The CFOs' Days Are Gone
Friday, March 3, 2006
The age of the rock star chief financial officer is over.
From 1998 to 2000, CFO magazine handed out 28 Excellence Awards to finance chiefs who had won praise from auditors, analysts and investors for innovative approaches to what had traditionally been a buttoned-down job. Many of the winners were public figures, regulars on CNBC and in newspaper business sections.
Nowadays, two of the winners -- WorldCom Inc.'s Scott D. Sullivan and Tyco International Ltd.'s Mark H. Swartz -- are in prison. A third, David M. Willey, formerly of Capital One Financial Corp., is fighting civil insider-trading charges filed by the Securities and Exchange Commission.
Next week, the best-known of the creative corporate money men, Andrew S. Fastow of Enron Corp., is scheduled to testify in federal court in Houston at the criminal trials of his former chief executive Jeffrey K. Skilling and chairman Kenneth L. Lay. Fastow agreed to cooperate with prosecutors as part of a plea bargain that resulted in a 10-year prison sentence for two counts of conspiracy.
Fastow, who was honored by CFO in 1999 for helping "his company thrive by creating and using unique financial techniques," had been charged with 98 counts of fraud, conspiracy, insider trading, money laundering and other offenses for his role in the 2001 implosion of Enron.
Not surprisingly, CFO magazine has given up the practice of giving Excellence Awards. "It became clear that we were not able to get enough information" about how well the finance chiefs were really doing, said editor in chief Julia Homer.
But the rise and fall of the awards mirrors a broader change in the role of the American finance chief. In the 1990s, CFOs won praise and publicity for finding creative ways to massage their companies' finances to improve the bottom line and "create shareholder value." They were lauded for their ability to invent financial instruments and for their visionary approach to mergers and acquisitions.
Nowadays, corporate boards and institutional investors are inclined to value a straight-shooter with expertise in accounting who plays more of a supporting role. While the ability to communicate with investors remains an important skill, analysts said, corporate boards are also insisting that finance chiefs focus strongly on compliance and bedrock accounting skills.
"What is important is their credibility, as opposed to their charisma," said Eisha Tierney Armstrong, managing director of the CFO Executive Board, a membership organization for top financial officers. A 2005 survey by her organization of the Fortune 1000 companies found that 45 percent of finance chiefs were certified public accountants and 70 percent had risen through the ranks of their company's finance department.
From 2000 to 2004, prosecutors indicted 27 chief financial officers on some sort of fraud charges, up from six from 1995 to 1999, according to a survey by Manu Gupta, a finance professor at Southern Illinois University. Among them was Ira H. Zar, former chief financial officer at Computer Associates International Inc. who pleaded guilty to securities fraud. Zar had shared the executive suite with the company's two top officers.
"The shareholder value lot . . . those that saw themselves as the main actors on the stage, have really had their comeuppance," said Jeremy Hope, author of the forthcoming book "Reinventing the CFO."
Much of the change comes as a direct response to the 2001-2002 Enron and WorldCom scandals, in which finance chiefs pleaded guilty to engineering much of the fraud that caused those companies to collapse.
The Sarbanes-Oxley legislation passed in the wake of the scandals imposed new duties on boards and top company executives. As a result, accounting skills are now at a premium, and the stakes for falling short of the new standards are much higher. "We frankly had expected CFOs to subside more into the background in the wake of Sarbanes-Oxley," said CFO magazine's Homer. "Instead, they have more visibility with the board than they have ever had because boards are more concerned with compliance than ever before."
As a result, finance chiefs' workloads have gone up, and not everyone is happy about it.
The average work week of a chief financial officer at a top public company increased to 53 hours from 49 from 2003 to 2004, said Hope, who also directs the Beyond Budgeting Round Table, a British research group. A CFO magazine survey of more than 200 finance chiefs slated to be released this month found that half of them said their jobs are less satisfying and that 16 percent said the Sarbanes-Oxley rules have prompted them to think of careers outside finance.
On the positive side, finance chiefs are earning more. A survey of 350 large companies by Mercer Human Resource Consulting LLC found that total direct compensation (which includes salary, bonus, stock options and long-term incentive awards) for finance chiefs has shot up to $2.2 million from $1.7 million in 2000.
"Greater risk means greater rewards. A CFO has now assumed greater risk, and to attract the same talent, you have to pay them more," Gupta said.