CFOs’ unique vantage point into the business often positions them as viable CEO successors. And, in fact, roughly one in 10 new S&P 500 CEOs comes from the chief financial officer role. Yet, despite these advantages, promoted CFOs face the toughest odds to outperform as CEOs.
As part of Spencer Stuart’s CEO Life Cycle research, we studied more than 1,300 CEO transitions to predict the probability of success in the top job based on a CEO’s last role. Our analysis found that only 8% of CFOs-turned-CEOs steered their companies to the top-quartile of performance (See chart, “Top Performers.”). By contrast, “leapfrog” CEOs — those promoted from two or more levels down — and divisional CEOs had far higher odds of outperformance.
What explains the difference in performance? It turns out that promoted CFOs outperform their peers on the dimension of the business they are most familiar with: they achieve higher levels of profitability, yet lag their peers in top-line growth. To bend the odds of CEO success in their favor, promoted CFOs need to lean into the less familiar: driving growth.
Benefits and Limits of Financial Conservatism
CFOs cultivate financial conservatism, an important asset in their oversight of a company. Embedded in the structure and logic of the balance sheet, they instill financial discipline, prudent stewardship, and a clear-eyed view of potential risk. Often outside of the CFO’s purview are more risk-prone responsibilities, such as innovation, revenue, and growth.
We see this in our data. CEOs promoted from the CFO role on average were slower to drive top-line growth than CEOs from other backgrounds, especially in the first years of their tenure. As they matured in the role, they progressively narrowed the gap. By contrast, CFOs produced stronger operating margins than peers during their first years of tenure (see charts below).
Slower top-line growth comes at a cost. We modeled revenue growth for promoted CFOs and their peers over the first five years of a CEO's tenure for a company with revenue of $11 billion, the median revenue in our sample. Companies led by former CFOs were at risk to generate nearly $1 billion less in revenue due to lower growth during the early years.1 During the same period, promoted CFOs generated a total of $374 million in additional operating income compared with their peers.
As one former CFO-turned-successful CEO observed, “Where CFOs are most comfortable is in the cost end of the business, not driving the top line. They may not be close enough to sales and marketing as they should be. A lot of times, people want to save their way to prosperity by focusing on costs and efficiency instead of driving the top line.”
An executive’s “modus operandi is a proxy of what they have been exposed to," wrote James G. March in his 1991 paper, "Exploration and Exploitation in Organizational Learning." Becoming a successful CEO requires a significant shift in said modus operandi. The good news is that CFOs can begin putting in place the building blocks for this shift well before becoming CEOs. Here’s what finance leaders can do.
Build commercial muscle. CFOs who are successful as CEOs shift their focus to growth. They reorient their thinking away from the idea that “capital is scarce” to “opportunities are scarce.” In addition to preserving cash flow and finding synergies, they chase the biggest opportunity and choose which alternatives to forgo to maximize stakeholder returns. Backing innovation efforts, market expansions, or acquisitions that increase return on capital may be new territory for former CFOs, but they are critical drivers for the sustained success of the business.
Tap into vision in decision-making and communication. Great CEOs have a vision. “They are storytellers,” one director explained. “You have to have a vision and be able to bring people along. Without the ability to breathe excitement into the organization, it's very hard to be successful.”
Successful CEOs also are effective at communicating their vision for the business, often engaging the organization by tying objectives to a larger purpose. Finance leaders can enhance their ability to communicate with vision by shifting their perspective beyond shareholders to include stakeholders. As one promoted CFO explained, “When you're CFO, you spend all your time convincing Wall Street and everybody around you that you're the smartest person in the room. When you're CEO, you've already been appointed the smartest one in the room. You don't have to convince anybody anymore. You need to convince them that you have a vision of what's going on in the future.”
Know when to take off your “finance leader” hat to build connections with your peers. Most CFOs feel tremendous pressure to serve as the financial conscience of the business, but that can keep them from interacting with peers in ways that help them learn and build influence. Taking off the finance enforcer hat requires vulnerability. One former CFO-turned-CEO advised CFOs to ask for help when they need it. “At every place I've been, there were a couple of people who really made me better," he said. “You have to be able to admit that they know more than you do. You have to be willing to say, ‘I’ve got a thimble full of knowledge about a particular area. I need you to help me.’" By knowing when to serve as financial conscience and when to focus on helping others succeed, CFOs become more adept at holding multiple perspectives at once.
Have the courage to develop successors. Since 94% of the CFOs appointed CEO were promoted from the inside, it’s paramount to invest in developing a successor. CFOs who became successful CEOs are strong people developers, regularly coaching their teams and providing opportunities for team members to learn and develop. When finance leaders invest in the professional growth of their people, they also develop a delegation mindset that will serve them well as CEO.
Data is not destiny. By understanding the mindsets, capabilities, and priorities of the most successful CEOs, CFOs can begin preparing themselves for long-term success. Pushing themselves to broaden their knowledge of the business, increase their growth orientation, and develop their people leadership skills will improve their performance as CFO and increase the odds that they will emerge as a top-performing CEO.
Claudius A. Hildebrand, Jenna Bayard, and Joel von Ranson are consultants at Spencer Stuart.
1 We examined several possible reasons for these differences, none satisfactorily explaining the difference. On average, CFO promotes led slightly smaller companies than peers, and, while they were represented in all major industry sectors, they were more likely to be found in financial services, industrials, and real estate. We also explored whether promoted CFOs were more likely to be selected for challenged companies, but our data did not reveal meaningful differences in the shareholder returns over the previous three years between the companies that chose a CFO as their next CEO and those who did not.