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FDs need the X-factor for CEO role

FD factor

When Gordon Brown’s popularity began to wane, a harsh criticism was levelled at him: while he was a fantastic ‘finance director’, expertly steering the country through what was arguably the toughest economic crisis in living memory, he should not have been promoted to become what was essentially chief executive of UK plc.

He had, his critics claimed, been elevated beyond his capability. He was a numbers man – not a leader.

Brown’s subsequent political demise was a stark warning for ambitious company FDs or chief financial officers who had enjoyed a similar boost to their status as the recession took hold.

Once overlooked as mere beancounters, working away behind the scenes to prepare the company accounts, ensure the business was adhering to regulatory burdens and, of course, carrying out the minor job of making sure the business was operating within its financial means, the credit crunch rocketed the average FD into a role of stratospheric importance.

Finance became top of everyone’s agenda and FDs able to successfully guide their companies through troubled times became the poster children of business. Many have since moved on to bigger and better things – the role’s new prominence sparking a flurry of rapid graduations to the star positions of chief executive, chairman or managing director. But murmurs remain around the FD’s suitability.

“It is becoming more common for FDs to take on the role of chairman or chief executive,” Mark Freebairn, head of CFO practice at Odgers Berndtson, says. “While a business grows, the top role tends to go to a marketeer. But when a business is in trouble, as many were during the recession, cost management becomes the most critical element and that job goes to someone with skills of a FD. That is why FDs are currently seen as more valuable to a business.”

David Tilston, a former FD at a number of companies including polymer manufacturer Victrex – who is now a non-executive director at radio technology firm Sepura – agrees. “The balance has shifted from a much more growth-driven, strategic development focus on to whether we have the right controls in place, what the company’s cash position is and on risk management,” he says. “Previously, we wouldn’t have heard so much about the role of FD. There is an economic cycle shift in what companies want from their FDs and their chief executives.”

Tidjane Thiam was one such golden boy of finance for whom life as a CEO went horribly wrong. The African-born former Ivory Coast minister joined FTSE-100 insurance icon Prudential as FD in Spring 2008, scoring promotion to CEO just one year later.

Ten months on, his career is in serious jeopardy. A £24.5bn takeover bid for Asian insurer AIA – the brainchild of Thiam – failed earlier this month, costing the group £450m. The company’s board have stood by their chief executive, but shareholders are now baying for his scalp.

The move was audacious and one, critics claim, Thiam made with scant concern for the views of shareholders, advisers, the rest of the board or other senior executives. The deal would have been one of the biggest foreign takeovers ever attempted by a British company.

You might have imagined that Thiam’s political past life would have laid the foundations for an expert approach to communication and, more importantly, persuasion in selling the AIA deal to shareholders – precisely the kind of skill the CEO is paid to discharge. You can’t teach it and, in some cases, it is the quality FDs are accused of missing.

Influential shareholder groups – including fund management firm Schroders, which holds a one percent stake in the Pru – have called for Thiam and his chairman Harvey McGrath to take the ultimate responsibility for the failed bid, forcing the lofty chief executive to make a public apology at the company’s annual general meeting for his “strained relationship” with shareholders.

“We understood at the start that there was a risk that we might not achieve our goal, but we believed the prize was worth the risk,” Thiam said at his first AGM as head of the insurer.

While the prize would have undoubtedly been an attractive one, it was a risky strategy and not one which many would have expected from the man from accounts. The cost of the aborted takeover included a £153m break fee for pulling out of the deal and the debacle has pushed the Prudential’s share price downwards from the 600p it boasted in April to the low 500s.

“Before AIA, people would have described Thiam as an excellent CEO. Now he’ll be lucky to keep his job,” says Chris Gaunt of headhunters Heidrick & Struggles.

Gaunt believes Thiam should be used to taking the rap for company problems. “The FD is a largely thankless position,” he explains. “They get all the blame when something goes wrong. If a company suffers, it is rarely the CEO who loses his job. On the other hand, FDs are rarely praised when something goes right.

The skills needed to be a good FD and a good CEO are not necessarily easy bedfellows. “No one is saying de facto that FDs make good CEOs,” explains Freebairn. “You have to be the right person. You have to have an outgoing personality and be able to stand up in front of a group of people and carry them with you. But if you happen to be a good FD with that personality type, then there is nothing to stop you becoming a CEO – except finding a good opportunity.

“No one could have predicted what was going to happen at the Pru. Thiam was recognised as being a fantastic FD and chief executive. He started to do something bold and ambitious and, for a while, it looked like it was going to work.”

High aspirations
David Nish, CEO of Standard Life who was its FD beforehand, agrees. “There are those who are pure FDs – they are very good at managing the balance sheet – and at the other extreme those who are more broad based and commercial,” he tells Financial Director. “It is that ability to establish a longer term, more strategic view that enables the transition from FD to CEO.”

Nish is a prime example of an FD who should not be tarred with the Gordon Brown brush, having engineered his career to ensure he had a broad base of experience, rather than a purely finance-oriented CV. The former accountant was last year selected to succeed chief executive Sir Sandy Crombie at the Scottish insurer. Crombie’s character left a large void and Standard Life’s board wanted to ensure it had chosen the best person for the job.

Nish, who had taken on the FD role three years earlier after leaving his job as executive director of Scottish Power’s infrastructure division, had to wait patiently across the boardroom table while the company carried out what it repeatedly dubbed “a worldwide search” for the perfect candidate.

He had spent years cementing his reputation in and outside the business as an individual going well beyond the boundaries of finance. Analysts for JP Morgan Cazenove noted that he was leading “a significant cultural shift” in Standard Life’s use of capital. But he was already working closely with Crosbie on investor relationships and, as he put it when he granted Financial Director an interview in 2007, “talking the shareholders’ language”.

And he had been at the forefront of leading his previous employer into the listed business world. So he had proven a level of non-financial sophistication that gave Standard Life’s board the confidence he could be the face of the business – enabling him to win out over other candidates who were already CEOs at rival companies.

“As in any big organisation, all appointments go through a rigorous process,” says Nish. “As part of that, you are likely to be benchmarked against external – and potentially internal – candidates. One of the things you should never do is go into campaign mode. It is self-defeating and can take your mind off the job. The best thing is to focus on doing the best job you can.”

He admits his leadership style has been different to that of his predecessor, who had held a chief executive role at the firm for six years – which he attributes to their differing experience.

“We had a lot of alignment around strategic direction but the ‘how we lead’ bit was quite different – reflecting our different personalities and experiences,” he says.

Nish is just one of a string of FDs recently moving into prominent board positions at high-profile companies.

Last year, fellow Scot Keith Cochrane became chief executive at FTSE-250 engineering group Weir after three years in the FD role, while around the same time Abbey CFO Nathan Bostock was cherry-picked by old work friend Stephen Hester to become Royal Bank of Scotland’s head of restructuring and risk – a behind-the-scenes, but pivotal role as the bank delivers on its state-owned responsibility to wind down or dispose of certain assets. Friends in high places may have helped, but Bostock brings experiences as a one-time head of risk at RBS, and has served as a chief operating officer for Abbey. He is as well connected as he is operationally diverse – and discrete with it.

Broader experience
When US investment bank JP Morgan held a boardroom reshuffle in June, chief executive Jamie Dimon admitted he wanted to broaden the experience of his top executives, creating a deep bench of experienced execs who could eventually replace him – with former CFO Michael Cavanagh at the forefront. Cavanagh held the finance role for six years and was crowned chief executive of its treasury and securities services business that month. The move will broaden his experience and influence so that he can compete for the CEO job as well on paper as behind the scenes, when Dimon leaves.

At Sainsbury’s, former FD Darren Shapland has been promoted to group development director. Tasked with delivering the company’s growth plans, Shapland is now in charge of new business development as the board examines opportunities as far afield as China. It is a golden opportunity for an FD to demonstrate previously underused political, international, leadership and visionary skills – or to acquire them swiftly. Many analysts believe Shapland is being groomed to succeed chief executive Justin King.

Also on Sainsbury’s board, chairman David Tyler is himself an FD, having served for nine years at GUS, which once owned Argos, Burberry and Experian. He succeeded Sir Philip Hampton – yet another former FD, this time at British Steel and British Telecom among others – who left the retailer to concentrate on his chairman position at RBS.

However, while many have ambitions outside of financial matters, some FDs are happy to remain focused on the job they have trained to do.

Andrew Bonfield, CFO at Cadbury until the Kraft mega-acquisition saw the American company’s CFO subsume the role earlier this year, was tipped to take over from Sir Stuart Rose at Marks & Spencer. But he tells Financial Director that he intends to remain in a finance role.

“Leadership is important,” muses Bonfield, who joined Kingfisher as a non-executive director after leaving Cadbury and admits he is on the lookout for a new challenge. “I’m not sure all FDs are suited to the CEO role. They are often not as extroverted as the chief executive tends to be. There are examples of people who have successfully moved on from FD to CEO, but there are plenty of examples of people who haven’t done as well. It’s not necessarily a natural progression.”

Bonfield believes that outside expectation has put pressure on some FDs to advance their career into the top position, with mixed results. “There are a number of companies where a CEO has come in from outside and is having to work with a FD who is disappointed because he ran for the top job and didn’t get it,” he says. “It’s not always because they were ever really in the running, but more that there is the perception from the outside world that that might happen. Good FDs do not necessarily make good CEOs. The pressure to move on comes from the market and the media because it is such a high-profile role.”

It was a lack of X-factor that Brown always suffered as prime minister. Perhaps he should have taken a leaf out of Bonfield’s book – his prospects could have been brighter as a result.

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