Leadership

Naming An Interim CFO Has Its Benefits

Appointing an interim CFO need not be avoided at all costs, according to a new study.
Naming An Interim CFO Has Its Benefits
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The appointment of an interim CFO is often seen as a sign of poor succession planning: the organization got caught flat-footed by the prior chief financial officer’s vacating the top finance job, for whatever reason. That may be the case at times, but doesn’t mean appointing an interim CFO should be avoided entirely, or is indicative of poor corporate governance, according to a new academic study.

In fact, according to professors at the University of Tennessee and Vanderbilt University, appointing an interim CFO has some benefits — like offering the opportunity to “try out” one of the internal finance team members to see if the role is a fit. In addition, an interim CFO gives CEOs and board members more time to evaluate the firm’s current position and find the right permanent successor.

The authors examined more than 14,000 CFO turnover events from August 2004 through December 2018, using an Audit Analytics database. Their study, “The Determinants and Consequences of Interim CFO Appointments,” found that about 20% of all CFO appointments were of the interim variety, and 1 in 5 interim CFOs were eventually promoted to permanent status. Very rarely was an interim CFO an external appointee – only about 16% of the time — and they were rarely moved to permanent status.

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Temporary to Permanent

Finance team members eyeing an interim spot take note: Organizations were more likely to promote an interim CFO to permanent status if the candidate had accounting expertise or held an MBA degree. In fact, accounting expertise was a strong predictor of appointment to permanent status.

What weren’t significant determinants of the decision to promote to permanent status, perhaps surprisingly, were the organization’s accounting performance, market performance, or financial reporting quality during the interim CFO’s tenure. 

About 20% of all CFO appointments were of the interim variety, and 1 in 5 interim CFOs were eventually promoted to permanent status.

Overall, interim CFOs at larger companies, according to the study’s results, were less likely to make it to permanent status. “That finding suggests that large firms use interim CFOs as a stopgap until they can identify and attract permanent successors, rather than as a mechanism to audition potential candidates,” according to the paper by Jason Bangert, Linda A. Myers, and Roy Schmardebeck of Tennessee, and E. Scott Johnson of Vanderbilt.

Interim Setbacks

All of this is not to say there isn’t a cloud around some companies when they appoint an interim CFO. The researchers found that smaller and poorer-performing firms were more likely to appoint interim CFOs. For example, companies that just missed analyst expectations in the fiscal year preceding the CFO turnover were more likely to hire an interim CFO, as were companies that disclosed a material weakness in internal controls. 

An interim CFO can be greeted harshly: Investors tended to react more negatively to interim CFO announcements compared with those of permanent CFOs. And interim CFO “service periods” were associated with less strategic investment and lower market valuations, the researchers found.

However, much of that seems to turn around when the board of directors names a permanent successor. When that happens, the positive stock price reaction is usually greater than with a standard new CFO hiring. In addition, the researchers found, permanent CFOs who follow interims achieve higher operating performance and are less likely to underinvest compared with permanent CFOs who do not follow interims. 

“The results of our study provide evidence that the use of interim CFO succession can be an effective succession planning technique,” the authors concluded.