A Look at How the CFO Role is Evolving
November 8, 2024 – There has been a steady evolution in the CFO role. Today’s fittest are guided by wise and purposeful leadership, working with the CEO. But a volatile operating context is setting the CFO at the epicenter of a risk storm, and regulatory and ESG reporting are proving burdensome, according to a recent report from Amrop. “In the finance domain, the CFO role is still by far the most sought-after by hiring organizations,” the study said. “Although an accounting background remains the most common, other tracks are now opening up. Looking forward, the CFO will remain a top contender for the CEO role, even if the succession slate is broadening to encompass other CXOs.”
How has the finance domain evolved over 10 years? To find out, Amrop analyzed its global database of C-suite assignments, looking at the proportion of total assignments accounted for by each role type.
Bandwidth
From his interactions with C-suite teams and boards across a wide array of industries, an Amrop partner draws a vivid picture of the volatility and unpredictability re-shaping the finance domain over the last few years. “Risk and business impact have come from places where traditionally we would not have seen them, and definitely not at this pace,” he said. “Consider Covid, how fast the world shut down and supply chains changed. Ways of working and different industries were impacted tremendously.”
“Financing is now being affected by the regional conflicts, the lack of money compared to before and the restrictive financial measures we are seeing in many places, with interest rates rising significantly in a very short time,” he continued. “Suddenly, geopolitical and environmental factors are becoming major issues. And that means that risk is fast evolving into a strategic priority for many. If you looked at risk in the past, there was a little on the people side (flight risk) and maybe some countries where it was risky doing business. Now we’re looking at cyber risk and geopolitical risk.”
The report explains that the turbulent business environment is compounding a slow but steady evolution in the finance domain. As one Amrop managing partner puts it: “The CFO role is not just about managing the accounts, the cash. They need to know how to manage defense now, not just offense.” Another Amrop managing partner confirms the evolution: “The main change is that everybody wants not an accountant but a strategic CFO, understanding the business drivers and able to help shape the organization by understanding the financial forces and risks. So that’s been the big shift within the last 15 years.”
This Amrop partner has observed a move towards a “business partner discussion with business cases, strategizing with data. It is also about informing the decision-making process and helping the organization speak data and numbers, as opposed to people with opinions,” they said. “The perspective of the CFO role has fundamentally changed. From a retrospective reporting CFO role to a forward-looking business partner; much closer to the organization. And that has really lifted the CFO domain a lot over the last years. The CFO now analyses past financial performance not only to forecast for future performance, but to propose avenues to the board for future value creation in areas such as investment, divestment, or restructuring.
Relationships
CFO presence on boards varies widely, but top-level relationships are changing, according to the Amrop report. “Wherever they sit, all CFOs must fully engage with their board, fellow CXOs and the Chair of the audit committee,” it said. “The CFO/CEO relationship is paramount. It unites the CEO’s global and board insight with the financial-strategic knowhow of the CFO. The duo is increasingly one of equals.”
Related: The Ultimate Guide to Assisting CFOs — From Recruitment to Reaching Growth Goals
When it comes to the CFO’s formal presence on a board there are significant variations. In the U.K., for example, 83 per cent have a seat in their boardroom, compared to only 1 per cent in the U.S., according BoardEx. But the future may hold change for the CFO’s prominence in the firm’s ecosystem. A recent academic study empirically examined the relationship between a CFO’s presence on the board and the firms’ propensity to over- or underinvest. It confirmed that “CFO board membership is significantly associated with a decreased level of corporate over- and underinvestment. Regardless of where they sit, all CFOs need to fully (and in some cases better) engage with the board and their fellow CXOs.” Of all these relationships, one is of paramount importance: that of the CFO/CEO, according to Amrop.
CFO Turnover Reaches Three-Year High
After slower starts to the year in 2022 and 2023, the first half of 2024 saw increased levels of turnover, indicating that as economic uncertainty becomes the new norm, previous trepidation to replace CFOs has dwindled. Let’s take a look at Russell Reynolds Associates’ Global CFO Turnover Index.
The study also notes that it makes sense for the CEO and CFO to form a close-knit team that unites the CEO’s global insight with the financial-strategic knowhow of the savvy CFO — one who acts as a trusted advisor and brings facts and data to the decision-making table. Together the CEO and CFO present a cohesive viewpoint to the board (and beyond). In Amrop’s piece: ‘Survival of the Fittest: C-suite ecosystem’, they observe that the CFO/CFO duo is a key to high performance.
As an Amrop board member explains: “I find that some of the most successful companies have a strong relationship between the CEO and the CHRO, the CEO and the CFO, and the CEO and the COO. Those three roles are absolutely critical to the success of that leadership team and the CEO in accomplishing what they need to do.”
Whereas the CFO was typically subordinate to the CEO, this is increasingly a relationship of equals, says this Amrop partner. “We often see now that the CFO is hired by the board. So, in the day-to-day he or she may be reporting to the CEO, but hired by the board, equally to the CEO. And the CEO no longer has the direct mandate to fire the CFO. You’re seeing much more a leveling of power.”
Risk
“The CFO is at the epicenter of a risk storm,” the Amrop report said. “From geopolitical, cyber, operational, to supply chain: the need to anticipate and manage risk is at its zenith. Risk may be a distinct domain working with finance, or part of the CFO’s mandate. Whilst it depends on an organization’s size and sector, the need for chief risk officers is ticking up. And whilst reputational risk is not yet a formal consideration for most CFOs, it may well become one, given the financial stakes of a fallout.”
Volatility in the financial markets, fluctuating interest rates, cyber- and geopolitical threats. These forces have rapidly coalesced into the perfect storm, and CFO’s are at its epicenter. As one Amrop partner puts it: “Typically the most measurable impact of risk tends to be financial, so it ends up in the CFO domain. Obviously the people risk is equally important. If you have 5000 factory workers in conflict zones right now, or regions hit by anything from flooding to extreme weather. As if this were not enough, the energy crisis is also a risk. In 2023, for many companies, cost and supply suddenly became a factor in terms of their ability to survive. So you suddenly have all sorts of exposures that you have to plan for.”
Another Amrop partner adds to that. “The whole IT security, IT cyber risk aspect is going to remain the big topic,” they said. “Then operational risks, complicated by digitization and digital channels.” He points to another form of risk: reputation. He admits that this is primarily a board concern — for now. “The CFO would usually not look at that. Geopolitical risks, cyber risks, operational risks are big themes. And obviously logistics and supply chain risks, are connected to operational risks.”
Development Perspectives
“The CFO is still a top contender for the CEO seat, but faces competition from other domains,” the Amrop report found. “Given the growing emphasis on culture, values, and sustainability, any CXO could be eligible for CEO, based on the executive’s capacity to drive these topics, credibility and ability to occupy the public podium. But as their role also widens, today’s CFO is probably even fitter than his or her predecessors.”
Related: The Demand for Interim CFOs Soars
Exploring the evolution of the CEO, Amrop sees that the CFO has traditionally been a lead contender for the top role (together with the COO). Furthermore, they found that the slate was limited, as other C-suite role-holders such as the CHRO were rarely in play. “For now, this largely remains the case,” the study said. “The usual rise to the CEO seat is still via the CFO (or COO) route. However, things are changing. First of all, the slate is broadening to encompass other C-suite roles.”
As one Amrop managing partner put it: “CEOs might come from all the CXO disciplines. It’s not going to need to be the head of the biggest division or the CFO. I think if we look at culture, values, and sustainability then it could be any CXO who takes the role based on his or her ability to drive exactly these topics. And personal credibility. So, I think that’s going to broaden. Staying in the running for the top slot will place even more emphasis on the qualities today’s CFO needs in a world where sustainability heads the agenda and all members of the C-suite must display a holistic and purposeful form of leadership: pursuing not just financial performance indicators, but ESG equivalents.”
Financial acumen and strategic weight alone will no longer equip the CFO to lead an organization. The CFO will need to develop an ability to not only forge a compelling vision but communicate it, internally as well as externally. As this Amrop Partner puts it, if a highly competent CFO “is an introvert and not capable of communicating, of embracing the company with their personality and so on, that’s taxing.”
Today, given the widening scope of the CEO role, it needs even more oxygen. To make the leap, the CFO will likely need coaching, training and/or the support of other CXOs, according to the Amrop report. It will take emotional intelligence, self-awareness and humility for CFOs to know their limits, to listen, learn, and accept help. An Amrop partner raises the example of how a major multinational appointed a ‘quiet’ CFO to the CEO position; a move that suddenly propelled him onto the public stage. “The company divided the tasks so that other people started speaking a bit more, so the CEO didn’t become so much the center.”
This Amrop board member is optimistic: “What we’ve seen over the last number of years is more and more CFO’s moving into that CEO realm and doing it very effectively. And of course, depending on the discipline it would also talk to where their gaps might be and how they would need to bridge those gaps. It’s a fascinating journey to see how that role has evolved. Indeed, the widening nature of the CFO role means that today’s CFO is better equipped to step up to the plate than his or her predecessors might have been.”
“I’ve seen a number of CFOs become CEOs because of the value brought to the table by virtue of their financial mindset,” the Board member continues. “But now it’s far more strategic, broader, an appreciation of supply chain, operations. This means that many CFOs have already developed a good understanding of what the role involves.” An understanding, as Amrop have seen, that is enriched and deepened by the close relationship between many CFOs and CEOs. There is everything to play for, and the stakes are rising.
Related: A Look at How the CFO Role in Private Equity is Evolving
Contributed by Scott A. Scanlon, Editor-in-Chief and Dale M. Zupsansky, Executive Editor – Hunt Scanlon Media
