Why CFOs Get Clawed in the Bear Market

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They are scrambling to revise sales, earnings estimates, product pricing, and margin targets in light of higher materials prices. CFOs are rethinking investment plans to reflect radically altered demand, and they are restructuring balance sheets around troubled assets.

Too Much Multitasking

Some are searching for capital and husbanding cash while, at the same time, fending off shorts and refuting rumors of inadequate funding. They are dealing with activist investors, who are pressuring them for immediate results, while balancing interests of other shareholders looking for long-term gains. We have seen CFOs dismissed who have brought one too many surprises to the board or for failing to keep pace with marketplace changes. We have seen CFOs—who were adequate before the downturn—technically overmatched in the present environment and unable to provide the necessary leadership skills to handle board demands.

It is understandable why directors want to know the risks facing their companies. Directors' reputations are on the line, as well. The dilemma is that until marketplace turmoil subsides, CFOs cannot assess risks with certainty. This can breed tension unless boards grasp that little is to be gained by pressuring CFOs for better information. Rather, directors should learn why CFOs are having difficulties providing the answers that board members want. Boards should take more time to understand financials in detail.

And CFOs should guide directors through the numbers to create a better knowledge of what companies need to do to cope with the present market turmoil. Directors should refrain from censoring bad news while insisting on transparency. Conversely, CFOs need the leadership and courage to present circumstances as they are and provide options for dealing with them.

Tapping Boards' Wisdom

Directors should serve as sounding boards for CFO concerns. Directors should encourage CFOs to talk about potential risks to their companies from economic shifts. CFOs, in turn, should be constantly evaluating and identifying risks without fear of recrimination or of being received as messengers of doom. Boards should serve as counsel to CFOs, while CFOs in turn should solicit the board's wisdom. The cumulative financial expertise of directors is a reservoir of insight, especially since some older directors may remember what the last bear market was like.

There is no way now to know how long it will take business and society to return to more stable and predictable times. After Japan's real estate collapse in the early 1990s, that country took more than a decade to return to prosperity and financial stability. Boards need to partner with CFOs to explore ways to get through this challenging economy and to establish reliable economic models that can lead their companies back to growth.

Kevin Connelly is chairman of Spencer Stuart and conducts an active search practice in board directors and chief financial officers.