For finance chiefs with a yen for moving up to the CEO chair, the likelihood of that happening pulled back this year — but future prospects might be brighter than that current trend seems to suggest.
From 2013 through 2016, the proportion of big U.S. companies whose chief executives had been CFOs in their most recent previous position had inched steadily upward. By last summer, that was the case for 7.8% of CEOs at the 671 companies that were in the 2016 edition of either the Fortune 500 or S&P 500, according to research by executive recruiting firm Crist Kolder.
But as of Aug. 1 of this year, the prevalence of ex-finance chiefs in the top corporate role had faded to 6.2% (of the 673 company’s in this year’s dataset), wiping out all the gains since 2014 and translating to a loss of about a dozen CEO seats for ex-CFOs. That’s something of a surprise, considering the ongoing shift in the mix of CFO responsibilities toward the operational side and away from pure finance.
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Indeed, the number of chief operating officers within the two groups of large companies has been falling steadily for two decades, bottoming out at 29% this year, as finance chiefs have assumed more and more of the operational load.
“Is this an aberration? We think so,” says Tom Kolder, president of Crist Kolder. “For about 80% of the CFO searches we’re doing, our clients are specifying that they want someone who can be a CEO successor someday.”
One way to look at that is that companies merely want a broad field of succession candidates to choose from. And they do want that, Kolder says, but it doesn’t mean CFOs will continue to be left on the bench to the same degree going forward. For succession planning, companies typically look at three-to-five-year time-frames in which they may make changes in the highest executive ranks. And it wasn’t until about 2012 that they significantly began asking recruiters to provide CFO candidates with the desire and capability to be a CEO, according to Kolder.
“I think we’re going to have to wait another year or two to see whether the number clicks up to 10% [of ex-CFOs in CEO roles] or just sits at 6%,” he says.
The desire for greater operational wherewithal in finance chiefs corresponds to a significant trend in recent years: since 2012, the average age at which CFOs are hired has shot up from 42 to 48. “Companies are looking to hire broad business leaders as opposed to subject-matter experts, and it takes longer to fully develop the right combination of financial and operating perspectives,” says Kolder.
But once someone lands a CFO role, he or she shouldn’t expect to hold it for too many years. The current average tenure of Fortune 500 and S&P 500 finance chiefs is 4.9 years. That does mean that more than 100 of those seats are becoming available every year, which might seem promising to finance chiefs at smaller companies who want to move up the size scale. Unfortunately, they shouldn’t get their hopes up, either.
The fact is, only 18.1% of the sitting CFOs at these large companies were also finance chiefs in their immediate prior positions. Instead, companies show a strong inclination to promote internal business-unit finance leaders, presidents, or COOs to the top finance spot, or else hire someone from outside who’s run finance at a big division of another company.
Looking externally is more common a bit further down the size scale. Companies in the $1 billion to $5 billion revenue range are Crist Kolder’s “bread and butter,” Kolder says, because they often don’t have enough talent in the organization to compensate for a high-level departure.
“The first thing they’ll say is that they want someone who has sat in the CFO chair before, which makes sense,” he says. “But the reality is that the sitting CFOs they’re able to attract and recruit are likely to be at companies in the sub-$1 billion revenue category, and in fact usually the sub-$500 million category.”
When the CEO and board of the hiring company meet those people, Kolder says, it often becomes clear that their companies’ business models and platforms don’t have the level of complexity in products, international markets, and scale and process requirements that are needed for the larger company. And that larger company is usually planning further growth that will entail even greater complexity.
In such cases, Crist Kolder presents instead the CFO of a multibillion-dollar division at a larger company, who has gotten some exposure to Wall Street and worked with large scale and complexity. “That feels better to the client,” Kolder says. “Maybe that person doesn’t have treasury skills, but they’ll make that compromise to be sure the person won’t get overwhelmed by their size, not just now but what they want to be five years from now.”
Here’s a sampling of other findings in Crist Kolder’s Volatility Report 2017 (it’s the 14th edition of the annual report, although it contains information going back to 1995):
