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CFOs, Are You Doing Your Job?

As an executive search professional that focuses on the office of the CFO, I am involved with the hiring of Chief Financial Officers for companies. Unless I am working to help a company hire their first CFO, the mandate I have is to replace a current CFO or a Chief Financial Officer that has left.

While only having the time to work on a handful of CFO searches at a time, you may know that I track CFO movement on my CFO Moves Blog. When I combine my personal direct involvement with helping companies hire their Chief Financial Officer with my tracking of hiring and unhiring of CFOs across the US, Canada and the UK, I see many CFO getting replaced.

You can understand that this a topic that interests me. And if you are reading this, the topic probably interests you as well.

I came across a very interesting academic working paper, CFO Succession and Corporate Financial Practices, authored by Ellen Engel, Feng Gao and Xue Wang, that was published in October 2013. This paper looks at reasons and financial reporting consequences of CFO successions. The document is a properly researched academic paper, and makes for an interesting read if you are academically inclined.

Here is the Abstract of the document which summarizes the findings of the research:

We examine the determinants and financial performance consequences of Chief Financial Officer (CFO) successions. We argue that if internal monitoring mechanisms are effective, there should be a greater probability of forced CFO departures in firms with poor financial reporting and capital management performance, and resulting improvements in financial practices following forced turnovers. We test these hypotheses over the period 2002 to 2008. We find that

(1) the incidences of accounting restatements and debt covenant violations are significantly associated with the probability of forced CFO turnovers;

(2) firms are more likely to hire successor CFOs from outside the firm following accounting restatements, especially those due to irregularities;

(3) the hiring of outside CFOs is associated with improved financial reporting quality.

Further, these findings are concentrated in firms with majority independent boards, suggesting that outside directors play a greater role in monitoring CFOs than inside board members.

These findings are not surprising.

When CFOs don’t do their job, they get fired and replaced.

As CFO, are you doing your job?

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Discussion

4 thoughts on “CFOs, Are You Doing Your Job?

  1. I think this is just one area where one sees replacements of CFO. What I’ve seen in my career going from Controller to CFO roles is that CFO’s replacements is not always a performance related issue, but often it has to do with the state the company is in as well as the cultural fit and fit with the CEO.
    Some CFO’s are great strategic business partner while others are builders or fixers. On top of that moving from different cultures also requires the right fit. I’ve seen a lot of good performing CFO’s (from a business/results perspective) but in some cases they were either in the company at the wrong time or did not fit the company culture or a new CEO came in who brought in his/her own team/culture. So CFO moves are triggered by performance, cultural fit, state of the company, CEO tenure & vision.

    Posted by Patrick Speek | January 7, 2014, 9:44 AM
    • Peter,
      I very much agree with you that this is not the only area where we see CFOs being replaced. You have hit on many valid and real reasons for CFOs to be replaced. I deal with this topic in detail in my upcoming book, Guide to CFO Success
      The point of this post was to address when CFOs get replaced because they were not doing (or not delivering) on key components on what was expected of them.
      Thank you for sharing!
      Samuel

      Posted by Samuel Dergel | January 8, 2014, 9:01 AM
  2. I can appreciate the effort that went into the study to be able to make definitive statements regarding what drives changes in the senior finance position. My background includes public, family and private companies and I would look at the responsibility of the Directors or owners for challenging the CFO regarding the quality of the financial reporting. The Directors and Owners bear a responsibility to ensure that they are financially literate and that they have effective communications with the CFO.

    The CFO should be communicating to the Directors / Owners where there are potential covenant breaches and should be communicating with their Auditors / Accountants in regards to complex technical issues. In respect to the improvement in financial reporting through replacement with external candidates, this would likely be due to the incumbent’s less than stellar technical competencies which will be accompanied by passing their deficient knowledge onto the team that they should have been developing.

    Posted by Eric James Thomson CPA CA | January 9, 2014, 11:12 AM
  3. Indeed interesting research, I find point two of particular interest; that firms are more likely to rehire from outside the organisation.

    Does this imply a question mark over the performance/capability of the rest of the team (as opposed to an internal promotion appointment)? Further, could you speculate that a CFO is unlikely to have personally made the error relating to the restatement, and that the actual error rests with the team, but rather CFO has failed to recognise and/or act on the error, plus as the leader it is their head on the block. Thus still leaving the team that made the error in place.

    Does this also contribute to the third point, an improvement in financial reporting quality, as perhaps as a result of the external appointment there is additional turnover in the finance team including those responsible for the original error?

    Posted by David Shepherd | January 10, 2014, 12:15 AM

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