Last month, publicly held California newspaper publisher Daily Journal Corp. announced that it needed more time to finish its audit and submit its 10-Q statement for last quarter. The firm is two quarters late on its financial reports. It also received a notice (its second one in the last year) that it is not in compliance with NASDAQ filing rules.
All that would be troubling on its own, but as Bloomberg View columnist Jonathan Weil pointed out, Daily Journal CEO Gerald Salzman is also the firm’s president, CFO, treasurer, assistant secretary and principal accounting officer, as well as a member of the board. “How one man can do all these jobs by himself is beyond me,” Weil wrote. “Usually the CFO reports to the CEO. Here he’s the same person.” Weil thinks Salzman’s combined roles may be the reason Daily Journal’s audit is taking so long.
As CFO reported, Salzman’s role-hopping isn’t common at public companies. “It’s really the first public company I’ve ever heard of [where] that’s the case,” says Lori Reiner, partner-in-charge of the Philadelphia region at EisnerAmper. Investors do sometimes see it at private companies, or at companies that trade on over-the-counter markets. But Daily Journal trades on the NASDAQ, and it is bigger than many of the private companies where an executive holds both the CEO and CFO roles.
The scenario raises a couple questions for finance chiefs. For one, what’s so wrong with holding the CFO and CEO positions at the same time? And second, is there a way to reasonably play both roles at a profitable, well-governed company?
Reiner says the CEO and CFO roles are definitely distinct, so holding one would likely make a person ineffective in the other. “The CEO’s job is to drive the business forward,” Reiner says. “They’re either very sales-oriented or operations-oriented, depending on the nature of the business.” Someone with a CEO mindset and responsibilities would likely miss some of the details on the financial side, for instance.
From a governance perspective, having one person play both roles will also “shortcut” the decision-making process, Reiner says. In addition, internal controls would likely be weaker. “That’s why a lot of companies do put in a CFO and a CEO from the beginning or fairly early on, because stakeholders in that company will insist on it,” she says.
Typically, Reiner sees the dual role in smaller, emerging private companies that “are picking and choosing their investments carefully,” Reiner says. “What we may see is a CEO who is also playing the role of CFO, and they may employ a great bookkeeper or a great controller. They also may leverage their outside advisers, their accounting firm, law firm, banker or insurance broker to help fill that void.” The problem with that approach is there’s a big difference between a bookkeeper or controller and a CFO, she says.
A finance chief “is an investment, there’s no question about it,” Reiner says. “But a good CFO will return much more in terms of profitability and an increase in business value” than a controller or bookkeeper, she says.
Reiner has several clients that don’t have a CFO but should, she says. Those companies may be trying to save money (perhaps to hire another sales or operations employee) or they may have been burned before by an ineffective CFO “and they felt like they could do it better themselves,” she says. “That decision may not really be right for the business from a long-term perspective. It’s a short-term, myopic view.”
Having a dual CEO/CFO will make audit firms scrutinize a firm more closely, Reiner says (Daily Journal Corp. may be seeing similar scrupulousness from its auditor Ernst & Young). “It’s probably more of a frame of mind that the outside audit firm would come in and be somewhat suspect,” Reiner says. Did that executive read all the documents and understand the accounting implications? Did he or she get the accounting right? “Our audit scope would take that into account, because there would be more risk, from our perspective,” she says.
Can It Be Done?
Holding both the CEO and CFO roles may not be wise. But imagine the scenario: you’re the CFO, your company promotes you to chief executive and there’s no one to fill the finance chief role temporarily. Or you’re the finance chief, and your CEO is ousted before the company finds a new one. Alternatively, you’re a CEO and the CFO is fired or leaves the company. Can you hold both roles on an interim basis, until a replacement steps in?
“By and large, they’re separate functions with full sets of responsibilities,” says David Douglass, managing partner at CFO-outsourcing firm Tatum. “It would need to be a short-term arrangement so that the company doesn’t really suffer.”
The best way to move forward would depend on the situation: is a CFO stepping into the CEO role, or vice versa? A CFO covering for the CEO should focus on strategy and shareholder communication, leaving other CFO responsibilities to the director of finance and controller. “There should be clear communication of what needs to continue and who’s going to be responsible for it during this period that the CFO is focused elsewhere,” Douglass says. The CFO covering the CEO role, however, could still provide oversight to the finance team during the period of transition.
In an industry such as bioengineering, or other sectors that are highly technical and changing quickly, the CFO holding the CEO role on an interim basis might tap the expertise of a board member to learn more about the technical aspects of the company and “be more of a public voice for the company in industry-specific areas,” Douglass says.
Conversely, if a CEO is going to hold the CFO position temporarily, that person may “want to rely on a board member who has experience with dealing with fundraising activities or with investors or Wall Street,” Douglass says. But no one should expect that CEO to become “an instant CFO with all the technical skills that person would have had,” Douglass says.
The board should get involved by identifying the interim executive’s strengths and weaknesses and figuring out how to support him or her. “Often on boards, there are members who have specific skills, perhaps in terms of industry knowledge, experience in helping develop member’s careers or in dealing with investors,” Douglass says. “Whatever the board’s unique expertise is can be highlighted and used to support that interim executive.”
Whatever the situation, “interim executives need to realize that they can’t do two full-time jobs well,” Douglass says. “They need to focus on the company’s priorities and not try to do everything a CEO would do and do everything a CFO would do.”
When it comes time for a replacement to step in, interim executives should also learn to move on. Dan Corredor, a managing partner at professional services firm Hardesty, has held roles as a CEO and as a CFO (not at the same time). “One of the most difficult things to do once you make that transition is to let go of the CFO role,” Corredor says. “You have to remember there are a lot of capable people out there that can do a good or better job than [you] did. Once that person has started and engaged in his or her role as a CFO, [you] need to let them do their job.”