Inside the Mind of a Strategic CFO

Using his background in corporate planning, Rich Fearon has helped Eaton Corp. cut its auto-industry exposure and boost its involvement in the electrical-efficiency business.

There are two routes to becoming a corporate CFO, says Richard Fearon, vice chairman and chief financial and planning officer for Eaton Corp., a $15.4 billion industrial manufacturer.

Twenty years ago, most CFOs came through the accounting and controller route, recalls Fearon. Today, “you’d probably find a more even mix between folks that have come up through the controller and accounting route and folks that have come up through a more general management route,” says the executive, a planner and forecaster cut very much from the latter mold.

Indeed, look into his prior jobs and you won’t see a hint of traditional finance. Fearon joined Eaton from Willow Place Partners, a Menlo Park, California-based corporate advisory firm he founded in 2001. From 1995 through 2000, he was with Transamerica Corp., where he was most recently senior vice president of corporate development. From 1990 to 1995, he was general manager, corporate development, for Singapore-based NatSteel Ltd. and vice chairman of NatSteel Chemicals.

Fearon believes his background in strategy has enabled him to foresee which business areas are headed for trouble and which are bound to bloom — and help Eaton act accordingly. For example, before the auto industry completely tanked, he foresaw trouble and pushed for a strategy that went elsewhere; similarly, he foresaw potential in electrical efficiency, and the company is now hoping to parlay that into success and stimulus money in the blossoming environs of energy.

While the finance and planning chief grants that the challenge of building sustainable revenue looms for the company, he thinks the worst of the recession’s effects are over. To be sure, the company’s third-quarter sales were down 26% from the same quarter in 2008, and net income was $193 million compared with $315 million in 2008, a decrease of 39%.

EatonCFO Fearon“The biggest risk we face is that the economic rebound will be followed by another leg down, where we see that there isn’t sustainability in the recovery.” — Richard Fearon, vice chairman and chief financial and planning officer, Eaton Corp.

Still, Eaton delighted some analysts by spawning operating earnings of $1.21, beating the midpoint of its operating profit guidance by 26 cents. Even more promising was its operating cash flow of $471 million for the third quarter and $1.6 billion in the past 12 months. On October 21, in a wide-ranging interview just two days after the company’s quarterly earnings call, Fearon talked to CFO.com about the outlook for his company and the country — often in strategic terms. An edited version of the interview follows.

How has your strategy background been helpful at Eaton in your role as finance chief?
I’ve had a great deal of experience in different sectors of the economy that’s extremely helpful in making those kinds of strategic decisions. Over the past years, ever since I started in 2002 at Eaton as CFO, we’ve been pursuing a change in our business portfolio. We’re driving at a portfolio that is more consistent in its earnings, has higher returns on capital, and has a higher growth rate. In pursuit of that, we’ve significantly altered our mix of business, both by industry sector and geography.

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