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What's the truth behind the rash of recent CFO exits?
Stephen Barr, CFO Magazine
April 1, 2000
Eric Mattson seemed to like nothing better than schmoozing analysts and meeting with big shareholders. But as CFO of $4.5 billion Baker Hughes Inc., the story he had to tell was wearing thin, as the Houston oil-and-gas-services company consistently lagged behind its peers and struggled to digest a recent $6 billion acquisition for which, most agreed, it had overpaid. He surely knew that.
But Mattson, who joined Baker Hughes as an assistant treasurer in 1980, didn't realize that his welcome was wearing thin as well. Last May, he resigned unexpectedly immediately following his return from one such investor-relations foray. His departure, Mattson told the Wall Street Journal, was "amicable," but analysts didn't buy it.
"It appeared to everybody that it came without much warning, and almost [seemed] arbitrary," says Geoff Kieburtz, an analyst at Salomon Smith Barney. "For somebody who had been at the company as long as Eric had, it was viewed as a bit harsh and as something other than a resignation." (Mattson did not return several messages left at his Houston home.)
Whether Mattson left Baker Hughes because he wanted to, or because he had to, he was not the only CFO to recently depart from a troubled company under murky circumstances. In the past year or so, the finance chiefs of such prominent companies as Maytag, Mattel, IBM, Service Corp. International, and Venator Group also resigned their posts for reasons that many suspect had to do with more than the purported desire to pursue other interests.
Although executive recruiters say demand has never been greater for finance chiefs, the real CFO headhunters these days are the unforgiving investors, the insolent analysts, the menacing regulators, the reinvigorated boards, and, in some cases , the finger-pointing CEOs. Just as the role of the CFO has taken on new prominence in the corporate landscape — bringing with it more power and more pay — the perils have also reached new heights.
"The job is much more treacherous," agrees Bob Falcone, who resigned as CFO of Nike Inc. in January 1998, amid suspicions that he was forced out as the shoe retailer struggled with numerous strategic and financial issues. "It's hard to say who's to blame, but there are plenty of unplanned exits." E. Peter McLean, a managing partner at executive search firm Spencer Stuart, concurs: "Even if you are not solely responsible for some piece of bad news, you are more at risk of taking the fall."
While CFOs have always been held accountable for corporate performance, these days pitfalls abound. Thanks to an aggressive campaign by the Securities and Exchange Commission to curb earnings management, a slew of new accounting pronouncements, and the unbridled expectations of a long-running bull market, CFOs have been on the firing line like never before. The faintest hint of an accounting problem sends stocks spiraling down and has plaintiff lawyers swarming. Lower-than-expected earnings trigger the same response. Meanwhile, the SEC has called on the board audit committee to take a more activist role in reviewing the financial reports, and most CFOs have their fingerprints all over the deals that companies increasingly rely on to expand strategic opportunities and grow revenues. It makes for a volatile mix that leaves little room for mistakes or second chances.
"Things were different [starting] in 1999. CFOs have had to be on the top of their game," says John F. Olson, a veteran SEC watcher and attorney at Washington, D.C., law firm Gibson, Dunn & Crutcher LLP. "They find themselves under more scrutiny and more pressure. Dealing with all these earnings and accounting issues can be very intense, and it can also mean losing their jobs."
Cause for Dismissal
Ten years ago, CFO turnover in the Fortune 500 was about 12 percent per year, according to the World Research Advisory Group of Dulles, Virginia, with retirement the major reason why. In 1998, the figure was up to 26 percent, and the research organization cited missing a quarter as a frequent cause.
Executive recruiters, however, insist that the most common reason for a CFO change remains as a follow-on to a CEO change: The CFOs at Ford Motor Co. and Kellogg Co. were gone after a change was made at the top. Next is that the CFO is enticed to make a career- or pocketbook- enhancing move. There's also the more nettlesome situation in which a company has evolved and its CFO is no longer "the person to take [it] to the next level," says John Wilson, a managing director at executive search firm Korn/Ferry International.
Finding out precisely how many finance leaders have been asked to take a hike in the wake of accounting fiascoes, earnings disappointments, failed mergers, or unsound investment decisions is trickier, since most of them are effectively silenced by generous severance packages. The numbers, however, may be higher than some think. In a CFO magazine survey last year, 17 percent of the CEOs queried had fired their finance chief within the previous three years.
"I've always considered 'resigned to pursue other interests' as code for being let go," observes Charles Elson, a law professor at Stetson University and a corporate-governance expert. He should know. As a director of Sunbeam Corp., Elson had a hand in ousting CFO Russell Kersh, after charges of financial window-dressing sparked a 75 percent stock drop. Kersh "resigned," according to the company press release of August 1998, but in February 1999 he filed an arbitration claim that he was "terminated...without cause."
Although few heads turned when the CFO's head rolled at Sunbeam, what many observers find surprising is the number of high-profile finance chiefs who have departed recently under a cloud of uncertainty and suspicion. Consider these three recent cases:
Behind the Scenes
Delving into more than a dozen eyebrow-raising CFO exits during 1999, we found that there's often more there than meets the eye. Sometimes performance problems are just the excuse given when the real problem is personality clashes. And more often than not, it's not just one thing that has gone wrong, but many. Handling of a CFO exit can create problems as well.
Consider what happened to Thomas Hearne in the year before Open Text Corp. closed the book on its CFO in late October. He'd had to fend off charges by the Center for Financial Research and Analysis of excessive acquisition-related write-offs for in-process research and development. There were also quality-of-earnings concerns about nonoperational gains; a surge in receivables and negative operating cash flow; and accusations of both selective disclosure in guiding analysts on earnings and failing to warn them of a revenue shortfall. "It would be fair to say that Open Text has not been as forthcoming as a lot of investors expect these days," says FAC/ First Albany analyst Robert Kugel.
Hearne's departure for "personal reasons" came on the same day the Waterloo, Ontario-based maker of document-retrieval software met analyst expectations thanks to a $1.2 million one-time gain listed under "other income." Income from operations was a mere $26,000, and days' sales outstanding had jumped 33 percent. The stock dropped 27 percent that day, and several analysts lowered their ratings and forecasts. Hearne told the National Post that his long commute was a factor in his decision to leave, but analysts hungered for more information.
"I never got a frank answer about why he left," Kugel says. "But at the end of the day, [his exit] was one of the things I take into account. I downgraded the stock, and my interest level tends to diminish at that point."
Reached at Delano Technology Corp., an E-business software firm in Richmond Hill, Ontario, which he took public as CFO in February, Hearne confirms that he left Open Text because of the long hours and the commute. Nevertheless, he acknowledges that the company struggled with execution issues and that his departure spooked investors. "Unfortunately, when the CFO leaves, they always wonder what's wrong with the company that they're not hearing about," says Hearne, noting that Open Text's stock has rebounded this year. "On its own, [my departure] wasn't a significant event, but combined with the other things, it added to the whole situation."
Credibility Is Key
What's at the heart of many CFO exit situations is the issue of credibility. Failing to deliver on promises is the most fatal of mistakes — especially when dealing with earnings prospects. "The analysts are an unforgiving lot," says Walter E. Williams, head of the CFO-search practice at TMP Worldwide, in Boston.
Take what happened last year at Pillowtex Corp. Troubles at the Dallas-based maker of bed and bath products predated the promotion of controller Ronald Wehtje to CFO in November 1998. The company struggled under a heavy debt burden from the acquisition of Fieldcrest a year earlier. A new computer system produced major blunders, such as sending the same shipment to a customer 13 times. There were also charges of creative acquisition and inventory accounting.
But the main reason Wehtje lasted barely eight months as CFO, many speculate, was that Pillowtex preannounced disappointing first- and second-quarter earnings for fiscal 1999, and then announced actual results that were even worse. The stock plummeted to about $9 a share, from around $31, before Wehtje stepped down in August to take his old job. Wehtje's mentor, Jeff Cordes, who had been promoted to president, resigned to "pursue other interests" last summer, and Wehtje left for good in November.
"If you look at the earnings prereleases, then missing earnings several times consecutively, that was pretty much the impetus," says one analyst who requested anonymity. "Ron wasn't singled out for blame undeservedly. He had little credibility on the Street." Cordes declined to comment, and Wehtje could not be located.
And credibility means more than making the numbers. Stephen Mangum, the CFO of Pier 1 Imports Inc., was banking on buying the Fort Worth furniture retailer out of last year's revenue problems. Stale merchandise and high prices had accounted for recent sales declines, and Mangum talked up the idea of a combination with another home-accessories chain to revitalize Pier 1's offerings and compete against more-upscale rivals like Pottery Barn and Restoration Hardware.
Many analysts raised their ratings last spring, and the share price climbed more than 50 percent in May and June in anticipation of a deal with Z Gallery, the likely target. But just as quickly as the stock rocketed upward, it plummeted 33 percent in one day on news of poor monthly sales, projected weak second-quarter earnings, and the failure of the takeover bid. Mangum was out the door the same day, with chairman and CEO Marvin J. Girouard explaining that Mangum "was very aligned with the acquisition, and when it didn't go through felt his credibility and interest in continuing at the company would be a difficult sell."
In this instance, credibility cuts both ways, internally and externally. Given how aggressive Mangum had been in talking up the merger to analysts, some suspect the CFO had been trying to sugarcoat Pier 1's dire sales trends to other executives, including Girouard. "He had pretty much promised the deal would go through," says one analyst who asked for anonymity. "His credibility with Wall Street was gone, and the fact that he may not have been giving the CEO all the information compounded the problem." (Mangum, who has been CFO at online jewelry retailer Miadora since November, declined to comment.)
The Blame Game
Surely, some of the CFOs "pursuing other interests" are doing so because they didn't want to be at the company anymore. And even if they left because mistakes were made, rarely are CFOs solely to blame. "Because I was on the inside of a company and I know how it works, I always wonder if someone is taking the fall unnecessarily," says former Nike CFO Falcone, who became CFO of 800.com, a consumer electronics E-tailer, in January.
A botched merger, for instance, typically involves a team of executives, investment bankers, and an approving board. A sales or earnings shortfall might point to problems with finance's forecasting abilities, though even with good systems and processes in place, the CFO would rely on other executives to make reasonable estimates, and may not have been able to push for internal changes when it was evident projections could not be met.
But as the executive responsible for guiding investors, the CFO is the obvious target when the stock tanks. "Firing the head of sales wouldn't make a difference to Wall Street," Falcone asserts. "But shareholders notice when the CFO goes." The CEO often has the clout to avoid taking the fall as long as possible, he adds, while directors "feel they have to throw somebody to the public so that people think they're taking care of the problem."
On occasion, the CFO's downfall coincides with the CEO's. That's what happened to Richard Hawkins at McKesson HBOC Inc., even though he was not implicated in the accounting scandal that hit a recently acquired subsidiary last June. A spokesman told the Wall Street Journal that the merger fallout occurred "during [his] watch." Sometimes the CFO's unceremonious ouster is merely a prelude to the CEO's demise. That, it turns out, is what happened at Baker Hughes.
Besides the unexpected handling of Eric Mattson's exit, what surprised some analysts were the assurances that the CFO's resignation had nothing to do with accounting irregularities. The issue hadn't cropped up at the time of Mattson's departure, but it would seven months later, when the company disclosed accounting snafus that would result in a $40 million to $50 million pretax charge and an earnings restatement. The stock fell 15 percent in one day, and the company had to postpone a $200 million bond sale. Two months later, in February, the board would oust chairman and CEO Max Lukens and one of his top deputies. "The board had finally had enough," analyst Geoff Kieburtz says.
Ironically, these days an abrupt and unexpected CFO exit may have more calamitous implications for the company than for the individual. "It never helps a company's reputation when the CFO leaves, especially when the departure is under mysterious circumstances," says Kugel. "It calls too many things into question."
But there may be no better time for a dumped CFO to find another job. Even with the lure of New Economy riches, there are an estimated 200 unfilled CFO positions in Silicon Valley alone. And at least five of the departed CFOs we tracked down have new jobs at Internet or high-tech start-ups.
Korn/Ferry's Wilson is even optimistic for a CFO who was axed for some gray-area accounting that he describes as more deceptive than fraudulent. "A lot of people ask him the same question about what happened," Wilson says. "But there's such a shortage of qualified CFOs that many start-ups don't care if you were caught up in some brouhaha."
As for Mattson, the former Baker Hughes CFO, he is doing quite well, thank you, reportedly working for an Internet start-up. "You devote your life to something, and you can't imagine anything else," opines one Baker Hughes analyst, who requested anonymity. "But you get away, and you see you'll do fine. I'm sure Eric's happy and excited about what he's doing. Baker has a battle in front of it."
WHEN CFOs RESIGN
These CFOs have all left their companies in the past year.
Pick Your Poison
A fired CFO gives his side of the story.
Robert Finch had reason to be giddy on August 10, 1999, when it came time to release the second-quarter results for Jacksonville, Florida-based FPIC Insurance Group Inc., a provider of medical malpractice and other insurance services. After all, earnings rose 48 percent, to $7.4 million.
But any feeling of euphoria was short-lived, as the stock fell 25 points over three days, to 20/1/4. At the time, a company statement called the drop "unwarranted," and described the shares as "greatly undervalued."
What troubled investors was that FPIC had dipped into the loss reserves of its Florida Physicians Insurance Co. subsidiary. Instead of showing solid earnings, the firm had artificially boosted profits by releasing $8.1 million that had been set aside to cover future claims. "They met the consensus, but it was not a high-quality number," says David Lewis, an analyst at Robinson-Humphrey Co., in Atlanta.
With the stock still in free-fall, Finch began to buy back stock under a previously announced program. In a press release on August 12, FPIC president and CEO William R. Russell noted the changes in the company's "reserving policy," but deemed it "appropriate." That tepid endorsement of Finch lasted less than two weeks. By Monday, August 23, the company announced that Finch had departed over the weekend, as had Steven Smith, the head of the unit involved in the reserve decisions.
General counsel John Byers told the Florida Times-Union that the dismissals "were not directly related" to the company's recent troubles, only with a need for "fresh blood." But the exits didn't come cheap. The company also announced a $1.75 million one-time charge to cover severance payments to Finch and Smith.
Analysts suggest that Finch may have been his own worst enemy. They say he had been pushy in forecasting the contributions of some recent acquisitions and guiding estimates upward, when higher loss experiences and expenses augured an earnings shortfall. Boxed in, his aggressive nature may have spurred him to try to make up the difference with reserves.
"If you keep pushing the number up and you're backed into a corner, you have to figure out how to get to that number," Lewis says. That, or come clean with the disappointing results.
In an interview, Finch acknowledges that he was fired, but contends that his departure had more to do with an executive-suite showdown than the board's desire to blame him. "The argument I've heard is that if we missed the [earnings target] and explained why, everything would be fine," Finch says. "I don't buy that." Either way, he suggests, investors would have fled from the stock.
As Finch sees it, the adverse market reaction to FPIC's second-quarter earnings brought a festering situation to a head. In May, he and several other executives met with FPIC's then-chairman James White to voice concern about Russell, the CEO. Among other things, they were troubled that he had promoted his girlfriend, a graphic artist at the company, to run investor relations.
The board stood by Russell, and by late August Finch's relationship with the CEO had deteriorated so badly that the board had to decide which executive to keep and which to let go. "We got fired," Finch says, referring to himself and Smith. "We walked in one day, and it was done."
Finch, who is now CEO of Pawnbrokeronline.com, an Internet start-up, says he's "much happier," yet he gloats that the board may have made a bad choice. FPIC's stock fell another 4 points, to $13, its lowest point in two years, on the news of Finch's departure, and remains mired in that range. "I think they anticipated that the stock would move up again," he says.
Severance packages ease the pain of departure.
Even when CFOs leave under murky circumstances, they don't leave empty-handed.
When Richard Daniel "resigned" from troubled Bankers Trust last June, for example, in the wake of its sale to Deutsche Bank AG, he was paid a reported $25 million in severance. This despite the fact that Bankers Trust had a net loss of $73 million in 1998 and had pleaded guilty to three counts of conspiracy involving improper transfers from customer accounts.
And when William Perocchi, former CFO of Promus Hotel Corp., left in January 1999, along with three other executives, he received $1.9 million in severance pay, plus $136,892 of accrued sick and vacation pay and $1.02 million to reimburse him for the excise tax on his severance benefits. Before being acquired by Hilton Hotels Corp. last September, Promus suffered from weak growth and culture clashes stemming from its $2 billion merger with the former Doubletree Corp.
Such packages don't surprise Yale D. Tauber, principal with William M. Mercer Inc. "Short of absolute embezzlement," he says, "I can't think of a case where a CFO has parted and not gotten something." Most employment and change-of-control agreements are iron-clad, he says, and CFOs are sophisticated enough to know that if trouble hits, "someone is going to be made to go." When that someone is the CFO, he adds, both parties typically want to make "a clean break" and to avoid litigation.
But the size of the severance package depends on stipulations in the employment agreements and what can be negotiated upon exit. For example, when Kathy Fisher, former CFO of Inprise, resigned last March (the board later admitted it had asked for her resignation), her employment agreement entitled her to severance equal to 12 months of base salary, or $220,000. John King's severance package, on the other hand, was negotiated after his resignation last July from Total Renal Care Holdings Inc. It called for a payment of $180,000 to be paid on January 3, 2000, but also called for King to render additional services until a new CFO was hired, and to "provide up to 120 hours per year of additional services until July 16, 2001."
"Ultimately, no one agreement can deal with all situations," says Tauber. "But as long as a CFO has been hard working and loyal, some payment is going to be made."