The Strategic CFO
Portfolio company hiring was like riding a rollercoaster during the pandemic – from supporting commercial growth to assessing the workforce ahead of market headwinds – and the evolution we are seeing in leadership teams, particularly among Chief Financial Officers (CFOs), is worth its own spotlight. HealthQuest Venture Partner, Ben Houston, also Partner and Head of JSS Executive, shares his insights on how the CFO responsibilities have expanded and the importance of recruiting a dynamic leader into this role.
What is the current state of the CFO role?
Today’s CFO is busy in ways that previous generations of finance leaders could not have anticipated, with more responsibility for corporate strategy, board engagement, digital initiatives, financial performance, controls and management. The COVID-19 pandemic and subsequent recessionary environment changed the CFO’s responsibilities; they had to sharpen their focus when it came to managing inflation, supply chain disruptions, hybrid work, financing the business during an evolving macro environment, workforce fluctuations (The Great Resignation, Quiet Quitting and RIFs) and interest rate hikes. CFOs also have a meaningful role to play in their companies’ Environmental, Social, & Governance (ESG) programs, an increasingly important topic for investors and companies. A 2022 McKinsey study reported dramatic changes in the gamut of functions that reported to the CFO, compared with data from two years prior. Amid all this disruption, it has become apparent that CFOs are expected to play a strong, central role, alongside executive peers, in stabilizing a business and positioning it to thrive in challenging conditions.
How did macro events shape the needs within this role?
I mentioned some of the macro factors above that ultimately shifted focus, and added responsibilities, of the role of the CFO, but overall, the increase in capital markets activity seen in late 2020 and the record setting 2021 had many companies in need of the formal CFO role. The increase in traditional IPO volumes (+93% YoY for the U.S.[1]) along with the strong emergence of the SPAC (Special Purpose Acquisition Company) vehicle required many companies to hire a CFO with public-company readiness and experience. In 2021, there were 613 SPAC IPO’s, an increase of 147% from 248 in 2020 and over 900% compared to 59 in 2019[2]. The increase in volumes for IPOs, both traditional and through SPAC IPOs, increased the demand for CFOs who were ready and experienced to lead private companies through these transitions. These day-to-day tasks of executing one of these transactions rely heavily on the CFO to stretch in functionality from investor relations, to legal to accounting, and more.
While public market exits have dried up in the last 18 months, we continue to see an abundance of hiring for the CFO role. However, these searches are no longer focused on CFOs who can transition a company from private to public or tackling the responsibilities of an IPO or SPAC process; instead, searches are focusing on CFOs with experience weathering prior downturns, turning companies around and bringing credibility during these challenging times. As a result, we have seen a decline in COO searches as more experienced CFOs take on both the financial and operational roles. This reduces cost to the company and streamlines turnarounds under one leader.
What are companies looking for in Chief Financial Officer hires?
The role of the CFO has evolved to become more strategic over time; not to diminish the historical functions of the CFO, these are incredibly important, but the strength in bench under a CFO across Controller, FP&A, Investor Relations, etc. focuses on most of these duties, thus elevating the CFO to be more strategic.
In a recent engagement for a private-equity backed business, some of the compulsory requirements included: significant prior M&A experience (buy side & sell side), past experience as a CFO of a private equity-backed company, proven track record to direct debt strategy and work with lenders and bankers, MBA in Accounting, large Audit firm experience (Deloitte, PwC, EY and KPMG) and of course, specific life science experience, and not to mention they had to be based in a specific city. Couple this with the considerations for a distributed workforce, repurposing hard assets, like office space, and budgeting for T&E in a hybrid world, it becomes increasingly evident what investors mean when they talk about the “war for talent”. Ultimately, the CFO search for an executive search professional such as myself, has become the most challenging search of them all.
How do you evaluate CFOs to ensure they are prepared to lead through this environment?
When hiring a CFO, a rigorous and multi-faceted assessment process must be applied. Each investor group and company has their own priority experiences that a search agency must consider and be thoughtful of – it is imperative that a diligent approach is taken during the brief taking. In the most part, my time is spent understanding the prospective CFO’s core competencies and leadership qualities, as well as their background in driving company growth (top-line & bottom line) as well as operational efficiency (supply chain, inventory management and distribution, etc.). The follow-on questions shift from quantitative to qualitative examples around how this was managed, how did the organization respond, what was the outcome and what challenges they encountered through this growth. When addressing core financial capabilities, the CFO will be asked to explain their experience managing significant budgets and P&Ls. How did they prioritize investments and what is their experience managing budget cuts, restructuring, or reallocating resources? We would also look to understand how the CFO implemented best practice across the finance organization: FP&A, GAAP reporting, IT systems and compliance.
For the ‘Strategic CFO’, understanding their M&A background (including strategic partnerships and joint ventures) and the transactions they have led takes up a large part of the discussion. Key questions around the number of buy-side/sell-side transactions completed, size of checks, capital structures, and whether they have directed and executed on documents are key for hiring decision makers to understand.
It is important to note that I have highlighted just a few topics and core areas an executive search professional may look to address. A lengthy article could be written on this topic alone. Finally, a thorough executive assessment (i.e., Myers-Briggs, DiSC Assessment, Lumina) along with thorough soft and back-channel references will be taken.
Do you have any predictions for how 2023 may further evolve the CFO role?
At this time, 2023 will mostly come down to the state of corporate transactions. While we don’t expect the IPO markets to reopen, certainly not to the extent they were in 2021, there is increasing optimism around M&A. CFOs are usually on the chopping block post acquisition and therefore we could expect to see an increase in available CFO talent. This is something to watch for if you are in the market for a CFO.
For companies not going through a corporate transaction, we expect the role of the CFO to be heavily focused on executing according to plan and focusing on profitability. CFOs who have led companies through prior market turbulence are highly coveted at this time, given the value they can bring to their executive counterparts, board members and employees broadly.
[1] FactSet, Annual U.S. IPO Activity
[2] https://www.spacinsider.com/data/stats