How To Use Your “New” CFO
The CFO’s role is being redefined in a way that is beyond helpful to CEOs. CFOs now stepping in when the CEO can’t and talking to investors, preparing strategy reviews, negotiating mergers and working directly with division managers to cut costs. When times get tough, finance chiefs step up.
January 17 2011 by Fran Hawthorne
William A. Roper Jr. was getting restless just reviewing spreadsheets and tax paperwork, as the chief financial officer of Science Applications International Corp. (SAIC), a $10 billion science and technology services company, back in the mid-1990s. To branch out, “I visited with the senior line managers and asked them, ‘What needs do you have, and how could I help?’” he recalls.
The reaction from both ends of the corporate ladder wasn’t completely welcoming at first. SAIC’s then chief executive, J. Robert Beyster, “wasn’t used to using the CFO in a broader role,” Roper says. As for the line managers, there was “some initial skepticism as to why was I getting into their knickers, so to speak.”
But Roper persisted. “One or two managers gave me some throwaway things to do,” he says. For instance, he renegotiated leases for a division head whose staff was scattered. “I sort of earned my stripes by working with line managers to help them improve their business operations,” Roper continues. Ultimately, “I became Bob Beyster’s right-hand person to deal with certain types of business-operational issues.” And eventually, in 2007, he became a CEO himself, running VeriSign Inc., a $1 billion Internet security services provider.
“I had to create that path,” Roper adds.
The path he carved out a decade-and-a-half ago is now a widely used highway. CFOs today are structuring and negotiating mergers, working with division managers to cut costs, stepping in for the CEO to talk to investors and boards and coordinating all the pieces of a strategy review. Not only can this free up a chief executive’s time, but the financial officer can also fill in when other top jobs are eliminated, as corporations trim their managerial ranks. In short, the finance chief is doing a lot more than counting beans — becoming, as many people put it, a partner for the CEO.
“If I were the CEO, I would say to the CFO, ‘I need you to become more strategically involved, and I need you to be a stronger collaborator,’ sums up Myrna Hellerman, a senior vice president at the New York-based human resources consulting firm Sibson Consulting.
Still, “collaborator” does not mean “replacement,” and there is a subtle line that both executives must be careful not to cross. “Even though the CFO is becoming more of a strategist,” warns Sanford Cockrell III, the national managing partner who heads the U.S. chief financial officer program at Deloitte, “at the end of the day that [strategy] is the CEO’s principal responsibility, and it does have to be clear to the board.”
Back when Roper began at SAIC, each top official’s duties were clearly delineated. The CFO oversaw the small-bore details of accounting, budget and tax preparation, financial reports, audits and Securities and Exchange Commission compliance. Those certainly remain in the job description.
But a range of pressures over the past decade—including corporate scandals, the Sarbanes-Oxley and Dodd-Frank laws, global expansion and then the global economic collapse, and increasing shareholder activism – have forced finance chiefs out of their Excel silos. For one thing,
they now face personal legal liability for inaccurate reports. Cockrell also points out that “in volatile economic times, a company’s ability to build an appropriate capital structure is crucial, and the CFOs typically have been the architect of putting that in place.” Moreover, forward-looking chief executives have learned to use the entire C-suite, as a team, to help set corporate strategy.
CEOs are especially likely to call on their finance executives when it comes to mergers, acquisitions, and divestitures. Of course, CFOs have always been involved in crunching the basic finances of these deals, but now they can do much more, from the earliest steps—working with managers to identify potential targets—through the negotiations, and then integrating the acquisition into the business.
If, for instance, the costs and benefits don’t seem to add up on a straight bottom-line calculation, the old-fashioned CFO would shut the folder and say, “No.” The new-style CFO might meet with the target company’s management, “looking at the reality behind the numbers,” such as the company’s competitors and market penetration, suggests Hellerman of Sibson.
At Jarden Corp., a $6 billion conglomerate based in the New York City suburb of Rye – it owns such everyday brands as Mr. Coffee, Sunbeam, Coleman camping gear, and First Alert smoke alarms—CEO Martin E. Franklin and Vice Chairman and CFO Ian G.H. Ashken have worked together for more than 20 years, buying up approximately two dozen companies. Ashken describes how they divide the labor when considering an acquisition:
“Martin is out there kissing a lot of frogs and seeing what frogs might be princesses. If there’s a frog that Martin thinks has the potential to turn into a princess, we’ll get together about whether they strategically fit. I will be in charge of doing the due diligence. Martin will go out and meet the business managers. The ultimate negotiations will come down to me, but if there’s anything I feel uncomfortable with, I’ll bring Martin in.”
The negotiation for Mapa Spontex Baby Care and Home Care, the Paris-based maker of Nuk baby bottles, in spring 2010 was a rare time when Ashken needed his boss’s advice. After a major manufacturing plant was gutted by a fire, the two men had to decide whether to ask Mapa Spontex to rebuild it, or simply omit the plant and lower the price. (Jarden ended up doing the latter, but it won’t reveal how much the price was reduced.)
“We’ve never seen ourselves as CEO and CFO,” adds Franklin. “We’ve gotten to a point where we finish each other’s sentences. He’s the other half of me.”
What Roper pioneered at SAIC—talking with mid-level managers—has become another key area where chief executives can use their newly empowered CFOs. Especially during the recession, finance chiefs have been working directly with managers to pinpoint smart ways to trim expenses, once the CEO has set the overall target. “Multi-line firms are using the CFO as a nexus to get at costs that are common to the business units, like IT. You can save a lot of cost if you can unify” the functions,” says Michael Rescoe, who has been the CFO of five large companies in the past 15 years.
One of those companies was New York City-based Travelport, which provides business travel services. During a complex set of spinoffs and acquisitions from 2006 to 2009, Rescoe held weekly conference calls with the heads of the three major business units to carry out the corporate order to slice spending by $400 million.
The finance chiefs are also getting into the trenches to design metrics for everything from employee performance, to a brand’s market position, to a pharmaceutical company’s relationship with doctors and hospitals, says Mike Boyle, head of CFO Advisory Services in the U.S. at PricewaterhouseCoopers.
The way CFOs deal with the outside financial community has changed as well. They are preparing the road show—not just joining it—and spending more time explaining the strategic implications of the numbers to board members, analysts, lead investors and credit rating agencies.
And if the CEO is still setting strategy, “the CEO must lean on the CFO to understand what the implications of getting to that strategy are,” says Boyle of PwC. If the company is considering an international expansion, the CFO might corral compliance, legal, tech and finance experts to analyze questions such as: “Do we have the capital to be able to execute on the strategy? How are we going to protect the assets if we build a plant or hire people? Are we subjecting ourselves to piracy?”
Some of these tasks were previously done by the CEO, other top brass, mid-level managers, or simply never done at all in the halcyon days before the recession and expanded regulation. So the CFO’s new activism has freed up those other executives to focus back on their own responsibilities. For instance, in companies with a less-active CFO, the chief marketing officer might be the one explaining strategy to the financial world, and “that would take the CMO’s focus off the primary job, the consumers,” says S. Douglas Hutcheson, who knows the ropes from both sides, having risen from CFO to CEO of Leap Wireless International Inc., a $2.25 billion wireless service provider based in San Diego (see sidebar).
Meanwhile, the chief executive “can be doing things he should be doing, meeting with employees, meeting with customers,” rather than CFO work, says Roper, the former SAIC and VeriSign executive. “He has more time to spend on strategy.”
Of course, some of the positions that used to do what the expanded CFO now does—particularly chief operating officer—have just been eliminated.
But for all the lovely talk of “other half” and teamwork, experts warn that no one should forget whose name comes at the top of the annual report. “There have to be organizational lines and responsibilities,” Deloitte’s Cockrell says.
It would be a major mistake for the CFO to fire anyone outside his or her direct chain of command, cut another department’s budget without consultations or criticize a manager publicly. That also risks putting some other top manager’s nose out of joint. Moreover, “the CFO should never represent that they own the [corporate] strategy or can change the strategy. The strategy is a conversation between the CEO and the board,” says Rescoe of Travelport.
At the same time, the chief executive has to remember each executive’s individual job duties and strengths, and not to give the finance specialist some tasks in another specialized field. “In some companies, the CFOs end up in charge of administrative areas such as IT or real estate, and that can be too much,” says Gerry Hansell, a senior partner in the Chicago office of Boston Consulting Group and leader of its corporate development practice in the Americas.
How chummy should the chief executive get with the CFO? Even a pair as tight as Franklin and Ashken at Jarden don’t meet socially, although their teenage children occasionally ski together. One expert warns against developing too close a relationship with any top subordinate, because “you have to make judgments that are based on what’s in the best interest of the company.” Still, an annual get-together with the whole C-suite at a restaurant is fine, says Rescoe.
He adds, “The best environment for the CEO and CFO is one where there’s a very close relationship, not of equals, but the fewer formalities the better. You have to be able to have a conversation at two in the morning on Sunday about something that’s going to happen on Monday.”
Are Small Companies Different?
If the CFO of a Fortune 500 company like Jarden is taking on non-financial duties, most experts say that’s even more likely to happen at small and medium-size companies, where there are few other managers to pick up the workload. “Your responsibilities overlap,” says Myrna Hellerman, a senior vice president at Sibson Consulting.
Teamwork is almost a given. If two executives want to talk, “You walk down the hall or you bang on the wall that you share,” Hellerman says. In a family-owned firm, the chief counsel may have been the family’s lawyer and the CFO may have been the financial advisor, and thus they could have worked together on personal matters in the past.
Mike Boyle, who heads the U.S. CFO advisory practice at PricewaterhouseCoopers, disagrees. He says small companies are less likely to be expanding their finance chiefs’ roles, in part because globalization has been a big impetus behind the trend, and few of these companies have a presence outside their home market. Yet he thinks they should be making these changes. “They should be driving performance and finding the best ways to support a strategy,” he says. “It doesn’t mean the role doesn’t apply for a small, U.S.-based company.”
In any case, corporate size is not the only factor determining how much the chief executive relies on the finance chief. Gerry Hansell, a senior partner at Boston Consulting Group, says that whether a company is “public vs. private, and cash-rich vs. in need of raising capital” are also important criteria. So is the CEO’s personality.
An activist CFO may be most crucial in a startup. “The CFO is trying to build an infrastructure that doesn’t exist,” says Michael Rescoe, who has been through just about every kind of restructuring as the chief financial officer at Travelport, the Tennessee Valley Authority, 3Com Corporation, PG&E Corporation and Enserch Corporation.
Should You Groom Your CFO As Your Successor
Now that the chief financial officer is taking on so many more executive functions—and with fewer rivals in the C-suite—moving up to the CEO might seem the next logical career step.
That’s what S. Douglas Hutcheson did at Leap Wireless International Inc., when he was promoted in 2005 from CFO to CEO. He started the finance post with a massive assignment, to help Leap reorganize out of Chapter 11 bankruptcy. For three years, he worked with the creditors’ committees, oversaw contract negotiations, gave advice on cost-cutting and testified in bankruptcy court. “The financial officer position really helped me understand how the entire business was put together,” Hutcheson says.
Not surprisingly, when Deloitte surveyed 136 finance chiefs at the beginning of 2010, more than half aspired to the top job.
“What the board is always looking for in the CEO is a person who has operations and financial experience,” points out Myrna Hellerman of Sibson Consulting. The financial part is obvious, and now CFOs are getting the operational experience by working with middle managers and division heads. And if they need to polish some higher-executive skills, Hellerman adds, they are going to management training and executive MBA programs.
“In any CEO search, you’re going to see a healthy degree of people with a CFO pedigree,” says Sanford Cockrell III, the head of Deloitte’s U.S. chief financial officer program.
Of course the CFO isn’t the only qualified insider hoping to rise. Each senior executive has different managerial experience, technical expertise, personality strengths and rapport (or lack of) with the CEO, any of which may give that person an edge. Indeed, traditionally the chief operating officer, not the CFO, was seen as the leading candidate to become CEO.
But the odds may be with the finance guy. “Today’s CFO is more a candidate than the CFO of 20 years ago,” says Mike Boyle of PricewaterhouseCoopers.