CEO-Succession: CFO or COO?

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By CharterQuest, 12 September 2023

Valentine Dobgima Nti, CGMA, CGA, PMP, M.Sc., MBA

Many have wondered at the Chief Financial Officer-to-Chief Executive Officer (CFO-to-CEO) succession phenomenon: Burnison (2015) analysed sitting CEOs in the Global Forbes 2000 and found that only 13% were former CFOs (exCFO-CEOs). The Bearings Institute (TBI) (2014in a European Fortune Global 500 CFO study, found that CFO-to-CEO successions were more likely during an economic downturn than during an expansion, a link recently verified by Heidrick & Struggles (2020): Analysing 965 large-company CEOs in 20 markets around the world, they found that 29% of CEOs hired post-COVID-19 pandemic were exCFOs, a higher percentage than in the previous 14 months. Others have instead reported a positive link with economic booms: Spencer Stuart (2013) found that Asia Pacific firms achieved more CFO-to-CEO successions due to the region’s buoyant economic environment. Also, Ciancio & Antonella (2018) found that the odds of CFO-to-CEO succession improved when Mergers & Acquisitions (M & A)s take hold.

Others have even implied that exCFO-CEOs (or at least, financially-expert CEOs) outperform their counterparts, especially on share price (Stuart, 2009).  The empirical link between Top Management Team characteristics and a firm’s behaviour as well as firm performance, remains a subject of contentious debates amongst Strategic Leadership and the Upper Echelon-Theory scholars. Using education/qualification as a proxy for Top Management Team (TMT) characteristics, some have established a link with executive behaviours such as earnings management (Miller and Xu, 2017); others found a link with firm performance measures such as Corporate Social Responsibility (CSR) Rankings (Huang, 2012), material misstatements (Kalelkar & Khan2016and the risk of firm failure (Custodio and Metzger, 2014).  Others however, report that MBA CEOs perform no differently than firms led by CEOs who hold non-liberal arts, law or liberal arts undergraduate degrees (Gottesman et al, 2010): In rationalising their findings, they posit that the time it takes from completion of a degree to becoming a CEO is long enough to diminish any benefit from a more-relevant educational background.

TBI also found that many CFOs were leaving their companies/sectors to return as CEO, with the Financial Services Organisations/sector (FSOs) being the single largest ‘net’ importer of exCFO-CEOs. This resonates with other UET scholars who found that the type of TMT background likely to be valued in different industries was contingent on their environment (Zhang & Rajagopalan, 2010); as such, the professed CEO−performance correlation could be confounded by inherent business and economic risk variations due to industry effects and differences in regulation and accounting practices (Akbar et al, 2017). This in part explains why Rajagopalan and Datta (1996) asserted the plausibility that CEOs with certain cognitive orientations and experiences are more likely to select certain industries; yet they wondered: Do CEOs select industries or industry conditions drive the selection of certain types of CEOs?

Furthermore, TBI found that 69% of CFOs will accept a CEO position right-away if one was offered to them, and warned that at least 35% of CFOs who show no enthusiasm for CEO-accession, attribute it primarily to lack of relevant experience/competencies.  However, other studies have found a significantly weaker enthusiasm for CFO-to-CEO succession: Ernst & Young (EY, 2016), surveyed 769 CFOs across the Americas, Europe, Middle East & Asia-Pacific and reported that only 31% of group-level CFOs aspired to be CEOs. Hyatt (2017) also reported that only 1-in-5 CFOs aspire to be CEO. Nonetheless -globally, CFOs with CEO aspirations has become an active target market for many experts and scholars. For instance, Mortensen (2018), premising that leaders learn more from on-the-job experience than from classroom training, recommended that Boards should facilitate CFO-development in social awareness, confidence and tolerance for ambiguity, as part of their CEO-succession-planning.

In serving the CFO role, The International Federation of Accountants (IFAC, 2014) advocated the benefits of holding a Chartered Accounting Qualification (CAQ).  Citing a 2010 EY global survey, it noted that the common level of education for a CFO is a degree in finance (29%), followed by a CAQ or MBA (27%). In respect of the CAQ, the Professional Accounting Organisations (PAOs), amongst others, develop the relevant syllabi, and oversee the development of members. These PAOs generally award members with a CAQ which prepares them for a career in two domains: Professional Accountants in Business (PAIB) or Professional Accountants in Public Practice (PAIPP) (IFAC, 2018). Whilst their syllabi are not limited to either, anecdotal evidence suggests the PAOs position their CAQ as primarily in either domain: PAIB (CIMA, IMA, ACCA) and PAIPP (AICPA, SAICA, ACCA). The ACCA is potentially a fuzzy-set (Verkuilen, et al, 2020as the only one with elective modules -deliberately designed to mingle in both domains. These PAOs fiercely compete within domains whilst collaborating across: Whilst CIMA (PAIB) has a Joint Venture with AICPA (PAIPP), and an active cross Membership Pathway Agreement with SAICA (PAIPP), the ACCA (fuzzy-set) is strategically-aligned with IMA (PAIB). Whilst facilitating cross-memberships, many recognise this is not sufficient, and through their individual learning agility (DeRue et al2012Dai et al, 2013), are forced to undertake further career development, as consistent with their CFO/CEO aspirations.

The foregoing background leaves wide open a  research gap: Firstly, the CFO-to-CEO succession findings are descriptively generalised, and devoid of any comparative intra and cross-country inferential or scientific support; Secondly, the issue is not compared to any other TMT position (e.g., the Chief Operation Officer, COO) with whom the CFO potentially competes for CEO-succession; Thirdly, the contradictory attribution to economic cycles suggests a major potential weakness and an opportunity in the Education and Strategic Leadership Development (SLD) of CFOs, in readiness for CEO succession; and Finally, it is unexplored from the vantage point of the PAOs who in the first place, certify these potential future CEOs as potential CFOs.This article explores this research gap; outlining the key research objectives, hypotheses as well as the importance of researching the gap.

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