INTERVIEW With "A Plus"
A Plus Magazine Editor George W. Russell, of A Plus, the official magazine of the Hong Kong Institute of Certified Public Accountants, asked ART's Managing Director to discuss the changing roles of CFO's, especially in today's fast-changing Greater China Market. With 48,000 high-end recipients each month, A Plus is one of the most widely circulated English-language monthly magazines in Hong Kong and the largest-circulating business publication.
Atlantic Research Technologies,
L.L.C. (ART), www.atlanticresearch.com,
is a global executive search firm, recruiting in the
industrial, high tech and service sectors, for senior- and middle-management
positions in general management, sales and marketing, finance, supply chain,
manufacturing, IT, and human resources.
A Plus: How critical is hiring the right CFO before an IPO -- the markets have been scrutinizing the choices made by companies such as Groupon and Zynga -- and what important role does he/she perform up to the IPO?
ART: "I see the founder of a company as the great captain of a beautiful and unique ship. The founder knows his or her ship from stem to stern, and s/he knows the crew very well and relies on the crew for most everything. But when it comes to bringing that ship into an unfamiliar port, the captain cannot rely on the stars in the sky, on experience with other ports, on the ship's seaworthiness or on the crew's skills. A harbor pilot, whose specialty is the intimate knowledge of all the currents, eddies and rocks present at that specific port must be brought aboard to bring the ship safely into the new port. Accounting and finance are well understood disciplines that generally should work in any environment, but an IPO is a special kind of situation - a new and unfamiliar port - that requires a specialist CFO to maneuver the company safely and properly through the process.
"In the classical evolution of a company, the first generation of finance head is often a person who can either help raise basic funding or who can maintain good financial accounting on an ongoing basis. That person might be called a VP Finance, Finance Director, Finance Manager, Controller, or even CFO, but basically that first finance head is looking at the day to day financial business picture and making projections about the company's future prospects. That job is not only "green eyeshade" numbers crunching but also the activity that characterizes most of the critical issues that keep businesses running smoothly.
"A challenge comes when a privately held company wants to go the IPO route. The people in the firm's finance department know the company well, have helped keep it going and advancing, and they also want the firm to be a great success. However, the process of preparing the firm for an IPO and taking it through, including all the road shows - that is just something that most perfectly excellent CFO's, Finance VP's, Finance Directors and Controllers just have not done, and frankly would not want to do. In such situations, it is imperative for a company to bring in someone who knows how to navigate the company through the IPO.
"We always recommend that whenever possible, a company should keep its best managers, even if there needs to be title changes and shifting responsibilities. The fact is that although the title 'CFO' suggests that one is the head of finance, the IPO CFO may or may not want to be involved in the day to day business of finance outside of the IPO. The IPO itself in fact usually takes most of that person's time and energies, therefore it is even more important to maintain a firm hold over normal business finance and accounting. There's plenty of room for a Controller or VP Finance to handle normal business and for the CFO to be almost entirely focused on the IPO.
"The pre-existing finance people represent the foundation and stability of the new finance department, and an incoming IPO-CFO should not automatically be seen as an easy replacement for other finance managers."
A Plus: A number of CFOs depart a company not long after the successful conclusion of an IPO. Is there such a thing as an IPO-specific CFO and how does he/she differ in skills or qualities from a post-IPO CFO?
ART: "Some people make careers of bringing companies to IPOs and then moving on, while others prefer to join a company, help it take off in the IPO, and then remain as the long term CFO. There is a lot of ongoing work after an IPO to keep a CFO occupied, not the least of which involves seeing wildly fluctuating stock prices post-IPO and handling those changes in a company's long term business plans. Also, long term investors want to see signs of continuity after an IPO, so CFO changes should not be done abruptly.
"We tend to see the IPO-specific CFO in the same way that we see IPO-specific CEO's. These are often people who are hired not only for their experience in IPO's but also for their biographies. Often these are people who come from a certain famous company in the same industry, or from other relevant successful firms, and their experiences at those companies are intended to suggest to prospective investors that this often much smaller firm now has senior managers at the helm who know what they're doing. These are the so-called 'been there-done that' kind of profiles. The suggestion to the investor is that this smaller company appears to be good enough in quality to attract senior managers from known firms.
"A lot of the early IPO CFO stars and IPO CEO stars move on shortly after the IPO, either because they are only performing a job for a specific brief task or because their happiest comfort level for a certain kind or size of company is different from that of the post-IPO firm.
"The post-IPO CFO who usually stays a long time after making the IPO happen is a person who enjoys the new company and is someone who really is looking for a home, not just a momentary 'big hit' in the stock market and cash-out. That kind of person is someone who usually is excited about building something new and keeping the company strong, healthy and growing. Often these CFO's last for many years after the IPO.
"In many cases, however, after an IPO, it is necessary to bring in a whole other kind of person as CFO. If the first generation pre-IPO company CFO was more of a numbers-cruncher, and if the IPO-CFO was a more of a road-show 'rock star,' then the third generation of CFO -- the post-IPO CFO -- is more of a larger company, fast growth (and perhaps fast fall) specialist CFO.
"Because the 3rd generation CFO needs to deal with wide fluctuations in stock value, perhaps we might describe that kind of CFO as sort of a 'surfer CFO' profile, who can run finances for a large, now public company, under the greatest of scrutiny. Often these CFO's are CPA's or CA's. In a sense, they have the hardest job, because they are in the game for the long run, not just for an IPO announcement and execution. This person needs to be able to run a much larger finance department with a more sophisticated reporting structure, as well as have an eye on long term planning and mergers and acquisitions. In most cases, there will be a larger international finance need, as the now better funded company might wish to expand abroad."
A Plus: Given the recent accounting scandals in the US and Canada, what lessons could Chinese-invested companies learn in terms of choosing an appropriate CFO before an IPO?
ART: "I think that Chinese business people understand that there are many challenges in financing, growing and running their businesses, be they privately held companies, family companies or pre-IPO companies. We all hope that these challenges will lessen in the years to come. Until then, the best advice that I could give is to hire a CFO for the IPO project as you would choose a friend. By this, I do not mean that the CFO has to literally be your friend or become your friend. Rather, if you are a good and honest person, you want to be surrounded by good and honest friends in your life. Such people will give you comfort, protection, happiness and success.
"If you are hiring a CFO, do not hire him or her if that person tells you that you must do dishonest things in order to succeed. In fact, like the good friend who tells you when you are wrong, the CFO who tells you what is wrong with your existing financial practices and who suggests positive changes, might be your greatest helper toward your greatest business successes.
"There is no country or nationality that is free from corruption or that is incapable of doing good. Everywhere there are great creators, visionaries, engineers and inventors whose ideas could be made into great, successful and ethical companies. The business owners, as well as their investors, who wish to see such successes, first need to heed the following advice: 1) 'To see and listen to the wicked is already the beginning of wickedness.' (Confucius) and 2) 'The only thing necessary for evil to prosper is for good men to do nothing.' (Edmund Burke). I think that if a founder of a business keeps those two wise quotes in mind, s/he will be able to avoid a lot of problems."
A Plus: What is the best way for a company to positively manage the departure of a CFO to investors, employees, media and the public?
ART: "Of course, each situation can be unique, and there is not one catch-all reason for a departing CFO, nor a single solution to explain the departure of a CFO. We recommend to our clients that whenever possible, they speak very frankly and privately with their current CFO about the firm's ongoing needs in finance and discuss mutually acceptable strategies for the CFO's departure.
"Whenever possible, it is good for there to be a clean hand-off from one CFO to the next. In the case of IPO candidate companies or recently successful IPO companies, it is very natural for there to be a different kind of CFO to be brought into the firm at different stages. Often employees, the media, and investors panic, because in their minds a CFO change means that the company's finances or prospects might be bad. This is especially common in markets where investors are not too familiar with business realities and envision the company in a horse race where a jockey suddenly is pulled off one horse in the middle of the race. In such a case, the first thought is 'Don't bet on that horse! Something must be wrong with him!' One solution might then be to take a moment to briefly reflect on the achievements of the outgoing CFO, and the value that s/he brought to the firm to get it to that specific stage of development. Then, the next CFO could be introduced as someone who has a trustworthy track record as well as experience in bringing similar companies to the next logical stage of growth.
"This kind of announcement can be made without a lot of stress, but I am often amazed at how many companies leave out the reasons for the new person being brought in. Some informed investors will understand the logic for the change, but most investors will not care or understand the reason for the change if the new CFO is just announced boastfully without providing an explanation of the differences between the former and the new CFO's experiences. If people are given an explanation of a logical growth process being handled, there will be much better understanding of the change."