CFO and CEO: Business partners,or married couple?

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CFO’s status has been on the ascent for over a decade - from bean counter to a consultant to the business.

The traditional roles of the CEO and the CFO are long gone.

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.”

Challenges today include:

Battle for talent

Deepening role of technology

Corporate reporting in a 24/7 media age

The series covers the evolving role of the Chief Financial Officer from three vantage points: Chief Human Resources Officer, Chief Executive Officer and Chief Information Officer/Chief Technology Officer.

The insights are based on C-suite or senior management interviews, desk research, business literature and interviews with analysts and covers a range of sectors: natural resources, technology, consumer goods, financial services, ICT and automotive – interlinked trends including the deepening role of technology in business, the battle for talent, the challenges of corporate reporting in a 24/7 media age, trade-offs around organisational structures (in-sourcing/out-sourcing) and between operational expenditure for today versus capital expenditure for tomorrow.

In identifying their desired CFO, the CEO is thus seeking a broader range of skills than number crunching. “I’m looking for somebody who has a good fundamental grasp of the business, not just the financial aspects of it, because anybody in the C-suite is really a partner to the CEO,” says David Garofolo, CEO at Goldcorp, a Vancouver-based resources company. In his absence, says Garofolo, these partners could in theory execute strategic agendas. This strategic role of the CFO was clearly evidenced when Goldcorp, for instance, moved their Vice President of Corporate Development, Russell Ball, into the CFO post in March 2016.

Grivner concurs. He is looking for a CFO with a blend of skills. “There is a ‘deal CFO’ and an ‘operational CFO’ and a third type that can do both. You sometimes enter a situation where the CFO is focused on doing a deal, and that doesn’t move the business forward on a daily basis. You want someone that is more operationally focused, has deal experience and can blend the two together.”

Finding the right mix

To meet the new challenges, the modern CFO needs:

A strong understandingof data

A fundamental grasp of the business

An ability to translate complex financial messages

And work effectively with CHROs, CIOs and CEOs

Such a CFO can glide easily from questions about how to take a company public or how to buy a company, from day-to-day operations. “You can rely on them to look at operational aspects of this business, then if a deal should come along they have the skills and capabilities to do that.”

Increasingly, CFOs also need a strong grasp of data, he adds. “There are KPIs on productivity, revenue per employee and the standard metrics, but the CFOs today - especially in this industry [communications] - have to look at broader indicators of the business. We [Colt] are going through a strategy change moving to higher bandwidth for customers and there is mountain of data we’ve gone through and it is very important that the CFO as a key leader of the business, understands that.”

So how would Grivner characterise the overall relationship between CFO and CEO? “It’s like a marriage,” he says. “You each have to understand the other’s strengths and weaknesses.” And just like a family, “people look at that relationship and are affected by it.” Typical sticking points might include different perspectives on balancing stability today with growth tomorrow.

“There is a balance between CFO and CEO. I’ve had CFOs where I was always the bad cop, and I’ve had CFOs where they were always the bad cop. There is an assumption sometimes that the CEO has to assume a certain position, or the CFO has to assume that position.”

Making the marriage work can deliver huge benefits for the organisation. EY, a global management consultancy, polled 652 global CFOs and concluded that “an effective CFO-CEO partnership is one of the defining characteristics of a well-run, market-leading organization”.

An effective CFO-CEO partnership is one of the defining characteristics of a well-run, market-leading organization.

CFO and CEO: Business partners, or married couple?CFO and CEO: Business partners, or married couple?

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91% of recently surveyed CFOs report “inside pressure as a motivation to manage earnings”.1

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.1 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.’

Communicating to the markets

“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.”

1. Henry L. Friedman “Implications of Power: When the CEO can pressure the CFO to bias reports”

The story CFOs tell about the business can shape how the business is evaluated.

91%

CFO and CEO: Business partners, or married couple?

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So what should CFOs expect when they take the top seat?

37%

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.2 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.”

From CFO to CEO?

13% of CEOs in theGlobal Forbes 2000 moved into the top jobs from being CFO.2

13%

CFO and CEO: Business partners, or married couple?

2. http://www.kornferry.com/institute/cfo-ceo-right-brain-leadership-gap

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About The Economist Intelligence Unit

The Economist Intelligence Unit is the world leader in global business intelligence. It is the business-to-business arm of The Economist Group, which publishes The Economist newspaper. The Economist Intelligence Unit helps executives make better decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies. More information can be found at www.eiu.com or www.twitter.com/theeiu.

About the Series

Together with the Economist Intelligence Unit, ADP has sponsored this series of articles to guide you through the challenges shaping the role of the CFO. Find out how ADP can help you link financial and human capital, data and technology together contact us on:

1800-4190-237

www.adp.in

@ADP

www.linkedin.com/company/adp

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