The Turnaround Specialist

New CFO Laureen DeBuono has stepped into a hornet's nest at Critical Path. Good thing she knows a good lawyer.
Jennifer CaplanMarch 8, 2002

Laureen DeBuono may be the ideal turnaround CFO. She’s smart, meticulous, and she’s a damned good securities lawyer.

After earning a bachelor’s degree from Duke University, a master’s from Stanford, and a law degree from NYU, DeBuono launched her career at Bronson, Bronson and McKinnon, a San Francisco law firm. But it wasn’t long before she decided to enter the nonbillable world, moving first to Varian Associates, a Palo Alto, California-based semiconductor equipment manufacturer. In 1987, DeBuono joined household-products maker Clorox, where she became more involved in the actual running of the business. In fact, in her next position as vice president general counsel at Nellcor Puritan Bennett Inc., a medical-device manufacturer, DeBuono helped negotiate that company’s $2 billion sale to Mallinkrodt Inc.

Soon after, DeBuono leveraged the Nellcor Puritan Bennett sale. In 1998, she landed the top finance post at ReSound Corp., a manufacturer of hearing devices and communications products. At the time, ReSound was not so sound. “The company had about $150 million in revenues but no market cap, no analyst coverage, very little cash in the bank, and a lot of businesses that were not rationalized,” she recalls. “But we were able to clean it up quite successfully.” Later, DeBuono oversaw ReSound’s sale to GN Great Nordic, a Danish telecom company, in late 1999.

In September, DeBuono signed on at yet another struggling company — this time, the aptly named Critical Path. When she joined the Internet messaging specialist as interim CFO in September 2001, Critical Path was in serious trouble. The company had gone through several CFOs, and earnings had fallen well short of fourth-quarter estimates. Worse, some managers at the company admitted to having improperly booked revenue, and the company was forced to restate earnings for the prior two quarters. In the aftermath of the restatement, Critical Path was slapped with 52 — count ’em, 52 — shareholder lawsuits, along with an SEC investigation. The company was also carrying some $300 million in debt, yet barely generated $27 million in revenues in the first quarter of the year.

Under DeBuono’s tenure, however, Critical Path has stabilized. The company reduced its debt load to around $38 million, and is now sitting on about $70 million in cash. The Net operator has also expeditiously settled its cases with shareholders and the SEC, proving that it doesn’t hurt having a CFO who knows his or her way around a legal brief.

In January, Critical Path management rewarded DeBuono for her hard work, naming her Critical Path’s permanent finance chief. DeBuono recently spoke with’s Jennifer Caplan about lawyers as CFOs, what it takes to save a sinking company, and the challenges of managing through an accounting scandal.

It’s uncommon for a CFO to have a legal background. Do you feel your knowledge of the law has made you a better CFO?

My legal background has been critical in making me the type of CFO that I am. As a lawyer, I believe you develop the best possible analytical and risk-assessment skills that you can — even better than in business school or going directly into an accounting situation.

My move to becoming a CFO has been relatively deliberate — but evolutionary. It’s been quite an easy move for me from legal into the finance area. After all, I have been working within companies for the past 20 years.

Prior to joining Critical Path, you were at ReSound Corp., a manufacturer of hearing devices, which was struggling financially. You went into that company, turned it around, and sold it off. Has your experience at Critical Path been similar?

Yes, ReSound was very similar to Critical Path in that, when I came in, we still had balance-sheet and convertible-debt issues to resolve, we needed to raise additional cash, and we still had pieces of the restructuring left to do. So the skills that I had developed at ReSound were right on. I won’t say it was easy, but I had all the experience to do it.

Becoming a “turnaround CFO” can be a double-edged sword. You take a big professional risk by going into a company that has the potential to tank. At the same time, if you are successful, you become a hot commodity. Would you say the risk is worth taking?

It definitely has been worth it. We have been extremely successful with our turnaround. If you look at our balance sheet, we had $69 million in cash at the end of Q4, and we retired almost all of our debt — we now have about $38 million left on the books. We’ve reduced our workforce by 50 percent, closed two-thirds of our facilities, and have been able to rationalize our product base.

There’s always some risk involved with a turnaround situation. But I do think that the rewards outweigh the risk. I do believe that Critical Path will be successful and that the reward will come.

Critical Path got in trouble because of some questionable revenue-recognition practices. The company’s new management team now faces the challenge of rebuilding an ethical culture at the company. How have you played a role in that area?

As a CFO, you are right in the middle of crafting what the corporate culture should look like in terms of policies and procedures. We have spent a lot of time over the last six months rebuilding our corporate policies as well as our financial and accounting practices. I feel extremely confident that we now have the right policies and procedures in place to be successful.

We are also in the process of putting into place a new code of ethics that we think culturally is important for each employee to follow. That code applies not only to how we act with our customers and with each other as employees, but also to how we account for things.

Part of the reason corporate ethics sometimes get bent is that managers feel overwhelming pressure to meet Wall Street’s earnings expectations. What do you think CFOs can do to insulate themselves from that pressure and create internal incentives for ethical behavior?

It’s extremely important that CFOs and investor-relations departments maintain an arm’s-length relationship with the Street. Analysts must understand that they have to put their own models together and do their own work in terms of looking at the company and reporting on it. Often times, companies have such symbiotic relationships with analysts and bankers that they simply exchange too much information. Going forward, we have decided not to do that. We are now being very conservative in our guidance to the Street and we are telling analysts that they need to do what is necessary themselves to give a recommendation on a stock.

Two of Critical Path’s CFOs came directly from PricewaterhouseCoopers, the company’s auditor. Do you think that close relationships between management and auditors make it easier for managers to stretch the numbers while auditors turn a blind eye?

I have always been a firm believer that your service providers must be kept very separate from the internal management of a company — be it audit firms, law firms, or anyone who provides a service. I also believe that it is extremely important that there is an arm’s-length relationship between the audit firm and the finance department. It is just common sense and good business practice. A CFO should not come from the auditing firm, just as the general counsel should not come from your law firm. There must be a clear separation.

Do you think it would help if companies were legally prohibited from hiring CFOs who have worked for that company’s audit firm?

I’m not sure legislation is the answer. But I do think that FASB, the SEC, and other groups need to look into how we can best resolve conflicts of interest that are pervasive among companies. I do believe that some clear guidelines should come down from the regulatory groups to help get rid of some of those conflicts.

How are you making sure that revenue is being booked according to GAAP, and what checks and balances have you put in place to help you do that?

I should point out that the issues that Critical Path had in the past did not emerge in the finance department but rather from the sales department. In a couple of instances there were contracts that were signed by the sales group recognizing revenues in the wrong way. It was the finance group that identified those issues and brought them to light.

Our revenue-recognition policies have been overhauled. Contracts are now signed by no one but me. Also, before any deal is inked, finance and legal must review the contract, and then I must sign every contract in the U.S. Only when we know that we are recognizing revenue in the right way — oftentimes we do bring in PwC if we need outside help — do we approve a contract.

It seems you’re now going from crisis-management mode to a greater focus on generating revenues. Has that been a difficult transition for you to make?

You’re right, there is a transition point when you’ve got to shift focus towards revenue generation. It’s not a hard transition, because you’re essentially using the same skills in a different way. Most of our work in finance going forward is structuring contracts in the right way so that we can bring revenue in. But it’s still about managing the budget and planning processes so that we know firmly where we are in terms of expenses on a monthly and quarterly basis.