The court battle over the fate of Rupert Murdoch’s media empire is evidence enough of the complications that can arise when it comes to the handover of power. And yet, over a quarter of organisations do not have a formal succession plan for departing finance chiefs, according to the latest CFO Signals survey from Deloitte.
In the US, the share of companies choosing external CFO candidates has hit a 10-year high, according to a report from executive search firm Crist Kolder Associates. A reliance on outside appointments can raise concerns about a lack of long-term, strategic thinking for the chief finance position.
Many high-powered executives struggle to think about concepts such as defeat or mortality
Recruiting someone with the right level of experience can take months and, even then, there are no guarantees that they will be a good fit. An empty finance seat, meanwhile, can lead to disruption within the business. Without key financial leadership, a lack of direction and decision-making can shake the confidence and morale of employees and wider stakeholders.
A succession plan can reduce costs and ease the transition as businesses know exactly what they are getting. Shareholders also tend to feel more comfortable if there is a clearly designated insider to face the company’s future challenges.
Why then are businesses failing to formalise a detailed CFO succession plan – and how can they get started?
Big shoes to fill
In the current business environment, filling executive positions has become more difficult, observes Cyndi Sax, vice-president of talent solutions at leadership assessment company Talogy. “Many organisations have been slow to prepare for the exodus of senior leaders as they reach retirement age.”
This trend has been particularly pronounced in the finance seat. Over the past 12 months, 20% of FTSE 100 CFOs left their jobs, compared with 13% in 2019, according to data from Russell Reynolds Associates. More CFOs are stepping into the CEO role or are opting for retirement, Sax notes, leaving businesses scrambling to find replacements.
Succession planning is further complicated by the fact that the CFO role itself has become more complex. The job description spans multiple business areas, from ESG and digital transformation to M&A and corporate strategy.
The more time you have to prepare the better – think ten to 15 years
“The available pool of candidates who possess the seniority, experiences and exposure to working with boards and investors is quite small,” says Sax. “A high-performing incumbent in a less-senior position may not be the best fit for the CFO role without significant broadening of their professional experiences. And the availability of external candidates who fit the strategic profile of CFO is likely to be limited and competitive.”
Jan-Philipp Ahrens, a professor in the University of Mannheim’s business studies faculty, says the emotional component involved in preparing someone to take over your job can make it difficult for leaders to think rationally and strategically about their own succession.
“Many high-powered executives adopt a survivor mindset where they struggle to think about concepts such as defeat or mortality, and fail to prepare properly as a result,” he says. “Other times, there is a strong desire to enhance or protect their legacy and they can struggle to relinquish control.”
Ahrens says these psychological barriers tend to be “very prevalent” in the C-suite and is partly the reason why many organisations “get succession planning so wrong”.
How to find a suitable successor
Organisations need to allow enough time to identify and develop a suitable CFO successor. Delaying can lead to rushing the decision or compromising standards.
Rianne Silvey, a principal consultant at New Street Consulting Group who works with businesses on succession planning says: “It’s a huge undertaking, requiring clarity on leadership development strategy and investment in time, attention and resources. Every company will be different, and not every business has the luxury of a large candidate pool to choose from, but the more time you have to prepare, the better.”
She recommends organisations begin preparing for C-suite succession 10 to 15 years in advance.
For example, Apple’s incoming CFO Kevan Parekh has worked in the tech firm’s finance team for over a decade and will replace its long-time finance chief Luca Maestri as part of a planned succession. “That is a great way to run finance,” says Greg Eaton, managing director of accountancy outsourcing company Isosceles and an interim CFO. “Having someone come in that knows the business and has been given enough time to understand the processes, but can still bring their own spin, is important.”
Communicate the process every step of the way, keeping all stakeholders well informed
In the search for a suitable successor, it’s important to stay objective. A common mistake is to make the easiest appointment, for example, promoting the most tenured potential successor, the most popular candidate or by promoting the person with the closest personal ties to key stakeholders.
CFOs need to be involved in finding their replacement – but the responsibility should not sit entirely with them, Silvey stresses. “They need to lean on their HR department or make use of an external, objective body, either to support or challenge their claims.”
Ahrens sees many businesses fall prey to the “mini-me” phenomenon, where executive teams and boards pick a successor who thinks and acts exactly like the outgoing leader. “This happens all the time and is a huge problem because it lacks perspective and fresh thinking,” he says. “It’s good to bring someone in who offers something slightly different.”
This happens more often in CFO succession plans due to the close relationship they have with the CEO, Ahrens adds. “Chief executives tend to want to replace important positions with people they are familiar with and can trust. But this can lead to a lack of diverse thinking or choosing the wrong person for the job.”
Silvey recommends organisations begin by determining the capabilities an incoming CFO requires in order to contribute to the business’s overall strategy. “It’s best to identify a group of potential candidates rather than putting all your eggs in one basket,” she adds. “Then try to find situations where they can prove themselves.”
What skills need to be prioritised
Succession planning is not as straightforward as selecting the next best person for the job. Even if there are likely candidates, they may lack the necessary skills or ambition to take on the role. To prepare potential CFO candidates, organisations should diagnose their needs and support their career trajectory.
When it comes to a development plan, Silvey believes there needs to be more of a focus on soft skills such as networking, collaboration and leadership. “As well as being good with numbers, organisations are eager to ensure that their finance chiefs can effectively engage, communicate, motivate and nurture others,” she says.
Any future CFO needs a deep understanding of the entire business and candidates should be exposed as many different business areas as possible. For example, through cross-functional projects or international assignments, if they work for a global company.
Steadily increasing the level of responsibility they are given is another way to prepare potential candidates for the role. “They need to be brought into more meetings, given the chance to lead on different projects and get more comfortable presenting and communicating to the board,” Silvey says.
The key to a smooth handover
Any change in leadership comes with some degree of disruption, even more so if it is triggered by an unexpected turn of events. Regardless of the circumstances, clear communication and transparency can help to ensure a smooth transition.
“Communicate the process and decision-making at every step, keep all stakeholders well-informed and ensure there is a shared understanding of expectations, roles and responsibilities,” Sax says. “Be clear about the transition process, articulate how historical knowledge and documentation will be shared and include relationship management by introducing the CFO to key stakeholders and team members.”
Providing the incoming CFO with coaching and mentoring can also help to navigate the complexities of their new role. It can be beneficial for there to be some overlap between the incoming and outgoing CFOs, Silvey says, “so long as they don’t linger too long”.
She strongly advocates for first-time CFOs to be assigned a mentor, especially for the first few years. “This could be the CFO that’s just left or a former finance leader,” she says.
Succession planning can be difficult but, as CFOs become more influential, firms may want to invest more time and attention to preparing their executive talent pipelines.
