Does a CFO's office befit someone who drives a Bugatti Veyron, drinks Dom Pérignon champagne, and smokes $400 cigars?
Some companies may soon find out. More than 50,000 investment bankers could be pruned from Wall Street firms in 2008, as many as 7,000 from Bear Stearns alone. And it's more than likely that some of these erstwhile Masters of the Universe will seek positions at the head of corporate-finance departments.
There is ample precedent for that kind of career shift. Many investment bankers have become CFOs, including such current finance chiefs as Richard Galanti of Costco, Robert Wiesenthal of Sony Corp. of America, David Johnson of The Hartford Financial Services Group, and Blake Jorgensen of Yahoo. (Jorgensen's predecessor as CFO, Yahoo president Susan Decker, was also an investment banker.)
There are good reasons to consider hiring an investment banker as CFO. The ability to find cheap funds in today's financial markets is one. "Alternative capital structures, alternative capital-raising strategies — it's all bread-and-butter stuff for an investment banker," says Dylan Roberts, a principal at management-consulting firm Oliver Wyman. Also, many bankers have plenty of experience evaluating merger-and-acquisition (M&A) prospects and steering global deals. Roberts says a CFO's principal functions are balance-sheet manager and strategic adviser to the CEO, and he notes that many investment bankers already fill those roles for their corporate clients.
Mitchell Gordon, president of merchant bank Morpheus Capital Advisors and a former CFO, says he was a much better finance chief for having been a banker. As CFO of container leasing firm Interpool Inc. from 2000 to 2003, "I knew when the bankers were telling me the truth and when they weren't," Gordon says. "I was able to tell in a nanosecond who had substance and who had nothing to bring to the table."
But in the eyes of many CEOs and directors, the typical investment banker is a flawed CFO candidate. Many companies want an executive with years of hands-on experience navigating Sarbanes-Oxley, other reporting and compliance issues, and complex accounting treatments. Given those needs, the typical CV of an investment banker "might be laughed at," says Terry Gallagher, president of retained executive search firm Battalia Winston.
Another concern is that investment bankers may lack some desirable softer attributes — the willingness to subjugate their ego for the good of the organization, for example, or patience. "A lot of investment bankers need the 'juice' of a deal," says Gordon. "It's as much a personality fit as anything else."
Kip Clarke, managing director and co-head of mergers and acquisitions at KeyBanc Capital Markets, says that most CFO slots don't offer the continuous action that dealmakers thrive on. Clarke himself discovered this a few years ago when he was a CFO at Inverness Partners, a private-equity group. An automotive-parts supplier in Inverness's portfolio was having cash-flow problems and consolidating manufacturing plants when the CEO and CFO suddenly resigned. Clarke stepped into the CFO spot to auction off pieces of the company and raise equity financing.
"We kept the company out of bankruptcy and paid 400 trade creditors 60 cents on the dollar," says Clarke. The situation made the job exciting. "When you're trying to save a sinking ship, you don't have time to worry about shaving $10,000 off the auditing bill," he says. But once the problems were fixed, Clarke found the routine tasks of the position "boring" and eventually passed the baton to his controller.
Mastering the Basics
Indeed, it is the ability to handle what some would call mundane tasks — accounting, taxes, risk management, cash management, and budgeting — that separates the bankers who last as CFOs from those who don't, notes Richard Lark, CFO of Brazilian airline GOL Linhas Aereas Inteligentes and a former Morgan Stanley vice president.
"To be successful, you have to embrace the debits and the credits," says Lark. "You have to be the accountant, the treasurer, all of those people at any point in time." He counsels bankers not to "jump into the public-company fire" and instead get experience at a privately held outfit first.
Not all companies use deep accounting expertise as the ruler for measuring CFO candidates. "You need the knowledge of financial reporting, accounting, and controls in the organization, but not necessarily in the CFO position," argues Roberts of Oliver Wyman.
But banking, broadly speaking, prepares an executive for only 50 percent of the responsibilities of a CFO, says Jeffrey Pribor, finance chief at General Maritime Corp. After 18 years in investment banking, Pribor landed a CFO spot four years ago — in the same city and industry, for an NYSE-listed company that he had helped take public.
Pribor had the expertise to deal with financial-services vendors and the investor-relations part of the job, but what caused sleepless nights were the things "that there aren't a good how-to manual for" and the "unknown unknowns" — the things he didn't know that he didn't know. Directors' and officers' liability insurance was one. "I had no idea how complicated D&O insurance was," he says. "The variations in coverage and cost boggle the mind. When it came time for the first renewal, I learned in a hurry."
The investment-banker-to-CFO shift can be jarring in two other respects: compensation and culture. Measured strictly on a cost-benefit basis, investment bankers may find a CFO job wanting. "Investment banking has one of the best risk-returns in the world," Lark says. "[Being] CFO is the opposite: the risk is very high, but on average the payoff is going to be lower." In addition, a CFO may have to wait years to earn the millions that an investment banker can earn in months, and even then the CFO's payout will be largely tied to the company's performance on the stock market.
Culture can pose another hurdle. As an investment banker, Mitchell Gordon was used to getting answers to E-mails in the middle of the night. But when he became CFO of Interpool, he was struck by the slow pace of the corporate-finance department. It took some adjusting — but it was his staff that adjusted, not Gordon. "Investment bankers have a better service orientation than any other professionals," says Gordon, "and that kind of service attitude can be good for any organization to adopt. My people at Interpool [ultimately] worked harder."
Some longtime investment bankers may be unable to adapt to a new workplace, especially if they come from a firm like Goldman Sachs where culture is so powerful, according to Gallagher of Battalia Winston. When investment bankers leave a firm voluntarily, they typically do so in droves and set up shops with former colleagues. But "when you peel them out on their own and put them in an established corporate culture, they have one of the highest incidences of failure," says Gallagher. For that reason alone, in searching for a CFO a company may want to stick to former bankers who have gained corporate-finance experience on some other organization's dime.
For investment bankers who successfully make the transition, it's a singular experience, says Clarke. Being in the trenches as CFO of a company in crisis made him a better banker, he says. "To be able to say I made payroll for a year and a half means I understand cash flow," he says. "To my clients, I am not just a guy in a nice suit with a good calculator; I actually understand how balance sheets move."
On the other hand, former bankers like Pribor who stay on the CFO side of the table find plenty of satisfaction. "I have as many Lucite tombstones as I need — they're in boxes in my garage," says Pribor of the trophies that investment bankers collect from M&A deals. "I prefer to spend the rest of my productive years creating value for a company and its shareholders."
Vincent Ryan is a senior editor of CFO.