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Some chief executives famously brook no dissent but, however awkward it may be, posing searching questions is a core skill for an organisation’s financial conscience, its CFO

This article was first published in the October 2012 UK edition of Accounting and Business magazine.

What does it take for a finance director to stand up to their CEO? The question is not as flippant as it sounds. The relationship between a company’s two most senior executives is crucial to its success. And yet it can go badly wrong.

This month marks the fourth anniversary of the government’s multibillion-pound bailout of the Royal Bank of Scotland. When the Financial Services Authority revealed in its report last December why RBS had collapsed, it had much to say about the bank’s CEO at the time, Sir Fred Goodwin, and some of the decision-making that went on in the company.

The disembowelled CFO

Buried deep in the report, on page 234, there was one telling statement about the relationship between the bank’s CFO and CEO, when the bank’s head of group internal audit was quoted as saying: ‘There have been a number of observations made during this review that the group CEO tends to operate too often in the CFO role and that [the CFO] should be more independent in his decision-making.’

Clearly the FSA had concerns about the way the two post-holders related to each other and whether they were working effectively.

In the end the FSA was left asking more questions about how the RBS board worked than it was able to answer. It wondered in its report if the board provided effective challenge to the CEO and whether the CEO’s behaviour discouraged effective and ‘robust’ challenge.

As for Goodwin’s relationship with his CFO, it’s difficult to know what the details were – the FSA report sheds little further light.

But that single comment raises an important question about the way CEOs and CFOs should work together and what the responsibilities of the finance chief are: what is the most important characteristic in a CFO when dealing with the leader of the company?

The ability of the chief executive and the head of finance to work together is essential if the company is to be successful. But the relationship is multifaceted and not just about the pair collaborating on strategy, although this is top of the must-have list as well.

It goes without saying that problems begin for a company when its board ceases to function properly. Dr Trevor Bentley, a pyschologist and consultant who advises executives on their team work, writes in an article for Gestalt Review: ‘In practice what seems to happen is that boards of directors tend to operate in ways that seek to minimise ineffectiveness. Relationships are often tenuous, superficial and even dishonest. There are quite often transitory subsystems of people who support each other out of personal interest. The best that most boards achieve, often through share option schemes, is to align the self-interest of individual directors with the interests of shareholders.’

Bentley’s paper describes how board members find it difficult to communicate, especially when it comes to expressing an opinion that challenges the accepted view.

This could be particularly the case if the CEO is perceived as being extrovert, tolerating no dissent and exuding overconfidence about his decisions. In a famous New Yorker article in 2009, Malcolm Gladwell, author of best-selling book The Tipping Point, argued that a psychological pathology of overconfidence among CEOs was a major cause of the banking crisis.

Extrapolating that problem to companies in general leaves other executives, including the CFO, in a difficult position, especially if they disagree with the chief executive’s direction of travel.

Professor Adrian Furnham, an expert on executive behaviour in the psychology department at University College London, says boards can encounter a number of problems that make effective collaboration extremely problematic. These include:

  • having boards so big they fragment into smaller factions
  • excessive ambition among key members, bringing them into conflict
  • ambiguity in the roles of board members, with ill-defined or even vague responsibilities
  • hidden agendas
  • delegation failures, which take board members off in different directions.

But among the key issues Furnham notes is a propensity for executives to go quiet and withdraw when faced with difficult issues. He calls it a conspiracy of silence. ‘Surprising perhaps, big boys often cope with issues by never mentioning them. Just as talk about money and death may be taboo in certain circles, teams often deal with emotional issues by ignoring them.

‘The way to stop groups conspiring to be silent is to bite the bullet and, where appropriate, put the issues on the table. There needs to be a rule about what can and cannot be discussed, when and why. It is often the personal pathology of the CEO that dictates what is taboo or not.’

‘Awesome bullies’

While Furnham is making a general point, the view chimes with the executive quoted in the FSA report. In an aside, Furnham says: ‘I am sure some CEOs are simply awesome bullies and some directors easily cowed by them.’

This is undoubtedly a major stumbling block for board members but verging on disastrous for a CFO. The ability to challenge a CEO respectfully is what the CFO’s role is all about. Margaret Ewing, former BAA CFO and until her retirement earlier this year a vice chairman and CFO mentor at Deloitte, says this is one of the core skills that board chairmen look for in a new finance chief. The core task here is to act as the company’s ‘financial conscience’, remain independent and pose searching questions of a CEO’s ideas and decisions. It’s on this issue of being confident enough to remain independent that she says many potential CFOs fall down. On the other hand, she says she knows of at least one incident in which a CFO was so independent of mind he was asked to step down shortly after joining a large publicly listed company.

The relationship then is one where there is a careful balance between collaboration and respect when one director questions the decisions of another.

‘This is a big, big issue,’ Ewing says, ‘and one of the attributes of a CFO that a board looks for. The CFO needs to work closely with the CEO and that partnership is important to the board, the investors and to the company as a whole. But the CFO also needs a relationship where that ability to challenge is trusted.’

Time to go

Indeed, Ewing believes the opportunity to challenge is such a critical issue that it could be a deciding factor in whether a CFO stays in position or decides to call time. ‘There will be times when there has to be some tough talking and the CEO has to respect that. Otherwise the CFO shouldn’t stay in the organisation.’

Ewing’s advice to existing and aspiring CFOs is to learn to make arguments in a way that is constructive and not confrontational. But there should also be support from the chairperson. If the CFO has a point, then the chairperson should be willing to talk to the CEO to get it heard.

This is a point Furnham also emphasises. ‘It is the role of the chairperson to get the best out of the board through optimal membership, appropriate control and openness. Getting members focused and clear about their role and joint agenda sounds easier said than done with self-important grown-ups, but it is essential to ensure board functioning.’

The four flaws

Finance chiefs unable to act independently and challenge their chief executives will fall into two broad camps: those incapable of doing so and those blocked from doing so, possibly by the behaviour of the CEO.

CEOs set the tone of the relationship with the FD because they are the individuals with most authority in the executive group. Dr Trevor Bentley, a psychologist and consultant who provides advice to executive teams, including bankers, believes chief executives can come to the boardroom table with any one of many pathologies, and identifies four main character traits that can damage the relationship with fellow executives.

The ‘specialist’ is an executive who comes to the CEO job having specialised in another role such as CFO. Bentley says: ‘The main point here is that whatever the specialism of the CEO they find it very hard to let go and do their new job.’ With so many CFOs stepping up to the most senior role this could present a particular problem for incoming finance chiefs. The key, says Bentley, is that CEOs should have a properly defined role and receive support. He adds, rather discouragingly: ‘The norm is that CEOs are appointed from a specialism and they aren’t really equipped to be CEO.’

In the next group Bentley identifies CEOs for whom any hint of failure induces a sense of shame. In an attempt to avoid this, the CEO puts pressure on the executive team who respond by backing away from questioning the CEO’s decision-making.

In other cases CEOs can simply become like overbearing parents making all the decisions and seeing the team as children who need supervision. ‘This CEO often plays the parent-to-child relationship instead of having an adult-to-adult meeting of equals round the board table,’ says Bentley.

Lastly, there is the narcissist. Bentley says most CEOs have some narcissism in their personalty and that it may be a healthy prerequisite for success. The problems come when the self-regard dominates and the CEO refuses to listen to anyone because it ‘deflates’ their self-esteem. This is when the narcissist inaugurates a regime of blame.

Bentley says all these scenarios are difficult to manage, especially if the CFO attempts to challenge the CEO on their own. ‘You need to have a powerful sense of self, a strong individual with self-belief to push back,’ he says.

One approach is to co-opt another board member, possibly the chairperson, into acting as a mediator.

Professor Rob Goffee, of London Business School, says: ‘My simple conclusion generally is that good boards have good chairmen. If the chairman has a good relationship with the CEO, even better. If this bit works, much else follows.’

Gavin Hinks, journalist

Last updated: 7 Apr 2014