When Should CFOs Take the Helm?

Do chief financial officers make desirable CEOs? At a time when finance plays an ever-larger role in corporate strategy and many CFOs serve not only as key advisers to the CEO but also as the point person for communicating with financial markets, the CFO’s portfolio of skills would seem to serve well as a platform for that final leap to the boss’s suite.

Or does it? The ability of the chief financial officer to win promotion to the CEO’s job is mixed. About a fifth of all CEOs in the United Kingdom and the United States once served as CFO. The number drops to between 5 and 10 percent in European markets (for example, France and Germany) and in Asia, perhaps because many companies in those regions still have CFOs who are little more than controllers. Our anecdotal research suggests that CFOs can rise to the top job and be perceived as successful in it under either of two general circumstances. In both cases, the specific needs of a company match the demonstrated skills of an individual.

When Financial Capabilities Serve a Company’s Present Needs

Not surprisingly, there is a strong perception that CFOs perform well as CEOs when companies are going through situations that require financial discipline and focus, such as attempting a turnaround or implementing mergers, acquisitions, or divestitures. Indeed, about 70 percent of UK CFOs who became CEOs did so as their companies were in the midst of such situations. Moreover, the skills that the CFO brings to the table are viewed as particularly essential in divestitures and turnaround programs (whether the focus is on cost cutting or on the sale of noncore assets). In the words of one private equity executive, a CEO with experience in the top finance slot “understands key performance indicators and how much they can improve the performance of an acquired business.”

When CFOs have the Broader Experience Expected of a CEO

Many interviewees argued that to become a successful CEO, a CFO needs hands-on general-management experience. Too many, said one, are perceived as “much too narrow ever to become CEOs”—a perception that CFOs must continually fight. A number of interviewees counseled CFOs to exit the finance department at some point in their career and build expertise in a different function.

Indeed, the experience of UK CFOs-turned-CEOs seems to bear out this point—more than two-thirds had at some point worked outside the finance function. This breadth of experience is a crucial part of what many respondents described as a necessary skill: the ability to focus on the entire organization, including the task of motivating employees, rather than simply mastering the numbers. Most of the UK CEOs with a CFO background who moved to the top job from 2000 to 2006 did so from within the same company—but fewer than half moved directly from the CFO position. A CFO is even less likely to be promoted directly to the CEO role at another company.

Making the Transition

When CFOs do win the promotion, the transition to CEO isn’t easy. Former heads of finance not only must deal with the usual challenges facing new CEOs but also, in many cases, drastically change their approach to business. Adopting a CEO mind-set. CFOs-turned-CEOs need to forget their finance role as quickly as possible and take a much more holistic view of the business. In particular, they should focus on the entire organization—not only on the numbers—by spending time in operations and with customers and by acting as the company’s external face to broader stakeholder groups beyond the financial community.

A few key critical issues emerge from the interviews with stakeholders who have watched CFOs making the transition to CEO and with former CFOs themselves:

Adopting a CEO mind-set. CFOs-turned-CEOs need to forget their finance role as quickly as possible and take a much more holistic view of the business. In particular, they should focus on the entire organization—not only on the numbers—by spending time in operations and with customers and by acting as the company’s external face to broader stakeholder groups beyond the financial community.

Delegating responsibility. CFOs-turned-CEOs must avoid being what one interviewee termed a “controlosaurus.” They must resist the familiar habits of their previous roles in finance and control and give their new teams enough room to operate without interference. It is particularly important to give new CFOs some latitude to lead the finance function rather than push them down into a limited role as controller.

Building the right team. Former CFOs need to recognize their limitations and the need to build a complementary team. In particular, that team must have strong marketing capabilities, operations, and sales—including people with the right combination of business and interpersonal skills to mentor the CEO in those areas.

CFOs promoted to the top job can bring a unique set of skills. Those who strengthen their management capabilities early on are more likely to be perceived as strong candidates—and will be better positioned for success once they get the nod. And for those who don’t end up in the CEO’s suite, our interviews suggest that the steady focus many CFOs have on shareholder value recommends them to become effective board chairs.

 

Executive Editor

 Ms Anna Sullivan

Ms Anna Sullivan