Pick up the business pages of any newspaper and you’re certain to see photographs accompanying some PLC’s results announcement. The pictures will invariably show two people – CEO and FD. Guess who is in the foreground, and who is playing the supporting role.
These pictures are a graphic illustration of the importance of the relationship between the two lead directors. But what do FDs think about their partnership with the CEO? To find out, we worked with Richmond Events to poll the FDs who are scheduled to be delegates at the Finance Directors’ Forum, the three-day conference which takes place on board the P&O ship Arcadia in the last week of June.
The many FDs who replied claim to have a good working relationship with their CEOs and rank “trust” as the most important factor in making that relationship work. But they appear somewhat more diffident about their own positioning on the board: many of their responses to questions are “neutral” rather than “agree/disagree”. Andrew Seth, former chief executive of Lever Brothers, believes such reticence suggests FDs “are much less secure about the world they’re living in”.
Before delving into the findings in depth, it’s worth looking at who the respondents are.
Three-quarters of the FDs were recruited after the current CEO; only 42% were appointed as a result of internal promotions – the rest were recruited from outside the business. The FDs have been working with their current CEO for an average of about four years, but 40% have been with the CEO for less than two years.
A random response would have resulted in half of FDs being appointed before the current CEO, half after, so these results look very much like the CEOs have hired their own men. “The concept of the business partner has really taken shape, particularly in a public company where you are assessed not as an individual but by the quality of the key people in your team. For CEOs, finance is increasingly the business partner,” says Suzzane Wood, partner and head of the CFO practice with search specialists Odgers Ray & Berndtson.
Last autumn, BNFL’s FD John Edwards underlined the importance of the relationship with the CEO when he told us: “I like working with chief executives who are operators and move forward. So if I had to choose a company you’d have to tell me who the chief executive was before I’d take the job.”
But while it’s always flattering to be handpicked by the CEO, FDs must ensure they know exactly what they’re going into and who they’ll be working for. Wood recommends that candidate FDs conduct exactly the same sort of due diligence on their prospective CEO as her firm does on the FD.
“Find out what the City thinks of the CEO, find out from the recruitment firm what their personality is, and what the real agenda is behind the recruitment,” she says. “Filling the slot is one thing, but look at what you’ll be expected to drive through, what the business plans are and how it affects this role – it’s pretty key to the decision to join.”
So how do FDs and CEOs work together?
About 40% of FDs said they spend 1-10% of their time with the CEO; the same again spend 11-25% of their time with the CEO. Ninety-five percent said they have an open-door policy with their CEO and three-quarters deny they only see their CEO by prior arrangement. Almost 90% say they have a good working relationship with their CEO.
Steve Harvey, who has the wide-ranging title of “director of people, profit and loyalty” at Microsoft UK, is in more or less constant contact with his CEO, Neil Holloway, but doesn’t actually see much of him. “I spend most of my time chatting to Neil on Instant Messenger. We also email and meet on a personal basis once a month. Most of our chats happen at around 7 o’clock in the morning.”
Wood makes the point that, at particular moments of crisis, deal-making or on endless roadshows, FDs and CEOs will spend a lot of time together.
“FDs ask me what they would have in common (with the CEO) outside of work: if you’re spending 24 hours with the CEO or you’re travelling around on planes or sitting in meetings, you’re going to see each other’s pressure points. Will you have things you can talk about to relieve the stress on those occasions? And, on the pressure points, are you likely to complement each other?”
Our survey asked FDs to identify the most important issue about the relationship with the CEO. By far the single most frequently cited issues were trust and respect. Openness and honesty also featured. “The ability to discuss ideas, new issues, problems, strategy with each other,” said one FD. “We get on socially,” said another. “There has been minimal personal friendship which keeps things fairly professional,” said a third FD who, after 15 years with his CEO, took the opposite view. “He thinks he knows more than everyone about everything and doesn’t listen,” said another FD who was clearly struggling with his board colleague.
Clearly the FD is brought in because of his particular skill set, his finance-based, numbers-grounded approach to strategy and delivery. But the particular requirements of the role – budgeting, financial reporting, and so on – can be a source of pressure on the relationship.
Seventy percent said that their CEO had a strong grasp of company finances, although 23% took a neutral stance on this question. But only 36% said their CEO had a strong grasp of accounting/financial reporting issues; 32% disagreed with this suggestion and another 32% remained neutral. Only 14% said their CEO had a career background as an FD at either the current company or elsewhere. But 30% said their CEO takes ultimate responsibility for top-level financial policy – 47% disagreed with this suggestion. Three-quarters didn’t believe that their CEO regards the FD as “just the numbers guy”, but 20% took a neutral stance on this proposition; two FDs agreed that it was true. When we asked if the CEO thinks his FD is too risk-averse, 48% disgareed, but 47% were neutral on this question.
We asked which areas of finance or accountancy caused CEOs the most difficulty.
“All,” said several FDs. “None” said an equal number. Accounting standards, tax, systems/IT language and the differences between UK and US GAAP got several mentions each. “Long-term projects,” said one FD; “Long-term contracts,” said another; “Forecasting,” said one. One FD said his CEO’s biggest problem was “IRR/ROIC” – which may make one wonder what that particular CEO is trying to achieve. One FD said his CEO’s main difficulty was “tracking costs that have a life of their own”, while another pointed to “Why things take so long to change, eg, process improvements, reports, etc.”
One FD said the most important issue about the relationship with the CEO was “ensuring he understands the financial consequences of his actions”.
Another saw his role as “warning him about bad news as early as possible”, while a third pointed to the difficulty of “sending consistent messages, particularly to shareholders”.
Wood describes the difference in the two roles this way: “You could argue that the CEO has the vision and the FD translates it into delivery – and therefore the ability to be telepathic would be handy. There are CEOs who ramble away, you can’t understand a word they’re saying – then the FD comes in, says a few bullet points and everybody understands. But those are very different personalities.”
Microsoft’s Harvey said that making sure the CEO was fully up-to-speed on the financials was a key part of his job. “We (in finance) want him to look good when it comes to finances and people-related matters (the other part of Harvey’s job description). The reality is we can’t always be in the room with him. But as I know the way he thinks I know what he is going to look for and I know the questions he will ask,” Harvey says.
“It still astounds me how many finance people walk into a meeting with me and haven’t anticipated what questions I’ll ask. My job is to be his conscience and to make sure he is properly briefed.”
Wood adds that even FTSE-100 companies are using psychometric tests to see how the personalities on the board work together – and to ensure new candidates will fit in. But it’s a far from perfect science. “I’ve battled with a couple of them where they’ve said, ‘This is what a finance man should look like.’ Well, how the hell do they know, because it’s changed,” she says. “I had one say, ‘The guy’s not right for the board because he can’t deal with ambiguity.’ I said, ‘He’s a bloody accountant! I should hope he has trouble with ambiguity because it’s his job to cut through it!'”
Seth’s own experience shows how the numeracy skills of the FD can cut both ways. “The FD has all the numbers – the numbers in his own areas and the numbers in other people’s areas,” he says. “The good FDs come in and say, ‘Are you aware what’s happening here?’ Whether it was a strategic issue or operational and short-term, you could rely on them to do that.
However, the FD is often not good at playing in a multi-disciplined team because he doesn’t quickly see soft issues, sales-related issues and sometimes growth-related issues. FDs are sometimes battle-scarred and think their role is to throw cold water around when somebody puts forward a growth plan.”
More than a fifth agreed that it was often difficult to pin down the CEO. Just over two-thirds said they and their CEO are usually in agreement, but a quarter were neutral, while three FDs disagreed. Only a third took the view that they could always count on their CEO to be the FD’s ally on the board – most were neutral. Only 12% contested the notion that, if the CEO and FD were in disagreement, the chairman would usually side with the CEO – two-thirds took the middle ground on this question, too.
Just over half agreed that the CEO and the FD were the two most important board members – the rest were evenly split between “neutral” and “disagree”.
None agreed with the proposition that they were more important than the CEO.
FDs typically recognised the importance of being able to have a full and frank discussion with the CEO – but “reaching a decision and jointly acting on it is vital”, said one. “Present a united position in public,” said another.
The dynamics between FD, CEO and the rest of the board are vital. Wood explains that it can be dangerous to “hang your hat” on the CEO – it can send a signal that you want to be a number two. Instead, she says, the FD candidate should ask, “‘What is the culture of finance in the business?
Who are my key customers?” FDs also have to decide whether the CEO is expecting the FD to be a puppet. “I’m not just recruiting to satisfy the CEO’s whims: it’s a board appointment,” she says. “The CEO is important but he’s not the only consideration. It’s about getting the balance on the board, not just between two individuals. I find the non-execs are very good when they’re hiring an FD. They add an extra dimension into what they think that balance is about. It’s hard for the CEO to say, ‘I want an understated personality (for my FD) because I’m quite dominant.’ The non-execs could well say, we want somebody who can ‘manage upwards’.”
FDs were exactly evenly split – agree-neutral-disagree – on the proposition “My CEO considers me his deputy”, but more than half disagreed with the suggestion that the CEO considers the FD to be his natural successor.
Almost half didn’t think that the CEO would leave before the FD does (an interesting view given the statistic above that most had joined after the CEO), but 42% had their eye on becoming a CEO either at their current company or elsewhere; a third were neural on this, while a quarter said they had no such ambition.
As one FD noted, “Succession of the CEO is always going to be an important issue.” Wood comments that, given the complementary personalities of a good CEO-FD partnership, there can be frustration if the top man moves on and he is then succeeded by the FD: what happens is that “everyone says ‘He’s not as charismatic (as the CEO)’. You can’t have two chat show hosts, so does this mean that the FD is forever setting himself up as the straight man if he’s working for an outgoing CEO?”
Harvey was for a while considered by his CEO to be the successor, but the CEO job is sales-oriented. “For me to take his job I would have had to retrain as a salesperson. I was told that (by the company) in no uncertain terms.”
Additional reporting by Tom Berry.
Andrew Seth will be speaking at a session chaired by Financial Director editor Andrew Sawers on the subject “The relationship between the CEO and the FD” at the Richmond Events Finance Directors’ Forum on board the P&O ship Arcadia, 26-29 June 2002. For further information on the FD Forum visit the website at www.fdforum.com or call (020) 8487 2252.
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