How CFOs Can Invest For Growth In Uncertain Times

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Berkshire Hathaway CEO and long-esteemed billionaire investor Warren Buffett dedicated the entire first page of his annual letter to shareholders remembering the guidance and contributions of his friend and partner, Charlie Munger, who died in November. Buffett recalled that Munger had always been an advisor to him, telling him in 1965 (“correctly!” Buffett adds) “that I had made a dumb decision in buying control of Berkshire.” In the letter, Buffett says Munger advised him on how to correct that “mistake.” Later as a partner at Berkshire, Buffett said, Munger many times “jerked me back to sanity when my old habits surfaced.” Buffett wrote that Munger was truly the “architect” of the present-day Berkshire, and Buffett has been the “general contractor” carrying out its day-to-day construction.

“Charlie never sought to take credit for his role as creator but instead let me take the bows and receive the accolades,” Buffett wrote. “In a way his relationship with me was part older brother, part loving father. Even when he knew he was right, he gave me the reins, and when I blundered he never—never—reminded me of my mistake.”

As Berkshire Hathaway’s latest earnings show, the architect designed a robust and unique financial machine that has reliably delivered success. Berkshire delivered record earnings in the last quarter, with operating earnings up 28% and cash reaching $167.6 billion. Operating earnings were near $8.5 billion for the quarter—up year-over-year from $6.6 billion—and showed massive growth in insurance underwriting and insurance investments.

And while the stock market has seen a banner last few months, with most indexes hitting record highs, Berkshire Hathaway’s returns have perpetually beat the markets. Compared to the S&P 500, Berkshire has gotten better returns for the last 40 years. So far in 2024, Berkshire has tallied an 18% return, better than the 7% for the S&P as a whole. Buffett said Berkshire’s “eye-popping performance” could be a thing of the past because of its large size and market concentration, but it’s had an amazing run.

While the markets—and savvy investors like Berkshire Hathaway—are booming, companies of all sizes are hyper-focused on their costs this year, looking to find the right ways to trim costs and yet invest for growth. I talked with Myles Corson, strategy and markets leader for EY Global and Americas financial accounting advisory services, about where CFOs should be investing so their companies can grow. An excerpt from our conversation is later in this newsletter.

ARTIFICIAL INTELLIGENCE

AI behaving badly cost Google parent Alphabet $90 billion in market value this week. Late last week, outcry over the company’s Gemini AI image rendering tool returning historically inaccurate racial depictions led the company to take that function offline. But the Gemini chatbot also gave controversial responses to questions, including refusing to condemn pedophiles (because people “cannot control who they are attracted to”) and dithering on whether Adolf Hitler or Elon Musk had a more negative impact on society (though Musk did repost content on X claiming Google has “done great damage to Western civilization”). In a blog post from Google senior vice president Prabhakar Raghavan, the company acknowledged its mistakes, but it wasn’t enough to solidify investor confidence. “The issue for the stock is not the debate [over Gemini] itself, it is the perception of truth behind the brand,” Melius Research analysts Ben Reitzes and Nick Monroe wrote in a Monday note to clients obtained by Forbes. “Regardless of your view, if Google is seen as an unreliable source for AI to a portion of the population, that isn’t good for business.”

VALUATIONS + FUNDING

As Carson Group strategist Ryan Detrick said in an email to Forbes, “Few things are more certain than death, taxes, and Nvidia beats on earnings.” Last Wednesday, the AI chips titan shattered expectations and broke records for the third consecutive quarter, boosting itself and the markets as a whole into new territory. After Nvidia’s blockbuster earnings report, the company’s market cap swelled past $2 trillion for the first time, solidifying its status as the world’s third most valuable company. And its stock performance helped the S&P 500 and Dow Jones Industrial Average both hit record highs on Thursday. Cofounder and CEO Jensen Huang, who owns about 3.5% of Nvidia’s shares, also benefited. His wealth swelled by about $9.5 billion after the earnings report.

Nvidia’s quarterly revenue was $22.1 billion, a 265% year-over-year jump. Data center revenue was $18.4 billion, up 409% from a year ago. And its full-year revenue was $60.9 billion, up 126% from 2022. “Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations,” Huang said in the earnings release.

NOTABLE EARNINGS

Walmart hit an all-time stock price high after the mega-retailer reported earnings last week. The mega-retailer saw revenues increase 5.7% year-over-year, and saw 17% growth in U.S. E-commerce sales, which totaled more than $100 billion globally. Its quarterly sales of $173.4 billion and earnings per share of $1.80 topped analysts’ estimates. The retailer also announced the planned $2.3 billion acquisition of streaming TV manufacturer and platform Vizio to accelerate its Walmart Connect marketing platform.

Walmart stock continued to rally as the company split its shares on a three-for-one basis on Monday. The move was announced late last month as a plan to make Walmart stock more affordable for a range of potential investors, including store employees. But its recent success attracted more buyers, with its stock price closing up about 2% on Monday.

INTERNATIONAL NEWS

China once was a preferred economic engine for the rest of the world, but that has changed in the recent past. The Asian nation reported the smallest annual direct investment from foreign governments since the 1990s, with direct investment liabilities increasing 33% last year, according to national data reported by the Wall Street Journal. Forbes senior contributor Mike O’Sullivan wrote this calls into question the strength of China’s economy in the years to come. Forbes senior contributor Milton Ezrati said these figures and others are telltale signs that many of the world’s other economic powerhouses are decoupling from China. U.S. companies, Ezrati said, have been trying to source goods from other countries, and Mexico was the top exporter to the U.S., topping China. Ezrati reports that other countries are relying less on China now too, with Germany’s imports from China down 13%.

OFF THE LEDGER

EY’s Myles Corson On How CFOs Can Invest For The Future

A CFO’s job is never easy, but this year is a tremendous balancing act. While it’s important to keep costs down, there are areas that need investment in order for the finance department to perform well this year and in the future. I talked to Myles Corson, EY Global and Americas strategy and markets leader for financial accounting advisory services, about how CFOs can make the right investments that keep momentum moving. This conversation has been edited for length, clarity and continuity.

It’s always important for a CFO to balance spending to invest in the business and keep expenses down, but how much more of a struggle is it this year?

Corson: There’s a lot of uncertainty right now, economically, geopolitically. That pressure is definitely ramped up right now on how CFOs strike that right balance. …Priorities change in the short-term, but the underlying issues of how CFOs balance across the protecting value—which is the traditional responsibilities of CFO: compliance, reporting—and making sure all of that is totally robust with the optimizing value, which is more of the driving efficiency, the cost management, the operational performance. Then the area that probably gets the most attention: the value creation and growth agenda. That’s where everyone talks about wanting to be, but what you consistently see is they struggle to get there.

If you look at where a lot of finance organizations actually measure their success, it’s through the lens of compliance, cost management and efficiency, not how they’re helping to drive value. One of the key things that I think CFOs really need to focus on if they’re going to make that shift to being perceived as more strategic and being better business partners, is actually starting to change the narrative and focus on that very value creation. How do they measure the value they’re delivering to the organization and see it as a positive story? It comes back to this question about getting investment. If you want investment, you need to demonstrate what the return on that investment potentially is, and no one’s better positioned than finance executives to tell that story. But they haven’t done a good job of it previously.

…In the short-term, while the pressure is on cost management and efficiency, don’t lose sight of the longer-term goal or where you’re trying to get to. One of the big concerns that we have and one of the things that came through in the [Global EY] DNA [of the CFO report] last year, is while CFOs know where they want to be spending, because they drive long-term performance through that, those are also the areas that most often they’re talking about cutting back when they’re under cost pressure. Particularly areas like sustainability, technology, talent investment.

One of the most important roles for CFOs is building confidence: externally, with stakeholders, with investors in the sustainable performance of their organization, but also with their own people. One of the big challenges when you go through cost cutting [is] it can set back the organization culture, it can set back the confidence of your people, and that takes time to rebuild. So the challenge is how do you continue to display the fiscal responsibility that CFOs are expected to have whilst also keeping the eye on the long term and maintaining that growth trajectory. And to do that, you clearly need to have a very clear vision for where you’re going. You need to be making sure that all investments you make are clearly aligned with that longer-term vision and the outcomes you’re trying to drive towards. And your people are really bought in to what you’re trying to achieve, both within the finance function, but also the broader stakeholders within the C-Suite, within the other functional areas of your business, because CFOs have a really important role to play in connecting those dots.

Having the right people and the right skill sets is important. How can a CFO successfully convince others in the organization to hire those kinds of workers and not cut back on departments?

That’s one of the challenges, and it’s why the EQ-as-well-as-IQ skills are so important for successful CFOs. Now they need to be able to influence. They need to be able to engage differently with key stakeholders. Traditionally, the CEO-CFO relationship has been one of significant strength, and I think there’s good alignment there. Where there is more room to [improve], is in some of the other functional relationships with CMOs, CHROs. …It comes back to not just relying on the traditional finance skills of analysis. It’s bringing in the storytelling and using different ways of communicating.

I come back fundamentally to having the clarity of vision. How does what the finance organization is trying to do support the overall objectives of the business strategy? If you can communicate that to a CEO—how you’re helping them to drive the things that they’ve pointed out as being significant to the strategy, and you’re also doing that within the context of your own finance organization—then you’re more likely to get support for continuing to maintain andinvest your resources, particularly if you can articulate why that is going to help drive the value creation, the business partnering and get people closer to the customer and work where the business value is created.

As far as technology, what do CFOs need to look at to determine where companies to invest? Especially with all of the excitement around generative AI?

There’s areas where CFOs have a role to play in terms of the organizational approach to AI, and clearly also protecting the organization in terms of managing the risks. Do we really understand what the consequences are, and building that confidence and trust that the technology is being used in an appropriate way.

…The technology is an enabler of the outcome. What really drives success and transformation in technologies is understanding the data piece, because really, the data is the foundation. Technology is what you put on top. Getting the data piece right is what will also help you to unlock the real potential of generative AI, but then also the human aspect. If you get the data and the human aspects of transformation right, you will have clarity around what the technology you actually need to use is, and you’ll make better decisions.

While there’s a lot of financial uncertainty now, it’s unknown how things will be in the future. How critical are a CFO’s decisions this year to navigate that future, no matter what it is?

There is always uncertainty. There’s always volatility. We have economic cycles. The key thing for CFOs is: how do you build the agility into your organization so that you can adapt? …I come back to this point around having the clarity of vision and being able to stay the course, because the decisions you make in the short term still line up with that long-term vision. If your organization understands that, if the people in your finance organization understand that, they will make better decisions as a result, because they understand there’s going to be some short-term ups and downs, but we’re going to stay the course and head towards that longer-term goal that we set for ourselves.

FACTS + COMMENT

The Federal Trade Commission and nine attorneys general filed a lawsuit Monday to block Kroger’s proposed acquisition of Albertsons, which would be the largest proposed supermarket merger in U.S. history.

$24.6 billion: Price Kroger would pay for Albertsons

5,000+: Stores Kroger would operate if the merger proceeds

‘Additional grocery price hikes for everyday goods’: The outcome of the merger would “further exacerbate the financial strain [on] consumers across the country,” said Henry Liu, director of the FTC’s Bureau of Competition

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QUIZ

This week, Walgreens Boots Alliance dropped off of the Dow Jones Industrial Average. Which company took its place?

A. General Motors

B. Amazon

C. PepsiCo

D. CVS

See if you got the answer right here.