The CFO, CEO, Board Love Triangle - A Matter of Judgement

What a joy to behold when the Chief Financial Officer, Chief Executive and Board have the perfect balance, clarity and robust structure of an equilateral triangle. From whichever perspective you look there is unity. Each corner giving strength to the other.  

Yet when the triangle is unbalanced, when no-one is sure what their role is in the relationship or they are jealously competing for space, then it can be as painful as a classic love triangle gone wrong. Not just for those in, or maybe half out of the relationship, but for everyone else caught in the cross-fire.  

So, what should a board look for in a CFO role? How should a CFO manage their relationship with the CEO and the Board and is the nature of these relationships changing? This short assembly of points from my latest book “Boards” https://bit.ly/2TFnoVm https://amzn.to/2PMa9RJ explores some of the issues and concludes that it is all a matter of judgement.

Lots has been written about the role. It’s far from a homogeneous one. One of the best examples of this is Deloitte’s “Four faces of the CFO”  https://bit.ly/32LZlrW   I like it because it goes well beyond seeing the CFO as simply the one who looks after the numbers or the “Minister of Hassle” doing the stuff the CEO doesn’t want to do. It has a more strategic, proactive and forward looking feel to the role. At the same time it doesn’t forget that the basics matter. The “Four Faces” “Operator”, “Steward”, “Catalyst” and “strategist” can also be easily applied to smaller organisations than those typically targeted by a Big 4 firm.   

With regards to what a board should look for in a CFO to fulfil the role it might be helpful to think of another sort of triangle - Maslow’s hierarchy of needs. 

At the base is integrity, something you absolutely need in your CFO for the organisation to stay safe and survive. Then you need them to have the relevant technical competence for the nature of the business. Management skills are then important as they will have to manage a finance function, suppliers of services and projects as well as the interaction with other functions and business units. 

Sales skills might not be an immediately obvious need for a CFO but when you think about the need to convince others of the importance of good budgeting, financial control, management of cash flow and forecasting it becomes more obvious. They will also have to be convincing with providers of finance and with other stakeholders. In major public companies the CFO will be sending a significant amount of time on investor relations. 

Whether your CFO is on the board or not they will need to have the skills to operate at Board level and to be able to interact with confidence. My general preference is for the CFO to be on the board and if you have got a CFO who hasn’t got that capability then either develop or change them. 

As with sales skills, strategic skills may not be as obvious a need. Yet if you want your CFO to be a strategic partner to the CEO and not merely a finance functionary then they will need to have a good understanding of strategy over and above financial strategy. The CFO will usually play a key role in the development of strategy. In a major public company the CFO will spend a reasonable amount of time explain strategy to investors. To do that successfully they will need to have more than just an understanding of the company’s strategy but also of strategic options and the strategies of competitors and supply chain. 

At the top of the pyramid as an optional extra are CEO skills. You may want to recruit a CFO who could be a potential successor or insurance policy for the CEO. This could be a very good approach given the typical succession horizon of a CEO and the development time for the CFO are aligned. However, if this isn’t the case then you need to be very careful as you may just simply be setting up a conflict.

Satisfying all of the above is dependent upon good judgement. High quality performance depends upon both the individual and collective judgement of the CFO, CEO and Board.

Knowing what you want is of course not the same as getting what you want. If you have read Graham Simsion’s entertaining book “The Rosie Project” you may find some parallels between finding the ideal partner and picking the perfect CFO. No surprise really because when a CEO or Board are looking for a CFO they are really trying to find a partner rather than a functionary. 

In the “Rosie Project”, an academic becomes frustrated by failing to find the perfect partner for life through what he describes as the “random walk of dating”. He decides a more scientific approach is required for such an important choice. So, he works out the exact criteria for his ideal partner in minute detail. Then conducts a search on that basis, only to fall accidentally but madly in love with Rosie who hardly meets any of his criteria and who drives him nuts. If you’ve ever heard a CEO saying they are looking for a CFO to be a peer, someone to provide challenge and be a “Ying” to their “Yang” and then watch them then go on and appoint a poodle of a CFO or reject a person who presents the very character they say they are looking for then you’ll get the parallel. 

Good non-execs or Trustees know that a critical meeting to have before you decide to commit to a role is the one you that you have with the CFO. I always like to start these discussions, after the pleasantries, with that trusty old favourite: 

“As I haven’t been on a Board in this sector before it would be incredibly helpful if you could just talk me through the financial dynamics of the organisation.”

One memorable response to this was:

“Sure. Probably the best way to do this is to take you through our income statement so you can see the make-up of our income and key costs, then look at the annual cash flow cycle, followed by looking at the major items in our balance sheet. Finally, I think it is important that you understand the principles by which we manage the finances of the place.“ 

It was a brilliant answer, calm, clear, confident, clear and detailed. Exactly, what you want from a CFO. The best bit though, was yet to come. Over the next hour or so using a combination of her monthly financial dashboard and the Annual Report she described these things in stunningly simple terms (i.e. Ones that I could understand). 

The “Talk me through the financial dynamic” question is useful not just in the context of due diligence but also when you are hiring CFOs or as part of the induction for new board members. If the CFO can’t do this then it isn’t your problem it’s theirs. For a CFO to be successful they have to be able to explain the way the finances work whether you are a financial person or not. I always use this question and it is best deployed with no advance notice. This combined with the selection panel carving up the job to ensure that you have the right blend of other characteristics usually does the trick.

From the CFO’s perspective managing their relationship with the board is complex. The CFO has to use their positional and personal power wisely. Being and being seen to be independently minded at the same time as being one of the central players in the executive team and a partner to the CEO can be straightforward with a wise and able CEO. Yet it can be really tricky with an insecure and or less able one. 

Respecting and managing difference is at the heart of the CEO/CFO relationship. Good CEOs know this and focus on it knowing that a high performing CFO will boost their own performance as well as the rest of the organisation’s. When a CEO and CFO have a high degree of self-awareness and genuinely value their differences and behave like peers it is likely to be more successful. When they don’t but are simply irritated by each other’s characteristics then it really can be quite painful. 

My worst experience of seeing this sort of pain is described in “Boards” with a little example, “No more Mr Bean” To cut a long story short the CEO in it had developed the appalling habit of calling his Finance Director “Mr Bean” (the bean counter) at board and other meetings. The FD had tolerated this but uncomfortably so and others had let it pass. As a newcomer I was able to point out in private to the CEO that this made him (the CEO) look ridiculous. That he was highly unlikely to get any further investment if he carried on like this as it was clear he hadn’t built a team he respected. After all if he didn’t respect them it was either that they weren’t very good and he had chosen poorly or there something wrong with him. He was stunned and had never thought of it that way but got the message. 

The Chair on behalf of the board will play a key role in supporting the development of a strong bond between the CEO and CFO and with the Board. They need to encourage both CEO and CFO to enable the CFO to play the fully fledged role and if they haven’t got a CFO that is capable of that or is operating in too subservient a manner  then the need to encourage the CEO to deal with it. Another dilemma I have described in “Boards” is called the “Radio Controlled Accountant”. Probably doesn’t take too much imagine to figure out what it’s about. 

The financially oriented independent director or trustee also plays an important role, especially if they are Chair of the Audit and Risk sub-committee. They can be a tremendous support to even the most experienced of CFOs and help in coaching them and the CEO on building the right relationship with each other and the Board. 

With regards to the matter of whether the nature of these relationships is changing?  Yes, I think they are and in a number of ways. 

Firstly, with respect to the role itself. Expectations on CFOs as with other C-Suite roles have been rising. The shift in title from Finance Director to the grander Chief Financial Officer has also raised expectations. 

Greater uncertainty and complexity are making the job more fascinating and ever more challenging, especially when it comes to forecasting. Dynamic budgets, lock step approaches to investment and the intertwining of supplier and distribution channels also add to the mix. Expectations in terms of the speed with which financial information should be available as well as the transparency and accessibility of it are also having an influence.

Whereas once the CFO was “The” source of numbers and analysis for others, the rise of Big Data, Artificial Intelligence and algorithmic tools means that others, for example the Chief Information Officer, Chief Operations Officer or Communications Director, are producing and sharing insights of equal interest to the CEO and Board. 

In summary, every Chair knows that they have to be a “Triangulator” and not only have the right people in the CFO, CEO and Board roles but also have them working together in a way that has the beauty and strength of an equilateral triangle avoiding weakness on any side.  Achieving this depends on the quality of their judgement and that of the CFO and the CEO as well as the rest of the Board.