Are CFOs right for the chief executive seat?

There once was a time when the route to the top of an organ­i­sa­tion was a well-trod­den one. To assume the role of CEO, a can­di­date would need to work their way through the ranks of their busi­ness to become deputy chief exec­u­tive and then take over when their boss stepped down. The only sig­nif­i­cant alter­na­tive to this approach occurred when a firm opt­ed to para­chute in an expe­ri­enced CEO from anoth­er com­pa­ny.

But that time was long ago. Over the past two decades, 85% of serv­ing CEOs in the S&P 500 have either achieved pro­mo­tions from one of three C‑suite roles – CFO, COO or divi­sion­al CEO – or leapfrogged straight into the top job from a posi­tion one lev­el below them, accord­ing to The Last Mile to the Top, a 2021 research report by man­age­ment con­sul­tan­cy Spencer Stu­art.

Of all the CEOs appoint­ed to the US’s biggest plcs in 2020, 10% pre­vi­ous­ly served as a CFO – dou­ble the pro­por­tion who’d tak­en this route at the turn of the mil­len­ni­um.

This trend indi­cates a grow­ing belief among finance chiefs that their roles are as good a prepa­ra­tion for the top job as any oth­er. Indeed, a recent sur­vey of CFOs by account­ing soft­ware firm Sage found that 77% of respon­dents were har­bour­ing ambi­tions to become CEOs.

Are CFOs being overlooked?

The main rea­son for this increase is clear, argues Andrew Kak­abadse, pro­fes­sor of gov­er­nance and lead­er­ship at Hen­ley Busi­ness School: over the past 25 to 30 years, the func­tion most cru­cial to ensur­ing the effec­tive oper­a­tion of a busi­ness has changed from prod­uct deliv­ery to finance.

“Cost con­scious­ness and con­trol of the organisation’s costs, as a step­ping stone to prof­it, has become a key issue,” he explains.

Mark Free­bairn is part­ner and head of the board and finan­cial man­age­ment prac­tices at exec­u­tive recruiter Odgers Berndt­son. He believes that the career path from CFO to CEO is becom­ing increas­ing­ly pop­u­lar because “the CFO is the only oth­er per­son in the com­pa­ny with same com­mer­cial band­width and breadth of vision across the whole busi­ness. The CFO is also the only per­son who has the same lev­el of investor and board rela­tion­ships as that main­tained by the CEO.”

The Sage sur­vey sup­ports Freebairn’s view: 95% of the finance chiefs it polled said that they were deeply involved in near­ly every aspect of their firms’ oper­a­tions.

The log­ic of pro­mot­ing a CFO to the top job may be clear, then, but the jury is out on whether it’s nec­es­sar­i­ly the best appoint­ment a com­pa­ny can make. The Spencer Stu­art research into the S&P 500 has found that for­mer CFOs are 24% less like­ly than for­mer COOs to lead their firms into the top quar­tile of per­for­mance as mea­sured by share­hold­er return – and 41% less like­ly than lead­ers who’d leapfrogged them into the CEO role.

This chas­ten­ing find­ing is a clear sign that com­pe­tence in man­ag­ing a company’s finances doesn’t nec­es­sar­i­ly trans­fer to run­ning a whole organ­i­sa­tion. As Kak­abadse, who advis­es busi­ness­es on suc­ces­sion plan­ning, stress­es, the move up from CFO to CEO is still “a mas­sive jump”.

Yet the most vision­ary CFOs-turned-CEOs know that the data is not always to be trust­ed. Free­bairn argues that “the only per­ceived con­flict was that CFOs were always seen to be risk-mit­i­gat­ing, which led to the lazy stereo­type that they couldn’t grow a busi­ness. This has since been dis­proved sev­er­al times over.”

Making the jump from CFO to CEO

Doug Baird, founder and CEO of the New Street Con­sult­ing Group, believes that a CFO is most like­ly to become an effec­tive leader “when finan­cial issues are at the heart of the business’s strat­e­gy, such as when a turn­around is need­ed”.

He cites Pelo­ton, which has strug­gled bad­ly in recent months. Its appoint­ment of Bar­ry McCarthy, a for­mer CFO at Net­flix and Spo­ti­fy, to the role of CEO in Feb­ru­ary was a smart deci­sion under these cir­cum­stances.

With his expe­ri­ence, “McCarthy clear­ly grasps the sub­scrip­tion mod­el”, Baird says. “Pelo­ton needs some­one with sig­nif­i­cant finan­cial acu­men to steer the busi­ness back to full health and make investors feel com­fort­able.”

Anoth­er sen­si­ble choice, accord­ing to Baird, has been the appoint­ment of Xavier Rossiny­ol as CEO of Swiss trav­el retail­er Dufry. He’s due to take up the job in June, hav­ing pre­vi­ous­ly worked for the group as CFO and, lat­ter­ly, a region­al COO. Rossiny­ol had left Dufry in 2015 to become CEO of air­line cater­er Gate­group.

“He knows the busi­ness, hav­ing worked there pre­vi­ous­ly. He has already been a CEO in its sec­tor, so he brings vision and com­mer­cial skills back to Dufry,” Baird says.

The cap­i­tal mar­kets are less con­vinced by Rossinyol’s cre­den­tials, though: Dufry’s share price fell when news of his appoint­ment broke in Feb­ru­ary.

Baird says: “To find the per­fect fit, we must look beyond someone’s CV and assess what they have achieved, as well as their nat­ur­al char­ac­ter. It’s not the case that all CEOs are adven­tur­ous and all CFOs are con­ser­v­a­tive. CFOs often take cal­cu­lat­ed risks.”

While he accepts that it’s unwise to gen­er­alise, Antho­ny Chad­wick, founder of the Alpha Vet Inter­na­tion­al group of com­pa­nies, believes that the traits that often make CFOs suc­cess­ful are unlike­ly to work in their favour when they become busi­ness lead­ers in most sit­u­a­tions. Last year he stepped aside as CEO of one of his firms, The Webi­nar Vet, to focus on devel­op­ing new­er units in the group, and appoint­ed the COO, Kathryn Bell, as his replace­ment.

“My own feel­ing is that, while CFOs can be ide­al can­di­dates for some firms, they are often con­ser­v­a­tive,” Chad­wick says. “Detail is their strong point and, giv­en their accoun­tan­cy back­ground, they pre­fer to save mon­ey, not spend it.”

Such ten­den­cies make them a bet­ter fit for a larg­er, well-estab­lished busi­ness, where­as they might strug­gle in faster-mov­ing firms that must fre­quent­ly adapt to dis­rup­tion in their sec­tor, he sug­gests.

“These younger busi­ness­es often need to be more agile and have a high pro­file in their indus­try,” Chad­wick says. “CEOs must increas­ing­ly be the voice of their com­pa­ny – to com­ment on hot top­ics and bring a larg­er employ­ee base along with them as the busi­ness devel­ops. This requires strong com­mu­ni­ca­tion skills and per­son­al empa­thy. CFOs will often strug­gle in these areas.”