CFO succession planning: how to prepare

From WSJ: As many boards acquire greater responsibility for risk oversight, the task of selecting CFOs and planning for their succession is gaining more attention in the boardroom. Bryan Proctor, head of the Financial Officer Center of Expertise at Korn Ferry, discusses the market and boardroom dynamics driving greater board involvement in the CFO hiring process, and explains what boards often look for in CFO candidates, including their potential to assume the role of CEO. He also offers insights on boards’ expectations of current CFOs to help develop their finance talent to succeed them as future CFOs.

Q: Why is CFO succession becoming more of a top-of-mind topic in the boardroom these days?

Bryan Proctor

Bryan Proctor: There are a few dynamics at work. As the role and profile of the CFO has grown over the last eight or nine years, boards have become more aware of how CFOs create value for the company, and they’ve become more sensitive to the risks of losing someone in that important value-creating role. At the same time, boards’ increasing focus on risk has led them to recognize that next to a CEO departure, a change in CFO is the biggest talent risk for an organization.

Naturally, that has made CFO succession a bigger discussion in the boardroom. A sudden resignation or departure of the CFO is a distraction to the organization, both internally and externally. CFO departures tend to have the second-greatest impact from a Street standpoint, causing analysts to ask why the person is leaving and whether there are any issues surrounding it. If the organization is well prepared for a sudden departure with a strong CFO succession plan in place, then that enables a decision to be made on whether to bring someone in from the outside or promote from within in a relatively short period of time. When this happens, it sends a message to the Street that management and the board are well prepared to mitigate that risk and have a clear understanding of what they want in a CFO.

The recognition of the risks associated with a CFO departure has accelerated recently due to a number of instances in which organizations have been caught flatfooted by an unanticipated early retirement or resignation by their CFO. Not only has CFO turnover increased lately, but so has the proportion of early CFO retirements. CFO turnover among the top 500 U.S. companies rose from an average of 12.2% between 2010 and 2012 to 19% in 2013, according to Korn Ferry research. The rate in 2014 was approximately 14%. Meanwhile, one in five retiring CFOs since January 2013 was age 55 or below, compared with just one in ten in the previous three years. Many of those early retirees were not in their roles long enough to fully develop their successors.

Q: How much of the board’s interest in CFO succession has to do with CEO succession planning?

Bryan Proctor: We’re finding boards are increasingly interested in whether the next CFO has the potential to be a successor to the CEO, particularly to the extent that there is a significant supply deficit of individuals who can fill these super-CFO roles.

It’s not always practical to think the CFO has the capabilities to become CEO, but boards want to have as many options as possible. If an individual being promoted or brought into an organization to fulfill the CFO role has the potential to succeed the CEO down the road, boards find that attractive.

Although the percentage of CFOs becoming CEOs has been flat at about 7.5% since 2010 for the top 500 companies in the U.S., we’ve witnessed an increased number of CFOs who are on the short-list for succession.

Q: In practical terms, how has this heightened attention to CFO succession translated into greater board involvement in the process?

Bryan Proctor: We’re seeing varying levels of involvement from boards, from courtesy phone calls with a finalist CFO candidate by the audit chair, to involvement from the outset in reviewing and interviewing candidates, whether internal or external. Boards are beginning to take what they’ve historically done with CEOs in terms of their responsibilities for succession planning, candidate assessment and selection, and applying that to CFO succession. The CFO’s succession ultimately is the responsibility of the CEO, but it’s the board’s responsibility to advise and oversee the activities of the CEO and the entire management team. While boards still expect the CEO to lead the process, they do want more transparency and a greater level of comfort around who will be the next CFO.

An emerging leading practice is to have as many board members as possible involved upfront in defining the priorities of the role, because the CFO position is often shaped by where the company is going—not where it has been. Both management and boards want to make sure there is alignment between the company’s strategic priorities and what the incoming CFO will contribute to achieving those objectives.

Q: What do you see around board involvement in talent development for preparing future CFOs?

Bryan Proctor: Boards are asking for more exposure to the depth of talent on the finance bench. They want to have a clear understanding of the assessment and development of internal CFO candidates. Historically, they have not always had a lot of exposure to internal candidates or enough information to evaluate them until there’s a need. By that point, the organization may have started to consider external candidates. I think we’re reaching the point where CFO succession planning and bench development will be a big part of how boards evaluate current CFOs.

Boards can help advise and maybe even offer some opportunities for future internal candidates to gain exposure to the board. Those individuals who are regarded as future leaders within the organization are oftentimes tapped to present or have a dialogue with the board or a specific committee. This gives the board an opportunity to get acquainted with the layer of talent below those who are normally presenting, and hopefully a greater level of comfort and maybe confidence around the future leadership for the organization.

In addition, boards also want a better understanding of potential external candidates. They’re asking for a pulse on what the market has available in talent— not just now but three and five years out, and what trends and shifts are occurring in terms of best-in-class CFOs.

Q: How might the board assess and evaluate CFO candidates differently than a CEO?

Bryan Proctor: Boards are generally aligned to what the CEO is looking for, but they tend to be especially focused on fit with the CEO; how well a candidate complements, yet productively challenges the CEO. Then they consider whether the CFO candidate can be a trusted business partner and highly credible with key stakeholders―Wall Street, investors and sometimes customers, as well as with other members of management.

Boards will also look at CFO candidates’ abilities to articulate a point of view, both to the board and externally, as a strong spokesperson for the organization. For instance, whether or not the candidates have experience or exhibit capabilities in managing investor relations and capital markets. And finally, of course, the question of whether a CFO candidate has the potential and qualifications to be a future successor to the CEO.

Editor’s note: This article is part of an ongoing series of interviews with CEOs, CFOs and other executives. Mr. Proctor’s participation in this article is solely for educational purposes based on his knowledge of the subject, and the views expressed by him are solely his own. This article should not be deemed or construed to be for the purpose of soliciting business for Korn Ferry, nor does Deloitte advocate or endorse the services or products provided by Korn Ferry.  

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