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When the CFO departs, who steps up?

Every company needs an established talent pipeline to fill the gap when its CFO leaves. But new research from CFO Dive finds that the role — and the way it is filled — is evolving.
Kendall Davis/CFO Dive

COVID-19 could be ushering in an age of surprise transitions among finance chiefs. CFOs, weathering the storm and bringing their companies to a point of stability, may look to cap off the experience with a career change, or even consider retirement.

If that trend pans out, rising stars in companies' finance and accounting ranks, who bring strategic and operational experience with them, could be the ones who benefit. Based on research by CFO Dive, most departing CFOs are replaced by someone from their own team, groomed and ready to go.

"We're seeing many surprises in this current environment," Peter Crist, chairman of executive recruiter Crist|Kolder Associates, told CFO Dive. "In the next two to three years, we'll see a bunch of surprise retirements. People in their late 50s and early 60s will say, 'You know, I've been in this chair a long time; I'm going to go early.' We think there will be demands on companies to have a successor ready."

Fewer succession plans

Given the importance of the CFO to both public and private companies, few things are more sensitive than the timing of their departure. That makes succession plans critical to company stability, and yet because of the quickly changing nature of the CFO role, with its increasing focus on strategic planning and operations, many companies are managing CFO transitions without a clear plan.

"All the emphasis on succession planning is really focused on the CEO," Shawn Cole, president and founding partner of executive search firm Cowen Partners, told CFO Dive. "The other C-suite positions are often left by the wayside."

Although companies appear to be operating less frequently with formal succession plans for their CFO, internal staff appear to be the most frequent beneficiaries, particularly in large companies that have the resources and personnel depth to give team members experience in a variety of roles to assume the top finance job.

"Large companies, like those in the Fortune 500 and S&P 100 have a deep bench," Crist said. "They can house their next CFO in a variety of roles. They can put that person in the controller chair, treasurer chair, group finance chair, or general management chair, and then promote them to CFO."

A look by CFO Dive at a sampling of 50 recent CFO transitions bears this out.

Of the 50 CFOs analyzed, more were hired internally than externally

Each square is a company with a new CFO, categorized by whether the CFO was an internal or external hire. Hover over each square to see details.

Each square is a company with a new CFO, categorized by whether the CFO was an internal or external hire.

37
internal hires
13
external hires
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Data come from a random sample of 50 CFO transitions from August 2019 to May 2020. For a list view, see the table at the end of the story.
Nami Sumida/CFO Dive

In the vast majority of cases — 75% — an internal hire, usually from the finance or accounting team, replaces a departing CFO. In CFO Dive's research, 37 CFO replacements were internal hires, compared to only 13 who were external hires. Of the internal hires, 26 (about two-thirds) came from finance or accounting — presumably those with strategic or operational experience to supplement their finance and accounting skills.

In CFO Dive's research, most of the finance and accounting staff to take over were controllers (5), treasurers (4), and accounting officers (3).

Others getting promoted to CFO were FP&A chiefs or worked in another finance capacity. Seven of them served either as deputy CFO, vice president of finance, or head of corporate finance.

But even while the majority of those companies studied involve a more traditional internal matriculation, the trend is evolving, and companies want executives who are well-rounded. "A VP of finance, with some sort of technical accounting background is a nice mix of finance, accounting and operations," said Cole. "People want someone who's been in the company and enterprise, who can communicate well, and can move the dial with their teammates, instead of being in the corner collecting data," he said.

"In the old days, people went into the CFO role with heavy accounting and technical skills," said Crist, who has worked in executive search management for nearly 45 years. "Today, less than 50% of CFOs in America are CPAs. We're moving away from that accounting background, and into strategy."

Of the 12 internal hires who weren't from the finance and accounting teams, only two were COOs, which is consistent with recent trends in which fewer companies have COOs, those duties often being handed over to CFOs.

According to Crist, only 10% of companies have a COO today.

"Without the COO, the CEO and CFO become the number 1 and 2 running the business," Christ said. "They're who the board sees in every meeting. All of this has augmented the CFO role, and made it far more complicated within the corporate structure."

Interim posts

In the liminal space between departing CFOs and hiring their replacements, companies often turn to a more temporary fix: an interim CFO, usually from within the finance department. Both Cole and Crist agree the interim finance chief is unlikely to keep the title.

"Off the cuff, their chances are around 10%," Cole said. "If a private equity firm is involved, they're looking for change agents. I think that's part of the decision-making. Perhaps they're thinking, 'This is our opportunity to get someone new, with fresh eyes.'"

If the CFO is leaving because they were underperforming, Cole points out, the board likely assumes the finance team is underperforming, too. This may lead to the inflated numbers of external hires; a "one bad apple" dogma.

Crist said many clients ask his company if they should appoint an interim CFO. His answer: If the client believes there's someone really good inside who might actually still be your CFO pick after a thorough search, he advises putting that person in the interim chair, as a de facto audition for the board and investors.

Of the internal hires, few were given interim CFO positions

The number of CFOs who were hired as interim positions, compared to internal hires and all new hires studied

Data come from a random sample of 50 CFO transitions from August 2019 to May 2020.
Nami Sumida/CFO Dive

"The longer you serve as the interim, the higher the probability you'll be the CFO," Crist said. "But in many cases, the companies stick someone in the interim chair who's technically proficient, but not a leader. They just want to make sure the books get closed while they look for someone from the outside."

The longer you serve as the interim, the higher the probability you'll be the CFO. But in many cases, the companies stick someone in the interim chair who's technically proficient, but not a leader.

Peter Crist, Chairman of Crist|Kolder Associates

While there's a higher probability these days of an internal person becoming CFO, Crist doesn't put it over 50%; he approximates the chances to be one in three.

"Some companies look at the CFO as the silver bullet," Crist said. "They know they need someone who can do more than finance. And the complexity of the role, and how it's used: these are some of the fundamental reasons they don't stick around longer than five years."

The heightened importance of the CFO role can put pressure on companies not to lose their up-and-coming finance and accounting talent to other companies.

Says Crist: A recruiter could get to them and say, "Why wait? Go be CFO of another company today." And many will agree to do so.

Future trends, future CFOs

In his near-five years at Cowen Partners, Cole looks at the company's culture when predicting what they do next. "It really depends on the organization's values," he explained. "If they're a conservative, privately held company, maybe they'll have a succession plan, because that CFO is a long-term employee. But if it's a private-equity owned organization, there's really no CFO succession; the CFO is largely disposable."

Of the 12 external hires replacing the CFO, all but two were finance people from other companies, and most of those (8) were CFOs. Of the others, one was a controller, one was an auditor, and the other was a vice president of finance. Of the two who weren't from finance, one was a CEO and the other was a program head.

If it's a private-equity owned organization, there's really no CFO succession; the CFO is largely disposable.

Shawn Cole, President of Cowen Partners

Crist added most companies no longer have CFO succession plans because the very profile of the CFO is unrecognizable from past iterations. Additionally, Crist noted the steady disappearance of the COO role, which has largely given way to the CFO-COO; only 10% of companies currently have a COO onboard.

"This is an important observation, because without the COO, the CEO and CFO become the number 1 and 2 running the business. They're who the board sees in every meeting. All of this has augmented the CFO role, and made it far more complicated within the corporate structure," Crist said.

With the role evolving in real-time, the CFO's ideal traits are increasingly difficult to pinpoint. Crist declined to name an ideal candidate, citing the breadth of duties the CFO is now expected to carry out. However, he mentions that in the last ten years, the phrase 'operating finance' has been top of mind for companies searching for their next finance executive.

"Let's say there are 10 traits CFOs need," Crist said. "That list includes accounting experience, operating finance experience, strategic planning experience, IT knowledge, and so on. A company ranks all of that by what they want most, and, usually, operating finance is the number one item, followed by finance function skill sets, and strategic thinking."

Not to be overlooked, finance chiefs increasingly see the CFO role as the last rung to climb before they arrive at the top. The last three CEOs of American Airlines have come from the CFO chair, Crist points out, drawing attention to the obvious endpoint of the CFO hiring process: the glimmer of hope that this #2 job might eventually step into the CEO's shoes.

Appendix

Here is a table of the 50 companies included in this story.

Company
Industry
Departing CFO
New CFO
Credits
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