The State of Hiring A Year in Review: Chief Financial Officers in the Korn Ferry 1000 (KF1000)
Improvements in the economy and recovery in shareholder value combined to create opportunities for movement among chief financial officers (CFOs) of the largest one thousand U.S. based companies tracked by Korn Ferry (KF1000) in 2013, with the turnover rate reaching the highest level in four years at 16.4%. Compared to the prior year, CFO hires in the KF1000 increased by 16.3%, and showed a 36.7% increase from 2010.
Turnover Rate 16.50 16.00 15.50
Percent
15.00 14.50 14.00 13.50 13.00 12.50 12.00
2011
2012
2013
According to Korn Ferry analysis of current and historical hiring data, an improving economic environment has played a significant role in increased hiring activity for CFOs in three ways:
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1. A s the economy shifts, so does the focus on where and how companies intend to create value over the next three to five years. As a result, a more positive outlook can change the desired background of the CFO.
2. E conomic improvement overall and enhanced stability within a company (as evidenced by a more stable/higher stock price) set the stage for a better CFO transition in the eyes of analysts and investors, and also allow for a more amicable hand-off. Among large companies, planned transitions are often accomplished by either developing internally over many years, or bringing in a successor in advance.
3. With a recovery in shareholder value, CFOs are generally in a better financial position to make a career change, including retiring as planned or retiring early.
In 2013, there was an unprecedented number of retirements, amounting to 36% of departures, compared to the historical average of about 23%. Having brought their companies to a more stable place financially, departing CFOs are generally more comfortable, professionally (in terms of reputation) and personally/financially, to transition out of their roles. Departing CFOs
35+42+23
Internal Role Change 22%
Retirements 36%
Resignations 42%
In 2013, nearly 60% of CFO hiring occurred among companies in the top half of the KF1000. Typically, the majority of turnover activity occurs in the bottom half, where the bench of talent is not as deep or well developed. Greater activity among the larger companies is a reflection of the economic improvement (as discussed above). For these companies, during or immediately after a recession is not ideal timing to execute succession in a senior executive role such as the CFO. Rather, preferred timing is when there are fewer risks to making a change, such as when the economy has stabilized and is showing renewed growth.
Turnover Distribution by Size
of CFO turnover occured in the top half of the KF1000
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CFO Appointments
58.2% KF500 44%
KF500 49%
KF500-1000 56%
KF500-1000 51%
2011
2012
KF500 58%
KF500-1000 42%
2013
“Hot” Sectors in Hiring In terms of hiring and promoting activity among the KF1000, the most active sectors were Industrial, Financial Services, Technology, Energy, and Healthcare/Life Sciences— all of which recorded their highest turnover rates in the prior four years. Among the specific sectors, Industrial saw the greatest activity with a 19.8% turnover rate. Similarly, Financial Services saw a 19.6% change rate, up 7.8% from the prior year. Technology, at 17.4%, has steadily increased each year since 2010. Energy came in at 16.4% and Healthcare/Life Sciences had a turnover rate of 15.3%, after being relatively dormant in 2012 and 2011. Consumer stabilized in 2013 at 14.6%, while Retail declined to 12.5%, from 2012 (its most active year) when it saw an 18.5% turnover rate. Services was at 10.6%, its lowest turnover rate in four years. Activity by Sector Industrial Financial Services Technology Energy Life Sciences Consumer Retail Services 2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
“Offense” vs. “Defense”—CFOs with General Management Backgrounds As Korn Ferry’s analysis reveals, improved business fundamentals are allowing companies to switch from a largely “defensive” posture (e.g. cost-cutting and compliance) to an offensive position of determining where and how to deploy capital and drive value operationally. As the CFO role expands far beyond “the numbers” to also encompass an operational and strategic focus, there is increased demand for executives with experience as general managers (GM), as opposed to the traditional finance and accounting background. In fact, when polling CFOs of the KF1000 in the firm’s biannual Pulse Survey, more than 70% of respondents reported that
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they were being asked to take on more operational responsibilities. In addition, 46% of those surveyed identified general management as the most important work experience for their successor to have; 51% said general management experience would benefit them the most as candidates for the CEO position.
46.2%
of CFOs see general management experience as critical for their successor
An analysis of the CFO hires within the KF1000 found that 25% (40 executives) came from a GM background, defined as non-accounting/ finance, including: chief operating officer, chief executive officer, division presidents, regional presidents, and so forth. These hires experienced a 15 percentage point gain from 2012, when 14% of incoming CFOs had GM backgrounds. In 2010, only 12% had a GM background. Not surprisingly, the percentage of incoming CFOs from controller/accounting functions showed a continued downward trend, amounting to 14% of hires (23 executives) in 2013, down from 15% in 2012, 19% in 2011, and 21% in 2010. Shift in Functional Expertise Control/Accounting
General Management
25 24 22
Percent
20 18 16 14 12 10
5
2010
2011
2012
2013
The GM trend impacts the succession planning process for the corporate CFO role. Ideally, companies want to identify, develop, and evaluate two to four CFO candidates with a variety of backgrounds, such as financial planning, treasury, and operating finance experience. Ensuring that high-potential talent rotates into operational assignments, such as an operating CFO or GM with full P&L responsibility, makes them more attractive candidates for the corporate CFO position. In addition, CFOs who have broader operational experience tend to be more suitable candidates for the CEO role, as part of the succession process at the top, than those with corporate finance expertise only.
When companies hired a sitting CFO, they came from a smaller firm 79% of the time; provided most had experience in key areas such as capital markets, interfacing with the board of directors, and an operational background. Less risk is perceived when bringing on someone with the right background from a smaller company (within reason; this would probably not occur when a huge leap is involved, such as from a small to large cap company), than taking someone from the same-size company who has not been a sitting CFO. It is also an indication of a deficit in supply as CFOs have the ability to be selective about their next role, and the vast majority aim to move “up market” to larger companies by revenue. This shortage in CFO talent is another reason why tapping nontraditional functions that align with the evolution of the position is increasing in popularity and value.
78.6%
of CFOs that took a new CFO position moved up market
Meanwhile, as large companies emphasize the operational, strategic role of the CFO, traditional accounting/controller duties are increasingly being delegated to a “Chief Accounting Officer” or a “super-controller,” with a level of compensation that is on par with that of a CFO. As roles are delineated, companies want to ensure that they have strong talent in both areas.
Industrial and Technology Drive the Trend; Consumer and Energy Stay Traditional Industrial companies in the top half of the KF1000 had an above-average, 23% turnover rate. Of those hires, 36% of incoming CFOs came from a GM function. Typically, Industrial companies hire more GMs than any other sector, because value in this sector is generally created and managed through people, production facilities, other assets, and the supply chain. In other words, these components are where money is made and risks reside. With so many “levers” that affect growth in Industrial companies, a CFO must have a deep understanding of the business, which favors those who have come out of a GM role or who have rotated through a GM role, versus someone who has spent much of his or her career in a corporate function such as treasury or accounting.
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Technology hired the largest percentage of CFOs out of the GM function compared to any other sector at 35%, which was up 600% from the prior year. In contrast, only 10% hires in Technology were sitting CFOs, down from 63% a year before. The Technology sector can be further delineated between hardware, which tends to be more focused on margins, and software, which emphasizes research and development to drive future growth. On both sides of the Technology spectrum, companies sought incoming CFOs with operating experience who understand the business broadly, beyond having the typical expertise in accounting and investor relations. In contrast, Consumer companies tend to take a more traditional approach, as evidenced by the lowest percentage of GM hires (13%), while consistently hiring a large portion of corporate CFOs from divisional CFO roles—more so than any other sector. In Energy, sitting CFO hires fell from a four-year high within the sector of 47% in 2012, to only 10% in 2013. However, Energy continues to hire candidates from control/accounting and treasury—a trend that was almost nonexistent in any other sector, except Consumer. In addition, Energy saw the highest percentage of freshman CFOs at 86%--more than double a year ago when 41% of CFOs were in that role for the first time. This might be due to the fact that Energy reported the highest percentage of CFOs moving into the CEO position. Often, a company is more willing to bring in a first-time CFO if someone else in the C-suite has that direct experience. Freshman CFOs Appointed
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Energy sector
All other sectors
86.4%
53.2%
Looking Ahead After a surge in hiring in the recent year, turnover is expected to stabilize in 2014. Although there are still retirements and transitions in the works, 2014 will not repeat the strong increase in turnover that we saw from 2012 to 2013, as career moves that had been delayed due to economic uncertainty were finally brought to fruition. Activity will likely pick up in 2014 one level down from the CFO, reflecting financial organizational changes as new CFOs create their own teams. The percentage of incoming CFOs with a GM background will likely continue to remain significant in 2014 and going forward, as evidenced by succession plans among Korn Ferry clients. Companies looking to hire successors and potential successors to the CFO report they are putting emphasis on GM experience. Also likely to trend higher are incoming CFOs with finance backgrounds such as financial planning, M&A transactions, and other senior financial executive roles with forward looking and strategic responsibilities. Among the sectors to watch for hiring shifts in the near term is Healthcare. Although this sector has focused traditionally on cost containment, the increase in consolidations and M&A activity could bring some changes in how CFOs are viewed in healthcare. What that means for incoming candidates, however, remains to be seen.
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Key contacts: Financial Officer Center of Expertise Bryan Proctor is a Senior Client Partner and Global Co-Leader of the Financial Officer Center of Expertise. In addition, he is an active member in the firm’s Board & CEO Practice.
Paula Park is a Senior Client Partner based in San Francisco, and a member of the Financial Officer Center of Expertise. In addition, she is an active member in the firm’s Technology Practice.
Pascal Gibert Global Co-Leader Financial Officer Practice Paris
Kristine Langdon Senior Client Partner Financial Officer Practice Boston
Eve Nam Principal Financial Officer Practice Newport Beach
Margaret Lee Vice Chairman, Global Co-Leader Financial Officer Practice Hong Kong
Marc Létourneau Senior Client Partner Financial Officer Practice Toronto
John Petzold Principal Financial Officer Practice New York
Chuck Eldridge Senior Client Partner Financial Officer Practice Atlanta
Mark Mulvanerty Senior Client Partner Financial Officer Practice Philadelphia
Stephanie Buckles Principal Financial Officer Practice Chicago
David Westberry Senior Client Partner Financial Officer Practice Dallas
Barry Toren Principal Financial Officer Practice Philadelphia
Erin Evans Global Knowledge Manager Financial Officer Practice Boston
Ellen Williams Senior Client Partner Financial Officer Practice Stamford
Carroll Leatherman Client Partner Financial Officer Practice New York
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