They might be the second-most important executives at many companies, but the role, demands and make-up of the chief financial officer vary immensely, as do the times—and the reasons—companies find themselves looking to hire a new one. For small- and mid-cap companies, there often comes a point when they “outgrow” their top financial executive and need to recruit their first CFO, someone who can do more than sign-off on the books every quarter. Larger companies continue to grow and evolve, and that can trigger a change. Or maybe your current CFO just up and leaves for a better engagement, CFO, CEO or otherwise.
In every case, companies should see it as an opportunity to deepen their bench strength, maybe even bring in a star. Bear in mind, today’s top-drawer CFO needs to deal with a lot—handle the crush of the public markets, steer the company through major acquisitions, come up with innovative financing schemes and serve as a reassuring information conduit for analysts and large investors. As a rule, of course, the bigger the company, the more critical and demanding the job and, with it, the skill set required.
The CFO position is a hiring decision that needs to include input from the board, says Samuel Dergel, a specialist in CFO recruitment for Canadian and U.S. companies, with search firm Stanton Chase International of San Francisco. “The board should have a role, often it is the chair of the audit committee.”
In fact, some boards may be especially motivated to hire the “right” CFO, says Dergel. “Many times a CFO is hired with the idea that they are the back-up to the CEO, or sometimes you may have a cowboy CEO and the CFO is the eyes and ears of what is going on” for the board.
He points to the scandal at SNC-Lavalin Group Inc. (TSX:SNC) over $56-million worth of undocumented payments to commercial agents in Libya that have gone missing. The company’s CFO reportedly objected to the payments but was overruled by the CEO, who has since left the Montreal-based engineering giant. “From a board perspective, do you want the CFO to be the CEO’s right hand or having enough independence and power to counteract a CEO that may not be meeting with the board as requested?” says Dergel.
In Dergel’s decade of CFO recruitment, he has found that most firms have a wish list of abilities and specialized background for their future CFOs. That was certainly the case with Vancouver’s Avigilon Corp. (TSX:AVO), which designs and manufactures high-definition video surveillance systems. The company’s original CFO, who was a founder of the company, made it known that he would stay in the post until the company went public at which time it would search for a replacement. The board’s wish list was a finance head who had public company experience, was a chartered accountant if possible, had been in a fast-growing company and had been in the technology sector.
Avigilon’s new CFO would also be expected to take on some CEO-like duties, says Murray Tevlin, a director and chair of the compensation and corporate governance committee as well as employment lawyer, who was heavily involved in the process. “We wanted a very good communicator, someone who could make a really good oral presentation and make a really linear written presentation because we are a public company now and the CFO is going to have to make important presentations.”
Avigilon went public last November and had identified and hired its new CFO by January. That’s warp speed for most companies, but not for one with a stated objective of growing revenue to $500 million from $60 million today in the next five years.
Their hiring process was unique. Tevlin hit on the idea of having CFO candidates create a presentation to all the senior management and directors on the topic of the first 90 days in the role of CFO at the company. “I thought it was very effective, I have never done that before,” says Brad Bardua, the applicant hired as Avigilon’s CFO in January. “You will see the person in action; particularly in a public company you will see their presentation style, but you also see how they are able to think on their feet in a real-world situation.”
Bardua not only aced his presentation, he had all the qualifications on the directors’ wish list. He’s a CA, had tech experience as CFO of Pacific BioEnergy Corp., and a fast-growth background as the former CFO of Gateway Casinos Group which raised annual revenue to $250 million from $80 million in a short timeframe.
Most of the work of the CFO and his or her team goes unnoticed by investors or even directors. That said, CFO departures are always noted. “The turnover of the CFO is often times going to be a danger signal to the marketplace. You really have to ask yourself why is the CFO leaving unless it is clearly evident that the CFO is leaving for a better position,” says Allan Foerster, a former CFO and founder of CFO 2 Go, which acts as the finance department for emerging technology companies in southwestern Ontario.
This February, for example, Manulife (TSX:MFC) made one of those worrisome moves, announcing CFO Michael Bell was leaving, a departure widely interpreted in the press as a negative for the insurer. The news was “buried”—according to The Globe and Mail—in a press release about its fourth-quarter financial results, a period in which Manulife took a large goodwill charge of investments and lost $69 million. Manulife said Bell was leaving to be with his family in the U.S.
Manulife would have known investor reaction would not be positive no matter the explanation. National Bank Financial analyst Peter Routledge described Bell as “integral” to Manulife’s interest-rate and equity-market hedging strategy and had made its often-complex financial results more transparent. “Because of the magnitude of Manulife’s progress on these fronts during his tenure, we believe his departure is a central contributor to the sell-off in the stock this morning,” he said in a research note on the day of the announcement.
For the record, Manulife’s stock quickly recovered and actually gained ground during most the period of the search for Bell’s replacement. And in early May, Manulife announced its new CFO is Steve Roder, an English chartered accountant with CFO and other financial experience in Asia.
In general, the move to a firm like Manulife—a major financial institution—is like getting to the major leagues for a CFO. Some CFOs do become CEOs (in a recent tally, about 15% of Fortune 500 CEOs had CFO experience), but according to Foerster, career-wise, the “prime real estate” for CFOs is in the banking sector. Recent recipients of the Canadian CFO of the Year award would seem to bear that out. “They are all coming from the financial services sector,” says Foerster. The winners’ list includes the CFOs of Royal Bank, Bank of Montreal and, most recently, TD Bank. “It also speaks volumes as to why Canada’s banks have weathered the financial storms so very well, because they have had that financial leadership.”
The 2012 CFO of the Year, Colleen Johnston of TD, says the CFO role has changed at all levels. The CFO is no longer part of a “supporting cast,” but one of the “drivers of shareholder value.” She points to the annual planning job her department carries out, which starts with deciding on the end goal and working back from there to figure out how to achieve it. “I never go out to an investor and say, ‘Well we exceeded our plan.’ They couldn’t care less. What they want to know is, ‘How have you done versus your peer group? How are you performing?’”
For small- and mid-cap companies, meanwhile, the CFO’s challenge is to act like he or she is in a much bigger organization, and not only be able to quantify past performance, but help predict, and attain, the future. “It is not the traditional bean counting role that it used to be,” says Avigilon’s Bardua. “A good CFO brings a balance of the technical but also the business acumen and strategy.”
Slider photo: Financial Executives International Canada