CFOs are more grounded in the reality-----Interview with Duke Prof. John Graham--

CFOs are more grounded in the reality-----Interview with Duke Prof. John Graham(1)

2007-06-01 13:22:38 [ Big Normal Small ] 　Comment

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Duke University Fuqua School of Business and CFO Magazine co-established the Business Outlook survey, which asks chief financial officers from a broad range of public and private companies globally about their economic projections. This survey draws a lot of public attentions and its results have been quoted in many major business media. What is the significance of this CFO survey and what can we learn from the results? Recently, Xing Zong, a Duke University Ph.D. student took an exclusive interview with Duke University Finance Professor John Graham, the director of CFO survey.

About Dr. John Graham
Dr. John Graham is the D. Richard Mead Jr. Family Professor of Finance at Duke University Fuqua School of Business. He is the director of the high profile CFO Outlook Survey. As the director, Graham is the primary spokesperson, appearing quarterly on CNBC to discuss the results and conducting follow-up interviews about the survey with major print and broadcast media

About CFO Magazine
CFO Magazine is a part of CFO Publishing Corp, an Economist Group business. With a rate base of 450,000 subscribers, CFO is the leading business publication for senior executives with financial responsibility. CFO reaches an international audience of corporate leaders with its global group of magazines, including CFO IT, CFO Europe, CFO Asia, and CFO China, as well as its web site CFO.com. For more information, please visit www.cfo.com.

Xing Zong(left) and Dr. John Graham(right)

Xing Zong: Prof. Graham. You said in the CFO survey that the optimism index predicts future economic growth quite well. Why? In other words, what’s the significance of CFO survey? Especially why CFO?

Graham: The CEO is obviously the top person in any given company. The CFO, you might think of as the No. 2 or No. 3 person. The CFO is the person who writes the checks, they know the company in terms of what investment projects they are taking. The CEO should also know this to some extent, but they are oriented towards the outside world. They spent a lot of time interacting with the external audience. The CFO spends a lot of time internally on the company. The CFO would know all the details about the company’s investment projects. Should we acquire that company? How much should we pay for those assets? The answers to these questions tell us what the plans are for the CFO’s company for the coming year. We aggregate this information for a whole bunch of companies across the United States. It gives us a great snapshot of what is going to happen during the next year.

We also survey CFOs in Asia and in Europe, so we have insight from CFOs in all three of these regions. Right now it is really exciting in Asia. But we learned from Asian CFOs that they worry about wage inflation. Anyway, we know that CFOs know so much about their company and what is their plan for the coming year. They are the ideal people to ask. There are practical reasons too. CEOs are so busy that it is difficult to get their attention to fill out a survey. CFOs, although very busy too, but seem more willing to fill out this survey.

There are also CEO surveys. But as we compare the CEO survey with the CFO survey, we determined that CEOs tend to be overly optimistic. CFOs are more grounded in the reality.

Xing Zong: I agree with you on this point. CEO should be more strategic and visionary and CFO should be down-to-earth.

Graham: We also compared the CFO survey to other surveys done by investors and consumers. Think about this. You and I are consumers. How much do we know about what is going to happen next year? Not much more than what we read in the daily paper. That should be based on what happened today and yesterday. All government data are based on historic data, that is, based on what has already happened. For CFOs, we are asking what is going to happen next year. They have a forward looking view we just can’t match. The CEOs could match the forward looking view but they are too optimistic.

Xing Zong: Health care tops the list of concerns of American CFOs. Asian firms are concerned about high fuel prices, increased global competition, world economic stability and reducing pricing power. Why such a trend? What do you see from these comparisons?

Graham: On one hand, we care about each region by itself. In terms of cross regions, right now the American economy is growing more slowly than the European economy and Asian economy. We know that six to nine months ago, the European CFOs were more optimistic than American CFOs. Thinking about this from the perspective of the United States, this told us that US companies should be able to sell more stuff overseas. That is, US growth will come in part from exports in the coming year. That’s one thing we can learn by looking across the regions; we can anticipate where the engine is that drives the world economy.

The other thing about concerns is to help us think where the worries are for the whole world economy. When things happen in one region, they can affect other regions. Let’s say China overheated, for a short period of time, they grow too fast, wage inflation got too strong, the infrastructure might not be able to keep up with continued rapid growth. These things will limit potential growth, and may contribute to a slowing growth rate in a few years. That’s very important for the rest of the world to know, because we are selling stuff to China. For reverse, the American economy grows slowly so that the rest of the world can’t count on Americans to continue to buy everything that supports the world economy.

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