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CFOs Should Not Necessarily Be Promoted From Within

Logic would suggest it's the best choice, but is it?

25Oct

In 1978, less than 10% of major companies in the US had CFOs. Now, more than 80% employ someone in the role. During this time, the role has expanded significantly in scope. In a survey by EY, around one-third of CFOs said they play a major role in the development of organizational strategy, and 75% of respondents said they spend 50% or more of their time on strategic aspects of the role. This shift has meant a different set of skills is required, and organizations are subsequently looking to different backgrounds, rather than purely those with a strong accountancy background as before.

This shift appears to have led companies to look towards promoting CFOs from within as opposed to externally. According to Korn Ferry, which studied the C-suites of the 1,000 largest US companies by revenue, in 2015 and 2016, 59% of the CFOs appointed by the 1,000 companies were promoted from within - a 51% increase over the four prior years.

This is largely because a strategic CFO needs to work closely with the CEO and serve as their partner and sounding board for any questions and doubts. There is a strong argument to be made that a CFO promoted from within will have a stronger relationship with their CEO. CFOs and CEOs’ need a strong bond of trust, and this is going to have been built up over time. The CFO will need to understand how the CEO communicates so they can have a transparent and honest dialogue. Again this will develop over time. They also need to share a vision of where the company is going, which the CFO is likely to understand better if they have been at the company for a while.

Logic would dictate that all of these things are achieved by promoting from within, and experience at many large global organizations would suggest that it works. For Luca Maestri, CFO of Apple Inc., was vice president of Finance and corporate controller before he was appointed CFO of Apple Inc, and worked his way up to CFO of GM’s European operations from within the company. Amy Hood, Microsoft CFO worked her way up from within the company, having served as chief of staff in the Server and Tools Business as well as running the strategy and business development team in the Business division. Anthony Noto, Twitter’s CFO and COO, was an external hire, having joined from Goldman Sachs. He had, however, built up a strong working relationship with Dick Costolo having been the main banker with the firm when Goldman served as lead underwriter in Twitter’s 2013 IPO.

But this logic is not actually supported by the evidence. In a survey by Russell Reynolds, 52% of CFOs internally promoted reported having very strong relationships with their CEOs, yet the amount of those hired externally who said the same is not far behind at 48%.

It is also suggested by what CEOs say they want. In another recent study by audit, tax, and advisory services firm KPMG, which surveyed 549 top executives around the world, almost half of CEOs worldwide listed ‘global experience - not just a global perspective - as the most important attribute a CFO can possess.’ A further 45% of CEOs said it’s important for CFOs to get non-finance experience. Of course, these candidates could have picked these skills up within the company, but it is certainly likely to narrow the pool. 

It is not just the CEO that CFOs have to maintain a close relationship with, though. For the CFO to operate effectively in today’s business environment, they need to work closely with everyone across the C-Suite. IT and finance functions both have a large footprint, impacting on some 80-90% of most organizations’ daily operations, and the CIO and CFO must also share a strong partnership characterized by mutual understanding. The same goes for the CSO, who they must work with on strategy, the CDO, to pool data know-how, and so forth. There is also a strong argument to be made that a CFO who has made at the company through various different levels of seniority will be better to placed to innovate, with a firmer grasp of all the processes and where areas can be improved. Equally though, a CFO from outside will be able to view processes more objectively. They will not be tied to the way things are done as they will have played no part in their creation. With no sense of ownership, they should be more capable of cutting them.

The truth is, there is no one size fits all approach to hiring a CFO. While organizations clearly benefit from having a tight-knit CFO/CEO combination, this does not necessarily come from having a pre-existing relationship, although experience at large companies would indicate that their CEOs believe it does to some extent. At smaller companies where the right candidate is harder to find from within, it is just as essential to make sure that both CEO and CFO are on the same page when it comes to the company's direction and their philosophy for getting there. 

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