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In the wake of Sarbanes-Oxley, CFOs must now contend with more inquisitive directors.
Alix Stuart, CFO Magazine
May 1, 2003
Walter Schuetze, once the Securities and Exchange Commission's chief enforcement-division accountant under Arthur Levitt, can hardly contain his exuberance about being audit-committee chair for Computer Associates International Inc. "I like getting into the nitty-gritty of the business," says the 70-year-old Schuetze, who has won a reputation at Islandia, New York-based CA as a stickler for details — pointing out an erroneous date on a fax cover sheet, for example. "It's great fun," he says of his role.
Less fun, perhaps, for CFO Ira Zar. He might be forgiven for finding last April's board addition a bit unnerving, given that the SEC and the Justice Department are still investigating certain past accounting practices at CA. But far from being uncomfortable, Zar says he values Schuetze's insights, delivered in frequent "mutual exchanges" with the finance chief. "It's not just a how-are-you-handling-this-issue sort of relationship," says Zar. There's more planning of the pre-meeting packages being sent out to board members, and more push to implement what directors consider best practices, like filing SEC reports in tandem with earnings releases. "It's an evolution, not a revolution," according to the CFO.
Welcome to life under the Sarbanes-Oxley Act, where many finance chiefs find new authority figures placed on boards that may have once been the personal fiefdom of the CEO. Sometimes, these new figures make demands of their own, quite separate from the wishes of the CEO. Rather than calling for reforms or setting agendas, though, these recently anointed audit-committee czars or nonexecutive chairmen are at first firing questions at finance and at the CEO — as they seek to learn the intricacies of the new companies.
"The CFO is in a great position to assist audit-committee members [in getting] the best information," said Joseph Fontana, managing director of corporate value consulting at Standard & Poor's, at a recent BusinessWeek conference for finance executives. The relationship "doesn't need to be confrontational."
Both Mentor and Watchdog
Sometimes the relationship provides a healthy dose of prudence for both finance chief and audit committee. Steve Shevick, who was elevated from vice president and general counsel to CFO of Synopsys Inc. in January, says the audit committee for the electronics-design software maker, based in Mountain View, California, has begun holding "sign-off meetings" before every round of SEC filings. Previously, he says, only the 10-Ks were reviewed; now, the 10-Qs are as well. And Checkers Drive-In Restaurants Inc. recently delayed releasing its earnings by two weeks, after its audit committee sought a review of the Tampa — based fast-food chain's treatment of tax-deferred assets, impairment charges, and surplus property reserves.
"Because of the heightened scrutiny dictated to a certain extent by Sarbanes-Oxley, we felt it necessary to closely work with our auditors and audit committee to make sure we were taking the appropriate approach on these matters," Checkers CFO David Koehler told investors in a March conference call.
Cheryl Francis, audit-committee chair for Hewitt Associates, HON Industries, and Morningstar, agrees. "Without talking to management, we don't have enough knowledge of what's going on inside a company," says the former CFO of R.R. Donnelley. From a position on the HON board that predates Sarbanes-Oxley (she joined the Hewitt and Morningstar boards more recently), Francis notes some changes today in the way things are done. She now spends as much as 30 percent more time with HON CFO Jerry Dimmer, she says, and routinely asks the CFO to educate the committee on risk areas, such as revenue recognition, and to prioritize them.
But in general, Francis views herself as a mentor as well as a watchdog at the companies on whose audit committees she serves. One of her projects, for example, has been to introduce Morningstar CFO Martha Dustin Boudos to associates with international business expertise. Boudos, though, will have to "figure out how to apply those conversations to Morningstar," says Francis. "I can't do that. I don't know the company as well as she does."
A Champion Chairman
A lead director or a nonexecutive chairman can present a different challenge than a strong audit-committee chair. That's because the chairman sets the board agenda, and if that chairman has views that are different from those of the CEO, the CFO can be faced with having to serve two masters.
The move to balance CEO power by naming a nonexecutive chair, or a lead director, has been slow to take off. Fewer than 10 percent of midsize and large firms currently have either structure in place, for example, according to a survey by Sibson Consulting. A Conference Board task force led by John W. Snow (who has since become Treasury secretary) recommended the arrangement in a January report, but it has yet to be mandated by the SEC or stock exchanges.
In the past, a split chairman-CEO structure often has been designed to team a company veteran, the chairman, with a young CEO. Such was the case with Wintrust Financial in 1998, when the naming of a nonexecutive chairman was considered a nonevent for the CFO, says executive recruiter Peter Crist, who is on Wintrust's board. "In the best-case scenarios, you get a separation of age and experience that will allow the company to do more," says Crist, who has seen that dynamic "more often than I've seen infighting."
Some CFOs find a champion in their nonexecutive chairs. Jack Healey, CFO of Industrial Distribution Group since 1997, has worked with nonexecutive chairman Rich Seigel through the tenures of three CEOs. The two forged a strong relationship when Seigel first took the post along with an interim CEO title in 1999. Seigel relied on the CFO's expertise to run the Atlanta — based provider of maintenance, repair, operating, and production products and services while he searched for a new CEO. When a subsequent CEO later challenged Healey's profit forecasts to the board, the CFO found Seigel more than willing to hear both sides.
"When I called Rich, he never asked me to prove my numbers; he just asked me to sit tight," says the CFO. After sounding out other board members and managers, Seigel ultimately put his trust in Healey and the management staff. The CEO later resigned from his post.
Having a nonexecutive chairman "is a lot harder on my staff, because you put a lot more in writing, and you cannot have him surprised," says Healey. But having a boss who also has a boss, he adds, "gives me a little more leeway."