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Why companies often won't consider controllers when choosing their next finance chiefs.
Marie Leone, CFO.com | US
March 19, 2007
Controllers couldn't make all the numbers work out for them this time. New research shows that as of April 2006, the number of Fortune 500 CFOs hired from outside of their new companies total 190. While 58 percent were plucked from the ranks of existing corporate or divisional CFOs, a paltry 4 percent were sitting controllers.
That's because controllers are rarely viewed as CFO material outside their own companies, according to research was released on Monday by executive search firm Korn Ferry International at the CFO Rising conference in Orlando. Rounding out the survey of external CFO hires, 17 percent of big company finance chiefs were chief executive officers and general managers immediately before being named to the CFO slot, 9 percent were senior financial generalists, 3 percent were treasurers, 4 percent were involved in strategy and corporate development, and 5 percent came from "other" disciplines.
Outside controllers aren't prime candidates for finance-chief spots because they lack leadership experience, says Korn Ferry managing director Charles Eldridge. Most controllers haven't done much in the way of presenting their cases in front of constituents like the board, Wall Street analysts, and large investors and instead focus on communicating behind closed doors, adds Eldridge.
The numbers were very different for 310 big companies that promoted insiders to the chief financial officer spot. Thirty-three percent of the insiders were controllers, demonstrating strong succession planning in those companies, says Eldridge.
The study revealed that among the insiders promoted at Fortune 500 companies, 19 percent were former treasurers and 14 percent were one-time senior financial generalists. CEOs, and general managers, and divisional CFOs, each accounted for 10 percent of the promotions, while 8 percent of the CFOs were promoted after heading up strategy and corporate development roles.
Controllers who were passed up during external searches were hurt by the Sarbanes-Oxley Act, Eldridge thinks. Before Sarbox went into effect, controllers were on a more direct route to the CFO slot. But the attention to internal accounting machinations required by Sarbox turned many corporate controllers into internally focused compliance experts. The change was necessary and crucial to a public company's survival, but their "super controller" status shoved such executives off the path to the CFO office, observes Eldridge.
Further, says Lorraine Hack, a partner at Heidrick & Struggles, a search firm: "Companies don't want to replicate in a CFO what they already have in a controller." What's more, the Sarbox "pendulum has swung the other way," and large company management and their boards are comfortable with regulatory compliance, she says. That means that search committees no longer demand that CFO candidates be certified public accountants, according to the headhunter.
Still, Hack says, Sarbox has made boards and management much more conservative, and many Fortune 500 companies thus only want to interview candidates that have large, public-company expertise. For now, that doesn't present too great a risk. The average tenure of a CFO in the United States is about 3.2 years, so there is a decent-sized pool of available applicants, says Korn Ferry's Eldridge.
Still, natural attrition will likely cause a shortage of big-company CFOs in the near future. Korn Ferry has already begun to address that problem by acquiring two executive coaching companies. The firms hopes that the affiliate companies will help groom CFO candidates who will become valuable when the war for talent accelerates, says Eldridge
Today, however, controllers will have break from their "linear track" if they seek a CFO job at another company, says Russell Boyle, who heads up the U.S. financial officers practice for Egon Zehnder International, another executive search frim. Controllers with CFO aspirations both inside and outside of their current companies must gain unit operating experience and lead corporate-planning efforts or investor relations departments to round out their resumes.
In fact, over the past few years, large, complex organizations have sought savvy financial executives to take the reins of corporate investor-relations function so that companies could communicate with Wall Street and investors in a sophisticated way, says Boyle.
In most cases, a company is hiring a skill set rather than an industry expert when they hire a CFO, adds Boyle, and insiders don't always get the call. For instance, a company may be looking for an expert in mergers and acquisitions, asset divestiture, launching an initial public offering, or a combination of those skills, he says.
Controllers still have a leg up on treasurers in competition for the CFO seat, Boyle suggests. A treasurer's focus is narrower than that of a controller because the treasury department centers almost exclusively on external triggers and events affecting capital raising, risk management, and banking relationships, he notes.
Eldridge points out that many boards remain gun shy about hiring treasurers—who are usually banking wizards—ever since the financial engineering schemes of Enron's Andrew Fastow were found to be fraudulent.
Promoting from within is sometimes a matter of "hire the devil that you know," says Boyle. However, he says the more likely reason for promoting a controller is that the executive has played "an incredibly important leadership role" across several divisions. For example, a controller who has rolled out an enterprise resource planning system for a multinational may be poised for a trip up the ladder. The same goes for a controller who has reworked a decentralized global finance and sales operation into a centralized system.
At smaller companies, Hack says, boards and investors are still looking for CFOs who are good accountants, can run tight ships, build financial infrastructures, and have operation and strategy in their backgrounds. In a category all their own are private equity firms, which are small from an organizational perspective, and usually seek operationally strong CFOs who don't necessarily have public company experience. That's where private company CFOs can go to gain public company experience, the headhunter says.
The bottom line for controllers who aspire to be CFOs, says Boyle, is that they must guide their careers away from simply providing analysis for the five-year plan and day-to-day financial management. They must become "the financially savvy person that the CEO wants to have a discussion with."