Part IIn today’s complex business environment, more and more companies are turning to Chief Finance Officers (CFO) to assume the premier position of Chief Executive Officer (CEO) of the company. However, the qualities required of a CEO are not always in line with the training and experiences of a former CFO. Yet the CFO can bring many qualities to the CEO position to help a company succeed. What are the benefits to having a CFO as CEO, and what are the required qualities of a CEO that may hamper the CFO’s success in this position?As the leader of a corporation, the CEO must be a well rounded leader. The CEO’s key responsibility is “making critical strategic decisions and creating conditions for those to be well-executed” He must have the people skills to motivate and build consensus both among the employees, shareholders, and board members. He must be able to develop a strategy and swiftly and effectively implement it.
“A CEO must think at a higher level of abstraction – more inductively and less deductively. A CEO must be more willing and able to act on key decisions with fewer facts, relying more on grounded assumptions. And a CEO must be able to communicate effectively to a broader constituency – in particular, he must be far more politically attuned.” John Dasburg, CEO of Burger King and former CFO of Marriott International IncGenerally the CEO is more concerned with the “Big Picture” of the company, and can not afford to immerse themselves in the details of any specific area. They are the motivators and leaders. Often the CEO can be successful simply by selling his vision and strategic plan, while letting others such as the CFO work out the details. In contrast, people expect the CFO to be detailed and analytical, even critical in their examination of the strategic plan, by examining it for financial flaws.
Probably the biggest barrier preventing CFOs from succeeding as CEOs is that of management skills. The CFO is an expert in the financial underpinnings of the company, but often is not required to display skill in people or project management. CEOs often make decisions based on the analytics, as well as intangibles learned from these skills; intuition, personal knowledge of those involved, and consumer opinion for example. In addition, the CEO is often required to make decisions with limited time to examine the details, something the CFO is trained to specifically not do.
The CFO is trained collect and analyze all the data before coming to a decision. They look at different factors, from NPV to the timing of cash flow and returns; then calculate the risk of the investment. The CEO will often look at the same data, yet will not give the hard numbers the same weight as the CFO. Instead, those intangibles may weigh heavily in the making of the decision. The CEO is often willing to accept take more risk than the CFO. The transition to being able to make the hard decision without all the data may be a difficult one for the analytically oriented CFO to make.
Another functional area the CFO will have little experience in is marketing. Sales and marketing will always be an important part of business. Many CFOs are hired to cut costs to increase the efficiency of a company. Marketing is generally a favorite target of the cost cutters. In a sluggish market, this may be effective, but in a growth market such as seen in recent years, focusing more on marketing can led a company to success. CFOs rarely have experience or understanding of marketing and sales, and their relationship to the market. This lack of dedicated experience can harm a company when it needs to grow to succeed.
However, the recent economic down-turn, to include the fall of the dot-coms and telecommunications companies, the numerous high-profile scandals that have racked prominent companies and the global growth that continues in all business has led to financial expertise being a top priority for a new CEO. The CFO can bring many skill sets to the CEO position to mitigate the complexity and public, and government, oversight prevalent in today’s business environment.
By definition, CFOs are more focused on the finances than a CEO normally is. However a financial background can greatly help a CEO to understand the status of the company, and can lead to enhanced success, while at the same time staying out of the scandals.
The responsibility for regulatory compliance is the domain of the CFO. They are trained in the details required to keep the company within the legal bounds. As stated by Deborah Thomas, head of treasury at Michael Page International:”The CFO has had to pick up responsibility for responding to regulatory changes. And with regulation, compliance and corporate risk at the forefront of everyone’s minds, the CFO makes the perfect choice for CEO”By the time a person is promoted to CFO, they possess an innate understanding of the regulations, legal requirements, and a comprehensive knowledge of the financial status of the company. These are all skills that a CEO needs to possess to be successful. As a CEO, the CFO may be capable of managing the regulatory complexities, while still finding opportunities for growth.
Today’s CFO is better-rounded than those in the past. Partly due to the recent scandals, the CFO works closely with the CEO in developing and executing strategy. It is often the CFO who is now the face of the company, managing the daily relationships with the shareholders. Today’s CFO is invested in the daily operations of the company, and will now come to the CEO seat with a full understanding of operations and strategy.
With business becoming increasingly complex, due to increased public oversight, regulation, and global growth; it is imperative that a CEO have a strong financial background.
Having the financial background can lead a company to increased success. Rather than trusting those intangibles, the CFO may make decisions based more higher probabilities of success. He may avoid the big risks, and subsequent big payoffs, but will often show a steady growth and return. In fact, according to a study by Duke University, companies that are run by optimistic, dynamic CEOs often run a higher level of short-term debt and attempt to time the debt market, a sign of taking risks. Whereas companies run by former CFOs tend to have higher debt to equity ratios, an indication of stability.
It is this ability to negotiate the risks that places the CFO as a highly desirable CEO candidate. The CFO is able to assess the risks and their impact on financial performance. The CFO seems to perform well overall as a CEO. So well that the trend is growing, according to CFO Magazine in 2005, 20 percent of Fortune 100 CEOs were once CFOs, up from 12 percent in 1995. The key to success for the CFO seeking to become a CEO is to round out their experiences. They will possess they technical expertise to perform the job, they just need to be able to supplement that skill with the management and visionary skills requisite for a good CEO.
1. Durfee, Don. SAY YES TO DR NO: New research suggests that CFOs are an essential counterweight to optimistic CEOs.
CFO Asia, 7 Sep 2006http://www.cfoasia.com/archives/200609-07.htm2. Favaro, Paul. Making the Leap from CFO to CEO.
Financial Executives Online. November 2001http://www.favaro.net/publications/cfo-to-ceo/CFOtoCEO.htm3. Durfee, Don. The Top Spot: Why more companies are tapping their finance chiefs for CEO.
CFO Magazine. 1 October 2005http://www.cfo.com/article.cfm/44444684. Corporate Finance. CFO to CEO1 April 2005http://www.cristassociates.com/press/CorpFin_CFOtoCEO_040105.pdf