ensuring that the company’s operations are conducted in the most cost efficient manner.  This is particularly important in the corporate world nowadays as shareholders demand an adequate return on their investments.  However, in an environment where resources are tight, it is a challenge to keep costs low without sacrificing quality.  The CFO therefore has the unenviable task of striking the right balance between cost-savings and service quality.  The CFO has to ponder issues of resource management, outsourcing, and sharing of services, amongst others, in order to reap the most out of the company’s limited financial resources.  I’m quite sure CFOs have often been criticised by the business units for being too tight-fisted with the company’s finances and hindering business opportunities.  But one area that CFOs should not compromise on is the need for sound and effective internal control systems and processes.  With the operating environment increasing in complexity, the CFO needs to be confident that these systems and processes can be relied upon to prevent or detect problems before they occur.

8. The third critical role of the CFO is that of a “strategist”, providing financial leadership in determining strategic business direction and aligning financial strategies.  As a strategist, the CFO has to focus on sustaining future business performance of the company to enhance shareholder value.   The CFO will have to think creatively within the boundaries of the legal and regulatory framework to optimise the company’s capital resources.  However, these strategies should not compromise financial resilience of the company over the long-term for short-term profitability.   This is arguably often a difficult call to make as the CFO may be concerned that he will not retain his job over the long-term if his decisions do not produce results in the short-term.

9. Finally, the CFO is a “catalyst”.  As a catalyst, the CFO is an agent for change, stimulating the right behaviours across the organisation to achieve its strategic and financial objectives.  The CFO has the important responsibility to establish the appropriate structure of enterprise accountability that provides the right incentives for all units within the company to achieve its objectives.   In this role, the CFO has to serve as a business partner to the other decision makers in the company, including the business unit leaders, to ensure the alignment of business strategies across the organisation.

10. I suppose all of you need no convincing that the CFO plays a critical role in any company.  The CFO is instrumental in ensuring the long-term financial soundness of the company.  But the CFO cannot perform this critical role alone. 

11. In order to be effective, the CFO needs the support of the Board and other members of management.  While the Board can delegate certain functions relating to the day-to-day management of the company to the CEO and CFO, it remains the Board’s responsibility to ensure that the company remains financially sound.  Therefore, it is in the Board’s interest to ensure that the CFO has the necessary resources and incentives for him to perform his functions effectively.  The incentives should reward effective risk management and not be skewed towards top-line or bottom-line monetary goals only.

12. A good CFO with the ability to manage all the various responsibilities effectively is, however, hard to come by.  When one is found, he is often loaded with other responsibilities to capitalise on his strategic thinking ability and financial proficiency.  This is often the case as companies push for greater cost efficiencies.  In the case of insurance companies, there seems to be a tendency for the appointed actuary to also be the CFO to take advantage of his strengths in financial analysis.

13. It is, therefore, important for Boards of companies to consider whether they are overwhelming their CFOs with too many responsibilities to the extent that they are unable to focus on their key functions.  More importantly, care must be exercised to ensure that CFOs are not assigned responsibilities that subject them to potential conflict of interests.  In particular, the role of the appointed actuary and the CFO has clear conflicts.  The actuary is responsible for ensuring that the insurer’s liabilities are valued based on sound actuarial principles to enable the insurer to maintain sufficient assets to meet its liabilities when they fall due.  The role of the appointed actuary would include an assessment of the soundness of the insurer’s pricing of its products and the impact on the financial position of the insurer.  In performing his role, the actuary’s primary responsibility is to provide independent advice to the Board on the ability of the insurer to meet its financial obligations to its policyholders and to recommend additional reserves to be set aside when necessary.  On the other hand, the CFO’s responsibility is to drive down costs and increase efficiencies, with the view of generating a reasonable rate of return to shareholders.  While one may argue that this does not necessarily conflict with the responsibilities of the actuary, it is not difficult to envisage situations where the judgment of the actuary, if he is also the CFO, may be clouded by the need to report a reasonable profit to shareholders.

14. Another common situation of conflict is when the CFO is also made responsible for the investments of the company as the Chief Investment Officer.  Although the risk tolerance of the company may have already been set by the Board, the Chief Investment Officer does have some flexibility to decide on the types of investments to purchase within each asset class.  Unless there is a separate Chief Risk Officer, the CFO would be placed in a situation of conflict as his responsibility as the CFO would require him to minimise risk whereas as the CIO, his responsibility would be to maximise return.  When the markets are not moving in his favour, the CIO may be persuaded to take on more positions, hoping to turn his portfolio around.  As the CFO, he should be more concerned with minimising losses, but his judgement could be clouded if he was the one who made the investment decisions in the first place.  Also, if the CFO is not the one responsible for the investment decisions, he would have greater independence to report any adverse developments to the Board promptly.

15. Clearly, the preference would be for such conflicting roles to be segregated.  CFOs should be allowed to focus on the already demanding responsibilities that are expected of them.  However, we recognise that in some companies, particularly those with small scale operations, because of constraints on resources, it may be necessary for CFOs to assume certain additional responsibilities that may conflict with their roles as CFOs.  In such circumstances, it would be necessary for the Board to institute adequate mitigating measures and control procedures to minimise the impact of the potential conflicts.

16. It is clear that companies are operating in an increasingly complex environment.  As a result, the role of the CFO is becoming more and more challenging.  It is therefore useful for CFOs to gather together in forums such as this to exchange views and learn from each other.  I am sure the speakers who have been lined up would provide you with rich insights into how to meet the challenges of a CFO.  However, beyond the more organised forums, it may be useful for CFOs in the insurance industry to meet on an informal but more regular basis to exchange views, share ideas and develop best practices for CFOs in the industry.  It could also be an avenue for CFOs to coordinate views on the challenges that they face and, where appropriate, work in partnership with the regulators to address them.

17. On that note, I wish all of you a fruitful and engaging conference ahead.