Why CFOs Make The Best CEOs

Over the past ten years, the CEO skills gap has narrowed as the demands on CFOs have increased.

The position of CFO did not exist throughout the majority of the 20th century. As a result, company heads had little need to turn to their back-office “financial managers” (as the position was known for most of the 20th century) for any strategic advice regarding the management of their business. The fact is that financial considerations did not affect enterprises to the same extent as they do today. The CFO was largely in charge of developing the budget, managing the books, and supervising tax reporting.

These back-office financial managers only began moving up the corporate ladder in the 1960s and became widely accepted in the 1970s after the US government implemented new financial regulations and concerns. When the need to accurately highlight business and stock performance became a significant issue, regulatory entities like the Securities and Exchange Commission and the Federal Accounting Standards Board played a major role in changing the entire face of corporate reporting and accounting. Regulations that were changed in the 1970s, in fact, set the standard and required businesses to begin taking financial factors more seriously.

With the rise of mergers and acquisitions in the ensuing decade, businesses began to understand the value of financial performance in gaining an advantage over the competition. Once finance and accounting professionals were given a front-row seat and given the responsibility of enhancing performance and eliminating inefficiencies, a crucial component of not just surviving, but also thriving, the relevance of the CFO was established. In addition to establishing and maintaining connections with shareholders, they assisted businesses in embracing new financial procedures, restructuring liabilities, and smoothing over other legal problems.

Today, with an increasing number of CFOs assuming the role of Chief Executive Officer, the situation is very different. Although the chief strategic distinction between these positions is that the CEO is in charge of the entire company, whereas the CFO is in charge of the financial performance, the reality is that in the majority of large corporations, CEOs and CFOs are assuming positions with overlapping duties that can be perplexing to those outside the organisation.

Until well into the first decade of the new millennium, CEOs of B2B companies were often picked from among those with strong backgrounds in operations, engineering, or technical fields, whereas CEOs of consumer-facing companies came from stronger marketing or sales backgrounds. There is a growing – and I must say sensible – trend of CFOs being considered for the role of CEO due to their expanding capacity to understand the finer points of the business while bringing forth an aptitude for analysing data. Recent research indicates that the highest years for CFO-CEO transfers were 2007 and 2008, with 20% and 17% of all transfers occurring in only those two years, respectively. There was also a second, albeit more subdued peak in 2012, when 11% of CFOs from 2004 became CEOs.

That’s not all, though. Greater uncertainty permeates the short- to medium-term prognosis for the world economy. Geopolitical and other macroeconomic challenges have caused energy prices to fluctuate, which has resulted in significant supply disruptions, significant currency swings, commodity price increases, public government deficits and cost-cutting, inflationary pressures in some countries, and ongoing environmental issues.

The emergence of Brazil, Russia, India, and China (the BRIC countries), which are now confronting their own growth issues due to the advent of new developing economies, is causing a longer-term irreversible gravitational transfer of power from the West to the East. These macroeconomic patterns have a big impact on how organisations operate, what priorities they face, and how they design strategies to compete globally. This is the global landscape in which tomorrow’s CFOs will operate. Both opportunities and challenges must be embraced as a result of it.

The first aspect that leadership takes into account is economics to have a better grasp of the factors that increase the likelihood that CFOs will become CEOs. The hypothesis that people with financial savvy are more in demand during difficult times was confirmed by the COVID-19 epidemic. This comprises a variety of skill sets relevant to numerous business specialties, including big data analytics, corporate communications, performance management, policy regulation, and strategic leadership.

Hold on though, there’s more. CFOs are being held more personally responsible for regulatory compliance and adherence. They devote more of their personal resources to dealing with regulatory issues and to influencing policymakers so that new regulatory requirements benefit the company. Due to increased external corporate exposure to the whims of the financial markets and increased shareholder scrutiny, the CFO job has also broadened in scope. Due to the increased regulatory requirements, particularly those connected to reporting and accounting standards, businesses in highly regulated industries like banking and utilities are more likely to choose a CEO with prior experience in finance. The CFO role has evolved into a useful business partner for operations, aligning the position more closely with the rest of the organisation.

Over the past ten years, the CEO skills gap has narrowed and became simpler to close, just as the demands on CFOs have increased. It won’t always be easy to go from CFO to CEO, though—from inward-looking to outward-facing. The CEO role is one of the hardest jobs in the entire company by nature. Future CFOs will need to contribute to the prevention of too onerous and cumbersome regulation. They will need to lobby on the company’s behalf, implement operational procedures and protocols that reduce the need for more regulation, and shape pertinent policy development. They must also make sure the financial division has the specialised knowledge necessary to address regulatory issues.

Above all, CFOs who want to lead companies as CEOs need to have the drive to steer their companies in a clear direction while keeping an open mind, as well as a strong desire to learn. Although these skills can be acquired through experience, they should be added right away to the CFO’s current toolbox if they are not currently there. Being a CEO is comparable to conducting a jazz orchestra, as former PepsiCo CFO Indra Nooyi eloquently stated when she assumed the role of CEO in 2006. “You improvise by observing the other players around you for cues.”

You improvise by observing the other players around you for cues. CEOs have a framework, but they have to deal with a group of individuals who all want to improvise on their own to create the symphony. CFOs typically excel at orchestral work; all they need to learn is how to conduct the jazz ensemble.