BoardMatters Quarterly, January 2013
CFOs in high demand
Addressing the board’s increasing need for
Of the 800 finance leaders surveyed for our recent report, CFO and beyond: the possibilities and pathways outside finance, 79% agree that CFOs are more in demand than ever for board-level roles because of their financial knowledge.
By sitting on the other side of the table (CFOs) can fully understand how the boardroom works.
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CFO representation on boards
Our research found that over the past decade, the percentage of board members with a finance background has increased significantly. In 2002, for example, just 8% of board members at 347 of some of the world’s largest companies were current or former CFOs.
A decade later, that share had climbed to 14%. This shift is even more evident on the audit committee. In 2002, just 19% of audit committee chairs were experienced CFOs. In 2012, the percentage rose to 41%.
The CFO appeal
There are three main reasons why finance leaders are becoming more common on corporate boards: the challenging macroeconomic environment, the expanding scope of the CFO role and the changing regulatory requirements.
Challenging macroeconomic environment: Financial markets are still highly volatile and banks are facing acute funding pressures. CFOs have the knowledge and experience to help companies navigate this complex economic environment and make the right strategic decisions.
Expanding scope of the CFO role: Over the past decade, CFOs have assumed a much broader, more strategic set of responsibilities. This has significantly increased the contribution they are able to make as a director. The core technical and finance skills that once dominated the role are now just one small part of the abilities that finance leaders must possess. As a result, boards and nomination committees increasingly see CFOs as much more than simply experts in reporting and accounting standards.
Changing regulatory requirements: In many countries, changes to the regulatory environment have increased the demand for finance expertise on boards. For example, public companies listed in the US must disclose whether they have at least one “financial expert” independent of management on their audit committees. If they do not have this expertise in place, they have to explain why.
In the UK, the Corporate Governance Code states that the board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience.
This need for recent and relevant experience means that CFOs are in particular demand for directorships. Our research shows that, between 2002 and 2012, the likelihood that a CFO would also be a director increased significantly.
In 2002, 36% of CFOs from the largest companies we surveyed held a director role at another company. By 2012, this percentage had increased to 46%.
Should CFOs serve as directors on other company boards?
While most CFOs recognize the benefits of taking on roles as directors, more than 40% think it is inappropriate to do so. Strict corporate governance legislation has led to an increase in the time required to be an effective board member.
More than half of CFO respondents estimated that they could spare only five hours or less per week on a supplementary role. In reality, the demands are typically much greater. Additionally, board directors are often personally liable if it can be demonstrated they have neglected their executive duties.
For some CFOs, the demands of their core responsibilities are too great, and the risk of overstretching themselves too significant.
Despite these factors, the leading CFOs we spoke to talked about using their board experience to enhance their performance as a CFO. Understanding board dynamics from the other side is the principal benefit according to 75% of the surveyed CFOs.
Most CFOs spend a lot of time engaging with their own board members, but it is only by sitting on the other side of the table that they can fully understand how the boardroom works.
A second key benefit, according to more than half of the surveyed CFOs, is the opportunity to gain exposure to another company or industry. This exposure enables them to learn lessons that have valuable applications in their core role.
As companies grapple with the aftermath of the financial crisis and the divergent growth trajectories of developed and rapid-growth markets, they want executives and directors who can provide comfort and confidence in an uncertain world.
The CFO’s unique combination of analytical, technical and strategic capabilities means that they are arguably very qualified to provide it. However, they should choose the role carefully – and at the right time – so they can effectively manage balance between the demands of the role of CFO and the role of board member.
Questions for the board to consider
- Does the board have a policy regarding the company’s executive team members (e.g., CEO, CFO, GC, chief operating officer) serving on outside boards to further develop their skills?
- Has management disclosed to the board the executive team’s outside board directorships?
- Does the board limit the number of outside directorships for its executive team?