CFO Studio Magazine with Dominic Caruso, CFO, Johnson & Johnson

filter all of that through a risk-management screen. The result is then translated into numbers: In light of our strategy, we would see X amount of revenue growth, our margins would do Y, and our bottom line would grow by Z. Those numbers are the financial strategy, and they in turn become a series of investor messages — the corporation’s investor strategy. Kotzen advises developing the same three pieces of strategy, but in parallel, “not locking in on a business strategy until a financial strategy and the investor strategy are understood.” Otherwise, the risk is that the business strategy “will not be supported by their current investors. And we’ve all seen a big increase in investor activism.” D&B Changes Strategy Just before the precipitous downturn of 2008, Dun & Bradstreet began implementing a TSR lens for value creation. D&B, founded in 1841 the firm was once Abraham Lincoln’s employer, is a trusted company, successful in its field, which is collecting and selling business data. But its direction for many years had been to cut costs in order to drive earnings. Though it had very strong cash flow, the company wasn’t using the cash as effectively as it could. D&B’s CFO Richard Veldran has moved the company forward, using TSR as a lens to evaluate strategy and make decisions on the use of cash. Veldran first encountered TSR when he worked for Procter & Gamble in the 1990s. “BCG came in [to consult], and Procter & Gamble began to use TSR as the lens for managing growth,” evaluating every brand in terms of its value creation potential, and cutting brands that were not driving appropriate return, he told a group of CFOs recently at the 2nd Annual CFO Innovation Conference at MetLife Stadium in New Jersey, where he shared the podium with Kotzen. At P&G, the stock and price- to-earnings multiple rebounded. “The stock turnaround was almost night and day,” said Veldran. In around 2006, Veldran, who was then Dun & Bradstreet’s Treasurer and Investor Relations Officer, brought Kotzen to D&B to help implement the TSR emphasis there. “We had been focused on cutting costs to drive earnings,” Veldran said. “But we began to see a compression in the price-to-earnings ratio. It wasn’t quite where it needed to be.” As a result of hiring BCG, D&B adjusted its business strategy toward more growth, and at the same time launched its first dividend. “We hadn’t looked to the many investors who want the stability of a dividend, who want that cash return,” Veldran said. Developing the company’s thinking regarding who its optimal investors should be contributed to the decision to pay a dividend, and in turn stabilized the company when about a year later, in 2008, the market collapsed. While D&B’s growth stopped in the recession, along with almost all companies’, Veldran says, “Our investor base was pretty stable, and our stock weathered the storm better than most companies’. I’d attribute this to three factors: •Our resilient, time-tested business model •We had attracted the right set of investors to our story and had set appropriate investor expectations; and •We had a demonstrated track record of making smart, disciplined use of cash — a critical factor in times of economic uncertainty.” The Drivers of TSR Total Shareholder Return is defined as the change in share price plus dividends, or to put it another way, the wealth that corporations return to shareholders. There are three components of TSR, with various “management levers” that can be applied, says Kotzen: • Profit growth: how is the top line growing and what’s happening to your margin • P/E multiple change Q4 2016 WWW.CFOSTUDIO.COM 11 “We had been focused on cutting costs to drive earnings.” — Richard Veldran, Chief Financial Officer of Dun & Bradstreet