The Pivotal Role of Your CFO: Dr. No or Dr. Go?
Every morning in Africa, a gazelle wakes up, it knows it must outrun the fastest lion or it will be killed. Every morning in Africa, a lion wakes up. It knows it must run faster than the slowest gazelle, or it will starve. It doesn't matter whether you're the lion or a gazelle-when the sun comes up, you'd better be running.
― Christopher McDougall, Born to Run: A Hidden Tribe, Superathletes, and the Greatest Race the World Has Never Seen
In managing the risk and opportunities on the road from a start-up to a growing, maturing organization, the CFO seems to be the most important role after that of the CEO. Yet, often companies do not pay equivalent attention to what constitutes outstanding CFO leadership? They focus on selecting for the technical knowledge of the CFO, and often end up with someone who is a competent Controller or Chief Accountant but not a strategic or financial leader.
Referring to the old James Bond book and hit film, we used to joke that too many CFO’s were “Dr. No”; viewing it as their role to question risk taking and keep expenses trimmed. While attention to the fiduciary responsibilities of the CFO position are always important, the best CFO’s we have known also played a major role in urging the right investments, promoting confidence in thoughtful growth, and helping communicate and clarify strategy.
In the private equity world, we have often seen following the acquisition of their company, the CFO of the acquired firm having to undergo several significant transitions their leadership and operating role. Many up and coming firms are lacking in sophisticated financial accounting and reporting systems; the CFO may have been involved in the hands on work of reconciling spreadsheet driven reporting and coordinating data gathering from the field. After the sale, the CFO must be open to upgrading not only these systems but reconsidering their own skills and approach to providing timely, accurate financial reports. A more subtle pressure is between the CFO’s role as part of the existing, now acquired management team and the fiduciary responsibility to the Private Equity firm. How is trust maintained with all parties? How is information is reported to the new owners, and how much detail? While the answer to this question may seem obvious, it is not simply a matter of maintaining an open, transparent approach. How strong is the CFO in instituting controls, analyzing risks or describing opportunities? How experienced is the CFO in dealing with an investor group? While some startup CFO’s gain extensive experience in presenting to investors through multiple funding rounds etc.… others may need greater skills in the next level of investor relations, corporate finance, managing compliance concerns and building a sound strategic plan. It is difficult to find CFO’s with this range of experience who also can act as strategic leaders with the courage to help drive decision making and encourage sound risk taking.
Our work with CFO’s at private-equity backed companies shows that outstanding CFO’s demonstrate many of the characteristics listed below. They were leaders who:
Balanced between responsible financial prudence and acting as supporters of growth. They encouraged investment, learned about market opportunities and competition and reassured the Board if a reasonable entrepreneurial decision did not pan out. They brought with them a longer term vision of how to create sustainable value and growth.
Effectively managed constructive conflict between parts of the organization. They were adept at helping the team sort out its priorities and able to influence across boundaries. They built collaboration across the team in order to get things done.
Acted as business partners rather than intimidating the line. They demanded transparency and “no surprises” but worked with the line to correct problems not to just point them out.
Understood and used the power of data analytics to drive decision making; Information technology was their “best friend”. They used data to help the line formulate meaningful metrics and goals.
Developed not only the finance team but the business and financial acumen and understanding of the company overall. They acted as teachers and encouraged critical business thinking and investment rationales.
Finally, the best CFO’s could “tell a story”. Along with the CEO, they could offer a narrative on the key drivers and challenges for the organization that made sense, and often in simple language rather than finance jargon. They could speak with clarity and adeptness to employees, the Board, stakeholders and the Executive team.
How do companies nurture this more strategic and expansive CFO capability? What exposures and assignments do they provide which can transform the role and value of their CFO’s? Some of the bigger firms we have worked with had given these excellent CFO’s a general management or customer facing assignment earlier in their career. These types of assignments broadened the emerging CFO leaders’ understanding of the dynamics of the business, increased their appreciation of the growth side of the equation and also taught them some level of humility as they managed through their own decisions and mistakes. Some were assigned to lead merger and acquisition teams, international initiatives or continuous improvement efforts. All had some profound experience of managing through complex change.
For the private equity firm who is looking for a CFO who can take a smaller acquired company to the next level, they may not find the breadth of experience described here. What they need to assess is the CFO’s learning and personal agility, the quality of the relationships of the CFO with multiple parts of the organization, and the abilities of the CFO to communicate, motivate others and develop a robust financial organization for the future. The instrument we have developed, the TEVS is aimed at assessing these critical competencies for Chief Financial Officers as well as other key C-Suite jobs. It assesses the perceived “equity” or value of the CFO as viewed by the management team. It is a window into how a particular CFO has influenced the growth of the organization as well as where they may be holding it back.