Does a CFO’s office befit someone who drives a Buggati Veyron or Mercedes-Benz SLR McLaren and smokes $400 cigars?
More than 50,000 employees could be culled from Wall Street firms in 2008, as many as 7,000 from investment bank Bear Stearns alone. And it’s more than a little bit likely that some of these masters of the universe could score positions at the head of corporate finance departments.
Many investment bankers have made the jump: Susan Decker of Yahoo! and Liberty Media’s Greg Maffei, to name two. Might more high-finance types take this path? If they do, they will have some hurdles to surmount.
In the eyes of many boards of directors and CEOs, the typical investment banker is an imperfect CFO candidate, but not for lack of skill. The concern is they don’t have some of the softer attributes, in particular the willingness to subjugate their ego for the good of the organization, patience, and being big enough to recognize there’s another top dog — the CEO.
“A lot of investment bankers need the ‘juice’ of a deal after a deal after a deal,” says Mitchell Gordon, president of merchant bank Morpheus Capital Advisors and a former CFO himself. “It’s as much a personality fit as anything else.”
Another element of the common wisdom is that the skill sets are slightly misaligned. In CFOs, most of Terry Gallagher’s clients want an executive with years of hands-on experience navigating Sarbanes-Oxley, other financial reporting and compliance issues, and complex accounting treatments. Given those qualifications, the typical c.v. of an investment banker “might be laughed at,” says Gallagher, president of retained executive search firm Battalia Winston.
But not all companies use deep accounting expertise as the ruler with which to measure CFO candidates. “You need the knowledge of financial reporting, accounting, and controls in the organization, but not necessarily in the CFO position,” argues Dylan Roberts, a principal at management-consulting firm Oliver Wyman.
For sure, bankers-turned-CFOs need to be paired with strong controllers. But today a CFO’s principal functions are balance-sheet manager and strategic adviser to the CEO, says Roberts, a role that many investment bankers already fill with corporate clients. “Alternative capital structures, alternative capital raising strategies — it’s all bread-and-butter stuff for an investment banker,” Roberts says. And that’s not to mention the experience bankers get evaluating M&A prospects and steering global deals.
Moreover, in the current economy, when financial institutions are preserving capital, knowing how to procure funds cheaply in the global financial markets is valuable expertise. Gordon, who was CFO of container leasing firm Interpool Inc. from 2000 to 2003, says he was a much better CFO for having been a banker. As a CFO, “I knew when the bankers were telling me the truth and when they weren’t,” Gordon says. “I was able to tell in a nanosecond who had substance and who had nothing to bring to the table.”
The most effective CFOs delegate administrative tasks and cover the big-picture, strategic issues, says Kip Clarke, managing director and co-head of mergers and acquisitions at KeyBanc Capital Markets; they’re not trying to negotiate a 1 percent discount on a software license.
Clarke received a fiery baptism into CFO-dom a few years ago at Inverness Partners, a private equity group. An automotive parts supplier in Inverness’s portfolio was having cash-flow problems, had tripped bank covenants, and was consolidating manufacturing plants when the CEO and CFO resigned unexpectedly. Clarke stepped into the CFO spot to sell pieces of the company and raise equity financing. “We kept the company out of bankruptcy and paid 400 trade creditors 60 cents on the dollar,” Clarke says The context made the job exciting. “When you’re trying to save a sinking ship, you don’t have time to worry about shaving $10,000 off the auditing bill,” he says.
But Clarke eventually left the post because he found the routine tasks “boring.” Most CFO slots do not have the continuous action that dealmakers thrive on. It is still in part a “control and planning position,” Clarke says, especially if the company is in a very steady state. After Clarke fixed the problems, he passed the baton to his controller after a year and a half.
Indeed, it is the ability to handle what some would call mundane tasks — accounting, taxes, risk management, cash management, and budgeting — that separates the bankers who last as CFOs from those who don’t, notes Richard Lark, CFO of Brazilian airline GOL Linhas Aereas Inteligentes and a former Morgan Stanley vice president.
Lark was fortunate to get exposure to the basics of the operational side of finance at a privately held Internet startup before joining GOL in 2004 and steering its simultaneous listing on the Brazil and New York stock exchanges. GOL was also one of the first foreign-listed companies to complete Sarbanes-Oxley 404 certification.
“To be successful, you have to embrace the debits and the credits. You have to be the accountant, the treasurer, all of those people at any point in time,” Lark says. He counsels bankers not to “jump into the public company fire” and instead get experience at a privately held outfit first. Many of Lark’s banking colleagues who became CFOs in Brazil’s IPO boom the past few years didn’t last in corporate finance, he says.
It’s just a fact: Banking, broadly, prepares an executive for only 50 percent of the responsibilities of a CFO, says Jeffrey Pribor, chief financial officer at General Maritime Corp. Pribor landed a CFO spot four years ago — in the same city and industry, for an NYSE-listed company that he had helped take public — after 18 years in investment banking. “It was almost too good to be true,” he says.
Pribor had the expertise to deal with financial services vendors and handle the investor relations part of the job, but the internal-facing functions he learned as he went. What caused sleepless nights were the things “that there aren’t a good how-to-manual for” and the “unknown unknowns”— the things he didn’t know that he didn’t know. Directors and officers liability insurance was one. “I had no idea how complicated D&O insurance was,” he says. “The variations in coverage and cost boggle the mind. When it came time for the first renewal, I learned in a hurry.”
The investment banker-to-CFO shift can be jarring in two other ways: compensation-wise and culturally. Measured strictly on a cost-benefit basis, investment bankers may find a CFO job wanting. “Investment banking has one of the best risk-returns in the world,” Lark says. “CFO is the opposite. The risk is very high, but on average the payoff is going to be lower.” In addition, a CFO may have to wait years to earn the millions that an investment banker can earn in months — and even then the CFO’s payout will be largely tied to the company’s performance on the stock market.
Culture can be another hurdle. When Mitchell Gordon joined Interpool, one of the remarkable differences was the responsiveness of his fellow employees. As an investment banker, used to getting answers to e-mails in the middle of the night, Gordon found the pace of a corporate finance department slow. It took some adjusting — but it was his staff that adjusted, not Gordon.
“Investment bankers have a better service orientation than any other professionals, and that kind of service attitude could good be good for any organization to adopt. My people at Interpool worked harder,” he says.
For some longtime investment bankers, the move into the C-suite is inharmonious, especially if they come from a firm like Goldman Sachs where culture is so powerful, according to Gallagher of Battalia Winston. When investment bankers leave a firm voluntarily, they typically do so in droves and set up their own shops with former colleagues. But “when you peel them out on their own and put them in an established corporate culture, they have one of the highest incidences of failure,” Gallagher says.
For that reason, boards of directors and CEOs may not want to be the guinea pig for a banker-turned-CFO — and instead cherry-pick candidates who gained corporate finance experience on some other company’s dime.
For the bankers that do make it to the C-suite, even if only temporarily, it’s a singular experience, according to Clarke. Being in the trenches as CFO of a company in crisis made him a better banker, he says. “To be able to say I made payroll for a year and a half means I understand cash flow. To my clients, I am not just a guy in a nice suit with a good calculator; I actually understand how balance sheets move.”
On the other hand, executives like Pribor that stay on the CFO side of the table and never return to banking find plenty of satisfactions. “I have as many Lucite tombstones as I need — they’re in boxes in my garage,” says Pribor of the trophies that investment bankers collect from M&A deals. “I prefer to spend the rest of my productive years creating value for a company and its shareholders.”