Under pressure: CFO departures escalate amid crisis

December 2020  |  FEATURE  |  BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

December 2020 Issue

The first 20 years of the 21st century have been punctuated by crises and uncertainty. From the bursting of the dotcom bubble in the early 2000s to the 2008 crash and subsequent global financial crisis (GFC), companies have faced waves of change and upheaval.

And now, in 2020 the COVID-19 pandemic has certainly created many unprecedented challenges for companies and their chief financial officers (CFOs) to overcome. During the current crisis, CFOs have found themselves firefighting: preserving cash, assessing risk, redesigning financial plans and revising forecasts to cope with the rigours of economic upheaval.

These pressures are in keeping with the evolving role of CFOs. Over the last decade, the CFO role has been transformed by circumstance and design. Where previously they were a cornerstone of a company’s financial control and compliance oversight, today they are a strategic partner to the wider executive team, expected to make vital contributions to growth plans and overall strategic direction.

Beyond this trend, the COVID-19 pandemic has further changed the role of CFO. Research by the Association of Chartered Certified Accountants (ACCA) and the Institute of Management Accountants (IMA) identified a growing shift toward CFOs taking on more strategic responsibility due to the crisis. A survey of 1152 members, as well as global roundtable participants that included CFOs and chief executive officers (CEOs), found 72 percent felt that the role of the CFO will either “increase or increase significantly” in importance over the next three to five years. This proportion rose to 82 percent among CEO respondents. In addition, 68 percent of CEOs felt that people highly value the strategic insights of CFOs.

As we approach 2021, CFOs continue to face many unknowns. The COVID-19 virus remains prevalent, with Europe experiencing a ‘second wave’ of cases and countries such as India, Brazil and the US still in the grip of the first wave. CFOs are braced for a slow recovery.

Perhaps more than ever before, CFOs are at the heart of their companies’ crisis response strategies. They need to guide their companies through, stabilising finances in the short term, laying the groundwork for renewed growth once conditions improve, and building the resilience needed to go forward.

Fresh pastures

Early in the outbreak, CFOs were generally optimistic about their companies’ ability to survive the pandemic. In fact, according to PwC, many were confident about not only emerging relatively unscathed, but in a stronger position, due to the lessons learned from previous crises.

However, as it became clear the COVID-19 crisis was unlike any other, urgent questions were raised about the quality of contingency and scenario planning, resource prioritisation, whether companies had the IT infrastructure in place to support remote working at scale, and what steps should be taken to limit exposure to future threats.

Amid this increasing pressure, the spotlight on CFOs intensified. Perhaps unsurprisingly, many have left their posts in recent months. According to Korn Ferry, 80 finance chiefs of companies on the S&P 500 or Fortune 500 departed up to the start of August. In just one week in early August, the CFOs of General Motors, Cisco Systems and Avis Budget Group all announced their exit.

To be sure, CFOs tend to seek new opportunities regardless of the state of the global economy, with the average tenure now just under five years, according to the Crist/Kolder 2020 Volatility Report. One driver for increased turnover is the changing responsibilities of a CFO’s role. Even before the COVID-19 outbreak, CFOs were becoming much more strategically, value and future focused.

While CFOs of course remain accountable for a core group of financial responsibilities, such as safeguarding assets, protecting against risk, financial reporting, financial planning and analysis, and cashflow management, their remit has grown in recent years. Now, CFOs require a much greater understanding of other areas of the business. Today, CFOs need to be sufficiently skilled in business partnering as well as financial engineering. They need a high tolerance for flexibility in their day-to-day roles.

COVID-19 has accelerated this trend, though it has done so in unexpected ways and within a short timescale. “The uncertainty of the pandemic forced CFOs to rethink the way they forecast, plan and allocate resources, moving away from being reactive to a more agile approach,” says Tim Wakeford, vice president of financials product strategy at Workday. “Three out of four finance executives admit their former planning processes had not prepared them to adapt to COVID-19, and when the crisis hit, they suddenly found themselves having to build more scenarios than they were capable of.

“The businesses that are thriving and recovering successfully are those that have streamlined planning processes, established driver-based forecast modelling, for example, and are making sure all scenarios they build out sit under the same common data model,” he continues. “A shift to continuous planning and agile operational models provides savvy CFOs more time and capacity to act as the strategic guide businesses need. Embracing an agile approach to planning will be crucial, not only for recovery and for organisations to gain competitive advantage, but also to make companies more future proof against ‘black swan’ events.”

Though many CFOs have left their post during the crisis, others have been unwilling to leave their company with such a bleak economic outlook. Indeed, some companies have seen a surge in loyalty from senior management, not just CFOs. On the other hand, some companies have used the COVID-19 crisis to undertake a ‘changing of the guard’.

Interim measures

Social distancing measures and travel restrictions have disrupted CFO recruitment, much as they have other working practices, with boards often unwilling to assign such a crucial position without meeting the individual in person. Of course, the longer the crisis persists, the more remote interviews will need to be accepted as an alternative, even for senior positions. In the meantime, companies seem keen to explore internal talent pipelines, at least in the first instance.

For companies that find themselves without a CFO and are still in the process of identifying candidates for a permanent replacement, appointing an interim can be a viable option. Interim CFOs can bring fresh impetus to organisations, delivering new solutions to the issues plaguing companies and providing much-needed leadership in the face of peril. Sometimes they can deliver solutions faster, more efficiently and more innovatively while under tremendous pressure.

Moreover, companies may be able to appoint an interim CFO who is specifically qualified to handle the sort of challenges brought on by COVID-19, and who can set the table for a long-term successor to begin their tenure with a clean slate. Whereas some companies may have been reluctant to appoint a short-term CFO – perhaps due to concerns about their potential impact on company culture or stability – such concerns diminish when the future of the company is at stake.

In addition, with a number of CFOs leaving their organisation during the pandemic, there is an opportunity for companies to increase their diversity. According to the Crist/Kolder study, of the 674 companies surveyed, just 90 had female CFOs, and 66 had ethnically or racially diverse CFOs. There has been progress on the ethnic and racial diversity of CFO positions, which have nearly tripled over the past decade. Across all industries, CFO diversity has increased 150 percent since 2013. But there is still much more to be done, and the COVID-19 crisis may open opportunities to further bridge this gap.

CFO for the future

Whether interim or permanent, today’s CFOs must develop a plan to navigate the economic downturn. According to EY, the COVID-19 crisis should result in the creation of a new finance function, one designed to be lean, agile and globally integrated, able to harness technology at speed and drive innovation at scale.

While the CFO role was already evolving prior to COVID-19, the crisis has accelerated the shift away from legacy technology to digitalisation in many organisations. “During the pandemic, investment in digitalisation has freed CFOs from analysing spreadsheets and doing manual tasks and has given them the agility to provide data-led insights for all business departments throughout the pandemic,” says Mr Wakeford. “The pandemic has, however, highlighted a need to be agile and plan continuously, adapting forecasts and resourcing in a matter of hours – a trend which we expect to see continue in the new normal and during other unforeseen events.

“In the years to come, we expect the role of the CFO will shift into one of strategic partnership with all other business units,” he adds. “CFOs, through continuous planning and by being able to provide other business departments with real-time, data-led insights, will become the lynchpin in helping businesses make the right decision at the right time.”

Previously, digitalisation was often tackled in a piecemeal fashion, but the crisis has required organisations to adopt a more holistic approach. With widespread remote working fundamental to sustained business operations, incrementally optimising functions is not ideal. Digital connectivity and streamlined IT are now a core part of day-to-day work.

Developments in both technology and organisational functions are making it easier for CFOs to deliver insight not just on the past but also the future of their organisations. Though historically the finance function has not been an early adopter of new technologies and systems, the COVID-19 crisis is making change a necessity. Not only can technology enable significant cost savings, operational efficiencies, flexible integration and deployment, improved access for employees and more robust disaster recovery programmes, it also enables CFOs to benefit from more accurate, real-time statistics and analysis.

Such tools will be hugely beneficial in a post-COVID-19 landscape, where demands on the finance function continue to grow. According to EY, stakeholders such as investors, banks and employees will call for greater volume and quality of data in areas such as management reporting, financial statements and treasury analysis. This will lead to the reassessment and optimisation of processes, functions and roles, with technology a key component.

Once social distancing restrictions and similar measures are scaled back and economic activity picks up, CFOs will need to shift strategic priorities from survival to forward planning and post-pandemic growth. This may include reinforcing balance sheets, reducing costs and boosting performance. Divestitures and other M&A initiatives may be part of the process. Such demands will require skilled and experienced CFOs adept at communicating priorities across the organisation and bringing all departments and business units into line on key steps to take.

COVID-19 has clearly shaken up the finance function, with both short- and long-term consequences. Going forward, cost management, business continuity and financial resilience will be high on the agenda as the post-COVID-19 economy takes shape. Recovering from the crisis may require transforming the finance function, moving it well beyond financial reporting and further into value creation, scenario modelling and decision support.

CFOs will be at the forefront of this ongoing transition.

© Financier Worldwide

BY

Richard Summerfield