Having spent two years as CFO of EPIX Holdings Corp. before becoming CEO last year, Thomas Taylor knows exactly what he is looking for in a finance chief: someone just like him.
It would be a tall order. Taylor was valedictorian of his MBA class at Notre Dame, is a CPA who spent seven years at Price Waterhouse, and was a former controller at Fortune 500 company Central Soya.
But Taylor’s wish list for CFO attributes offers a glimpse as to why internal candidates — usually, treasurers and controllers — often get passed over when companies are looking to fill the top spot in the finance department. “I want someone with an accounting background first and foremost,” says Taylor from the Tampa, Florida-based headquarters of EPIX, an HR outsourcing specialist with $1.8 billion in revenue.
But that’s not all. An MBA “would be nice, too,” he adds. “That’s not as critical as an accounting background, given the training and structure one gets with a CPA. I’d like the candidate to have been a controller and have some treasury experience. Also a stint in some strategy function, since a CFO must be a business partner to the CEO. And leadership skills — that’s crucial, too — a strong-willed personality who will stand up for what is right, and who knows the difference between right and wrong.”
Omniscience would be swell, too. But Taylor’s not alone in asking a lot of EPIX’s next finance chief.
In the post-Enron era, the CFO’s role has taken on a whole new level of importance — nearly as important as the chief executive’s job. The new reporting rules instituted by the Sarbanes-Oxley Act mandate that CFOs and CEOs sign off on their companies’ financials not once, but twice. The certification puts CFOs at risk of criminal penalties for materially misrepresenting the numbers. That alone makes the CFO position more daunting.
The extra reporting requirements may explain, in part, why companies often go outside their own payrolls when looking to find new finance chiefs. In this post-Enron, post-WorldCom, post-dotcom world, boards are now seeking exceedingly well-rounded candidates to fill open CFO slots.
Indeed, the ideal CFO candidate these days is a strange beast — a combination of treasury, control, operations, sales, marketing, and HR, with enough leadership skills to partner with business units and enough courage to shout down misguided investments. It appears nobody wants another Andrew Fastow.
Getting to this level professionally requires a set of skills beyond the world of numbers, including operational experience and managerial know-how. On their own, treasurers and controllers often lack that breadth of expertise. Says Peter McLean, vice chair of executive search management firm Spencer Stuart and co-head of its financial officer practice. “If you could meld the controller and treasurer together experientially, you’d have the essence of a good CFO.”
Even then, that may not be enough. “You then need someone who has found his or her way into the inner circle of strategic discussions and debates, working alongside CEOs, COOs, division presidents, and business unit heads to create and execute strategy,” says McLean. While McLean says it’s not impossible for a treasurer who has specialized in treasury to make the jump to CFO, or a controller, “it’s just harder.”
And it won’t get any easier in the foreseeable future. David Nosal, head of the CEO practice at another large executive search management firm, L.A.-based Korn/Ferry International, says Sarbanes-Oxley has changed everything. The added reporting requirements will make it even more difficult for internal candidates “who heretofore thought there was a seamless succession path to the CFO position,” assets Nosal.
Recruitment specialists say boards of directors and CEOs are looking ever more skeptically and stringently at internal candidates before they promote them. “Credibility in the job is everything now, and boards and CEOs are just so exposed if their CFOs fail,” Nosal asserts. “They’re not going to take a risk on someone who does not have the experience required for the task. The old days of ‘someone not ready but apt to prove himself’ are gone.”
So why is it that some treasurers, controllers, and VPs of finance manage to convince boards that they are in fact CFO timber, while others get passed over?
To answer the question, we asked some of America’s top CFOs how they made their climb, which skills they accumulated along the way that helped guide their journey, and how those in treasury, control, and other finance positions can follow their examples.
Interestingly, their responses color a portrait startlingly similar to the ideal candidate Taylor is seeking to fill the CFO slot at EPIX. There are deviations — some CFOs cite an MBA and operational experience as vital, while others insist that a CPA background is essential. Above all, these CFOs maintain that functional expertise isn’t crucial to the job. It’s the ability to lead.
Take Bob Agate, for example, the retired former CFO of New York-based Colgate-Palmolive. A native of Britain, Agate left school at 16 to work for a chartered accountancy and qualified as an accountant five years later, whereupon he hired on at Deloitte in London. In 1961, he became an assistant accountant at Colgate.
The rest of his career is a blur of international assignments: CFO of Colgate’s subsidiary in India, CFO at the company’s Malaysian operation, back to the U.K. for a few years, off to Australia, and then, in 1979, a position as controller of Colgate’s European division in New York. Another half-dozen positions on the control side followed, ending with Agate’s appointment as CFO in 1987. Agate retired in 1996.
So did he always know someday he’d become CFO? “I had no idea until I was actually offered the job,” Agate says. But, looking back, he thinks his wide-ranging experience left little doubt that he was an ideal candidate. “We always stressed that the two primary skills for a CFO at one of our 80 companies around the world was operating experience first and accounting knowledge second,” he comments.
Agate says it’s difficult to challenge a management team if you’re not involved in operations, and challenging one’s peers requires at least a modicum of operating knowledge.
As for accounting knowledge, Agate says Colgate identified three typical finance backgrounds that generally yielded candidates with good bookkeeping skills: a professional CPA, an MBA in finance, and a generalist who may have come up through a bank or brokerage with good and broad financial knowledge.
But Agate recalls that whenever Colgate moved a bright person who lacked an accounting background into the CFO post, “their difficulty understanding accounting issues paid a price.”
Which is the better incubator to become a CFO: treasurer or controller? “Both,” Agate responds, “but only if a treasurer obtains experience on the control side, and vice versa.”
Nosal concurs: “It’s not that one or the other is better to become a CFO, but that both have touched parts of the enterprise beyond their functional areas, like a VP of finance, someone who may have been a treasurer or controller but is equally well-versed. Add a bit of international experience, and that’s a good candidate.”
See the Drivers
Steve McGowan is that kind of CFO. McGowan, a former VP of finance at technology giant Sun Microsystems, earned his stripes in control. McGowan was the controller of Sun’s sales and services business, a controller at one of the company’s manufacturing plants, and a controller of a major Canadian subsidiary.
Although he has never worked in treasury, he has an MBA from Loyola and is a certified management accountant. “A CFO must have strong fiduciary skills, a deep understanding of accounting and the processes that underlie it, and broad financial knowledge of the company,” McGowan asserts. “The broader and deeper the background the better to prepare you for both fiduciary and strategic roles.”
McGowan’s responsibilities at Sun draw from his diverse business experiences. The Sun CFO manages finance, legal, IT, and public policy functions.
Yet McGowan says his controller assignments were most important in helping him to move up the corporate ladder. “A controller must understand the financials and also what is driving them or behind them, that’s clearly number one,” McGowan adds. “You see all these financial drivers coming in like revenues, expense margins, and implications to cash that you must then pull together in a brief summary to obtain a picture of the company at that time. That’s great preparation.”
Tom Manley, CFO of Cognos Inc., an Ottawa-based vendor of business intelligence software, is another finance chief who has controller experience. Manley never served as a treasurer or pursued a CPA, but built his career through successive finance and operations responsibilities, starting in cost accounting positions in budgeting, accounts payable, plant controller and VP of finance at his former employer, Nortel Networks.
Before signing on at Cognos, his first CFO position, Manley was a general manager of a Nortel division. “I’ve had a good mix of line management and finance roles,” he says.
Manley considers himself a generalist with a knack for learning things along the way. He actually began his career as an engineer at General Motors (his electrical and mechanical engineering degree predates his business degree). “I never set a path toward becoming a CFO,” Manley quips. “But I think a good CFO is someone with broad experience and good common sense.
While Manley contends that accounting knowledge post-Sarbanes is critical to the CFO job today, he doesn’t think you have to be a CPA to be an effective finance chief.
“There are plenty of CPAs out there who have a difficult time translating accounting into business performance and impact,” Manley explains. “There are lots of theoretical accountants around that would make terrible CFOs. The market for CFOs right now is for people with strong business acumen beyond accounting expertise. A great CFO applies his or her broad knowledge to help the business become successful.”
Leadership: CPA Not Required
CFO Mike Lynch of Federal-Mogul Corp., a Southfield, Michigan-based automotive parts supplier with $5.5 billion in revenues, also has a background in electrical engineering. “I’ve got an MBA, but I’m not a CPA,” says Lynch, who started his career at Ford Motor Co. in finance, then “worked jobs all over the company,” common in large multinational corporations.
After early stints in marketing and sales, Lynch moved firmly into finance as a controller of various business units at Ford North America, CFO of Ford Australia, CFO of Ford New Holland (Ford’s old tractor operations, since sold to Case), assistant controller of Ford’s international operations, and controller of its automotive components group (eventually spun off as Visteon).
After the IPO, he moved to Dow Chemical as its vice president and controller. Then in 1999, he signed on as Federal-Mogul’s CFO — an external candidate brought in to do the job.
More than anything else, Lynch believes finance department managers need to exhibit leadership to help further their careers. “You don’t need to be a CPA to lead people,” he asserts.
He also says it’s unfair to expect a prospective finance chief to be an expert in a whole host of fields. “I know of few CFOs who can be a working-level treasurer, controller, internal auditor, or IT manager all at the same time, though they may have once performed those roles.” While he says a CFO must understand finance, accounting, treasury, control, and budgeting to lead effectively, “it is not humanly possible or sensible to be all those functions.”
Lynch divides people between leaders, managers, and doers. The doers are the 50 people in the jungle hacking their way through it with machetes. The managers are four people setting the work schedule and training people how to hack. The leader is the one shinnying up the nearest palm tree to declare ‘We’re hacking our way through the wrong jungle.’
Challenge, Challenge, Challenge
Lynch does have some advice to the treasurers, controllers, and VPs of finance hoping someday to shinny up that palm tree. “Get as much diverse experience as possible,” he says. “Excel in your area, but at some point in time when you’ve proven yourself, offer up your service in another area to obtain exposure to different things. Always try to learn as you go along, but also demonstrate your leadership capabilities by not accepting the status quo. Instead, challenge it.”
Cognos’s Manley offers similar counsel. “The ones that succeed get out of their boxes,” he says. “You must understand how a business is run and how you can provide value to line management to help drive results every day. Always challenge others’ beliefs if you believe them wrong. I can say ‘no’ as well as any CFO, but what makes the difference is that I can explain it, too.”
McGowan spouts the same line: “CFOs must have the courage to ask the truly tough questions, like why are we making this investment, what’s the strategy, and where are the returns? We’re the ones who represent the shareholder in asking these tough questions.”
As for Taylor of EPIX, he says his hunt for someone to take his old CFO job is drawing to a close. “I think I’ve got the perfect candidate,” the CEO boasts. “He’s got the right balance. He started in public accounting, is a CPA, has lots of financial experience, and even been a CFO before. I’m hoping to conclude the deal next week.”
Given the tight market for top-notch CFOs, Taylor may want to get on the phone right away.