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''To Pursue Other Interests''

Increasingly, CFOs seem to be taking the rap for poor corporate performance.
David M. Katz, | US
May 7, 2002

The pattern has become all too familiar. A company issues a statement, announcing it is a) restating earnings, b) laying off a whole lot of workers, or c) fighting a shareholder lawsuit. In a few days, another release comes out — this one noting that the company CFO is departing. Usually, the company's management asserts that the finance chief is leaving "to pursue other interests."

Coincidence? Maybe. The fact is, finance chiefs do leave jobs to do other things. In the past year alone, a number of CFOs have resigned good positions to spend more time with their families, go back to school, or switch sectors. Long-time energy industry finance executive Edward Moneypenny, for instance, quit his job at Covanta Energy because an opportunity arose in a different sector (at retailer 7-Eleven).

But when the departure of a finance chief comes directly on the heels of bad company news, "pursuing other interests" often means "looking for work." And a whole lot of CFOs seem to be looking for work these days. Although numbers are hard to come by, it appears that finance chiefs are resigning — or being dumped — at a brisk clip.

Admittedly, blame for the recent batch of accounting scandals has been widely spread among senior management types — not to mention outside auditors. And in a number of these cases, CFOs ought to shoulder a great deal of the responsibility. In the Enron fiasco, for example, CFO Andrew Fastow managed the off-balance-sheet investment vehicles that ultimately brought the company down.

But the recent rash of CFO exits has some observers wondering if there's a larger trend here. The question some privately ask: are finance chiefs the scapegoats of a busted economy? Notes Stephen Wasko, CFO of Perceptual Robotics in Evanston, Illinois, reporters like "to put a face on some aspect of a story." These days, the face most often put on the story of corporate ineptitude — or worse, malfeasance — appears to be that of the CFO.

Decoder Ring Needed
Spotting this trend is easy. Getting corporate executives to talk about it is not. The reality is, few management teams are willing to flat-out state that there's a link between poor corporate performance and the departure of a CFO.

Take the case of pharmaceuticals giant Bristol-Myers Squibb. The company suffered a disastrous first quarter, with earnings plummeting 56 percent from what they'd been a year earlier. In the wake of the Q1 results, CEO Peter Dolan announced in April that CFO Frederick Schiff was leaving the company. In explaining the move, Dolan stated that he had previously "begun working on CFO succession" as part of the company's plan to improve its performance.

That's about as close as you'll get to a company pillorying a finance chief for bad numbers. And even here, Dolan never specifically fingered Schiff for the company's troubles. In fact, in the very next sentence in the press statement, Dolan noted that Schiff was leaving Bristol-Myers Squibb to — surprise — pursue other interests. ( tried to contact Bristol-Myers Squibb about this story, but did not get a response.)

Figuring out what corporate press releases actually mean — and not just what they state — can be tricky stuff. It's hard to tell, for instance, whether Larry Reinhold's choice to exit as Critical Path's finance chief last August was voluntary. Early in his tenure at the Internet messaging specialist, the former PricewaterhouseCoopers consultant uncovered questionable revenue recognition practices at the company. In fact, two of the company's executives eventually confessed to concocting the scheme, which was apparently intended to boost Critical Path's reported income.

Under Reinhold's urging, Critical Path restated earnings downward in February 2001. At the time, David Hayden, executive chairman at Critical Path, praised Reinhold for unearthing the bookkeeping ploys. "I want to commend him [Reinhold] for having taken immediate action," he stated. "We are proud to have Larry on our team."

Larry didn't stay on the team for long, however. After Critical Path took yet another revenue restatement — a $1.3 billion impairment write-down — the company announced a management shakeup. At first, Reinhold was named to the team in charge of shaping the company's "new leadership."

For some reason, though, Reinhold didn't end up being part of that new leadership. His departure was announced August 21 — just weeks after Critical Path reported it was firing 450 employees and closing two-thirds of its worldwide facilities. In that statement, management had fairly gloomy things to say about the company's prospects, reporting that it had "low visibility into future revenues due to the uncertain economic environment."

The Curse of Visibility
Was Reinhold's departure linked to the worsening news at Critical Path? Hard to say. A spokesperson for Critical Path said the company declined to comment about Reinhold's employment. And more than six months after leaving the company, Reinhold himself wouldn't discuss his experience at Critical Path (citing his current co-defendant status in litigation against the vendor). Still, his advice to newly hired CFOs about how to manage their career risks is revealing. "Always be prepared for surprises," Reinhold told, "no matter how thorough your due diligence before taking the job."

When recruiting a new finance chief, Reinhold notes, executives may describe a situation as "ideal" or at least "very favorable." But he cautions, they might "be less forthcoming about challenges in the businesses you may face."

Even when a CFO leaves a company on decidedly good terms, veteran finance chiefs say, care should be given to how that departure is handled. It's crucial, for instance, that a finance chief makes sure an employer sets the exit apart from any negative company news. Otherwise, assumptions get made, reputations tarnished.

One finance chief, who spoke to on a not-for-attribution basis, regrets having gone along with his former employer's decision to announce his departure about the same time the company was reporting poor quarterly results. The CFO concedes his boss might have wanted to avoid the "one-two punch" that would surely have come from stringing out the two announcements. While the finance executive says he could have pushed harder to get the company to announce his resignation sooner, he says he wanted to exit "in a classy way."

Sometimes, class has a price. Although the company did report that the CFO was leaving voluntarily, the timing of the announcement made it seem otherwise. Says the former finance chief: "You start cursing the visibility you have."

Such visibility comes with the territory, however. As Perpetual Robatics' Wasko points out, over the past decade, CFOs have evolved from being mere "uberaccountants" into "significant business partners." With the added responsibility, Wasko says, CFOs have assumed a bigger share of the credit — and the blame — for corporate performance.

Should I Stay or Should I Go?
Recruitment experts say the surest way to avoid taking the rap is to get out of a troubled company while the getting's good. But gauging whether a business is truly in a death spiral or merely going through a rough patch can be a tough call. Making the decision even tougher: a CFO's reputation can be boosted substantially by engineering a successful turnaround. And no finance chief wants to be known as a quitter.

Perceptual Robotics' Wasko, for instance, doesn't consider himself a turnaround specialist. But he made the decision to stay the course when he found himself in choppy waters at his previous job.

Wasko signed on as CFO at metal-processing company Connector Service Corp. in 1998. Over the next three years, the Connector finance chief faced a barrage of problems. The biggest headache: Connector was moving from a pure services business to one with a stake in its operations. Under the company's old business model, if Connector produced a new stamping dye, a customer would pay for the product's license up front. That "kept the barriers to change low" for clients by making it easier for them to switch to different services providers, Wasko notes.

The change in strategy, however, resulted in a more asset-intensive business — and heftier near-term cash requirements. Responding to the business's changing finance needs, the company's management began to borrow, rather than raise private equity capital. "We did a lot more creative stuff with banks," says Wasko.

While the change in direction spawned some short-term financial pain, Wasko says, it made sense in the long term. But he admits he was under less pressure to produce immediate results because Connector was privately held. Would he have stayed on in such trying circumstances at a public company? "Thinking about me personally," he says, "if I had a good handle on the plan, I would have."

Diligent Due Diligence
Indeed, CFOs have a better chance to succeed in a new job if they know the situation going in. "I think it's tremendously important that a CFO do a great amount of due diligence" before taking on a job, says Jeff Naylor, CFO of Big Lots, the Columbus, Ohio-based closeout retailer.

The most basic thing a prospective CFO should find out, Naylor advises, is whether an employer has a "sustainable business model." That model should include products and costs that aren't carbon copies of those of competitors. Big Lots, for instance, differentiates itself by the way it buys products and sources real estate, Naylor says.

Big Lots is able to sell items cheaper, he explains, because the retailer buys goods that are discounted due to packaging changes, excess production runs, and the like. "We will typically buy from a competitor that has moved from a smaller facility," says Naylor, "and we'll lease that real estate — usually at very attractive rents."

By Naylor's lights, that's a sustainable differentiation. Still, he acknowledges he did his homework before taking the job at Big Lots. "I did an enormous amount of due diligence going in," he notes. "A misstep can have a dramatic impact on your career."