Relationship between the CFO and CEO | In Practise

Relationship between the CFO and CEO

Former CFO, UBM and Vice Chairman of the Board, eDreams

Learning outcomes

  • What are the core responsibilities of a CFO versus CEO?
  • What is the role of the audit committee in a public company and what is the relationship with the CFO?
  • What are the key factors CFOs should consider when first communicating with the CEO?
  • If you join a company as CFO where the CEO has supervoting stock or majority ownership, what are some of the ways you can bring up any potential concerns you may have around strategy or processes within the business?
  • What are principles CFOs should consider when communicating with investors?
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Executive Bio

Robert Gray

Former CFO, UBM and Vice Chairman of the Board, eDreams

Robert completed an MBA from Harvard Business School in 1980 before starting his career as a banker with JP Morgan and Deutsche Bank where he spent over 23 years working on IPO’s, M&A and LBO’s with corporates. In 2004, Robert joined Codere as CFO where he spent nearly 6 years leading to a successful IPO. Robert was then hired by UBM, a UK-listed media conglomerate, as CFO with a plan to roll up various other B2B and B2C media assets. UBM is now the largest trade show operator after around 60 acquisitions before recently merging with Informa. Robert also serves as Vice Chairman of the Board and Chairman of the Audit Committee at eDreams and enjoyed one year as CEO of PR Newswire in 2015. Robert has over 12 years of experience as CFO of large public companies and has a deep understanding of communicating with all stakeholders and delivering excellent corporate governance. Read more

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Can we take a step back and start from the actual finance function itself and the core responsibilities of that function within an organization?

One of the things I like about the function is that it is very diverse. The core responsibility and at the heart of it, the finance function is about numbers. That means the finance function has to produce both statutory accounting numbers, you need to make sure the accounting is right. It has to provide other management information to help direct the company. It is responsible for external reporting to investors and other stakeholders in the company. That's the core. What's really important in finance is making sure you have the team and capacity to deliver those numbers. That's at the heart of it.

Then more broadly, using those numbers to help understand and manage the business leads you into a number of other responsibilities. And I think the core of the CFO role is to be a strategic partner to the CEO and to the board in understanding the business, help direct it, understand what the capital market pressures are, and reflect those back into financial policy and the strategy of the company.

How would you split those two responsibilities between the CEO and the board? Do you see them as separate?

Well, they can be. Certainly, in the UK, where generally the CEO and CFO are the two executive directors, there's a very explicit expectation that the CFO will certainly act as an advisor and strategic partner to the CEO, but also has a responsibility - I always think of it as church and state - to report independently to the board. So the board, the audit committee of the board, and indeed regulators put particular obligations on the CFO about the integrity of the external reporting, and in the case of the board, to make sure that they understand anything in the business that may not be going as is being presented in the board.

Ideally, if there are differences between the CEO and the CFO, they are worked out outside the boardroom and the team presents a unified front following the CEO's lead. In instances where there's a divergence between the CEO's view of the business and what the CFO perceives to be going on, then you communicate usually through the audit committee, or in extreme cases to the regulator, about trends or facts about the business that aren't otherwise known.

Is the CFO completely independent of the CEO in the responsibility around the accounts and the quality of that to the board and the audit committee?

No, it’s overlapping. For one thing, a CFO reports to the CEO, so the CEO is the CFO's boss. But as I said, there's this unusual situation in which you both work for and your appraisal and so forth are done by the CEO, but there is this additional responsibility. It's only rarely that it ever becomes an issue. There's enormous power in the reporting function that may not require a direct confrontation with a CEO.

Ideally, you work together in a close partnership and share perceptions of the business. Whenever my perception diverged from that of my CEO, obviously my focus is to try to present my view and either convince the CEO that I'm right or accept that I'm not right. In other words, it should be evidence analysis-based and in partnership. I've been lucky enough to work only with CEO’s who are highly ethical to the extent possible, given public market pressures, and didn't care about how things are reported but obviously cared that they were reported appropriately and in a positive way, but never pushed for any accounting reporting or like that I would have thought inappropriate as a CFO.

A lot of this is hypothetical. You hope that there is never a divergence and that whatever debate happens takes place outside the boardroom. If at some point those diverge, then obviously there's going to be a problem in the relationship between the CEO and the CFO. There is a very healthy tension between the two.

But let's say that the CEO is pushing the envelope in terms of the accounts and the reporting and the CFO goes to the board and the audit committee. Does the CEO have influence over the committee and board? I mean excluding those instances where you have Zuckerberg or Adam Neumann and they have super voting stock. More broadly, how much influence does the CEO have over the committee?

Obviously, they would have a lot, and that I think has led to a number of real accesses in companies like that. When I think about the CFO role, I worked in one company where the CEO had voting control of the company. That's the case with the Spanish gaming company. In UBM, it was a broadly held public company with all of the disciplines that you would expect around a UK plc. A substantial one is about FTSE 125 when it was acquired by Informa.

I would say in a well-run public company, there shouldn't be much debate. If the CFO can't convince the CEO and other colleagues of his or her view, then that's something I would take on board as CFO. By the way, it was a big and complex business with lots of work, so there was room for debate. But I guess what I'm trying to say is I was never confronted with a situation in which I had to go to the board. What I did occasionally do is use the power of reporting to raise consciousness about an issue in the minds of the board in a way that was neutral and benign, but to begin themes about how reporting can be improved, or where there might be issues, for example, in the quality of the control environment of the company, meaning the quality of the accounting function. You can do a lot without confronting.

Most good CEO’s will recognize the extraordinary value of a strong CFO who understands the business and shares the same goals, which are ultimately to grow the business, grow the profits and the stock price. Generally, CFO and CEO compensation, at least in the UK, run very parallel - same objectives generally, a small part of bonus which is subjective and personal.

When looking at CFO turnover in public companies, when you see a lot of CFO’s either leaving or getting fired or just a lot of turnover, how would you look at that from the outside as an investor, for example?

I guess the first thing I'd say is that board turnover has become more rapid in recent years. I think companies are much more conscious of refreshing the skills of the board and I think there's more turnover in the board and particularly in the chairman of boards. That's part of why I think there is more turnover in CEO’s and CFO’s. Generally speaking, in CFO turnover, you do read about cases where CFO has failed to give proper guidance or something else has gone wrong in the company or falls out and the CFO gets fired. But generally speaking, a lot of the turnover is simply new CEO comes in and they want their own team. So that leads to a lot of the turnover. By the way, some CFO turnover is because they're promoted to CEO when the CEO steps out. Again, I think that's part of a general trend towards more turnover.

The other thing to keep in mind is they're great jobs, they're fun, but the day-to-day life of a corporate CFO, particularly a large publicly traded, complicated company is very intense. One of the things I've said occasionally, and I don't think it's unfair, is the CEO by definition is able to set much of his or her own objectives, rhythm, and what they decide to focus on and what not to focus on. The CFO has to attend to the process, systems, the reporting obligations I mentioned earlier. All of that means a routine which is demanding. I think several years in one of those jobs is enough.

Because of the responsibilities in control, financial planning and also the capital markets demands you have, would you say CFO role is more structured than a CEO role?

Yes, I'd say so. The responsibility is to make sure that every accounting close takes place or at least to make sure you've got the right team to get that done. There's a budgeting cycle that usually the CEO takes place in, but it's run by the finance function. There's the board reporting cycle, so most companies have 10 or 12 board meetings a year and the CFO tends to be one of the biggest producers of content to the board. Then there is public reporting, the two full closes a year. And following each of those, a round of meetings with investors. The investors want to see the CEO alone in some instances, the CFO alone in other instances, or they want to see both of you together to see how you interact. That just creates a heavy load of routine.

Many CFOs are also responsible for financial and other business processes. Some CFOs are responsible for the IT function and a group CIO reports to them. Again, it's a fun and diverse job but there are many administrative responsibilities or administrative extra responsibilities that happen on a timetable and simply must be done on time. Otherwise, you will be turned over.

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Relationship between the CFO and CEO

October 28, 2019

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