CFO and CEO: Business partners, or married couple?
Over the last decade, there has been a profound shift in the relationship between CFO and CEO. Partly, this is because the CEO role has changed so dramatically. In the era of shareholder capitalism, with a 24/7 media cycle, CEOs have become more public facing. This means many of their duties have, over time, been shared with others in the C-suite. Enter CFOs, whose status has been on the ascent for over a decade – from bean counter to master strategist.
“The role of the CFO has been undergoing change for a few years. It started in the early part of the 2000s in terms of CFOs becoming more of a consultant to the business,” says Carl Grivner, CEO of Colt, the US-based network communications company. “It has evolved now into a participant in the business and operational decisions, not just the financial ones. As the role continues to evolve, he or she becomes a key business partner.”
The CFO toolbox has to enlarge in step. “Successful CFO leadership requires a deeper understanding of strategy, increased leadership skills, and an ability to effectively communicate financial acumen and knowledge to non-financial colleagues,” declares the Wharton Executive Education Program. These close the gap between the traditional roles of the CEO and the CFO.
Listeners on earnings presentations and conference calls might easily mistake CFOs for CEOs. Discussing performance in the first quarter of 2016, IBM CFO Martin Schroeter said: “We’re not only transforming our existing businesses,” he told securities analysts, “but building new markets and addressing new opportunity areas.”
In an era of information overload and hyper-connectivity, the CFO has also had to become more adept at communicating to the markets. Skilled CFOs must translate complex financial messages for CEOs, directors, investors, customers, suppliers, lenders and the analysts who probe financial performance. The story CFOs tell about the business can shape how the business is evaluated.
The risk, of course, is that the CEO may put pressure on CFOs to present the company in a misleading light. The tough Sarbanes-Oxley legislation in the US, aimed at curbing corporate malfeasance, again highlighted the problem of ‘cooking the books’ and untrue financial statements.
The temptation to massage the numbers is not uncommon. In Implications of Power: When the CEO can pressure the CFO to bias reports, author Henry L. Friedman cites multiple academic surveys showing pressure on CFOs to submit to CEO bias. In a survey of 169 CFOs, 91% reported “inside pressure as a motivation to manage earnings”. Another survey of 141 public company CFOs revealed that 17% of CFOs felt pressure “to misrepresent their results by their companies’ CEOs during the past five years”. To avoid such pitfalls, Colt’s Grivner says there must be clear pathways for CFOs – and others in the business – to blow the whistle. “If you think something is happening that it is not right, you should always have an open avenue to go to the board directly. It sets the stage with that person to say: ‘If I don’t agree with something, I’m not going to lose my job if I go beyond or above the CEO.’
“If you disagree with something or believe something is not being portrayed properly to markets, then that should be an option to anyone. Everybody needs to have a degree of independence from the CEO in terms of the ethics of the business. This establishes a culture of integrity.” Similarly, Goldcorp’s Garofolo argues that the CFO is now at the heart of the ethics of any business. “Ever since the days of Enron it’s not just a matter of raising money and taking care of statutory reporting,” says Garofolo. “I’m looking for someone who can run the business as capably as I can.”
Perhaps because of their growing influence and prominence, many CFOs today surface as candidates for the CEO job when it arises. Executive recruitment firm Korn Ferry reported in 2015 that 13% of sitting CEOs in the Global Forbes 2000 moved into the top jobs from being CFO. Nearly two in ten sitting CEOs previously held senior level financial officer posts. So what should CFOs expect when they take the top seat? Garofolo warns candidates to brace for scrutiny. “Every word is weighed, every gesture is weighed by several constituents,” he says. “That was a little surprising for me.”