When CFOs Take the Top Spot

It doesn't happen often, but when CFOs become CEOs, companies often outperform, at least on stock prices.
Alix StuartNovember 1, 2009

When Greg Ebel was promoted from CFO to CEO of Spectra Energy last year, he expected his job at the $5.2 billion (in 2008 revenues) natural-gas company to be a lot tougher. Instead, Ebel has actually found his current role to be less stressful than his previous one. “The finance chief is accountable for virtually everything, but is in control of very little,” he explains. “Now I may be accountable for more, but I’m arguably in control of everything, so it’s a lot easier to get people to move.”

It’s often said that CFOs make great CEOs, and times like these should only heighten that impression. “The CFO is the strongest functional leader on the executive team,” says William Reeves, executive recruiter at Spencer Stuart, and the downturn, if anything, “has made CFOs more valuable.”

And yet it’s still the rare day when a CFO gets to experience the stress relief that Ebel describes; in fact, it’s uncommon for CEOs to have ever had CFO experience. According to data provided by Spencer Stuart, only 17% of current Fortune 500 CEOs have headed up finance at some point in their careers.

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How do those fortunate few perform once they take the helm? CFO magazine’s analysis of the 83 large-company CEOs who have been CFOs at some point in their careers shows mixed results.

By one measure of company fundamentals — free cash flow to equity as a % of revenue — it looks like CFOs might be taking their eye off the ball once they get a loftier title. This metric, which looks at cash net of debt borrowings and repayments in proportion to revenues, essentially shows what’s left over for shareholders, either in the form of dividends, stock buybacks, or long-term investments.

It’s one you might expect to see former CFOs perform well on, given the laser-focus on cash that they should retain. Surprisingly, only about one-third (30%) outperform the S&P 500 on this metric during their tenures (based on 47 who have been in their current CEO role three years or more). That figure stays the same when you look at last year only, suggesting these CEOs did not rush to unleash their inner CFOs at the first signs of the recession and credit crunch.

To be fair, there are often good reasons for these results. Take Energy Future Holdings (formerly TXU). The $11.4 billion holding company for electric utilities saw free cash flow as a % of revenue in 2007 reach 676% before John F. Young was promoted, but it was only 9% last year. In the interim, however, the company was taken private via a leveraged buyout, drastically increasing its interest expense and reducing its available cash.

Shareholders, for their part, seem to have plenty of confidence in CFOs-turned-CEOs. Fully 75% of those in the CEO seat three years or more have seen their stocks outperform the S&P 500 over their tenures, and about 55% even saw above-average stock performance last year. Not that any of them are miracle workers. Of the 47 companies, only 2 — Waste Management and Darden Restaurants — showed positive stock performance in 2008.

Why the disconnect? Ebel has a theory: “Ex-CFOs understand the levers they can use to improve stock performance. The more you know about finance, the more tweaks you can make to grind out incremental stock gains, which make a huge difference over time.”

For a look at how companies perform when CFOs become CEOs, click here.