CEOs & CFOs.TODAY, MORE THAN EVER BEFORE, a CEO and CFO must function as a team. Financial expertise has always been critical to managerial strategy, but rampant mergers and acquisitions, shareholder activism and ever more complex regulatory requirements are recasting the CFO role--and, in turn, the relationship between finance chiefs and their CEOs. The change isn't always positive. While many CFOs report having more involvement in strategy, others say that intense scrutiny from regulators and Wall Street, coupled with onerous compliance requirements, have turned the job into one of endless drudgery. This Chief Executive Special Report examines why some CEO-CFO partnerships work--and why some implode.
The CEO-CFO Partnership
Why do some CEO-CFO pairings soar--while others crash and burn?
"I USED TO JOKE 'they are the kite, and I am the string,'" says Andrew Greenebaum, referring to his CFO tenures at three different firms. "CEOs are dreamers and thinkers, and CFOs are the watchers of the purse strings."
That point of view jibes with results of a recent survey in which 47.5 percent of CFO respondents reported that their CEOs are more optimistic about their companies than they are. Conducted by CFO Magazine in conjunction with Duke University's Fuqua School of Business, the survey reported that just 5.1 percent of CFOs said the opposite--that they are more optimistic than their CEOs.
Visionary vs. realist--or even pessimist--is, by nature, an adversarial relationship. And yet even CFOs happy in their roles invariably describe the CEO-CFO relationship with some variant on that theme. What's more, most say the nay-sayer aspects of their jobs have grown significantly since Sar-box hit Corporate America in 2002. "The CFO is becoming the official bad guy," says Bill Wheeler, CFO of MetLife since 2003. "When it comes to compliance with SEC regulations or Financial Accounting Standards Board (FASB) rules, we're the internal cop who gets to deliver the bad news."
DOLING OUT MORE BUBBLE-BURSTING doses of reality isn't exactly Wheeler's--or any CFO's--dream job. But it comes hand in hand with the greater emphasis on regulatory compliance and financial reporting that all companies have had to contend with over the past five years. Some CFOs find their post-Sarbox compliance workloads intolerable, switching companies or even careers to escape the drudgery. Greenebaum, for example, left the CFO spot at the lifestyle company Vans to pursue a new career in investor relations at Integrated Corporate Relations. But many take the enhanced reporting responsibilities in stride--even finding an upside.
"There's less mystery than there used to be," says John Ma-honey, CFO of Framingham, Mass.-based Staples and a former partner at Ernst & Young. "The accounting blowups at some companies wound up with CEOs and CFOs pointing fingers at each other. But for most it created a healthier, more robust dialogue about ensuring that financial statements are properly prepared."
Shoulder-to-shoulder vetting of numbers is just one area where regulatory changes have had an impact on the CFO's role and top-level corporate relationships. More and more often, CFOs are called upon to walk CEOs and board members through the intricacies of financial statements and explain the nuances of the more complicated accounting processes--particularly when a rule change or court case about a given practice makes headlines. "Board members, and particularly audit committee members, are much more concerned about truly understanding the numbers themselves," says Julia Homer, founding editor of CFO Magazine. "CFOs uniformly report that they spend more time educating the board and individual board members about finances."
Talking the Walk
COMMUNICATING WITH EXTERNAL constituents--whether they be investors, NGOs or even regulators--is also increasingly falling to the CFO. While CFOs must first and foremost lead the charge in producing timely, accurate financial statements, CEOs increasingly rely upon their finance chiefs to be good communicators capable of not only accurately representing the company's finances, but also painting a picture of where it has been and where it is going from a financial perspective.
"If you want the CEO to run the business, someone has to run the relationship with the Street," points out Chris Langhoff, a recruiter in the financial officers practice at Russell Reynolds Associates. "There are more activist investors today than ever before, and--depending on what role the CEO wants to fill--the CFO often serves as the point person for them."
These added responsibilities, in turn, demand a skilled communicator in the CFO role. Wheeler, for example, serves as "chief spokesperson" to the investment community, and also spends a significant amount of time monitoring proposed accounting rules for his industry, what they will mean for New York City-based MetLife's financials and what the company can do to influence policy. One regulatory proposal (SOP 05-1) actually prompted the former investment banker, who usually relies on his accounting team to talk to the FASB, to pick up the phone himself.
"I'm not an accountant, never thought I would have to worry about technical accounting, and don't have a lot of interest in it," he says. "But as the largest company in our industry in the U.S., it's our responsibility to be out front on these issues. So I literally got on the phone with the senior people there myself and tried to talk it through."
"It's fallen to CFOs of public companies to play a role in standard setting," agrees Mahoney, an Ernst & Young veteran who points out that since the rash of accounting scandals big accounting firms no longer have the same standing with standard setters that they once enjoyed. The role is one of the less welcome tasks CFOs have added to their plates. Influencing rulemaking is an uphill battle, one that frequently ends in frustration--as did Wheeler's efforts to reason with the FASB about SOP 05-1. What's more, discussion centers around complex accounting rules open to interpretation, an area outside the comfort zone of CFOs who came up through finance rather than accounting.
As a result, the CFO organization must have a deep knowledge of accounting principles and the way financial statements are prepared. While that expertise doesn't always have to reside with the CFO, it's increasingly important that finance chiefs are sensitive to those issues and understand their implications even when they aren't accounting experts themselves.
IN ADDITION TO REGULATORY blocking and tackling and day-to-day operations, many CFOs report taking on a greater role in developing and executing business strategy over the past five years. In fact, 60 percent of CFO participants in a recent survey by Accenture described their company's CFO role five years ago as that of a "service provider," while 75 percent describe the role today as "business partner."
The principle functions of finance teams--tracking and reporting results, allocating capital, ensuring control and compliance and supporting decision-making--have always been tightly intertwined with business strategy. But today's CFOs want to be, and quite often are, more than control agents or scorekeepers, working closely with CEOs to map out a strategic course and play a significant role in leading it to fruition.
It's part of the job that suffered under the initial onslaught of Sarbox-related responsibilities, as finance departments were overwhelmed by the need to analyze and adapt to new requirements. Staffing up and hiring out have since absorbed some of the load, as has rounding the learning curve on Section 404. And CFOs are hopeful that the advent of "Sarbanes Lite" relief for smaller firms will usher in a more moderate regulatory climate.
Tellingly, it's the business strategy element of their role that many CFOs find most rewarding, so much so that it compensates for the Sarbox compliance-related processes many CFOs find so tedious. "When I took this job, I had no idea how much it would change with regard to new accounting policies, but I still get to spend a lot of my time driving where the company is growing," says Wheeler. "As long as I have that responsibility and am not just seen as the green-eyeshade clerk in the back, I'm pretty happy."
BY JENNIFER PELLET
BY THE NUMB3RS
47.5 percent of CFOs say they are less optimistic about their company's financial prospects than their CEOs
Is Your CFO an Economic Barometer?
Want to know which way the economy is headed? Try asking your CFO. Eleven years of data from quarterly surveys of CFOs conducted by CFO Magazine in conjunction with Duke University's Fuqua School of Business (www.cfosurvey.org) suggest that CFOs are pretty solid predictors of economic indicators.
"We've gone back and looked at the data, and it turns out CFOs are really good predictors of what will happen over the next year, particularly of earnings, capital spending and employment--the three big numbers," says John R. Graham, director of the survey and a finance professor at Duke's Fuqua School of Business in Durham, N.C. "Compared with similar data of the views of CEOs, production managers and other positions, the CFO predictions are the best."
What gives CFOs economic second sight? Finance chiefs are uniquely positioned to be forward-looking, points out Graham, who sees CFOs' sentiments as more informed than those behind the much hyped consumer confidence index. "They're the ones about to sign the check each quarter. We consumers don't know what's going on until we read about it in the paper."
THE Truth ABOUT CFO Turnover
Why nearly one in seven Fortune 500 companies lost a CFO last year--and how to stop the exodus.
ALVARO DE MOLINA MAY not have been the first CFO to leave his position in search of something better, but he was probably the most candid about why he was leaving. Calling his job "suffocating," de Molina exited Bank of America last December after only 18 months as finance chief. "The roles of the CFO and the CEO are not as fun as they used to be from a regulatory standpoint, but the CEO gets to run the show," de Molina told the press at the time. "The CFO of a well-run company gets all of the guts but none of the glory."
That sentiment may well sum up why turnover among CFOs at public companies has soared over the past three years. In 2006, 12 Fortune 50 CFOs bailed on their jobs, while the year before, companies with $1 billion-plus market caps changed CFOs three times more often than they did in 2002. Though a recent study by global executive search firm Russell Reynolds Associates found that CFO turnover as a whole slowed a bit in 2006, CFO departures due to resignations actually increased by 41 percent over 2005.
Why Do They Go?
ASIDE FROM FIRINGS OVER poor performance and backdating scandals, many, like de Molina, are simply fed up. Having achieved sizeable wealth early on, they're no longer motivated by a big paycheck to stay in a pressure-cooker job that carries with it a tremendous amount of personal liability. "I've seen situations where the primary driver to leave was to join a company that they felt was better controlled," reports Trent Gazza-way, a managing partner at Chicago-based Grant Thornton LLP. "And that makes sense. If the tone at the top is better, that reduces the risk and also makes the job easier."
The demands of the CFO role are greater, yet the time allotted for achievement is ever shorter. According to the March 2007 Duke University/CFO Business Outlook survey of chief financial officers, 35.3 percent of respondents cited heightened pressure to deliver better results in a shorter time span as a reason for early CFO departures. "One thing we hoped would come out of the Sarbox legislation was a fresh approach to the numbers," says John Graham, professor of finance at Duke University's Fuqua School of Business and director of the Duke/CFO study. But that hasn't happened, he adds, at least not from the CFO's perspective. "They're feeling the same old pressures, but if anything, investors and the board are less understanding if CFOs don't deliver the numbers they may have gotten in the past."
Add to that a growing fatigue with nonstop compliance drudgery ushered in by Sarbanes-Oxley. Thirty-four percent of the Duke/CFO survey respondents noted that the increased compliance work was making the job tedious, leading to early exits. Chris Langhoff, member of Russell Reynolds' financial officers practice, notes CFOs are particularly frustrated that the time spent on compliance is keeping them from contributing in a meaningful way to the strategic vision of the company. "They have to spend so much time now from a regulatory point of view, and also preparing for boards, preparing for investors, talking to investors--it's just a huge time drain and takes them further away from the business," says Langhoff.
Intense pressure from the CEO and the board is another significant factor in CFO malaise, according to 30 percent of respondents to the Duke/CFO study. "We all knew there was extreme pressure from external markets," says Graham. "Now I think this has been brought inside the company too, where the CFO feels more as though he or she is in the hot seat." Audit committees are paying far more attention to the CFO, and when things don't go well, it's often he or she who shoulders the blame.
Where Do They Land?
THE MOST GIFTED CFOs find multiple options on the market. "The war for talent has continued to escalate," Langhoff reports. "Whether public or private, companies are looking for top talent as a way to make the business better." Some finance chiefs take offers at other public companies, hoping for greener grass. Others transition to different positions entirely. Alvaro de Molina, for example, accepted a position with private equity firm Cerberus Capital; Jon Symonds left Astra Zeneca in June to become a managing director of Goldman Sachs; Tom White, former CFO of the Hub Group, is now at private equity firm Apollo Management monitoring investments in the logistics industry.
For embattled public company CFOs tired of the public scrutiny, private companies offer an attractive haven. Tom Ryan, a veteran CFO of public companies, most recently Allied Waste Industries, called it quits two years ago to "retire and enjoy life." He soon missed the camaraderie of the corporate environment and the intellectual challenge of his work and decided to return--but only to a private company. "I grew up wanting to do this for a living, and I enjoyed it at three other companies. I can't say I hated it at Allied, but I could see where it was going--every time I turned around there was a new thing I had to put my children up as a pledge to certify," says Ryan, who notes that the amount of time he was forced to spend on "non-value-added" activities, coupled with the broad litigation risk, made the job wholly unappealing.
This past June he re-entered the work force as CFO of Pro-Build, a supplier of building materials. "At a private company, you're not working toward every quarterly earnings release," he says. "So I spend my time working on things I think will have a lot of value, and where I can do something worthwhile as opposed to worrying about the next analyst meeting."
What Can Make Them Stay?
UNFORTUNATELY, THERE'S ONLY SO much a public company CEO can do to ease a CFO's pain. "Sarbanes-Oxley is what it is," says Graham. "But one very important thing is to make sure the channels of communication are wide open."
When Paul Reilly considers the factors that have kept him happy at Melville, N.Y.-based Arrow Electronics since 2001, and through the turbulent Sarbox changes, he points to the solid, open communication he enjoys with CEO Bill Mitchell. "I can stroll in and talk to him not just about areas of concern or interest in the finance world, but my view on many different aspects of the company," says Reilly, who adds that Mitchell weathers bad news well. "He keeps a pretty even keel when you have to go in there and give him something unexpected. He's been very vocal that there should be no secrets here."
Mitchell's proactive support from a resources perspective has also allowed Reilly to stay involved in strategy development and execution--the aspect of the job he most enjoys. "Quite often I hear from Bill, 'What can I do to help you, Paul? Do you need more resources? Do we need to change the process?'" The company recently added resources to the treasury function, hiring several people to better manage its hedging program and cash investment, and installing a new IT system to make various financial processes more efficient.
Experts note that CFOs forced to get by with sub-par resources--whether it's a team too small to handle the administrative burden or inefficient systems that slow down processes--will eventually burn out. And certainly that's been an issue in recent years. But Sam Silvers, principal and national practice leader for Deloitte Consulting's CFO transformation practice, says the purse strings are beginning to loosen. "World-class organizations have figured out the importance of it, and you're getting greater investments in those finance organizations than you did before," he says. "The ROI on those investments are a little bit squishy, but they're still critically important."
Making the investment now, before the CFO tires of muddling through, might be a wise move, considering that things aren't likely to get any simpler for the finance officer--and turnover in that office only adds to the upheaval. "There's been a lot of turmoil for a lot of years [for the finance function]," says Chuck Eldridge, managing director of Korn/Ferry's financial officers practice. "Is it going to get quiet? I don't think so. It's just hard to envision that day when things will be hunky-dory, if you will, in the world of finance."
BY C.J. PRINCE
BY THE NUMB3RS
12 Fortune 50 CFOs bailed on their jobs in 2006
What CFOs Want
You may not be able to change Sarbox, but there are steps you can take to keep your CFO happy.
1 Talk it out. Keep an open, honest dialogue going and be proactive about offering help. Develop trust and remember that you're a team, says Korn/Ferry's Chuck Eldridge. "They have to have that partnership relationship where the CEO views the CFO as a confidante. That relationship is almost husband and wife-like, where they've built up this trust. That's when things begin to work well for both parties."
2 Pony up. "You have to allow the CFO to invest in the finance organization," says Deloitte Consulting's Sam Silvers. That includes new information tools, new budgeting and planning tools, process change, new talent and so on. Expect the CFO to make a thoughtful business case, but remember that the ROI for some of these investments will be less of a straight line. "How important is better information to support the business to make better decisions? It's pretty important. How about mitigating risk? Talent retention? Pretty important. None of them has a huge quantitative component that you can easily, comfortably put a business case around, but they all have huge qualitative benefits."
3 The right team. With the appropriate positions in a supportive role, CFOs can keep an eye on the details but also focus on the bigger picture. "They need to have an outstanding controller, a chief accounting officer, someone to do that job so the CFO can actually look at the business and partner with the CEO in driving the operating results and the strategy," says Russell Reynolds' Chris Langhoff. "Otherwise you're making them into glorified controllers."
4 Take finance seriously. Arrow Electronics CFO Paul Reilly says that the fact that CEO Bill Mitchell views the finance function as an integral part of the business "makes this job much more challenging and fun than some other companies."
5 Speak up. "Probably the best thing CEOs can do," says Pro-Build CFO Tom Ryan, "is use their bully pulpit in terms of talking to the people writing and administrating the laws to get them to change their attitudes."
This CHIEF EXECUTIVE SPECIAL REPORT was produced for Chief Executive Group by INKSTONE EDITORIAL.