After the CFO Departs, Who Will Take the Helm?

After the CFO leaves, who will take over?

COVID-19 may be ushering in an era of unexpected turnover among finance executives. CFOs who steadied the ship and led their companies to stability during the storm may seize this opportunity to seek career transitions, or even consider early retirement.

If this trend materializes, rising stars with strategic and operational experience in corporate finance and accounting departments may become the biggest beneficiaries. Research from CFO Dive shows that most departing CFOs are succeeded by someone from their own team—internal talent who has been groomed and is ready to step up.

"We are seeing a lot of surprises in the current environment," Peter Crist, chairman of executive search firm Crist|Kolder Associates, told CFO Dive. "Over the next two to three years, we will see a wave of unexpected retirements. Those nearing sixty will say: 'I've been in this chair for a long time, and I plan to retire early.' We believe companies will face pressure to have succession plans ready."

Succession planning is actually declining

Given the importance of CFOs to public and private companies, the sensitivity of their departure timing is almost unparalleled. This makes succession planning crucial to a company's stability. However, because the CFO role is rapidly evolving—increasingly focused on strategic planning and operations—many companies manage CFO transitions without a clear plan.

"All the attention on succession planning is focused on the CEO," Shawn Cole, president and founding partner of executive search firm Cowen Partners, told CFO Dive. "Other C-level positions are often left by the wayside."

Although the frequency of formal CFO succession planning seems to be declining, internal employees appear to be the most common beneficiaries, especially in larger companies with the resources and talent depth to let team members gain experience in a variety of roles.

"Companies like the Fortune 500 and S&P 100 have deep benches," Crist said. "They can place their next CFO in a variety of roles—let that person sit as controller, treasurer, corporate finance, or general management—and then promote them to CFO."

A sample of 50 recent CFO transitions by CFO Dive confirms this.

Internal promotions dominate overwhelmingly

In the vast majority of cases—75%—the successor to the departing CFO was an internal employee, usually from the finance or accounting team. In CFO Dive's study, 37 CFO successors were internal promotions, while only 13 were external hires. Among internal promotions, 26 (about two-thirds) came from finance or accounting backgrounds—presumably with strategic or operational experience to complement their finance and accounting skills.

In CFO Dive's study, the finance and accounting professionals who became CFOs were mostly controllers (5), treasurers (4), and chief accounting officers (3). Others promoted included FP&A heads or those in other finance roles. Seven had served as deputy CFO, VP of finance, or corporate finance director.

Although the majority of those studied followed a traditional internal promotion path, the trend is evolving as companies seek well-rounded executives. "A VP of finance with a technical accounting background is a great combination of finance, accounting, and operations," Cole said. "People want someone who has been around the company and the business, who communicates well and can bring colleagues along, rather than someone sitting in a corner collecting data."

"In the past, people entered the CFO role with deep accounting and technical skills," said Crist, who has worked in executive search management for nearly 45 years. "Today, less than 50% of CFOs in the U.S. are CPAs. We are moving away from an accounting background and toward strategy."

Of the 12 internal promotions without finance and accounting backgrounds, only two were COOs, consistent with the recent trend—fewer companies have COOs, and their responsibilities are often shifted to the CFO. According to Crist, only 10% of companies now have a COO position.

"Without a COO, the CEO and CFO become the number one and number two people running the business," Crist said. "The board sees them at every meeting. All of this strengthens the CFO role, making it much more complex within the corporate structure."

The odds of an interim CFO being made permanent

During the transition between a departing CFO and their successor, companies often turn to an interim CFO—usually from within the finance department. Both Cole and Crist believe that interim finance chiefs are unlikely to keep the title.

"Intuitively, their odds of being made permanent are around 10%," Cole said. "If a private equity firm is involved, they are looking for a change agent. I think that's part of the decision. Maybe they're thinking: 'This is our chance to bring in someone new, with a fresh perspective.'"

Cole noted that if a CFO leaves due to poor performance, the board likely believes the finance team is also underperforming. This could lead to a higher proportion of external hires—a "one bad apple spoils the bunch" mentality.

Crist said many clients ask whether their company should appoint an interim CFO. His answer: if the client believes there is truly an excellent internal candidate, and after a thorough search that person could still be the final CFO choice, he recommends putting that person in the interim role as a practical audition for the board and investors.

"The longer someone serves as interim CFO, the higher the probability of becoming the permanent CFO. But in many cases, companies put someone who is technically strong but lacks leadership in the interim role, hoping only to close the books while searching externally."

—Peter Crist, Chairman, Crist|Kolder Associates

Although internal candidates are now more likely to become CFO, Crist does not believe the rate exceeds 50%; he estimates the probability at about one-third.

"Some companies view the CFO as a silver bullet," Crist said. "They know the person they need can't just understand finance. And the complexity of the role and how it is used is the fundamental reason why their tenure rarely exceeds five years."

The increased importance of the CFO role also puts pressure on companies not to let their rising finance and accounting talent be poached by other firms. Crist said headhunters might approach them and say: "Why wait? Go be a CFO at another company today." Many would readily agree.

Future trends and the future CFO

Cole, who has been at Cowen Partners for nearly five years, predicts a company's next move by observing its culture. "It really depends on the organization's values," he explained. "If it's a conservative private company, they might have a succession plan because that CFO is a long-term employee. But if it's a private equity-owned organization, there is effectively no CFO succession plan; the CFO is largely replaceable."

Of the 12 external hires who succeeded CFOs, all but two came from finance departments at other companies, and most (8) had served as CFOs. Of the rest, one was a controller, one an auditor, and one a VP of finance. Of the two without finance backgrounds, one was a CEO and the other a project leader.

"If it's a private equity-owned organization, there is effectively no CFO succession plan; the CFO is largely replaceable."

—Shawn Cole, President, Cowen Partners

Crist added that most companies no longer have CFO succession plans because the CFO profile has changed dramatically from what it used to be. Additionally, Crist noted that the COO position is steadily disappearing, having largely given way to a combined CFO-COO role; only 10% of companies now have a COO.

"This is an important observation because without a COO, the CEO and CFO become the number one and number two people running the business. The board sees them at every meeting. All of this strengthens the CFO role, making it much more complex within the corporate structure," Crist said.

As the role evolves in real time, the ideal CFO profile is increasingly difficult to define. Crist declined to name an ideal candidate, citing the broad range of responsibilities CFOs now bear. However, he noted that over the past decade, "operational finance" has been the top consideration for companies seeking their next finance executive.

"Suppose a CFO needs to have 10 attributes," Crist said. "The list includes accounting experience, operational finance experience, strategic planning experience, IT knowledge, and so on. Companies prioritize according to their own needs, and usually operational finance ranks first, followed by finance function skills, and then strategic thinking."

It should not be overlooked that finance executives increasingly view the CFO role as the last step before reaching the top. Crist noted that the last three CEOs of American Airlines all came from the CFO position, highlighting the ultimate aim of the CFO hiring process: the hope that this number-two role might one day ascend to the CEO seat.

Appendix

Below is the list of 50 companies referenced in this article.