The following comes from an Aug. 14 posting on the online version of Fortune magazine.
The new pope wanted to talk about money. That was the message that went out to a group of seven prominent financiers—major Catholics all—from around the world in the summer of 2013. Barely five months after the shocking resignation of Pope Benedict XVI, Pope Francis had summoned them to assemble at the seat of holy power, the Vatican. They knew their general assignment: to create a plan to restructure the Vatican’s scandal-plagued finances. And like Catholics everywhere, they knew that Francis had already signaled that he was a new kind of pontiff, a “people’s pope” who championed charity and tolerance over dogma. Still, they didn’t know what to expect when they arrived at the Vatican for a meeting with the pope on the first Saturday in August. How interested was he in finance, really? And how serious was he about changing business as usual inside the Vatican?
A major hint came from a change in tradition upon their arrival: The visitors didn’t report to the Apostolic Palace, the Renaissance showplace where for centuries past popes had received visitors in high style. Instead they entered Vatican City on the other side of the colonnade of St. Peter’s Square and took a 150-yard stroll through the hilly enclave to the new pope’s place of business—Casa Santa Marta, a five-story limestone guesthouse that could be mistaken for a newish hotel. There they were ushered into a nondescript meeting room on the first floor with no paintings or religious ornaments and took their seats around a conference table. The members—including Jean-Baptiste de Franssu, ex-chief of asset-management giant Invesco in Europe; Jochen Messemer, a top executive at ERGO, a large German insurer; and George Yeo, former foreign minister of Singapore—chatted nervously as they waited.
After 15 minutes, Pope Francis entered the room—and got right down to business. Attired in a simple white cassock and plain metal cross, he took his place standing at the head of the table. With little preamble, he began outlining his strategic vision, in an approach described by one participant as “highly managerial.” Speaking in fluent Italian and taking frequent pauses while a translator repeated his words in English, the pope explained to the group that for his spiritual message to be credible, the Vatican’s finances must be credible as well. After centuries of secrecy and intrigue, it was time to open the books to the faithful. Strict rules and protocols must be adopted to end the cycle of scandals that had plagued the Vatican in recent years.
Francis declared that sound financial management was a pillar of his greatest mission: aiding the poor and underprivileged. That mission was endangered by volatile, unpredictable budgets that careened from modest surpluses to steep deficits. The Vatican’s inept practices had inhibited giving, he explained, and had to stop. “When the administration is fat, it’s unhealthy,” he said. Francis wanted a leaner, more efficient Vatican administration that would be solidly “self-sustaining.” That, he said, would free up more money for his charities. “You are the experts,” the pope said, “and I trust you. Now I want solutions to these problems, and I want them as soon as possible.” With that, Francis left the group to figure out the details.
There was no ambiguity about the job ahead. “The Holy Father’s message was crystal clear: ‘Let us make money to go to the poor,’” recalls Joseph Zahra, chief of the panel, a pontifical commission known by its acronym, COSEA. Zahra, a former chairman of the Bank of Valletta, Malta’s largest bank, says of Francis: “In finances, he’s not a micromanager but an inspirational leader.”
….Indeed, Francis has brought in some of the biggest brand names in the world of business. KPMG is implementing uniform, internationally accepted accounting standards to replace the Vatican’s previous crazy quilt of bookkeeping. EY (the former Ernst & Young) is scrutinizing management of the Vatican’s stores, utilities, and other municipal services. Deloitte & Touche now audits the accounts at the Vatican bank. And Spencer Stuart has recruited top management talent from around the globe. Heading the effort to restructure media operations, assisted by McKinsey & Co., is Lord Christopher Patten, a former head of the BBC and the last British governor of Hong Kong.
When Pope Francis puts a cardinal in charge of something, the choice is typically an outsider. His most important appointment so far, either lay or religious, is Cardinal George Pell, an Australian whom he recruited from the archdiocese of Sydney. Pell now heads the newly formed Secretariat for the Economy, and Pope Francis has granted Pell power over finances that no official has remotely held before. He’s responsible for setting and enforcing all budgets and managing all investments. The son of a heavyweight boxer, Pell, 73, is an imposing figure who is short on niceties and brutally frank about the necessity to radically pare costs.
….The pontiff does not talk about balance sheets and cash flow. He leaves the numbers to the experts. His forte is leadership. Like any good chief executive, he knows that the culture of an organization is established at the top. And he is always well prepared. “He has five or six sources of information on every subject,” says Austen Ivereigh, author of a forthcoming biography of Francis, The Great Reformer. “It’s impossible to hoodwink him.” By getting the views of many participants—both Vatican officials and lay advisers—in all of his reform initiatives, the pope quickly determines if his instructions are being implemented or blocked by the old guard. If he sees resistance from old-school directors, he’ll quickly make changes, as when he replaced the entire board of the AIF, the financial regulator.
One of his rules is that big donors and companies that do business with the church should get no special treatment. Before he took charge in Buenos Aires, the archdiocese was a large shareholder in Argentine banks, and the banks regularly granted their ecclesiastical investor loans on easy terms. As cardinal, Francis denounced the arrangement as a blatant conflict of interest and sold all the archdiocese’s bank holdings. He also refused to attend fundraising dinners, usually regarded as one of a cardinal’s top jobs. His aversion to catering to the wealthy didn’t stop with his ascension to the papacy. It’s a Vatican tradition that the Secretariat of State, which receives donations from the rich on the pontiff’s behalf, would reward big donors by arranging special audiences and masses with the pope. Pope Francis ended the practice.
….For 2013 the Holy See posted revenues of $315 million and expenses of $348 million, for a $33 million deficit. Since 2007 the total shortfalls have totaled $56 million. Those figures actually understate the size of the Holy See’s financial problems. The current spending number is due to rise sharply for a pressing need: taming big pension liabilities. It’s a problem the Vatican shares with virtually every Western economy. The Vatican inaugurated a generous defined-benefit pension plan in the early 1960s but didn’t have an actual pension fund until three decades later.
….The pope’s strategy for addressing both spending and pension issues is to gradually shrink the Vatican workforce through attrition and raise more money to maintain the benefits. In February of 2014 he imposed a hiring freeze and also stopped formerly generous overtime payments. The plan is to move existing employees from overstaffed congregations to growth areas, such as financial management, without replacing those who depart.
….The other major problem facing the Holy See is that its revenues from investments—almost half of its total—are unpredictable, and returns are far lower than they should be. The Holy See does own one reliable source of profits, the Vatican bank, or IOR. The IOR (for, in Italian, Institute for Religious Works) regularly provides around $70 million toward operating revenues. Perhaps the most surprising feature of the Vatican’s finances is the extremely modest size of its portfolio of stocks, bonds, and real estate. The seed money for the Vatican’s investments came from a $92 million settlement the Italian government provided in 1929, in compensation for its confiscation of the Papal States, covering much of central Italy, 60 years earlier.
….To turn the Vatican into a consistent profitmaker, the new regime is counting on two institutions with the potential for big growth in earnings: the museums and the Vatican bank. “Those are the two main income sources for the future,” says Zahra, the Maltese adviser to the Vatican.
….Pell meets with Pope Francis once every two weeks at Casa Santa Marta to brief him on the progress being made by their handpicked team of financial experts. He describes the pope as a good example of the “old-style Jesuit” who “knows which way is up” and asks the right questions. To serve his higher calling as a pope of the people, Francis knows, he must continue to keep one eye on the bottom line.
To read the entire story, click here.