Google made waves yesterday announcing Morgan Stanley's CFO, Ruth Porat, will be its next CFO. Many were quick to point out Twitter CFO Anthony Noto also came from Wall Street in an attempt to frame Google's hire as evidence of the ongoing battle for talent between Wall Street and Silicon Valley. Instead, Google's hire deals more with paranoia than a battle for talent. Today's tech leaders are paranoid about becoming irrelevant. Such anxiety does not bode well when contemplating more practical business affairs, such as managing a company's finances and balance sheet. Companies may find success in a structure that combines the best of Silicon Valley with Wall Street. As technology minds worry about the future, financial minds are focused on managing the present.
Technology companies are more paranoid about everything these days. Larry Page seemingly wants to get rid of his day-to-day job to focus on the next big thing. Tim Cook constantly refers to the nonstop worrying that Apple executives go through in terms of competition and what products to work on. Mark Zuckerberg is always on the lookout for the next big thing before it negatively impacts Facebook. Jeff Bezos is continuously looking for ways to keep Amazon relevant in the booming ecommerce renaissance. Paranoia isn't an inherently bad thing when coming up with strategy, however, one complication enters the equation if paranoia begins to creep into the financial aspects of the business such as cash management, capital structure, and cash flow. A certain level of sanity and rationality needs to preside in terms of a company's financial management.
While a CFO has slightly different roles depending on the company and industry, the overall job description in tech is pretty straight-forward: manage the balance sheet and capital structure, in addition to giving input on the income statement and cash flow. The product remains the pinnacle while financial management takes on a supporting role. We are seeing a new breed of tech giants sitting on cash levels that will likely have implications on the operating environment for many years, assuming the cash is well managed. Enter Wall Street. I suspect Google hired Morgan Stanley's CFO for her knowledge on how to manage $64 billion of cash, including the best ways to structure M&A deals, handle more shareholder-friendly capital management actions, and make sure the financial statements are receiving proper care and attention. Porat will likely not be involved in figuring out Google's next big computing platform, just as Apple CFO Luca Maestri isn't designing an Apple Car.
All of of this paranoia combined with keen sense to separate such anxiety from a company's financial management would represent a change from the past. In 2004, Microsoft's answer to holding $56 billion of cash was to issue a special one-time dividend of $32 billion, which is another way of saying they didn't know what to do with the cash and thought MSFT stock was too expensive to buy back. Today, management teams are looking at excess cash much more carefully, and in some cases, too conservatively, which is evidence for more in the way of thoughtful financial management. Instilling a sane lookout over the cash fortress will only pay dividends for years to come.
While Apple's capital return program has been well publicized, others have not participated in such shareholder-friendly alternatives, instead using cash (and stock) to continue buying the future. While there is nothing inherently wrong with such a strategy as long as value creation remains a priority, there will likely come a time when cash levels reach such a point (if that time has not already arrived) that CFOs will play a role in setting expectations and the narrative about a company's philosophy for holding excess cash.
While Google is still trying to figure out the next big thing, Facebook continues to rely on its network and reach to consolidate power and information. Meanwhile, Apple is focused on using design to create products that impact our lives and society, while Microsoft is trying to find its place in mobile. Regardless of what the next few years will bring in terms of how things shake out, those companies valuing long-term fiscal responsibility and stability are already thinking of the future. Paranoia is good for a company, until it brings on ruin. Placing safeguards in place to prevent this ruin from reaching the balance sheet is a smart move.
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