Say Yes to Dr. No?

New research suggests that CFOs are an essential counterweight to optimistic CEOs.

In 1917 the U.S. Navy was in a panic over German U-boats, which had been sinking American ships in the Atlantic. Henry Ford, who had earlier boasted that his assembly lines could push out a thousand submarines a day, offered his company’s services. If he could build cars, he reasoned, why not boats? The Navy took him up on his offer and ordered 100 steel sub chasers.

One year later, Ford delivered — sort of. After various mishaps, he had managed to produce only 17 awkward, leaky vessels.

It’s no secret that big corporate decisions aren’t always made according to the tidy principles taught in business school. Hunch and hubris trump net present value more often than many care to admit. Sometimes the result is a success. Other times it’s a corporate train wreck. Such decisions tend to share one feature, though: they are generally made by a powerful, confident CEO who meets little serious internal opposition.

Curbing a chief executive’s more outlandish ideas seems like a natural job for the CFO. After all, finance executives are increasingly the number-two executive and are by training inclined to look for the possible reasons why a good idea might turn out badly. But do CEOs and CFOs really approach important decisions differently?

A new study by researchers at Duke University provides some answers. The preliminary findings (a working paper is due out this fall) show that there is some truth to the clichés about CEOs being the company cheerleaders and CFOs being habitual naysayers. They also point to some reasons why a balance between these executives is so hard to maintain.

Looking on the Sunny Side

The researchers surveyed more than 2,000 executives, including CFOs in the Americas, Europe, and Asia and CEOs in the United States. In addition to asking managers what they consider when making decisions, they also posed questions designed to gauge the respondents’ personalities, such as their optimism and aversion to risk.

There are indeed differences between the two executives. Chief executives are a more optimistic breed: in the United States, 79 percent of them fall into the “highly optimistic” category, compared with 65 percent of CFOs. Meanwhile, U.S. CFOs are far more optimistic than their European and Asian counterparts.

CFOs stress different factors when deciding how to allocate the company’s money. Finance executives across regions look first at an NPV ranking of projects, followed by the timing of cash flows and the returns that the same division has earned in the past. CEOs — while looking at many of the same financial measures — give more emphasis to intangible factors, such as the reputation of the divisional manager and that manager’s confidence in the project.

In part, these differences reflect job requirements. CEOs are supposed to come up with the big ideas and provide the enthusiasm to rally the company around the vision. Boards expect the CFO to be critical, examining big ideas for flaws. But there is often something else going on: it seems that executives’ personality traits have a way of spilling over into the decisions they make for their companies.

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