From a legal perspective, CFOs can be considered an officer of the company even if they are not a director of the business.
As an officer of the company, CFOs could be held personally liable if the business breaches certain laws. This means that if the business breaches the law, officers of the business are found to have committed a crime, potentially putting their personal assets - including the family home - at risk.
There are a range of mechanisms CFOs could explore that could help protect their personal assets in such a situation.
CFO's Expertise
The basic financial skills are important because the CFO is a primary player in structuring the company’s use of capital. Use of capital includes managing investments, revenue, and expenses. A good chief financial officer is critical to the success of any organisation, and a bad one may cause that organisation to fail. The question is; what makes a good CFO?
The great CFO’s are almost universally well-educated and share many common key attributes. Here’s what we think makes a good CFO:
- Thinking strategically inside a well-defined vision
- Focused on the operation and how top and bottom line growth are affected
- Has a comprehensive understanding of the business
- Has insight into what drives the numbers
- Is an intuitive leader who motivate others
- A master at effective persuasive communication
- Ability to identify and explain opportunities
- Approaches opportunity with caution mitigating risk
- Uncompromising integrity and the highest ethical standards
What Makes a Good CFO?
The really good CFOs take part in creating the strategic plans that move a company forward. They earn a reputation for effective leadership not only with their departments but with the company in general. They demonstrate a respectable executive presence among the whole executive management team.
As CFO, he or she must clearly understand how their company functions – the operations and business model. The CFO must not only report numbers but also expertly interpret and explain the “why”. CEO’s will tell you that the best CFO will answer a question before anyone even thinks to ask it.
Why are Communication Skills Important for CFOs?
Effective communication, oral and written, is fundamental. Every key player must understand where the company stands concerning performance and resources, and it is the responsibility of the CFO to forward that information clearly. Many CFOs see their role as making the numbers tell a story of opportunity, investment, the company direction, and potential risks. CFOs use numbers to tell the story of how financial knowledge, teamwork, and problem solving can help each department align with the other to add value and accomplish the company’s mission. CFOs must maintain the highest ethical standards and create trust and confidence in others. Great CFOs understand and honor the unspoken notion that hey hold the keys and are responsible for protecting everyone's money.
CFO's Key Responsibilities
A CFO is in charge of a company’s financial operations. This includes responsibility for internal and external financial reporting, stewardship of a company’s assets, and ownership of cash management. Increasingly, the role is more forward-looking and expanding to incorporate strategy and business partnership.
Do Small Businesses Need a CFO?
Clearly, CFOs play a critical role in their company’s success. Clearly, their role is evolving into one that plays an even larger role than in the past. One could argue that without an effective and talented CFO, many businesses would fail. That argument begs the question; what do many small, or even some medium size businesses do if they cannot afford to spend a compensation package large enough to attract a talented CFO? How can they tap into the benefits acquired from the expert advice that large companies and corporations have? Outsourcing (or renting one?) is the answer. Many small business owners don’t even have a CFO but could benefit enormously from that type of financial advice. The time has come to consider outsourcing this position.
Outsourcing a CFO is much cheaper than hiring one. The employer doesn’t provide benefits, can set the number of hours necessary, and the hourly or value rate is often negotiable. Keep in mind that a confidentiality clause is a must when contracting a CFO, and it’s best to find someone who has some familiarity with the intended industry. Outsourcing for a CFO is very similar to any delegating in that it will free the small business owner’s time for other important matters. In addition to freeing up the owner’s time, the outsourced CFO can function as sort of a trial run of how a full time employed CFO might contribute to the company.
Understanding exposures
Sarah Bartholomeusz, CEO of You Legals, thinks there are many instances in which a CFO may be personally liable for breaches of the law and that a broad range of legislation potentially imposes personal liability on directors and officers.
“The most well-known provisions come from the Corporations Act. These include insider trading and the duty not to trade while the company is insolvent," she says.
“It sounds quite simple but sometimes the waters of insolvency are a little murky. It's really important for directors and officers to properly understand insolvency and where their personal obligations arise," she says.
The Competition and Consumer Act is another law that can make directors personally liable for false or misleading statements.
Additionally, each state and territory has enacted environmental protection laws that place obligations on corporations and their directors for environmental offences.
“Legislation that deals with the rights of employees, such as superannuation and occupational health and safety laws, impose significant personal liability on directors," says Bartholomeusz.
OHS legislation, for example, requires directors to actively exercise diligence in matters of workplace health and safety.
“Offences under the OHS legislation are divided into three broad categories that impose penalties from corporate fines to personal fines and even imprisonment in cases of recklessness," she adds.
There are potentially serious consequences if a CFO does not have proper protections in place if they are sued.
“If a director does not have insurance or indemnity and they are personally liable to whichever party seeks redress, it will be necessary to provide the funds to compensate the other party, whether that is through personal investments or holdings, including their house," Bartholomeusz says.
Insurance is essential
Insurance is often a first line of defence and the main means of protection for many CFOs. As an officer of the business, CFOs could help safeguard against potential risk by conducting due diligence when looking at the insurance policies that cover current directors and officers.
“Read the policy or speak with your company's insurance broker and make sure you understand the scope of the cover," says Bartholomeusz.
Most insurance policies will cover three main types of liability:
1. Personal liability insurance in circumstances where the company is unable to indemnify its officers
2. Reimbursement to the company when it has indemnified its officers
3. Legal insurance and liability coverage for defending a shareholder or other third-party claim.
Bartholomeusz explains The Corporations Act prevents companies from indemnifying an officer or director who is involved in any dishonest or illegal activities such as:
· Wilful breach of a certain duty
· Improper use of positions
· Improper use of information.
“In these circumstances, your insurance policy will be rendered null and void," she warns.
Deed of Indemnity
Aside from insurance, an option for CFOs to help prevent personal liability is to ask the company to provide a deed of indemnity.
“An indemnity deed can provide significant protection for officers by assigning losses they would otherwise personally incur to the company," says Bartholomeusz.
“It is an extremely useful tool officers can use to manage the legal risks associated with their role," she adds.
The scope of an indemnity deed is usually agreed between the CFO and the company, although this may not always be the case.
Bartholomeusz says that there are some legal limitations that restrict the extent of indemnity that can be provided as companies also wish to limit the breadth of indemnity provided to officers.
From an officer's point of view, a deed that provides indemnity to the full extent permitted by law provides the greatest protection and security.
However, the law imposes numerous legal restrictions on the extent of any indemnity for legal liability. For instance, the company cannot indemnify an officer for any activity that is dishonest or that breaches a criminal provision of any legislation.
Extra options
Aside from insurances and indemnities, there are several other techniques CFOs might use to help protect themselves and their assets.
However, Bartholomeusz says there is a suite of provisions within the Corporations Act that are designed to 'pierce the corporate veil' and that it would be naive to think that simply transferring property into a spouse's name will offer protection.
“They look beyond whose name is on the paperwork to determine the true owner of the property to claw back assets that may in fact belong to the company or its directors or officers," she explains
In addition to insurance and indemnity, CFOs may wish to explore other ways to protect assets such as the family home by holding them in trust for the benefit of a spouse and children.
Nevertheless, Bartholomeusz cautions CFOs against thinking that losing their home is the worst thing that could happen.
“A trust will not save you from jail. The only way to truly protect yourself from personal liability is to be aware of what your obligations as directors and officers are, fulfil those obligations diligently and when in doubt seek professional advice," she stresses.
Key Takeaways on how to be a successful CFO
- Read and fully understand the insurance policies that relate to directors and officers.
- Explore whether it's necessary for the company to provide a deed of indemnity.
- Don't assume transferring property into a spouse's name provides appropriate protection.