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The Confidence Factor

by Peter Santora and Dean A. Yoost

Chief Financial Officers already sit at the right hand of CEOs, overseeing a domain that now extends beyond tax, treasury and financial reporting, into risk mitigation, asset optimization and operational performance metrics.

If only the CEO was the only person demanding more of the CFO. In fact, board audit committees have stepped up their reliance on the CFO as well. CFOs who don’t earn the confidence of the audit committee can be certain about one thing: those directors will be pressing for a change at the top of the finance function.

Among the 1,000 major U.S. companies that Korn/Ferry International tracks, the CFO turnover rate has been about 12 percent in recent years—down from the height of the financial crisis years. But overall, CFO tenures appear to be shrinking—and are now almost equivalent to CEOs.

Last year Korn/Ferry saw a jump in external CFO hires—indicating companies’ increasing willingness to change leaders as they shift strategic gears.

The complexities of globalization, rigorous securities legislation, and amplified disclosure regulations are among the primary forces driving a more engaged audit committee. “There has been a substantial increase in the demands and expectations of audit committees—and a substantial increase in what’s expected of the CFO,” said Kenneth Daly, the president and CEO of the National Association of Corporate Directors. Boards are growing more judgmental and discerning, in particular, about the quality of the data they receive, he said.

The audit committee often views the CFO as the conscience of the company—and expects balanced and honest assessments of forecasts coming from business units. The committee also expects superior business acumen, a deep understanding of industry and market dynamics, and a strong grasp of all the details, says Leslie Heisz, the chair of the audit committee of Ingram Micro. “How can a CFO tell us that the company’s assets and liabilities are fairly stated and at the same time not be intimately familiar with the operations and financial controls that impinge on the statements?”

Audit committee members tell us that CFOs, as the leading financial officer of the company, should not just meet expectations, but excel in key areas. These include:

The board gets not only accurate and timely financial data, but receives that information in a format that the committee wants and understands, including commentary explaining the drivers of the business. Not every member is a finance expert, after all.

The CFO not only presents sound financial information, but also responds to committee inquiries in a comprehensive and forthright manner.

Key risks are identified and reflected in the statements, so that the audit committee clearly understands the aggressiveness or conservativeness of accounting policy choices and application.

The CFO exhibits strong management skills and leads a solid team—including the controller, chief accounting officer, treasurer, director of financial reporting, and director of investor relations—so that the committee is sure that internal controls and external audit processes are robust.

The CFO must have a strong look-back ability to identify patterns, yet be able to forecast issues on the horizon such as possible liquidity concerns and refinancing opportunities.

Mohan Gyani, the chair of the audit committees of Safeway and Union Bank, says he expects the CFO to be the committee’s “eyes and ears”—the go-to resource for company information. Audit committees tend to feel most confident in those CFOs who communicate with them actively and frequently.  Ongoing informal communications, committee member say, are more important than presentations at committee meetings. The most successful CFOs actively cultivate relationships with the audit committee chair and members to build trust. The less formality in these relationships, the better.

But “informal” doesn’t mean thin on meaning. Jim Palmer, the CFO of Northrup Grumman, believes that the CFO must facilitate “an environment which breeds clear and consistent communication with the audit committee, ensuring responsiveness to the committee’s agenda and addressing the most significant issues substantively.” CFOs should be prepared to deliver high-quality and strategically insightful reports quickly if needed.

Bala Iyer, who chairs the audit committees of Life Technologies and QLogic, says that today, any large organization needs a CFO with a broad business background. “The CFO needs to know about global trends, financing, accounting, reporting matters, legal concerns, and regulatory and legislative areas,” he says. “Increasingly, the CFO is also heavily involved in investor communications, corporate risk, strategy and mergers and acquisitions.”

Korn/Ferry research has shown that successful executives are most often identified and developed within the organization. However, the type of cross-training that would create the broad CFO Iyer recommends still isn’t common in finance functions. This often results in searches outside to find the “best athlete” to fill the CFO position.

That’s when audit committee’s varied needs and expectations start to coalesce. There is no one-size-fits-all CFO skill set, though a solid foundation in technical accounting and finance is assumed. In addition to the communicativeness, thoroughness and integrity outlined above, audit committees want CFOs who are strategic thinkers and operation leaders, and who bring global perspective, risk awareness, problem-solving experience. They want someone who they can trust to be a strong first line of defense, especially if anything goes awry.

Filling this bill isn’t easy. But it’s good advice for CFOs who don’t want the next job opening to be their own.
Peter Santora is a Managing Director and a Senior Client Partner within Korn/Ferry International’s Financial Officers Practice. 

Dean A. Yoost is the Founder and Executive Director of the Audit Committee Roundtable of Orange County California, and a member of four boards of global companies, serving the audit committees at each.

Topic tags: audit committee, board of directors, Chief Financial Officer, corporate governance


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