The strategic CFO creating value in a dynamic market

The Strategic CFO


.


Ulrich Hommel • Michael Fabich
Ervin Schellenberg • Lutz Firnkorn
Editors

The Strategic CFO
Creating Value in a Dynamic Market
Environment


Editors
Prof. Dr. Ulrich Hommel
EBS Universita¨t fu¨r Wirtschaft
und Recht i. Gr.
EBS Business School
Gustav-Stresemann-Ring 3
65189 Wiesbaden
Germany

Ervin Schellenberg
EquityGate Advisors GmbH
Mainzer Str. 19
65185 Wiesbaden
Germany

Michael Fabich
EquityGate Advisors GmbH
Mainzer Str. 19
65185 Wiesbaden
Germany


Lutz Firnkorn
Ackeranlagen 7
74523 Schwa¨bisch Hall
Germany


ISBN 978-3-642-04348-2
e-ISBN 978-3-642-04349-9
DOI 10.1007/978-3-642-04349-9
Springer Heidelberg Dordrecht London New York
Library of Congress Control Number: 2011939762
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Contents

The Strategic CFO: New Responsibilities and Increasing
Job Complexity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Michael Fabich, Lutz Firnkorn, Ulrich Hommel,
and Ervin Schellenberg
Part I

Strategy-Linked Approaches to Risk Management
and Corporate Financing

Linking Strategy to Finance and Risk-Based Capital Budgeting . . . . . . . . . . 9
Ulrich Hommel and Mathias Gerner
Linking Strategy, Operations and Finance with Simulation-Based
Planning Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Michael Rees
Risk-Return Management of the Corporate Portfolio . . . . . . . . . . . . . . . . . . . . . 49
Ulrich Pidun and Matthias Kru¨hler
Capturing the Strategic Flexibility of Investment Decisions
Through Real Options Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Johnathan Mun
Exposure-Based Cash-Flow-at-Risk for Value-Creating Risk
Management Under Macroeconomic Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Niclas Andre´n, Ha˚kan Jankensga˚rd, and Lars Oxelheim
Part II

Coping and Benefiting from the Dynamics of Financial Markets

Capital Markets 2.0 – New Requirements for the Financial
Manager? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Holger Wohlenberg and Jan-Carl Plagge
v


vi

Contents

Evolving Capital Markets and the Changing Role of the CFO . . . . . . . . . . 127
Hady Farag, Frank Plaschke, and Marc Rodt
Integrated Capital Structure Management – Value Improvement
by Overcoming the Silo Approach of Financial Institutions . . . . . . . . . . . . . . 143
Michael Fabich, Ervin Schellenberg, and Katinka Wo¨lfer
Managing Cash Flow and Control Risks of Financial
Contracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Petri Ma¨ntysaari
The CFO’s Information Challenge in Managing
Macroeconomic Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Lars Oxelheim, Clas Wihlborg, and Marcus Thorsheim
Part III

Linking the Dynamics of Financial Markets and Product Markets

Capacity-Adjustment Decisions and Hysteresis . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Benoıˆt Chevalier-Roignant and Arnd Huchzermeier
Linking Strategy to the Real World: Working Toward Risk
Based Supply Chain Optimization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
Wilhelm K. Kross

Dealing with Recent Challenges in Cash Flow Management:
Commodity Volatility and Competitive Pressure . . . . . . . . . . . . . . . . . . . . . . . . . . 249
Lutz Firnkorn, Arno Gerken, Sven Heiligtag, Konrad Richter,
and Uwe Stegemann
How Climate Change Impacts the Role of the CFO . . . . . . . . . . . . . . . . . . . . . . 265
Thomas Ru¨schen and Markus Eckey
Capturing the Impact of Market Dynamics on Firm Value
for Service-Driven Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Diem Ho
Creating Corporate Value with the Exposure to Financial
Innovations: The Case of Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295
Marcus Schulmerich


Authors Biography

Niclas Andre´n is an associate professor of the Department of Business Administration, Lund University School of Economics and Management, Lund, Sweden. He
holds a PhD in business administration. Niclas Andre´n is the Director of the master
program in Corporate and Financial Management and former Director of the master
program in Finance, both at Lund University. He has extensive teaching experience
within corporate finance, esp in corporate risk management, valuation, and financial
restructurings. He has specialized in interactive and applied teaching pedagogics,
not least case-based teaching. His research interests are corporate risk management,
behavioral corporate finance, and asset pricing.
Per-Olof Bjuggren has a Master of Political Science from Lund University and
took his PhD in Economics at Lund University in 1986. The PhD thesis is about
vertical integration in the Swedish pulp and paper industry. A new theoretical
paradigm, the transaction cost approach, is used. It is one of first studies that use
this approach empirically. In 1994 he was appointed associate professor of Economics at Linko¨ping University. Since July 1995 he is Associate Professor of
Economics at Jo¨nko¨ping International Business School. His own research includes

studies in the fields of industrial organization, law and economics and corporate
governance. He has published articles in journals such as the International Review
of Law and Economics, Small Business Economics, Geneva Papers of Risk and
Insurance and Family Business Review. Several articles have also been published
in refereed international books. He has together with Arne M Andersson and Olle
Ohlsson published industrial organization textbooks (in Swedish).
Dr. Benoıˆt Chevalier-Roignant graduated in business administration from EMLYON Business School and WHU – Otto Beisheim School of Management in
September 2007 and subsequently joined the Munich office of L.E.K. Consulting,
a global consulting firm with focus on private equity advisory services. From 2009
to 2011, he completed a doctorate at the Department of Production Management at

vii


viii

Authors Biography

WHU under the supervision of Arnd Huchzermeier, PhD and Lenos Trigeorgis,
DBA. In September 2011, he joined the University of Texas at Dallas as postdoctoral fellow under the supervision of Dr. Alain Bensoussan. His research deals with
application of stochastic control theory and differential games to the analysis of real
options in competitive settings. Benoıˆt co-authored Competitive Strategy with
Lenos Trigeorgis (forthcoming at the MIT Press) and has published in leading
academic journals such as the European Journal of Operational Research.
Dr. Diem Ho is manager of University Relations for IBM Europe Middle East and
Africa. He is in charge of research collaborations, skill development, and technology
access with/for the academic community and driving higher education reforms to
meet industry needs and societal challenges in a service dominant economy. Diem
has held many different positions in IBM, from research, consulting to management. He has successfully led management consulting engagements at more than
16 leading European banks and financial services companies throughout Europe.

He was elected to the IBM Academy of Technology in 1995. He is an associate
editor of the Journal of Computational Economics and has been guest editor for a
number of journal special issues. Dr. Ho is also a member of the peer review teams
for the EFMD-EQUIS and EPAS accreditation programmes (European Foundation
for Management Development – European Quality Improvement System and
Programme Accreditation System) and a member of the EPAS committee and has
involved in a number industry group initiatives such as the Career Space Consortium (ICT skills and new University curricula for the 21st Century Economy) and
the European Learning Industry Group (ELIG). He’s supervised PhD candidates
and published widely in Engineering, Physics, Mathematics, Remote Sensing,
Image Processing, Optimization, Finance and Business Intelligence. He is also a
frequent invited contributor to the OECD and UNESCO conferences and publications. Diem obtained 2 M.S. degrees and a Ph.D. degree from Stanford University,
California.
Dr. Markus Eckey is a Vice President in Deutsche Bank´s Global Credit Trading
division where he originates and executes structured asset finance transactions.
Before, he worked in Deutsche Bank´s Corporate Development department focussing on principal M&A transactions and strategy-related projects. Prior to joining
Deutsche Bank, Markus worked in the Investment Banking Division of Goldman,
Sachs & Co., specialising in M&A and IPO transactions across a variety of
industries. Markus holds a diploma in Business Administration from the University
of Mannheim and a Ph.D. from the European Business School (ebs).
Michael Fabich is co-Founder and Managing Partner of EquityGate Advisors GmbH
in Wiesbaden (Germany). With over 25 years of professional experience, Michael coheads EquityGate’s corporate finance team. He has previously been Head of the
German investmentbanking division of Salomon Smith Barney (Citigroup), Member
of the Board at Salomon Brothers AG in Frankfurt, and Member of the Global and
European Investmentbanking Committees. Previously he was Co-Head of M&A


Authors Biography

ix

Germany at Dresdner Kleinwort Benson. Michael founded and headed Schro¨der
Mu¨nchmeyer Hengst Corporate Finance GmbH. Before setting up EquityGate, he
was Chairman of the German Advisory Board of Duke Street Capital in London.
Michael graduated from the University of Applied Sciences in Mainz, and is a
Member of the Advisory Board of the Strategic Finance Institute (SFI) at European
Business School (EBS) International University.
Dr. Hady Farag is a Principal in the Frankfurt office of The Boston Consulting
Group (BCG). He is a core member of the Corporate Development practice area and
the Corporate Finance Task Force. He has supported clients across a wide variety of
industries and geographies, including Europe, Southeast Asia, and South America,
focussing on capital market and M&A-related projects. Prior to joining BCG, Dr.
Farag served as researcher and later Head of University Development at the
European Business School (EBS), where he earned a doctorate degree in business
administration. He also holds master-level degrees from both EBS and the Joseph
M. Katz Graduate School of Business (University of Pittsburgh).
Lutz Firnkorn is a Project Manager in McKinsey & Company’s Frankfurt office,
where he focuses predominantly on risk management for European financial institution. Furthermore, he is a PhD candidate at the endowned chair for corporate
finance and capital markets at the European Business School (EBS), with research
focus on corporate finance and corporate risk management. Lutz Firnkorn holds a
Masters degree (Diplom Grande Ecole) from the ESCP-EAP in Paris.
Mathias Gerner is a Research Assistant and Doctoral Candidate at European
Business School (EBS) International University in Germany. In addition, he was
a Visiting Scholar at The University of Texas at Austin (UT) during the summer
2009. He completed his studies in Industrial Engineering at The University of
Karlsruhe (TH) including a semester abroad at the Mathematics and Statistics
Department at the Herriot-Watt University of Edinburgh. Between 2006 and 2008
he successfully finished the Management Trainee Program (SGP) of the Siemens
AG, Sector Energy. His main research areas are commodity risk management,
energy prices and derivatives.
Dr. Arno Gerken is a Director in McKinsey & Company’s Frankfurt Office, and is

leading McKinsey’s Global Risk Management Practice out of Europe. Dr. Arno
Gerken has vaste experience in risk management for financial institutions as well as
for corporates. Dr. Arno Gerken holds a diploma in national economics, with
majors in game theory, micro theory, and statistics and received his PhD from the
University of Bonn, Germany, on credit portfolio modeling.
Dr. Sven Heiligtag is a Principal in McKinsey & Company´s Hamburg Office and
a member of both the Transportation & Logistics as well as the Risk Management
Practice. He has significant experience in advising clients on corporate finance,
strategy, organizational and marketing/sales topics. Dr. Sven Heiligtag has a


x

Authors Biography

Masters degree in Chemistry from the University of Hamburg, a Ph.D in Biochemistry from the University of Hamburg and the Cancer Research Center of Hawaii.
Prof. Ulrich Hommel PhD is a Full Professor of Finance and heads the Endowed
Chair of Corporate Finance & Capital Markets at European Business School (EBS).
Ulrich Hommel holds a Ph.D. in Economics from the University of Michigan, Ann
Arbor, and has completed his habilitation in Business Administration at the WHU,
Germany. He was an Assistant Professor of Finance at the WHU from 1994 to 1999
and has subsequently joined the faculty of the EBS. He is the Director of the
Strategic Finance Institute at the EBS. In the past, Ulrich Hommel has held visiting
appointments at the Stephen M. Ross School of Business (University of Michigan),
the Krannert School of Management (Purdue University) and the Bordeaux Business School. His main research interests are corporate risk management, venture
capital & private equity, family business finance and corporate restructuring. Ulrich
Hommel has been Academic Dean of the Faculty at the EBS from 2000 to 2002 and
has subsequently held the position of Rector and Managing Director from 2003 to
2006. Since 2007, he is also an Associate Director of Quality Services at the
European Foundation for Management Development (EFMD) in Brussels and, as

one of the Directors, is responsible for the EFMD Programme Accreditation System
(EPAS).
Prof. Dr. Arnd Huchzermeier chairs the Production Management Department and
the Center for Collaborative Commerce (CCC) of WHU – Otto Beisheim School of
Management in Vallendar. In 1986, he received a masters degree in business
administration as well as computer science and operations research from the
Karlsruhe Institute of Technology (KIT). In 1991, he received a Ph.D. degree in
Operations Management from the Wharton School of the University of Pennsylvania,
USA. He published, among others, in Interfaces, Management Science,
Manufacturing & Service Operations Management, Marketing Science and Operations Research. Since 2007, he is Member of the Board of ECR Europe’s International Commerce Institute; Belgium, and Executive Editor of the International
Commerce Review: ECR Journal. In 2000, he was awarded the Mercurius Award
by Fedis, the European Federation of Distribution Societies, Belgium. In 2002, he
received the Franz Edelman Finalist Award from the Institute for Operations
Research and Management Science/INFORMS, U.S.A. In 2003, he won both the
ISMS Practice Prize from the Marketing Science Institute, U.S.A. and the Management Science Strategic Innovation Prize from the European Associations of Operational Research Societies / EURO, Belgium. In 2009, he was awarded the ECCH
Case Award from the European Case Clearing House, U.K., in the category
‘Production and Operations Management’. Since 1995, he acts as Academic Director of the German industry competition ‘Best Factory/Industrial Excellence Award’
(jointly with the business journal Wirtschaftswoche and INSEAD, France). In
2009, he co-founded the car sharing company Mobility Now.


Authors Biography

xi

Ha˚kan Jankensga˚rd is a PhD candidate at School of Economics and Management,
Lund University. His dissertation consists of a collection of essays about corporate
risk management. Previously he has worked for Norsk Hydro ASA, Oslo, Norway,
implementing their strategic risk management programme. Currently he is managing partner in HedgeCorp AS, Copenhagen, Denmark, specializing in developing
standardized products for financial planning and risk-adjusted forecasts to support

corporate decision-making.
Dr. Wilhelm K. Kross is an internationally recognized expert in the fields
of applied risk and project management, and the immediate Past President of
the PMI Frankfurt Chapter. A post-graduate engineer with an Exec. MBA and
a doctorate degree in finance, and co-author of more than four dozen publications
and two books on risk management, Wilhelm gained hands-on experience while
working on initiatives in more than 40 countries across the globe. Formerly a Senior
Vice President of Marsh GmbH, responsible for the functions of CFO and COO of
the risk consulting subsidiary in Germany and Austria; previously the Head of
Management Consulting of Value & Risk AG; and with more than 10 years of
earlier working experience in various managerial functions in Africa and Canada;
Wilhelm’s main engagements since starting his own business have consisted of
designing and implementing risk management systems, mega-project (re-) structuring and financing, and interim management in major turn-around and crisis
management situations.
Dr. Matthias Kru¨hler is a Project Leader and member of the Corporate Development practice area at the Boston consulting group in Hamburg. His project work and
research is focused on corporate strategy, portfolio management, the role of the center
and post merger integration. Matthias Kru¨hler has studied business administration
at Albert-Ludurigs-University at Freiberg and Westfa¨lische Wilhelms-University at
Mu¨nster, and moreover holds a PhD in business administration from the Technical
University of Freiberg. His dissertation focuses on parenting advantage and value
creation in corporate conglomerates and private equity firms.
Prof. Petri Ma¨ntysaari PhD is Professor of Commercial Law at Hanken School of
Economics in Finland. He is a graduate of the University of Helsinki (M.Jur., 1988),
the University of Bristol (LLM, 1989), and Hanken (PhD, 1998). Prior to coming to
Hanken in 1996, he practised law in Helsinki and was a visitor at Max-PlanckInstitut fu¨r ausla¨ndisches und internationales Privatrecht in Hamburg (1992–1994).
Professor Ma¨ntysaari’s main research interests are in corporate finance law, the law
of corporate governance, commercial contract law, and electricity law.
Dr. Johnathan Mun is Chairman and CEO of Real Options Valuation, Inc.
(a software, training and consulting firm in Silicon Valley, focusing on advanced
risk analytics, risk simulation, stochastic forecasting, portfolio optimization, strategic real options analysis, and general business modeling analytics). He has authored

12 books used by multinationals and universities around the world, and created 12


xii

Authors Biography

software applications in risk analysis, risk simulation, strategic real options, business statistics, and general decsion analytic tools (www.realoptionsvaluation.com).
He holds a PhD in finance and economics (Lehigh University), an MBA in business
administration, an MS in management science, and a BS in biophysics, and holds
other financial charters and certifications in risk and financial analysis (CRM, FRM,
CFC, MIFC).
Prof. Lars Oxelheim holds a Chair in International Business and Finance at the
Lund Institute of Economic Research, Lund University and is affiliated with the
Research Institute of Industrial Economics (IFN), Stockholm, and with the Fudan
University, Shanghai. Dr. Lars Oxelheim is chairman of the Swedish Network for
European Studies in Economics and Business (SNEE). He has authored or edited
some 35 research monographs and authored or co-authored a number of research
articles published in international business, finance, and economic journals. His
recent research monographs include Corporate decision-making with macroeconomic uncertainty (Oxford University Press), Markets and Compensation for
Executives in Europe (Emerald Group Publishing), National Tax Policy in Europe
– To Be or Not to Be (Springer Verlag), Corporate and Institutional Transparency
for Economic Growth in Europe (Elsevier), How unified is the European Union?
(Springer Verlag), European Union and the Race for Inward FDI in Europe (Elsevier) and Money Markets and Politics – A Study of European Financial Integration
and Monetary Policy Options (Edgar Elgar). Lars Oxelheim is a frequently invited
key-note speaker and adviser to corporations and government agencies.
Dr. Ulrich Pidun is an Associate Director Corporate Development at The Boston
Consulting Group in Frankfurt. His project work and research is focused on
corporate strategy development, corporate portfolio management, value-based
management, and strategic risk management. Ulrich Pidun has studied chemistry

and mathematics in Marburg and London and holds a PhD in Theoretical Chemistry
and an MBA from INSEAD, Fontainebleau. He is also a visiting professor for
strategic management at the Technical University of Freiberg.
Jan-Carl Plagge After graduating in business administration from the University
of Muenster with a M.Sc. degree in 2006, Jan-Carl Plagge joined the Issuer Data &
Analytics team at Deutsche Boerse. His work is focused on the development of
international- and strategy index concepts serving as underlying for structured
products. In 2010 Jan-Carl Plagge joined the index provider STOXX Ltd.Since
2009, he is an External Doctoral Candidate at the European Business School (EBS)
International University in Oestrich-Winkel/Wiesbaden (Germany).
Dr. Frank Plaschke is a Partner and Managing Director in the Munich office of
The Boston Consulting Group (BCG). He joined BCG in 1997 and worked for BCG
Hong Kong in 1999/2000. He is a member of BCG’s worldwide leadership team
in the Corporate Development practice area. Dr. Plaschke is the global topic leader


Authors Biography

xiii

for “Office of the CFO”, which comprises topics around finance excellence and
organization, value management and incentive systems, monitoring and reporting,
planning and capital allocation, risk management, as well as capital markets
and investor strategy. He also co-authors BCG’s annual Value Creators Report.
Dr. Plaschke was awarded his master degree in business administration from the
University of Bayreuth, and his PhD in business administration from the University
of Dresden and the Schmalenbach award in 2002.
Dr. Michael Rees is currently an independent consultant with over 20 years
experience in strategy formulation, business analysis, financial analysis and risk
modelling. He has previously worked as a Partner at Mercer Management Consulting, as a Vice-President at J.P. Morgan, and – as a retained consultant – as Director

of Training and Consulting at Palisade Corporation.Michael has a Doctorate in
Mathematical Modelling and Numerical Algorithms from Oxford University, an
MBA from INSEAD, and has studied for the Certificate of Quantitative Finance,
graduating top of the course and also receiving the highest final exam mark. He is
also the author of Financial Modelling in Practice (John Wiley & Sons, 2008).His
current professional focus is on providing model-building, training and associated
project management services to support the decision- and communication-needs of
senior executives; more information about Michael and his services is available at
www.michaelrees.co.uk.
Dr. Konrad Richter is a Senior Expert in McKinsey & Company’s Vienna office,
and is dedicated member of the Risk Practice. Dr. Konrad Richters work focuses
predominantly on risk management topics for European financial institutions as
well as for leading utility and telecommunication firms. Dr. Konrad Richter holds a
diploma in Physics from the Vienna University and a PhD in economics from the
University of Kiel.
Dr. Marc Rodt is a Principal in the Munich office of The Boston Consulting Group
(BCG). He is a core member of the Corporate Development practice area and the
Corporate Finance Task Force. His work focuses on corporate finance topics
ranging from M&A and IPO support to finance organization and corporate processes.
Previously, Dr. Rodt studied business administration at Ludwigs-MaximiliansUniversita¨t Munich and earned a doctorate in business administration in finance
from Ludwigs-Maximilians-Universita¨t Munich.
Dr. Thomas Ru¨schen completed his business studies in Mannheim and Frankfurt
before joining Deutsche Bank in 1990 in the field of European financial markets. As
Senior Relationship Manager in London he was responsible for corporate accounts
in continental Europe and then became Country Manager for Italy. From 2003 till
February 2011 he headed the department Asset Finance & Leasing, a product group
within Deutsche Bank’s Corporate and Investment Bank Division, responsible for
the financing of long-term economic commodities worldwide, e.g. in the area of
renewable energies. He is currently globally responsible for Key Account

xiv

Authors Biography

Management within DWS Investment GmbH, the mutual fund subsidiary of
Deutsche Bank Group. In addition, he is responsible for Distribution in Europe as
well as for DWS Access, DWS’ closed-end fund business for illiquid assets. He is a
member of the executive committee of DWS and is also responsible for coordinating DWS’ overall strategy around sustainable and climate change related investments. In this capacity he is also a member of the ESC Environmental Steering
Committee of Deutsche Bank Group. Furthermore, he is Member of the Group of
Founders of Dii GmbH, the Industrial Initiative of DESERTEC.
Ervin Schellenberg is co-Founder and Managing Partner of EquityGate Advisors
GmbH in Wiesbaden (Germany), with over 20 years of professional experience
investment banking and private equity. Ervin leads EquityGate’s equity advisory
team and co-heads corporate finance. He has previously been Member of the Board
and Head of DACH at Duke Street Capital, an alternative investment firm in
London. He joined from Salomon Smith Barney (Citigroup), London, where he
was Director in the European industrial investmentbanking group and the leader of
the automotive investmentbanking team in Europe. Before, Ervin worked for
Dresdner Kleinwort Benson, Frankfurt, in the structured finance and M&A department. As a graduate from Goethe University in Frankfurt, Ervin regularly publishes
on recent topics in corporate finance and capital markets, lectures at European
Business School (EBS) and Hochschule RheinMain, holds seminars, and is regularly invited to speak at finance conferences.
Dr. Marcus Schulmerich is a Vice President with State Street Global Advisors
GmbH (SSgA), Munich, and as a Senior Product Engineer responsible for Europe,
Middle East and Africa. He heads a team of product specialists covering all quantitative
equity strategies in the Enhanced and Active space as well as Hedge Fund and Absolute
Return strategies. Before joining SSgA he was a product specialist with PIMCO in
London and Munich for many years, responsible for actively managed fixed income
and commodity portfolios. Dr. Schulmerich started his career with ADIG Investment as
a Financial Engineer and Risk Manager. He has worked with SSgA since 2006 and has

eleven years of work experience. Dr. Schulmerich holds a Masters degree in Mathematics and an MBA (M.I.T. Sloan School of Management). Since 2005 he is a guest
lecturer in Finance at the European Business School (EBS) in Wiesbaden / Germany
and at the University of Applied Sciences in Munich where he regularly gives lectures
in Financial Engineering, Derivatives as well as Portfolio and Risk Management.
Besides his professional and academic work Dr. Schulmerich publishes on equity
portfolio management, interest rate modelling and real options valuation.
Dr. Uwe Stegemann is a Director in McKinsey & Company’s Cologne Office. He
is leading McKinsey’s German Risk Management Practice. Dr. Uwe Stegeman has
long lasting experience in risk management for financial institutions and corporates.
Dr. Uwe Stegemann studied business administration and economics at the University of Cologne, and received his PhD from the European Business School (EBS).


Authors Biography

xv

Marcus Thorsheim holds a M.Sc. degree in business and economics with a
specialization in corporate and financial management from Lund University School
of Economics and Management. He is currently a researcher at the Institute of
Economic Research at Lund University and coordinator of the Swedish Network for
European Studies in Economics and Business. His research interest are risk management, capital structure and financial reporting standards.
Dr. Holger Wohlenberg became Managing Director of Deutsche Boerse in July
2004. He is responsible for the exchanges Market Data & Analytics business.
Holger joined from Deutsche Bank where he headed Technology Investment
Banking.He began his career at McKinsey & Company, where he was focused on
advising technology, network and media clients. He was elected Partner in 1997.
Holger received a PhD degree in Business Administration, major in Information
and Communication Economics, from the University of Munich.Holger Wohlenberg is chairman of Stoxx Ltd., Market News International Inc., Infobolsa S.A. and
holds a board seat in Indexium AG.
Katinka Wo¨lfer is a Doctoral Candidate at the Strategic Finance Institute (SFI) at

European Business School (EBS) International University in Oestrich-Winkel/
Wiesbaden (Germany). She received a diploma in business from the Justus Liebig
University in Giessen and the University of Kentucky, and graduated with an MBA
from the University of Wisconsin-Milwaukee. In recognition of high scholastic
achievements, Katinka was selected for membership in Beta Gamma Sigma, the
international honor society for collegiate schools of business. Her main research
interests include corporate capital structure management and mid-cap financing.
Katinka is also a Junior Analyst at EquityGate Advisors GmbH in Wiesbaden
(Germany).
Prof. Clas Wihlborg holds the Fletcher Jones Chair of International Business at
Chapman University, California. Dr Wihlborg is author, co-authors, and editor of
some 20 books and numerous articles in the areas of risk management, international
finance and financial institutions. He serves on the editorial board of several journals
and he is a member of the European shadow Financial Regulatory Committee.


.


The Strategic CFO: New Responsibilities
and Increasing Job Complexity
Michael Fabich, Lutz Firnkorn, Ulrich Hommel, and Ervin Schellenberg

1 Introduction
The role of Chief Financial Officers (CFOs) has evolved significantly in recent
years. They are no longer restricting themselves to managing funding availability,
capital structure and financial market risk. CFOs are increasingly involving themselves in all areas of company management including strategy selection and operation. While industrial companies have traditionally shown great reluctance to
appoint CFOs as CEOs, this appears to have become a more regular occurrence
in recent years. These developments are certainly reflective of increased capital
market pressures to deliver satisfactory performance to shareholders and the fact

that competition increasingly involves the liability side of the balance sheet as well.
As CFOs see their roles evolve to what we refer to as “Strategic CFOs”, linking
financial policies to strategy and operations in the context of managing the
company’s risk position assumes a central role in their task portfolio. This volume
is based on the fundamental premise that managing company risk properly is
the very essence of good management. Risk needs to be managed at the source,
i.e. the company’s investment decisions. In this context, we define risk as a
combination of threat and opportunity as any spread around expected outcomes
tend to have a “bad” as well as a “good” side.
CFOs everywhere are currently facing a variety of challenges, which requires
them to tackle their job differently going forward. First, financial markets continue
to evolve and the financing toolkit keeps on changing despite (or because) of the
financial crisis. Many companies are still operating in “natural habitats” on the

M. Fabich (*) • E. Schellenberg
EquityGate Advisors GmbH, Wiesbaden, Germany
e-mail: ;
L. Firnkorn • U. Hommel
Strategic Finance Institute (SFI), EBS Business School, Wiesbaden, Germany
e-mail: ;
U. Hommel et al. (eds.), The Strategic CFO,
DOI 10.1007/978-3-642-04349-9_1, # Springer-Verlag Berlin Heidelberg 2012

1


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M. Fabich et al.

financing side and are not fully exploiting the benefits of ongoing financial
innovation. In fact, they frequently interact with a limited set of financial intermediaries and are therefore guided to certain product groups by their financial
advisors. Second, the financial crisis has put the management of liquidity high up
on the CFOs agenda. While financial market rationing has historically been viewed
as a purely academic issue, it has achieved very practical relevance in recent years
and companies still lack a good understanding how much liquidity should be
accumulated to prepare for turbulent times. Third, shaping overall performance
volatility is an essential part of managing enterprise-wide liquidity as well as the
expectations of financial analysts and investors. Volatility can be reduced as part of
risk mitigation or can be used as a performance enhancer in the presence of
operative flexibility (real options). The full utilization of this potential requires
CFOs to involve themselves in non-finance matters and to assume control of an
explicit process of coordinating a company’s investment and financial policies.
Hence, CFOs increasingly become enablers for the strategy selection process. It is
therefore more than appropriate to refer to the “modern CFO” as the “Strategic
CFO”.
This book represents an inquiry of how the CFOs role has been evolving in
recent years and what further changes can be expected in the future. It will shed
light on the CFOs novel challenges and how to cope with them from an academic
as well as a practical perspective. The remainder of this volume is divided into
three parts:
• Part I focuses on the linkage between strategy and financing as well as
risk management activities. The reader will be provided with state-of-the-art
methodological underpinnings for the measurement of risk and will be given
examples and general insights how capital budgeting and (real) investment
portfolio management can be improved with a risk-enhanced view.
• Part II deals with changes in the CFOs more traditional task portfolio and places
special emphasis on how they can put their companies in a position to benefit
from financial market dynamics.
• Part III focuses more explicitly on the interdependencies between changes in the

firm’s competitive environment and the evolution of financial markets. As the
scope of competition is expanding to involve the liability side of the balance
sheet, CFOs need to coordinate a company’s response to financial and product
market dynamics.

2 Strategy-Linked Approaches to Risk Management
and Corporate Financing
Financing and risk management, on the one hand, and corporate strategy, on the
other hand, are two sides of the same coin. Investment opportunities can only be
realized if sufficient funding is available and, thus, a firm’s financial policy must act
as an enabler for value creation on the business side. In addition, financial slack is


The Strategic CFO: New Responsibilities and Increasing Job Complexity

3

nowadays increasingly considered an important competitive weapon, for instance in
the context of takeover contests. While risk management is still treated by many as a
‘back office’ function, its reach must include strategy selection and investment as
the ultimate sources of risk. Ulrich Hommel and Mathias Gerner explain these
linkages on a conceptual level in their chapter “Linking Strategy to Finance and
Risk-Based Capital Budgeting”. They outline the logical steps of designing a valuebased risk management regime and explain why the Cash-Flow-at-Risk (CFaR)
approach is the logical methodological choice. In the subsequent chapter on
“Linking Strategy, Operations and Finance with Simulation-Based Planning Processes”, Michael Rees provides a detailed treatment of risk analysis using MonteCarlo simulations, which also serve as the conceptual underpinning of CFaR. He
discusses how a simulation approach can help firms to better understand, evaluate
and manage risks and how it can be integrated into an explicit “risk-based planning
process”. Rees identifies the CFO as the natural owner of this process, which
underlines the general argument of this volume that the “modern CFO” is a
“Strategic CFO”.

The management of business uncertainty using simulation techniques is further
discussed in the following two chapters. Ulrich Pidun and Matthias Kr€
uhler elaborate in their chapter “Risk-Return Management of the Corporate Portfolio” how the
simulation approach can enable companies to make better-informed portfolio
decisions on the real investment side. They propose logical steps required for the
optimization of the corporate portfolio from a risk-return perspective. Johnathan
Mun shows in his chapter “Capturing the Strategic Flexibility of Investment
Decisions Through Real Options Analysis” that interpreting investment opportunities
as real options is a natural extension of risk-based capital budgeting. The author
provides an overview of the different forms of optionality and illustrates their
relevance for firm decision-making based on a large variety of industry applications.
Lastly, Niclas Andre´n, Ha˚kan Jankensga˚rd, and Lars Oxelheim illustrate in their
chapter “Exposure-Based Cash-Flow-at-Risk for Value-Creating Risk Management
Under Macroeconomic Uncertainty” how firms can manage the impact of adverse
macroeconomic developments. Unlike the simulation-based approaches discussed
earlier, the authors propose a regression-based approach to quantify the firm’s
exposure to macroeconomic and financial market risk. They explain the methodology in general terms and then illustrate its application using the case of Norsk
Hydro.

3 Coping and Benefiting from the Dynamics of Financial
Markets
The second part of this volume takes a closer look at the changing role of the CFO in
corporate financing. Rising volatility and structural change in financial markets as well
as commodity markets are creating new challenges for CFOs with respect to meeting
the financing needs of company operations. As a consequence, they must develop a


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M. Fabich et al.

more in-depth understanding of the firm’s core business and need to keep abreast of
financial market innovation as well as regulation. They increasingly see themselves
in the role of lobbyists to guide political bodies through the process of crisis-proofing
financial markets without imposing an undue burden on non-financial firms.
Holger Wohlenberg and Jan-Carl Plagge provide an overview of recent capital
market developments from the perspective of non-financial firms in their chapter
“Capital Markets 2.0 – New Requirements for the Financial Manager?”. They
discuss the opportunities arising from financial market globalization, liberalization
and innovation and describe the challenges associated with financial market fragmentation, lacking transparency as well as regulatory changes. In the next chapter on the
“Evolving Capital Markets and the Changing Role of the CFO”, Hady Farag, Frank
Plaschke and Marc Rodt build on the discussion so far and provide an in-depth
treatment how the CFO’s role has changed in recent years and how these
developments have impacted the CFO’s required skillset.
The following three chapters of Part II provide insights on how CFOs need
to approach specific aspects of managing the firm’s finance function. Michael
Fabich, Ervin Schellenberg and Katinka W€
olfer discuss in their chapter “Integrated
Capital Structure Management – Value Improvement by Overcoming the Silo
Approach of Financial Institutions” the principles of capital structure management
from a theoretical as well as a practical perspective. They stress the importance of
aligning corporate financing with the firm’s business activities, as both determine
the enterprise-wide risk profile jointly. Based on a thorough discussion of the
limitations of the scientific capital structure literature, the authors suggest practical
approaches of how the CFO can design a firm’s capital structure, manage its
equity value and enlarge its debt capacity. Petri M€
antysaari focuses in his chapter
“Managing Cash Flow and Control Risks of Financial Contracting” on the general
drivers of corporate financing and places particular emphasis on how governance
and contracting structure are shaping the availability of funds. Lastly, Lars

Oxelheim, Clas Whilborg and Marcus Thorsheim explain in “The CFO’s Information Challenge in Managing Macroeconomic Risk” the importance of conditioning
financing decisions on the macroeconomic environment as a core driver of volatility facing the firm. The authors propose an integrated approach linking financial,
operational and strategic considerations and outline how risk management can
shield the firm from detrimental changes in the macroeconomic environment.

4 Linking the Dynamics of Financial Markets and Product
Markets
The third part of the book is dedicated to the question how the CFO can actually
assist the firm in conducting its overall strategy in a highly volatile environment.
The availability of funds plays a central role for shaping the firm’s (real) investment
and product market behavior, which in turn is influenced by market dynamics and
competitors’ actions. Given the CFO’s knowledge of the enterprise’s financing


The Strategic CFO: New Responsibilities and Increasing Job Complexity

5

opportunities and risk exposures, she is ideally positioned to enforce an integrated
and coordinated approach to corporate financing and investment. This part of the
volume will take a closer look at this issue.
Benoi^t Chevalier-Roignant and Arnd Huchzermeier show in their chapter
“Capacity-Adjustment Decisions and Hysteresis” how firms can adjust their
capacity planning in the presence of risk and operational flexibility. They argue
that the real-option approach is particularly relevant when determining short-term
capacity requirements in the light of the firm’s uncertain long-term prospects. The
authors illustrate additionally how to adjust the valuation framework to account for
unrecoverable initial outlays (‘hysteresis effect’). In the chapter “Linking Strategy
to the Real World: Working Toward Risk-Based Supply Chain Optimization”,
Wilhelm Kross examines how supply-chain-specific risks can be managed and, in

this context, emphasizes the need to align the risk management approach with other
business processes and organizational choices.
Lutz Firnkorn, Arno Gerken, Sven Heiligtag, Konrad Richter and Uwe
Stegemann focus on “Dealing with Recent Challenges in Cash Flow Management:
Commodity Volatility and Competitive Pressure.” They provide an overview of
how firms can manage the short-term impact of market volatility as well as their
longer-term dependency on competitors’ behavior in the context of strategy selection and liquidity management. The authors argue that short-term aspects can be
handled as part of the firm’s regular hedging program or by optimizing contracts
with business partners and financial stakeholders. While short-term issues lend
themselves to a quantitative approach, the longer-term consequences of market
dynamics need to be addressed with a qualitative analysis of competitors’ financial
viability and their ability to react to environmental changes.
The remainder of Part III is devoted to a number of special topics with considerable relevance for companies today. Thomas R€
uschen and Markus Eckey discuss
“How Climate Change Impacts the Role of the CFO”. They explain that climate
change, particularly CO2 emissions, can exert significant influence on a firm’s
operations, reputation and, ultimately, economic performance. The authors discuss
in-depth how the various risks associated with climate change can be identified,
quantified and mitigated. Furthermore, the authors explain why the CFO plays a
central role in any effort to deal with these issues pro-actively. Diem Ho argues that
service-driven firms are special and, hence, that CFOs of those companies face a
variety of unique challenges. In his chapter “Capturing the Impact of Market
Dynamics on Firm Value for Service-Driven Enterprises”, Ho develops a threestep approach of financing and planning and places particular emphasis on the
information and process infrastructure needed for achieving managerial excellence.
Lastly, Marcus Schulmerich explains in his chapter “Creating Corporate Value
with the Exposure to Financial Innovations: The Case of Interests Rates” how
interest rate volatility impacts real option values. The chapter serves as an illustration that real investment decisions can be affected by financial market risk (even as
‘remote’ as interest rate risk). Schulmerich demonstrates how interest rate risk can
be incorporated into real options valuation models and uses several illustrations to
explain the practical relevance of his approach.

Part I

Strategy-Linked Approaches to Risk
Management and Corporate Financing


Linking Strategy to Finance and Risk-Based
Capital Budgeting
Ulrich Hommel and Mathias Gerner

Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 Strategy-Based Risk Management and Risk-Based Capital Budgeting – Two Sides
of the Same Coin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 Strategy-Based Risk Management – A Process View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2 Linking Investment Performance and Risk Management Objectives . . . . . . . . . . . . . . . .
3.3 A Comment on the Time Horizon for Corporate Risk Management . . . . . . . . . . . . . . . .
3.4 The Corporate Risk Map – Distinguishing Between Compensated and
Uncompensated Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.5 Hedging Strategy Selection and Enterprise-Wide Risk Management . . . . . . . . . . . . . . .
4 The Cash Flow at Risk Approach (CFaR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.1 The Relevance of Cash Flow at Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2 Relevant Risks, Distributional Properties and Their Aggregation . . . . . . . . . . . . . . . . . . .
4.3 Managing the Internal Financing Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10
11
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25
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27

Abstract Today’s strategic business decisions require a thorough picture of both
the firm’s risk environment and the linkage to financial performance. Thus, senior
management cannot pursue a silo approach and consider the company’s capital
budgeting and risk management decision as separate and distinct activities.
The purpose of this chapter is to highlight that all risk management activities
need to be an integral part of the overall business strategy and must be ultimately
aligned with the firm’s financing decisions. We present Cash Flow at Risk (CFaR)
as a powerful and versatile management tool enabling the firm’s top executives to

U. Hommel (*) • M. Gerner
Strategic Finance Institute (SFI), EBS Business School, Wiesbaden, Germany
e-mail: ;
U. Hommel et al. (eds.), The Strategic CFO,
DOI 10.1007/978-3-642-04349-9_2, # Springer-Verlag Berlin Heidelberg 2012

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U. Hommel and M. Gerner

comprehensively integrate strategic, financial and risk considerations in uniform
decision framework.

1 Introduction
The role of risk management within non-financial firms has significantly changed
over the course of the past 20 years. In the late 1980s and throughout the 1990s, the
job of a firm’s risk manager was still defined as a mid-level position within
the corporate treasury dealing predominately with insurance contracts, whereas
the treasury department itself was dealing with the firm’s interest rate and foreign
exchange rate risk exposures. The vast majority of practitioners interpreted risk
management as a form of crisis management and established the function out of
fear of financial losses and not because a well-defined risk management process
could systematically increase company value. Value-at-Risk (VaR) systems had
been implemented without actually paying attention to the suitability of these risk
tools for mapping the firm’s specific business environment.1 While VaR may be
beneficial for financial trading departments in the context of pricing exotic
derivatives and monitoring the daily trading risk, it provides only a limited benefit
for non-financial firms managing their corporate risk exposures in illiquid markets
and over long time horizons (Culp 2002a).
The risk managers of the early 1990s – oftentimes having an academic background in mathematics or physics rather than in business or economics – merely
concentrated on the technical nature of risk management by defining probability
distributions or estimating time-varying correlation matrices.2 However, only little
effort has been spend on the question of how to harmonize the firm’s risk management practices with the corporate objectives such as value maximization or the

stabilization of the firm’s cash flows.
Over the past decade though, the scope of risk management has been widely
extended – beyond the sole concentration on insurance contracts and the hedging of
financial risks. Nowadays, a firm’s risk management approach covers a broad
selection of the potential risks a corporation faces, for instance including operational risk, regulatory risk, political risk, and most recently strategic and liquidity
risk. At the same time, the risk manager’s position has significantly gained in terms
of prominence. Within most firms, the risk management function is nowadays
executed by a senior manager with the title Chief Risk Officer (CRO) and is directly
supervised by the board of managing directors (Nocco and Stulz 2007). Her
responsibilities cover the definition of risk limits and the monitoring of the various

1
Bessis (2010), Duffie and Pan (1997), Gregoriou (2009), Holton (2003), Jorion (2007), and Saita
(2007) provide a more in-depth overview of the VaR methodology.
2
A discussion about time-varying correlation matrices is provided by Engle (2009).


Linking Strategy to Finance and Risk-Based Capital Budgeting

11

risk measures with the objective to manage the overall risk position in line with the
company’s fundamental business objectives.
This chapter will emphasize that a corporate risk management department
should never be considered as a stand-alone insurance function. In fact, we want
to highlight that each risk management activity needs to be an integral part of the
business strategy and must be aligned with the firm’s financing decisions. Cash
Flow at Risk (CFaR) is presented as a management tool enabling the firm’s top
executives to integrate the various strategic, financial and risk aspects. This methodology allows non-financial firms to quantitatively assess the various threats and

opportunities facing a corporation occasionally, periodically or even continuously.
In addition, CFaR summarizes all relevant information into a single performance
measure, which can then be used as a basis for strategic business decisions.
The structure of the chapter is as follows: Section 2 provides the background of
the recent academic discussion on the integrative treatment of strategic risk management activities and the firm’s financing decisions. The subsequent section
concentrates on the design of the risk management process and its role within a
comprehensive strategy-based risk management framework. Section 4 introduces
the reader to the principles of employing the CFaR technique in a risk management
context. While our focus is on CFaR’s role as a coordination mechanism between
risk management and financing activities, this chapter will provide a more detailed
treatment of the quantitative techniques needed to compute the CFaR measure.
Finally, Section 5 concludes.

2 Strategy-Based Risk Management and Risk-Based Capital
Budgeting – Two Sides of the Same Coin
Capital management and corporate risk management are effectively two sides of the
same coin. Nevertheless, finance theory and practice have treated these two topics
largely separately in the past (Shimpi 2002). The CFO was assigned the role of
managing the firm’s capital requirements by minimizing the cost of capital (mainly
via the creation of an optimal mix of debt and equity funding), whereas the treasury
department was dealing with the firm’s risk position ex post using insurance
contracts and financial hedging instruments (mainly focusing on foreign exchange,
interest rate and commodity price exposures).
However, managing risk exposures and capital availability separately comes at a
significant cost as it ignores the causal impact of risk exposures on cash flows and
cost of capital (Froot et al. 1994). In order to overcome the isolated treatment of
these two issues, companies need to adopt a comprehensive decision-making
framework, which integrates the risk view into the strategy selection process and
the management of real investments. It requires the application of a tool set for risk
modeling, which complements and extends standard capital budgeting techniques.

Business schools commonly teach the gospel of “perfect capital markets” as part
of their basic finance curriculum, where shareholders are able to fully diversify their