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Why We Should Keep Our CFOs Boring

If you're looking for a risk-taking CFO, you need to take care

22Feb

People in finance have, historically, been taught not to take risks. Risk-taking is for CEOs, who are always on the hunt for new opportunities to exploit. CFOs are there to ensure that these risks are managed carefully so as not to destroy the company. They are realists, adding a healthy dose of pragmatism to balance out the CEO’s idealism.

However, this is changing. The pressure on the CFO to drive growth from a strategic position means that they are now forced to take more risks if they are going to meet expectations. This doesn’t just necessitate new skills, it requires a whole new mindset.

Such CFOs are not easy to find. When looking to hire a new CFO, most companies look for an experienced figure, and it can be difficult for those of the seniority required to suddenly change their attitude. It is also a gamble, with risk-takers shown in numerous studies to be more willing to operate unethically and color outside the lines.

It is vital to understand how far your CFO is willing to go and strike a balance. Judging this balance, however, is not easy. One way of doing it is to take a deeper look at a candidate’s personal life to build a fuller picture of their character. But does a lack of ethics in someone’s private life necessarily translate into their professional career? Many companies operate with a policy in their finance function that if someone is unable to control their own finances, they are hardly going to be able to take control of other people’s. Many finance companies subsequently run credit checks before hiring someone. Should candidates face similar treatment for any transgressions in their personal life?

The danger of having a CFO who conducts their private life in a manner society would consider unethical was evidenced in a study published last year of Ashley Madison users - the online dating service for marital affairs - by academics at the University of Texas at Austin and Emory University. They looked at 9 CEOs, 31 CFOs, and 104 other top executives who were exposed as Ashley Madison (AM) paid users by hackers calling themselves ‘the Impact Team’, who released a full database of more than 30 million of the site’s users across more than 40 countries, both present and past. Their findings strongly pointed to a close relationship between personal and professional ethics, with 9% of Ashley Madison CEO/CFOs revealed to have faced a class action lawsuit compared to a 3% frequency for all other CEO/CFOs. Furthermore, 7% of AM-using CEO/CFOs had a financial restatement, compared to a 2% frequency for other firms. In total, 12% of CEO/CFOs who had used the site were found to have committed an infraction of some kind, compared to a 4% frequency for other firm-years. The study concluded that, ‘These differences are all statistically significant with standard errors clustered by firm.’

Ashley Madison users are demonstrating a clear tendency to take risks. NPR's social science correspondent Shankar Vedantam noted that, ‘You can think of Ashley Madison in terms of ethical behavior, but you can also think of it in terms of risk-taking behavior. You're taking a risk with your marriage, for example, if you go looking for an extramarital affair. If the same risk-taking behavior also shows up in other domains of your life, it can have negative effects, but it can also have positive effects.’ He pointed to another study which looked at 47,000 Ashley Madison users who weren’t senior management but had, stupidly, used their work email addresses. The study looked at the companies they had worked for and whether they were more or less likely to engage in various kinds of risk-taking, again finding that risk-taking in one domain strongly correlated with risk-taking in other domains.

This raises some other interesting questions. In an age where we record every aspect of our life on social media, it is easy to get an idea of someone’s personal activities from simply looking at their Twitter feed or Facebook profile. And a CFO willing to bend the rules is going to have an impact throughout the function. In an interview last year with Fraud Magazine, disgraced former Enron CFO Andy Fastow cited corporate culture as a major contributing factor for the illegal practices that led to the company’s bankruptcy and the imprisonment of several of its senior management, including him. When asked what the tone at the top was like, he noted that:

‘I think it was a bad corporate culture. People were incentivized to do the wrong things, and senior management, including myself, set very bad examples by the decisions we were making. At Enron, we had the best mission statement and code of conduct and all those things that look great. We had a great human resourcing department that churned this stuff out, but we had an incentive system that incentivized people to do transactions that were good for financial reporting purposes but bad for the long-term value of the company. And we had senior executives, like myself, who were doing deals that sent a bad ethical message.

So, you could tell people to be ethical, have beautifully written statements about company values and all that, but you have a CFO who does a deal that's intentionally misleading to the outside world. You have to remember we hired the brightest, most ambitious young people, and they were smart enough to figure out what the CFO just did. And so, despite your corporate code of conduct and your code of ethics, those people saw that this guy became CFO, and he is incredibly misleading. So they decide, ‘I’m going to be misleading. I will be misleading to the people I work with and to my customers.’

So, what the top does is very important, and they should assume that the people who work for them are smarter than they really believe. It's like every generation doesn't realize their kids are a lot smarter than they are, and can outsmart them whenever they want, and top management should understand that their employees see right through them.’

Enron is an excellent example of senior managers who took risks in their private life taking huge, often criminal, gambles at work. The company was notorious for its getaways, with Alex Gibney’s excellent documentary, ‘The Smartest Guys In The Room’ showing employees led by the CEO partaking in extreme sports and frequenting strip clubs.

CFOs operating in today’s business environment may need to take more risks, but it is an incredibly fine line, especially with so much regulation now tying up the finance function. It is up to companies to establish their own comfort level when it comes to investigating the personal life of candidates and employees, and it could be argued that the actions of a few bad apples does not mean so many should have their privacy invaded. However, the damage done can be devastating, as it was with Enron, and if a person’s personal life really does reveal so much about how they are likely to behave at work, can you afford not to look into it?

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