Channeling Kevin Bacon in the movie A Few Good Men, these are the facts, and they are indisputable: As the role of the chief tax officer (CTO) becomes geometrically more complex (see Roundtable No. 5, September/October 2015 issue of Tax Executive), so does that of the chief financial officer (CFO). At TEI’s Annual Meeting in Dallas in October, at a plenary session moderated by Louis Mestier, vice president of tax at Hanger Inc. and chairman of TEI’s Corporate Tax Management Committee, attendees heard a lively discussion among three CFOs on their evolving roles and responsibilities: Douglas Aron, executive vice president and CFO of Hollyfrontier; Daniel Cancelmi, CFO of Tenet Healthcare; and Biggs Porter, executive vice president and CFO of Fluor Corporation.
Mestier: Tell us a bit about yourselves and your company.
Aron: I’m the chief financial officer for Hollyfrontier Corporation, which is an independent refining company with five petroleum refineries throughout the United States. We’re about a $10 billion market cap company with $15 billion to $20 billion of revenue, depending on a very volatile oil price. I also serve as the CFO for another publicly traded master limited partnership for which Hollyfrontier owns the general partner—that’s Holly Energy Partners—and our tax department really works in a shared services kind of way to cover both of those different entities. We’re based in Dallas. I’ve been with the company or predecessor companies for almost fifteen years.
“First and foremost, financial reporting is incredibly important. It might not be the most exciting thing to focus on, but it’s incredibly important to get the books right.”
Cancelmi: I’m the CFO of Tenet Healthcare Corporation, which is a public company. We manage eighty-seven hospitals and more than 400 outpatient centers throughout the United States and have operations in more than forty-two states. We also have a services business, which provides revenue cycle services to hospitals, physicians, and other providers. Tenet is about a $19 billion revenue company. We have more than 130,000 employees.
Porter: I’m the CFO of Fluor Corporation, which is the largest U.S. publicly held engineering construction company and one of the largest in the world. We operate around the world in about sixty-five countries, covering every continent except Antarctica. We build very large projects—refineries, petrochemical plants, LNG (liquefied natural gas) facilities, bridges, highways, power plants. We also have a group that serves the U.S. government and have several thousand people in Afghanistan. Fluor has had about $20 billion to $30 billion in sales over the last several years. We’re very tied to commodity prices, and we do a lot of work for the mining industry as well.
Mestier: Can you give us an idea about the operations of your tax department?
Cancelmi: We have about twenty-five people throughout the country. It’s led by Doug Raibi who’s been with the company almost thirty years. Doug is incredibly well-qualified, and he does a great job managing our tax department. Most of the function is insource. We do outsource some property tax type of functions to some degree, but we’re primarily insourced. We certainly look to our tax department for a number of different things, but first and foremost is accurate financial reporting and developing people in the department, and so certainly what you always need to take into consideration is succession planning. It’s a highly complex area—tax—and it’s important to train people and develop people.
Aron: We have all of our tax folks based here in Dallas at the corporate location. There are about fifteen to twenty people, led by Leslie Simmons, who has been in that role for awhile now and is doing an outstanding job of not just looking to minimize our overall tax rate but also looking for ways to become a profit center. And she’s found, with her group, a lot of different opportunities for us either through jobs tax credits or other opportunities in certain states, in terms of accelerating depreciation, for example. Certainly something we think about on a strategic basis is involving the tax department and helping minimize that tax rate, thus improving profitability.
Porter: We have just under forty people in our tax department that’s headed by Jim Lucas who, in addition to being a vice president of tax, is the treasurer of the company, so it gives him a little bit additional insight into both aspects of the job. We’re fairly centralized—most of the work is done in Dallas or in the United States. We do have local controllers around the world who handle local statutory and tax return reporting, but most of the broader oversight occurs out of Dallas. We do outsource, similarly to what Dan said, property tax and sales tax work, but otherwise all of the significant analysis and transactional strategy work happens out of Dallas. Of course we try to keep them very integrated in the business so they can optimize the effective tax rate, but certainly making sure that we’re keeping everything in order around the world.
Different Philosophies on Tax
Mestier: I’ve been with companies with various philosophies on what’s important to them in tax. Some companies value cash; some companies value effective tax rate; some value other metrics for tax. What’s the priority at your company in terms of metrics in generating the value of the tax department?
Cancelmi: When we think about the value of our tax department, I’ll go back to what I said a little bit earlier: Tax is a very complicated area. I think it’s fair to say that a number of organizations over the past several years have had internal control deficiencies in their tax area that created material weaknesses. So, first and foremost, financial reporting is incredibly important. It might not be the most exciting thing to focus on, but it’s incredibly important to get the books right. And certainly, from a tax-planning strategy, looking for strategies where we feel the execution risk is relatively low, we feel we will prevail. Another obvious item that is incredibly important from a tax perspective is minimizing cash tax payments, whether it’s on the federal or state level.
Porter: I agree with the first part about financial reporting. If you don’t have that, it’s not worth pursuing anything else, because the wheels are off at that point. So, from the standpoint of executing business strategy around the world, the first thing we have to do is be compliant, whether it’s tax for financial reporting or anything else. That’s a critically important starting point, but it really is a matter of the times whether we should weight our priorities toward cash or an effective tax rate. You’d really like to see both, but the circumstances change. A company’s needs could be different at different points in time. It could be more focused on cash or focused on long-term strategy with respect to reducing the tax rate. For Fluor, we’re very challenged at reducing our tax rate because we don’t get to choose the countries in which we operate—we operate where our customers decide to have their projects largely—so we don’t have too many tools available to us. I think then, from a tax rate standpoint, it’s more a matter of doing what we can but trying to eliminate surprises, manage the risk, and manage the circumstances as best we can. Since we don’t have vacillation in the tax rate on a quarter-to-quarter basis, certainly, everything at the end of the day has to come down to cash flow, and if a low effective tax rate with perpetually high cash payments probably isn’t sustainable, there’s something wrong.
Aron: Having to choose one, I think effective tax rate is the one that we’re most interested in and focused on. Again, you’re thinking longer term. If you’re looking at cash tax payments, you’re probably just deferring some payments for later, right? So, how can we affect that? I’d say we’ve had some recent and rather detailed interaction between our tax department and our government affairs group at the state level—I mean, the federal level’s really almost impossible now. I shouldn’t say that. I don’t want to discourage anybody from keeping fighting the good fight. I think we’ve had a lot more success at the state level, and having those groups work together, we’ve been able in certain instances to get that tax rate a little bit lower.
Taking Time for Tax
Mestier: How much time day-to-day, week-to-week on average, do you spend on tax matters, and how much would you like to spend on tax matters, and where do you see the trend going?
Aron: The second part, as little as possible. I think if you have a strong team, and we do, led by Doug, I think you can minimize the amount of time you need to spend on tax. You don’t have to spend an extraordinary amount of time, and I think from a tax professional’s perspective, you want to control your destiny. You don’t necessarily want someone always on top of you, telling you what to do all the time. So I think, to the extent that it’s a well-functioning tax department, the CFO doesn’t necessarily need to be in that office every day dealing with the tax team. I think that’s how we want to manage this function, and that’s how we do manage this function, because we have very qualified resources. Again, I go back to it being a very complex, specialized area; you need to develop your team and make sure you have the adequate resources, and that’s what you strive for.
Cancelmi: I wouldn’t measure it in hours per week or even per month. I think when there’s an issue, we’ll spend more focused time, but otherwise, quarterly we bring together the accounting and the tax groups and talk through issues through the quarter and have Leslie report to our audit committee quarterly about what’s going on in the tax area. But when you have as qualified a staff as I believe we do, I have very little day-to-day time spent on the tax area.
Porter: It’s really hard to measure the amount of time spent on any one particular area, including tax. Certainly we have the quarterly process, and there are the pop-up issues where you dive in. But I think what we’d really like to have happen is for tax matters to be integrated into our decision-making such that we’re making decisions in a whole variety of circumstances that tax becomes a part of. It’s really not separable activity. Certainly when we talk about strategy as a company, tax should be built into the discussion to the greatest extent possible, and transaction-by-transaction similarly.
Mestier: Let’s shift the discussion to nontax areas. A large part of what you do is managing financial risk. How are financial risks identified and managed in your organization, and how has it changed in the last five years?
Aron: We’re conducting enterprise risk assessment throughout the year. We do have a full annual update of that, and it’s broad and across the organization, and it cascades down to all levels. I think that what’s incredibly important about a risk assessment is ensuring that not just senior management, the board, and the audit committee are involved. You need to cascade that down through the organization so the individuals on a day-to-day basis understand the risks to the organization and understand that’s important to the company and the board and to senior management and that these are areas that need to be focused on throughout the year. So, how has it changed? We continue to refine that assessment and try to improve it, but is it that dramatically different from five years ago? Maybe not, but what we try to do is involve as many people as we can into the process. It’s one thing for us as CFOs to understand the risk and be concerned about it, but if individuals underneath who are executing on a day-to-day basis don’t understand that and they’re not involved, then you’re going to create risk—because those are the people who are on the front lines.
Porter: I think the risks have changed in the last five years, and so that tends to drive where you pay your attention and to some degree how you measure and assess. But Fluor has had very well-developed processes for measuring risk project by project, within projects starting out in the proposal phase and continuing through the execution process. Then we track things at the enterprise level as well. Where we continue to evolve is in getting people to communicate in real time what’s changing in the environment and to make sure risks are identified on the front end—communicated, not just documented, so they’re surfaced accurately. Also, I think we have increasing focus on the opportunity side. If you’re a very risk-focused organization, you make sure all the risks are mitigated, but you may be missing where there’s a chance to go do something better or perhaps an opportunity. So I think we continue to evolve in that direction of making it not just risk management, but risk and opportunity management.
Aron: I think in that “what’s changed?” category, it’s certainly more visible now; it’s something audit committees are focusing more on now. You have formal risk committees within companies that sometimes will involve tax and sometimes won’t. Cybersecurity is certainly one area that has a much more heightened focus in the last five years, in my opinion. From our perspective, minimize the risk to the extent you can, or mitigate the ones that make the most sense and that you can control. Then with some others, it’s just good to be aware, and often you might not be able to do much to change those risks. In our business, for example, one of the biggest risks is commodity price volatility. Well, you can do a little bit of hedging around some of that volatility, but that doesn’t make the risk go away and guarantee your solvency. But you do your best to mitigate that, and a few tax strategies can help, but overall there are some that just can’t be mitigated in a way that gets you comfortable that it’s not still a risk.
Top Priorities for CFOs
Mestier: One thing you said that really resonates for me is having tax integrated in the process whenever possible. It’s good when you have the CFO who welcomes that, but it’s also our responsibility as CTOs to insert ourselves as early in the process as possible to get out there and find the facts of what’s going on out on the field. What we deal with is really facts. We apply tax law, but we have to deal with the facts, so I definitely understand that. At the CTM Committee we do a survey of corporate tax departments every few years, and in the last survey we did, CTOs were asked, “What is the biggest priority when it comes to CFO and the board (as far as tax goes)?” The answer they gave was “No surprises.” You guys and the board don’t want any surprises. Given the current environment, what’s the biggest tax issue or tax item that keeps you up at night or something you spend a lot of time talking about—more than you want anyway?
Aron: I would say that potential change in regulation is the one tax issue we likely have the least control over. It doesn’t seem like it’s got a whole lot of momentum, but every ninety days or so, there’s some rumored new potential bill or legislation that would impact pass-through entities. For us, owning a master limited partnership has what I’d call a tax advantage structure and a better cost of capital as a result of it. It wouldn’t be a death knell for us, but it would have an impact on the industry and certainly thousands of companies that have that pass-through structure. Broadly, I would say change in government regulation. And you get back to that uncertainty word that we discussed earlier. If we know the laws, then we are generally able to operate within them. It’s when they’re changing, or changing often, that it becomes frustrating and a bit more difficult to plan.
Porter: I would add that it’s not just changes in law but changes in enforcement attitudes around the world. We see a lot of circumstances around the world that local countries and jurisdictions decide to be very aggressive in in terms of pursuing foreign corporations. Sometimes it’s a matter of political gain; sometimes it’s a matter of trying to balance their own budgets and their own circumstances. Worrying about the attitudes around the world in various jurisdictions requires us to be mindful from a compliance standpoint as sort of the entry point to the game. But then if you’re doing the right thing, it doesn’t mean you’re not going to have disputes or issues in countries around the world. Our guys do a great job of defending us against sorting those issues out, but I think they create some of the bigger surprises.
Cancelmi: I mentioned earlier we operate in forty-two states, so changes in regulation at the state level is something we talk about. It’s one thing with the federal government, and those issues are certainly more visible and a lot of times are daylighted earlier. But changes can happen really quickly at the state level, especially as states encounter fiscal constraints, so that’s certainly something we stay incredibly focused on.
Mestier: How involved is your tax department in the highest leadership levels of your company, and when do you involve tax in major operating decisions?
Porter: In our case, heavily involved. We combined the treasury and tax function together, so that gives great visibility into the transactions of the company from both a capital standpoint and a tax standpoint. In addition to that, every significant project comes through the tax department for review to help us understand the tax consequences or to position the project for the best success with respect to managing the tax situation in any given country. I described our work as being “around the world,” but to make it a little more complicated: The project could be in South America, but the engineering could be done in the Philippines or the Netherlands, or a project office operating out of some place in the United States. It’s important to get the team involved early; we’re good at that. Our people are increasingly sensitized. We do measure largely at the program margin basis, project-by-project, but people at the leadership level are also incentivized down to earnings per share. They understand we have to solve the tax considerations as well. They’re also incentivized with respect to cash. Matching up the incentive systems with what we think is important will bring everyone together and can help solve these problems when the tax department gets involved early.
Cancelmi: Our tax department is incredibly involved at the highest levels. There is no legal structure developed without the involvement of our tax team. Any transaction that we’re working on, whether it’s big or small, our tax team is involved. As well as from a financial planning and analysis perspective, it’s incredibly important. Once we understand where we think we are from a forecasting perspective, which obviously impacts our tax situation. Our team is involved in that process as well. In any merger-and-acquisition transaction, the tax team is involved up front, from the development to how the deal is being formulated and structured. I think within our organization, Doug and his team are involved at the highest levels routinely.
“We see a lot of circumstances around the world that local countries and jurisdictions decide to be very aggressive in in terms of pursuing foreign corporations. Sometimes it’s a matter of political gain; sometimes it’s a matter of trying to balance their own budgets and their own circumstances.”
Aron: I think Dan said it well earlier when he said that oftentimes, Doug, his tax person, knows about deals before he does. I’ve had Leslie call me before and say, “I’ve got a little concern about such and such deal,” and I say, “You’re going to have to give me a little bit more information. I’m not sure exactly which one you’re talking about.” I agree, we very much have our tax group in on the front end and oftentimes will help us decide between projects. We’ve got a relatively limited capital budget, because we’re in a capital-intensive industry and sometimes we have to make choices. In some, I’d say rare, but some instances, it will come down to where can we get a more favorable tax treatment or incentive from a state government to expand or add a project in a certain locale, and tax will help drive that.
Mestier: To get involved with the decisions and get the data, how does your company make sure your tax department—and throughout the organization, too—gets current, accurate information, and how does that flow in the organization?
Aron: In our case, they certainly have access to folks in each location. I don’t think anybody says, “Oh, geez, someone from tax is calling. I’m going to avoid them.” Maybe in some organizations, but I don’t think it happens in ours! The other part is reliance somewhat on outside resources, contractors, and our audit firm. We make sure those resources are available within reason to have the best data they can.
Cancelmi: I think obviously the CTO reporting to the CFO is important. It certainly provides further access than if the individual was further down the organization. I would agree: They have access to anything and everything that anyone else in the finance team has access to.
Porter: Likewise, the access to data is all there. You can’t underemphasize the importance of networking. We say networking starts the front end of every project and every significant transaction, so when things change, there’s a merge, there’s already a connection made, and the tax department can be made aware of those changing circumstances. Any part of the business has to be integrated together with effective communication, and you rely on that in tax and in every area.
“I would say that potential change in regulation is the one tax issue we likely have the least control over. It doesn’t seem like it’s got a whole lot of momentum, but every ninety days or so, there’s some rumored new potential bill or legislation that would impact pass-through entities.”
Mestier: The CTO is really your link to the tax department on a regular basis. What are the characteristics that you find most important in your CTO and why?
Porter: Technical competence is pretty important. I’m not a tax person, so obviously I’m heavily reliant on Jim and the whole tax group’s competence and their area of expertise. That’s certainly number one. Also, good judgment and good communication. It takes all those things to be an effective leader in a major complicated company. We’ve talked about all the other things: How do you make sure risks are managed, and how do we have optimal results? Well, those are the three characteristics, and I think Jim and our guys do a great job, and I really appreciate that.
Cancelmi: Certainly technical competence is first and foremost, but it’s sort of a given, too. What I think is really important for a tax professional is to be able to take this very complex information and function and be able to communicate it in plain English to a layperson who’s not involved on a day-to-day basis from a tax perspective. Communication—being able to convey the key themes and concepts to senior management, the board, etc.—is just incredibly important.
Aron: I would add leadership to that. Certainly you start with the technical competence, but then, can they inspire their group to want to continue to come to work? We’ve talked about that within Hollyfrontier: how to attract two kinds of people to come to work. One is somebody you’re looking to hire for an open position, and the other is the people who still work for you and whom you are hoping to grow their careers. We’ve had very little turnover, which I think is a compliment to Leslie and the rest of her team. She’s providing not just a job but a career to the folks in her tax department, and I think that’s important for all CTOs to think about. Not just “Am I keeping the CFO and audit committee happy?” but “Am I helping to grow the careers of the folks who work for me?”