For once, Sarbanes-Oxley is not driving the trend. “[Given the need to comply,] having a former CFO in charge would certainly be helpful, but it’s not a prerequisite,” says Charles Elson, a professor of corporate governance at the University of Delaware who sits on several boards. But like operational duties, Sarbox offers finance executives a chance to prove they can handle more than numbers. “The law has turned out to be a great opportunity for CFOs to really get into the guts of a company’s processes and show they can be operational experts,” says Gary Moran, a managing director with Alvarez & Marsal in New York.
Decline of the COO. There’s another reason why more CFOs are becoming CEOs: less competition from COOs. Between 1999 and 2005, the number of companies in the Fortune 500 and S&P 500 with a COO dropped from 249 to 204 (see “The Vanishing COO,” at the end of this article). CFOs are picking up those duties. “The board expects the CFO to be involved in line activity,” says Crist. “So, increasingly, CEOs who move up from COO aren’t bothering to backfill the position.”
Where Are They?
Ex-CFOs now run companies of every type, but they are nearly ubiquitous in certain places.
Deregulated industries. Former finance executives are most common in once heavily regulated industries such as utilities, airlines, and financial services (see “Where to Find Financial CEOs,” at the end of this article). “These companies are operating in the aftermath of wrenching deregulation,” says Sonnenfeld. “Now they need somebody who understands how to operate in a completely different financial environment from their predecessors’.”
Such businesses also share a particular need for financial expertise at the helm. Utilities, for example, are cash machines, generating more cash flow than they need to reinvest in the business. “Even before deregulation, utilities had financially oriented CEOs because you need people with the discipline to invest that cash,” says Paul Fremont, a utilities analyst with Jefferies & Co. Airlines put financial expertise high on the list for the opposite reason — their focus on pricing, cost cutting, and restructuring.
Desperate circumstances. Turnaround situations offer the classic showcase for a former CFO. Recent examples include Delphi, where, in 2005, Robert Stevens “Steve” Miller (former CFO of Chrysler) was brought in to repair the company and help find a buyer; TXU, where C. John Wilder joined from Entergy to guide a successful overhaul of the business; and BearingPoint, where the former CFO of Oracle, Harry L. You, has taken the helm after an accounting scandal that led to the departure of both the CEO and the CFO.
Complex companies. Global businesses also run to financially oriented CEOs, with former financial executives heading some of the largest global enterprises, including General Motors, Altria Group, Archer Daniels Midland, and Lockheed Martin. “Global businesses have become extraordinarily complex,” comments E. Peter McLean, vice chairman of executive search firm Spencer Stuart. “Boards of those companies want financially literate people who understand issues of capital allocation, but also understand how to use financial products such as hedging and derivatives.”