The Top Spot

Why more companies are tapping their finance chiefs for CEO.

Attention to metrics. At Ball, where the share price has appreciated strongly in recent years, Hoover attributes at least some of his success to his determination to produce a return that exceeds the company’s cost of capital. “Our focus on EVA [economic value added] has led us to make decisions — such as the decision to divest the glass business — that have really improved the performance of this business,” says Hoover. “Today, you could go into any of our beverage-can plants and the people on the line could explain EVA to you.” This has earned praise from analysts and investors alike. “You would be surprised how many companies don’t think about their cost of capital,” comments Christopher Manuel, an analyst with KeyBanc Capital Markets. “Hoover has done all the right things to make it work.”

Investor-friendly. Former CFOs have another edge: experience talking to Wall Street. “You often see CFOs step into the investor-relations role naturally because they’ve been dealing with investors and analysts for years,” says Jeff Kotzen, a BCG vice president.

The lessons haven’t always come easily. Bowman recalls an experience from his days at ITT. “Back in 1994, we didn’t know how to signal to the market whether we had a good quarter or a bad quarter,” he recalls. “There was a lot of whispering going on among investors. We missed our EPS by a penny, and stock fell $3. I thought, ‘Why did we do that?’ It made me learn that you tell your stakeholders what you expect to do, remind them of that, and make sure you do it. And at the first sign that you can’t do it, tell them.”

Olsen argues that CFOs may also be better at keeping their investors happy — not a surprise given their focus on shareholder value. For instance, a company with a low P/E multiple may have value-oriented investors who doubt management can come up with good investment ideas and would rather see high dividends. “You sometimes see CEOs fighting an uphill battle,” says Olsen. “They want to improve their P/E ratio, but then their value investors start asking why they are trying to grow their way out of their problems. You need an investor strategy that recognizes the boundaries of what you can do in the short term. A CEO with a CFO background may be more sensitive to those issues.”

An eye for risk. An ability to see the risks that might wreck the business is another valuable CFO trait. For instance, PG&E’s Peter Darbee became adept at classifying risks and quantifying their likely impact on financial performance. “When I learned that I was to be appointed CEO, I started thinking about the major threats and opportunities facing the company,” he says. He soon focused on the possibility of another energy crisis in California. “What I realized was that the state, the energy commission, and our company were all so burned by the California energy crisis that if we saw the same situation again, we wouldn’t make the same mistake. But what if we faced a close cousin that was camouflaged so people wouldn’t recognize it?”


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