June 14, 2014 – The challenge of identifying the most qualified CFO has traditionally fallen to executive search consultants who scour global talent markets for the professional with the best fit. Sitting at the apex of this group is recruiting firm Crist|Kolder Associates. Based in Hinsdale, Illinois, Crist|Kolder has recruited some of the most influential CFOs for organizations including: General Motors, Kohler, Allstate, Walgreen, Kraft, Safeway, Xerox and dozens of others. In the following interview, Peter D. Crist discusses the changing role of the CFO in today’s business environment. A 36-year veteran of the search industry, Mr. Crist began his career in 1977 with Russell Reynolds Associates in Chicago.
ESR: How many CFO assignments does your firm conduct annually?
Crist: Close to 30 a year. They run the gamut from American Express, Xerox, and Safe- way to pre-IPO situations for PE firms like Blackstone. Let me provide you with some color: our firm does about 50 projects a year – 25 to 30 of those are CFO positions, most of which are for public companies. We will do private equity work if it is a large property, such as the CFO assignment we conducted for SeaWorld two years ago – for big properties that will go public. Lots of our CFO work is for small cap and mid cap public companies, with the remainder of our work being searches for CEOs and board members of small cap and mid cap public companies.
ESR: Without question, the CFO position is quite critical. To what extent has their importance or influence increased over the last 10 years and why?
Crist: It has evolved over a period of time from the sort of green eyeshade accounting-type, record-keeping person to the modern day CFO, who is truly an operating partner with the CEO. Over a long period of time the DNA has changed. The CFO chair has taken on a greater level of accountability as well as more risk. There has been a pendulum swing at the board level which we call board activism. Boards now are very involved in CFO selection. In fact, 10 to 15 years ago a CEO would call me directly and say, “My CFO is going to retire so let’s go out and find a CFO.” Today, more often than not, a board member will make that call and will say, “We have a situation which is very confidential. I want to introduce you to the CEO.” We have just had a whole series of those, by the way.
ESR: Can you elaborate on Sarbanes-Oxley and also any other regulatory issues that have come up that have really helped to expand the CFO’s role and put more focus on it?
Crist: All industries and all CFOs were affected accordingly. Sarbanes changed the function, if you will, by elevating the risk factors; when you sign your name to the books, if they are wrong, you can go to jail. Historically, that did not exist. The risk elements went up. And if there is risk in the enterprise, there is risk at the board level. Boards today talk about the risks associated with the CFO chair as much as they do with the CEO chair. Sarbanes also added regulatory issues which are time consuming, expensive and distracting. Well, of course, they have been terribly spooked by what happened with Enron and some of the other companies. I am the elected chair of a public company. I can tell you much of the discussion that takes place in the boardroom is about the risks associated with what the CFO of that company is doing just as much as the CEO. It is front and center all the time. It is one of the reasons we are so busy. Again, you’ll see it in our “Volatility Report.” The average lifecycle of a public company CFO is five years. It’s the same for a CEO – a five-to-six year time cycle. So, when you have that much volatility, that much change, there is constant concern about the seat. It is a hot one, too!
ESR: How has this changed your strategy and/ or ability to recruit CFOs, and is the talent pool more robust or is the pipeline more narrow as the result?
Crist: Well you can answer it two ways. We had a record years in 2012 and 2013; we completed a record number of CFO projects. What this means is that the demand cycle for CFOs is very high. I don’t know if that’s because there is a lack of talent or just because we are moving through a demand pocket. But every search we start for a CFO begins with the conversation: “We want somebody to do more than finance.” That means they have to be strategic; the person has to be an operating partner with the CEO. So those two common themes direct us into talent that can do more than just be a CFO. And it forces us to look at people differently in terms of what their potential as a leader/manager is down the road. CFOs today sometimes also have supply chain responsibility, which they didn’t have before….plus, M&A, strategic planning, communications, and responsibilities of that nature. Suddenly companies are creating a role where the position is more CAO-like, then CFO. Part of the reason why there is so much demand right now has to do with the fact that some CFOs are failing at the broadened role that is being creatively forced. Or, they are good enough to move through the CFO role: “Okay, I’ve been CFO for three or four years, what’s my next move?” Or, “I have been promoted to COO,” or “I want do something else.”
ESR: It’s amazing that a firm like yours, which is a smaller but specialized, has been so successful in being able to work at the very top of Corporate America as an alternative to the larger firms.
Crist: Well, we’re pretty good at what we do. You start with the fact that our domain knowledge in the CFO space is better than anyone’s or any firms. We know almost every CFO in the country on a first-name basis. And we communicate with that audience frequently, whether it is asking for ideas for CFO searches or approaching CFOs about board projects. Everyone answers our calls. Plus, there are a number of situations where a board or CEO may have historically used a large firm but now wants an alternative. Big firms can’t access all the talent because of their conflicts. And we are truly the only alternative at the high-end game that can command a dialogue at the board level and engage at the same level as the best player at any of the larger firms.
ESR: Explain the differences between how you approach the CFO assignment for a publicly traded company with revenue of $500 million versus a company of the same size that is privately held. I know you don’t do a lot of privately held CFO searches but you know enough about it to discern the differences when you are recruiting for one or the other.
Crist: First of all, as a general rule, our minimum size company is closer to $1 billion in revenue. There are exceptions. We do conduct private company CFO searches such as the CFO assignment for Pella, the family-owned company that manufactures windows, and Kohler, the family-held company in Wisconsin. In these instances our initial communication was with family members. So it’s not much different other than the fact that the CEO and the family control the process in a private situation; in the public venue you are dealing with the CEO and a board.
ESR: How often are you asked to assess internal candidates for the CFO role versus external candidates, or are both always part of the spec? Does company size have anything to do with this?
Crist: Almost every search has at least one internal candidate. Now it is important to note that we are not psychologists, so we are not going to assess as they might. At about the sixth or seventh week of a search, when the client starts to meet candidates from the outside, we will begin to assess the internal candidate and tell the client what that internal candidate looks like against the external candidates. There is a comparison of the internal person’s skills, background and experiences to the external candidate’s. The best example I can provide is the search we conducted for McDonald’s several years ago. We introduced McDonald’s to seven outside CFOs from outstanding companies. Jack Greenberg was the CEO at the time. We eventually said, “Jack, you’ve got a seven out of 10 inside, and the amount of money you’re going to have to pay to extract a sitting CFO is pretty high.” Matt Paull was the internal candidate. Matt Paull was a very good pick. Matt Paull was in the CFO chair for seven to eight years, and they just loved him.
ESR: CEO succession is critically important for all companies. What percentage of executives being groomed for the CEO position are coming from the CFO rank? If that percentage has increased in recent years, why has this been the case, and do economic conditions dictate this?
Crist: In our “Volatility Report” there is a whole section devoted to this topic. The report shows very specific numbers associated with industries where there has been promotion from the CFO to the CEO chair. I will tell you there is always volatility in the CEO, COO, CFO positions. It always happens; up cycle, down cycle. In the down cycle we just went through in 2008 and 2009 there was less movement in the CFO chair. There is resistance to change either the CEO or CFO in a down cycle. We are now moving into the upswing. Now is when the volatility starts to jump. Boards will take more risk as the economy starts firming up.
ESR: How has the relationship between the CEO and CFO evolved in the last 10 years and has it altered how you approach the CFO assignment?
Crist: Well, by any stretch of the imagination, the partnership of the CEO and the CFO is stronger – they are attached at the hip. So, the great thing about what we do is to focus more on the partnering aspects versus industry experiences and tool kits. We recruited a retailer to be the CFO of Allstate, and a CPG person to be the CFO of Walgreens. Same with Kraft. The CFO of Kraft was the CFO of Ingersoll-Rand, an industrial company. They love the guy. I mean he is a great CFO. The partnering element today is so much more important, the strategy element is so much more important and the operating experiences are so much more important today than the technical tool kit. I can check all 10 boxes on the technical tool kit for a CFO and if they are not a real business partner it doesn’t work.
ESR: The transfer in talent must be different from what we might see in a sales or marketing role.
Crist: Absolutely. Not too long ago at a briefing I showed the profiles of people at P&G, GE, Ford, Honeywell, and S.C. Johnson — five totally different enterprise models. And the client said, “Let’s meet every one of them.” He said, “I want them all.” The fungability of finance allows us to be effective from one enterprise model to another.
ESR: In economic downturns, you touched on this a little, about not changing a CFO during these periods. Do companies look for CFOs with a different skill set, such as crisis turnaround experience, or do you find most CFOs today are qualified to handle any economic condition?
Crist: Actually the condition of the enterprise dictates the strategy of the CFO search. We conducted the CFO of General Motors when it was in bankruptcy and so that set the tone for what kind of person we were going to be looking for in the search. We conducted the CFO search for a retailer last year. It was the most rapidly growing retailer in the country at the time. And the chief said, “We’ve got to have somebody who has seen this kind of rapid growth because it’s like a rocket ship.” So, again the condition of the enterprise dictated the strategy of the search.
ESR: This is a very broad question, but how does a company measure the impact of the CFO. We know how they measure the impact of a CEO, but how much will a CFO make or break a company?
Crist: Well, the level by which a board measures the CEO and the CFO now tends to be in lockstep. The delta between the two used to be great, really broad, but now that is shrinking. So, the measure of value tends to be: “How is the enterprise doing,” because we have to make sure the enterprise is of great value. Second: “What is it that you added,” either from a strategist standpoint, a deal standpoint, or most importantly (from the board members’ perspective), how is the CFO dealing with the Street. There is real paranoia at the board level with respect to how the CFO deals with the Street. In response to this, one of our tactics is to sit in investor meetings where 20 CFOs might present. I’m the guy in the back of the room watching them present. In the end, the best way to measure impact is if the company did well over a long period of time, or did the CFO get promoted to a line role like Rob Edwards at Safeway (COO), Rob Davis at Baxter (group president), or Mike Larsen at Gardner Denver (CEO). It is hard not to see their impact on their respective companies.
ESR: Does the talent pool for CFO candidates expand in economic downturns or recessions, or does the pipeline become more clogged?
Crist: You always have abundant talent because of replenishment by big companies; whether or not it has matured enough tends to be the question. Bear in mind, risk aversion on the part of the candidate grows in a down cycle. So, if I called you up in an economic down cycle and said, “We have a great search.” You might respond, “I’m going to sit this one out. I’m going to sit tight with the devil I know versus the devil I don’t.” Risk aversion dictates behavior. As the economy has firmed, you are now finally seeing people who said no to us two or three years ago now saying, “Okay, put my name on the list.”
ESR: Well, it’s risky to make a move.
Crist: Sure it is, but the talent pool replenishes itself and it morphs with what the demands are. If you talk to the head of human resources of a big company and ask what does your finance staff look like today versus what it was like 10 to 15 years ago they are going to give you what you heard from me for the last 45 minutes.
ESR: How often do companies fill the next rung down in finance with the intent of grooming those professionals for the CFO role? Are you bringing people into a No. 2 role knowing that the company is then trying to groom that per- son for the next role?
Crist: There are lots of situations where companies will say, “We are two to four years away from a retirement, but need a successor…will you guys do that project?” We tend to decline. And the reason for that is that there’s too much risk on both sides. If the time frame to the CFO retirement is long then there is risk to the candidate about making it. And if it’s too short the risk of failure can be very high. Those are tough projects.