CFO? There Are Several Risks

¶ … CFO?

There are several risks apparent when investigating issues relating to human subjects. One risk is that the study may have a detrimental impact on the subjects. Further risks are that the study may be skewed by human subjectivity. If questions are asked of the subjects, the answers may not be entirely honest, particularly if the subject is sensitive. Related to this risk is the potential that the study will be impacted by bias on the part of the researcher. This bias can find its way into the design of the research itself and guide the responses of the subjects.

There are no specific ethical issues regarding my study. The subjects are all adults from non-vulnerable groups. The study concerns their professional careers, a subject with little inherent sensitivity. The topic does not address ethical issues in the subjects' careers, nor does it expose any proprietary commercial information that may be sensitive in nature. There is, however, a small amount of bias in my approach. For decades, there has been a relatively standard career path for individuals wishing to become a Chief Financial Officer, and some of those assumptions could possibly have worked their way into my research.

In order to negate the impact of any potential bias, I have taken as objective approach as possible to the issue. Further, I have evaluated my study against secondary sources including both CFOs and those whose career is to hire CFOs. I have sourced information from as many different perspectives as possible, in order that any bias I may have had is eliminated.

If this project were for publication, I would apply for an exempt review. There is no risk to those involved in the survey, and those involved are not in any vulnerable group. Therefore the exempt review is the most appropriate for this project.

2) Although I feel that I have few biases, there are certain assumptions that can influence my data collection. These include a view that the path to becoming CFO comprises a certain set of attributes such as education and work experience. This view discounts less quantifiable factors, such as interpersonal relationships, and is rooted in my North American outlook towards business culture. In many parts of the world promotion to such a position likely would require the cultivation of a large network of relationships.

This assumption - that the path to the CFO office is largely based on a certain combination of experience and education - is consistent with my personal values. Not only does this path seem most reasonable to me, but other paths make little sense. To create a study that yields practical information, I am not convinced that vagaries such as family connections or relationships should be included, as for many prospective CFOs they either have these things or they do.

I intend to address this conflict with my values and assumptions by incorporating a non-quantifiable component to my study to incorporate such considerations. Ultimately, I may not use the results of that information, as blending easily quantifiable variables with unquantifiable ones may make for messy research and obfuscation of results. However, by gathering some information I intend to ascertain whether or not that particular set of information is worthy of further exploration. In this way, I will not include it, but I will not rule it out either.

Though I do not intend any direct interpersonal challenges to my work, I would deal with them by listening to the beliefs of those opposed. In this study, I would be surprised if somebody felt I was completely off base, which makes those perspectives particularly valuable. By taking the time to understand such perspectives I would allow the opportunity to develop further study of the issue based on those alternate views.

3) My research question is: "What education, experience, personality traits and skills are needed to become a CFO?

To determine the answer to this question, I will undertake the following process. I will design a survey, which will pose a series of questions to the respondents. These questions will be about specific levels of education received. This will include questions about both academic and professional education, since both are applicable to the position. I will also examine the issue of experience by inquiring what types of positions have been held by today's CFOs. This will help to examine the career path that they have taken to find themselves in this position.

Questions concerning skills will be split into two types - hard skills and soft skills. The questions with regards to the hard skills will require the respondents to provide a list detailing some of their hard skills. These portions of the survey, and the portions concerning education and experience, will be in the form of open-ended questions to help eliminate bias on both the part of myself and of the respondents.

There will also be questions regarding soft skills and personality traits. These will be more reflective in nature than the other questions, but will still be formatted in the same open-ended way. It is hoped that the respondents will take the time to reflect on their traits and soft skills. In order to help ascertain what skills are considered most important, we shall ask CFOs specifically which skills they wish they had but do not. That will give a sense of areas which are valuable to a CFO today, but that may not have been taken into consideration when hiring.

While the main survey will be sent to current CFOs, a secondary survey will be sent to headhunters that specialize in CFO recruitment. These individuals have a keen sense of what firms expect from a CFO today. It will be valuable to compare the results of these two different sources of information to examine the degree to which they intersect.

For this research, qualitative measures help to gauge the importance of some factors that are difficult to quantify. The most obvious benefit is the ability to incorporate all of the factors into the study, rather than just those that are easily quantifiable. Some of what goes into becoming a CFO is vague, and tough to pinpoint at the best of times. One factor as cited in the literature was the increasing need for leadership. Yet, leadership is such a vague concept that it cannot easily be quantified. Using qualitative measures we can attempt to determine what exactly the term means to different people, how important is it to the role, and how much of it a CFO candidate should have. Another benefit is that it allows certain skills to be translated, and better grouped together. Different respondents may use different words or phrases to connote the same thing. Qualitative research allows for better synthesis of these differences, and can help to mitigate the influence of differences in respondent's interpretation of certain terms or questions.

The drawback to using qualitative research is that it can lead to an overreliance on anecdotal sources. This puts the study at risk for overreliance on the researcher's interpretations. In turn, this increases the risk that the researcher's biases will color the survey results, as those biases can reasonably be assumed to creep into the interpretations. Using qualitative research also makes it more difficult for outside parties, such as the reader, to check for biases and other areas. Whatever drawbacks numbers may have, they are finite, and that alone allows them to connote greater meaning. Qualitative results can be lost in the researcher's phraseology, numbers cannot.

Likewise, quantitative research can help with this study in that it does provide clean, finite answers. It is entirely appropriate for many of the questions in this study. They are a way to distill hundreds of unique stories into a coherent and consistent set of information, which is what will be required in order for this survey to have usefulness. Also, having concrete numbers allows readers to examine the data for themselves, without the filtering lens of the researcher. Another benefit is that quantitative measures can be compared with one another. We will be able to correlate any variables that are quantitative in nature. This will allow us to gain greater insight into some of the key issues regarding career paths that lead to CFO posts. For example, two variables may both be common among CFOs but may turn out to be mutually exclusive. Those with CPA designation may not need MBAs, so there may be low correlation between the two. Quantitative research will allow us to test correlations of different variables to determine if there is more than one path, and if so the degree to which the different paths may intersect.

However, there are drawbacks to quantitative research in this study. One is that some responses are going to be difficult to quantify. This would have to be overcome either by making adjustments to the survey structure, or by using imprecise proxies, to quantify some answers. This increases the risk that the information will be distorted. Another drawback is that not all of the data will be numerical. Questions about soft skills and personality traits can be quantified through various means, but to use more sophisticated measures of personality type and communication style would be beyond the scope of this project, more worthy of entire studies of their own. Thus, quantification of all variables could lead to overcomplication of the study, which increases the risk that the number of surveys returned will not be statistically significant.

For this survey, the ideal is a mix of qualitative and quantitative. This will allow us leeway in interpreting responses, which by virtue of the question structure, may involve many similar but slightly different responses. Using qualitative analysis will also help to understand some of the quantitative results. It allows for some perspective and comparison to be achieved.

There are many variables that we will be able to measure quantitatively. We should use both types of research because to do so will give us better results. Those variables that are highly quantitative in nature should be evaluated as quantitative. We hope that the majority of variables can reasonably be translated into quantitative measures, as this will allow for better correlation analysis between them. For this type of research, we feel the quantitative approach is the strongest, but prefer to use qualitative analysis for some variables for the sake of expediency. Further, this approach reflects the hiring process for the CFO position, in which both qualitative and quantitative factors are taken into consideration.

4) This research will consist of two surveys. One will be directed at CFOs, the other directed at headhunters who hire CFOs. That these two groups have approached the issue of becoming a CFO from different perspectives necessitates two different surveys. The surveys will be sent to 1400 CFOs around the country. We hope to either piggyback the surveys with the quarterly survey from Robert Half, or use their mailing list. Their surveys receive strong return rates, which would make them a strong partner. If we go on our own, we will use a database of CFOs and possibly have a smaller sample size.

We will also send surveys to a much smaller group of headhunters. We hope to identify 40-50 of these industry experts and submit their survey to them by mail as well. The information we get from them will contain their biases, but will also be based on information that has already been aggregated by their offices.

5) Part I: Introduction

The role of the Chief Financial Officer, having remained unchanged for decades, has begun to evolve in recent years. The traditional career path to become a CFO went through accounting, treasury or finance. CFOs were often viewed as bean counters, unworthy of consideration as a serious executive.

However, the CFO position has become more prominent in recent years. Accounting scandals have unraveled the value of several corporations, encouraging boards to raise the profile of the position. CFOs have taken on greater leadership roles, and are beginning to supplant COOs with their increasing involvement in strategic issues. More CFOs are being tapped to become CEOs in recent years, something that was once a rare occurrence.

Given this shift, I feel that it is time to re-evaluate the notion of the CFO career path. Chief Financial Officers today need a different set of skills and experiences than they once did, a direct result of the new challenges encompassed within the role. This study is especially relevant for me, as I view the CFO role as something that I aspire to at some point in my future.

There are two intended audiences for this study. The first comprises students and junior accounting staff who are mapping out their career path. This study will be of direct benefit to them, in giving them a sense of the skills, education and experience they should be building. The other audience is comprised of those studying broader issues in strategy, executive structure and governance. The need for better CFOs is widely understood, as is the fact that the role is in a state of flux. But knowing precisely how the market as a whole views the CFO role will contribute to studies in these broader issues.

Therefore, I intend to answer the following question: "What education, experience, personality traits and skills are needed to become a CFO?" The study will examine the types of education, both academic and professional, is required. The intent is that these will also be correlated with one another, to determine what total education package is demanded by today's CFO marketplace. In addition, the study will examine the different career paths taken by those who have become CFOs today. There is a view that the tradition paths - through accounting or treasury - are no longer the only paths a person can take to the CFO's office. Also, the study will examine the soft skills and personality traits to try to identify trends in those areas. Too much emphasis has been placed in the past on the acquisition of formal education and experience, but today the role seems to demand advanced leadership and communication skills as well. We will examine the prevalence of these demands and try to correlate those with career paths, to help identify how today's CFOs acquired those skills.

Some of the limitations to this study are that it only captures the role of the Chief Financial Officer today. This role is presently in a period of expansion and clarification. This is due to the changing needs of CEOs and boards. The role is also subject to major legal and regulatory changes. The introduction of the Sarbanes-Oxley Act, for example, had a dramatic impact on not only the role of the CFO, but the value of that role within the organization. The role of the CFO is different today than it was ten years ago. It is not unreasonable to expect that the role will be different in ten years' time. So the study is limited in its ability to reflect whatever shifts the role may undergo, thus limiting its value as a career-planning tool.

Another limitation is that the study only reflects North American firms, and therefore generally can be considered to reflect North American business values. Globalization has brought ideas and influences from other cultures to our business world, and our ideas to their world. While the size of the American economy and U.S. listing requirements will inevitably result in a certain amount of hegemony, it should also be understood that the global business arena is comprised of many different corporate cultures. My study does not reflect the values of those cultures, and is not intended to give any sort of universal insight into the CFO position. It merely reflects the business culture in one part of the world, today.

There are several industry-specific terms that will be used in this study. They include:

CEO - Chief Executive Officer, the head of the company. The CEO is hired by the board of directors, and is responsible for hiring the CFO. This understanding of basic organization structure is essential.

CFO - Chief Financial Officer, the executive in charge of finance and accounting issues at most corporations

COO - Chief Operation Officer, an executive in charge of operational issues

CPA - Certified Professional Accountant, a professional accounting designation. In most states, only designated accountants are allowed to audit financial statements

GAAP - Generally Accepted Accounting Principles, a code that outlines the fundamentals of how financial statements should be prepared and reported

Headhunter - an executive recruiter. For the purposes of this paper, most headhunters will specialize in identifying candidates for open CFO positions

Sarbanes-Oxley Act (SOX) - a law passed in 2002 that placed additional reporting and governance requirements on corporations and their executives.

Part II: Literature Review

The starting points for an examination of what it takes to become a CFO are those in the industry - the headhunters who recruit CFOs and Chief Financial Officers themselves. There is considerable literature from these industry sources. Much of the literature focuses on the shift in the CFOs role in recent years, in large part due to increases in regulation.

A recent study by ARC Morgan found that 60% of CFOs of companies registered with the Securities and Exchange Commission either resigned or were terminated when evidence of material weakness in internal controls was found." Companies have reported increasing difficulty in finding good candidates, and many CFOs have fled for private companies.

The result has been that in recent years the technical requirements for Chief Financial Officers have actually increased. At public companies, regulatory scrutiny remains high and thus strong technical skills are still the number one requirement, according to the nation's top CFO recruiters. These technical skills include building and maintaining adequate controls, ensuring compliance, reporting, and the preparation and presentation of materials. Today, this means that in addition to having a strong accounting background, a CFO must have in-depth knowledge of the relevant information technology. It is a much larger part of the bottom line than it has been in the past.

The first step to acquiring these skills is to develop a solid academic background. This typically includes a bachelor's degree in accounting, followed by professional training, usually CPA designation. According to executive search specialists, "there is definitely a trend away from the CFO who comes out of the investment-banking, deal-making business." "Now CPAs are preferred in some organizations. If you have just an MBA, you may be perceived as [deficient] in areas like [Financial Accounting Standards Board] rules and reporting and regulatory requirements."

Another key educational component is an MBA, generally in finance or accounting.

This has traditionally been seen as a must to get into the executive suite, and little has changed. The CFO role requires broad strategic sense, and that is typically viewed as coming from an MBA. "Getting to this level professionally (CFO) requires a set of skills beyond the world of numbers, including operational experience and managerial know-how. On their own, treasurers and controllers often lack that breadth of expertise." According to executive search professionals, "it's not impossible for a treasurer who has specialized in treasury to make the jump to CFO, or a controller, it's just harder."

The experience acquired to build a CFO's resume should be heavy on the technical side. Many openings request candidates have experience in Big Four accounting firms. Knowledge of the regulatory environment should also be built through years of experience dealing with those particular issues.

It is considered important by those in the recruiting business that a CFO candidate should have built some experience outside of the finance or accounting department. Candidates should have "found his or her way into the inner circle of strategic discussions and debates, working alongside CEOs, COOs, division presidents, and business unit heads to create and execute strategy." Those filling functional roles are not always looked upon as candidates for the executive suite. In order to gain the requisite experience outside of finance and accounting, a prospective CFO must "make (his or her) self known" so that the CEO knows he or she is interested in building such experience.

The literature highlights that with the CFO's increased value to the organization comes a greater need for soft skills and leadership, and the ability to build relationships with the CEO or board. "Responsibility for compliance with the Sarbanes-Oxley Act of 2002 rests on the shoulders of CEOs, CFOs and the board of directors." This fact has put the CFO into a much closer relationship with both the CEO and the Board. Therefore a prospective CFO needs to meet the needs and expectations of the CEO and the Board. David Johnson, CFO of the Hartford Services Group, states it succinctly: "The CEO connection is the single most important thing a CFO must understand and maintain," and that a sound strategy will depend on myriad interpersonal factors.

Robert Half survey of 1400 CFOs revealed that a candidate with stronger soft skills and weaker technical skills can often trump a technically-sound candidate with weaker soft skills. Banham reports that among CFOs studied for his article, leadership was deemed by them to be the single most important qualification, more so than even technical knowledge, as CFOs take on increasingly large roles within the organization.

A prospective CFO should also develop his or her communication skills. The CFO is responsible for explaining the financial statements, and must be able to speak about them in both plain English for the stockholders and in detail for the investment community. A survey of CFOs revealed that they are "spending more time explaining corporate strategy and the company's business model to investors and analysts."

Other soft skills that a CFO should possess include a strong degree of personal integrity, as this will be demanded by boards and CEOs looking to protect their jobs; relationship-building skills; strategic planning skills as the CFO becomes more involved in this aspect of the company's operations; and negotiation skills.

Part III: Research Methodology

The research will consist of two surveys, distributed to CFOs and to CFO headhunters. The survey will inquire of the CFOs what skills they posses from the four categories. The headhunters will be asked what skills corporations are seeking when they look for a new CFO.