Why CFOs Get Clawed in the Bear Market

Everything from insensitive boards to personal liability for financial reports is making CFOs more apt to quit their jobs

by Kevin Connelly

Turnover has increased among chief financial officers since 2005, and boards should worry about it. The average tenure of CFOs in the top 500 companies is now 4.1 years, vs. 5 years in 2005, and there are few signs of the trend stabilizing. High turnover isn't healthy for corporate governance, especially in a bear market. CFOs with superb technical skills and the required leadership capabilities are hard to find in normal economic times. In the kind of turbulence we're experiencing now, CFOs face unusual difficulties providing financial results, making accurate business forecasts, and allocating capital accordingly.

Accounting and forecasting systems designed for "normal" conditions are often inadequate for times of rapidly shifting economic events and sudden changes in asset values and commodity prices. Heightened pressure from boards to provide a crystal-clear picture of where the company is headed financially adds to CFOs' stress.

Directors need to collaborate with CFOs in ways that foster transparency and the commitment to working together. And directors need to encourage CFOs to stay in their jobs. The dangers of the position have reached a point where some financial executives are turning down opportunities to become CFOs of public companies. Many opt instead for roles in private equity, where they face less regulation and greater chances to improve value.

SarbOx Pressures

The risk for today's CFOs has roots in the Sarbanes-Oxley Act of 2002, specifically Section 404. The law requires companies to publish information concerning the scope, effectiveness, and adequacy of the internal-control structure and procedures for financial reporting. Although Section 404 appears to be less of a burden now, it remains a compliance booby trap, since the inadequacy of controls is frequently evident only in the wake of breakdown.

A second provision of the law has had an even more chilling effect on CFO tenure. SarbOx tasked CFOs with certification of, and responsibility for, financial reports, making them and chief executives personally liable for accurate financial disclosure. Spencer Stuart has met with candidates for CFO jobs who won't discuss working with companies that have assets in jeopardy. They consider the potential personal liability and reputation risk to be too great.

Finally, SarbOx tasked CFOs and CEOs with rapid disclosure of material changes in financial conditions or operations. This section of the law may not have anticipated periods of turmoil, such as at present, that make such disclosure difficult, if not impossible.

Ravages of the Bear

The current bear market has intensified risk and stress on CFOs, which is why boards need to be more understanding. CFOs, especially in financial service companies, are facing genuine difficulties establishing the worth of assets. Mark-to-market accounting requires almost daily writedowns of subprime mortgage portfolios. Valuations deemed reasonable and even conservative a quarter ago can appear aggressive and improper in a declining market. Even CFOs of nonfinancial institutions, such as transportation and auto manufacturing companies, are watching the value of airplanes, autos, and trucks plummet, because of skyrocketing fuel prices and declining demand. At what point do these asset values become impaired?

The prices of wheat, corn, oil, iron, copper, and other commodities are ratcheting up so quickly that CFOs in many different businesses, directly and indirectly affected by fluctuating commodities prices, are struggling to make sense of how to keep up with price changes. It has even become more difficult for CFOs to negotiate acquisitions or divestitures of operating companies, because it is hard to answer the question of what these businesses are worth.

Most CFOs have not experienced markets like the present one and have to learn to make the necessary adjustments. The last time U.S. business saw similar turbulence was in the late 1970s and early 1980s, before many of today's CFOs began their careers, so there are few guideposts for what they are facing.