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CFOs on the Hot Seat


In the days after the Enron accounting scandal broke, Carol B. Tom? swung into action. As chief financial officer of the $58 billion home-improvement giant Home Depot Inc. (HD), she immediately strengthened the company's code of ethics. All 1,500 staffers who work in finance were subjected to much stricter guidelines. Her 25 lieutenants now have to sign personal attestations that all their financial statements are correct -- just as she and her boss, Chief Executive Officer Robert L. Nardelli, have to by law. The work has been grueling. "For all of my professional life, all I wanted was to be a CFO," says Tom?. "But there are now days when I really ask myself if I signed up for all this."

Life has gotten a lot tougher for CFOs since the late-1990s bubble ended in a series of high-profile investigations and indictments. Enron Corp.'s Andrew S. Fastow, who faces a 78-count indictment to which he has pleaded not guilty, may be the infamous extreme, but every CFO is feeling heat from the crackdown that followed the revelations of his alleged misdeeds. A slew of new rules from legislators and regulators has added greatly to CFOs' compliance burdens, increased their potential personal financial liability, and exposed them to severe penalties if they break the law. Now, CFOs who knowingly make false statements in filings to the Securities & Exchange Commission face fines of up to $5 million and 20 years in the slammer.

The role of CFOs, who typically earn a healthy $2 million to $3 million at big companies, is undergoing a radical transformation as they are forced back into watchdog mode. During the go-go years of the stock market boom, some behaved more like corporate strategists than traditional number-crunchers and guardians of the company coffers. Some became part of the problem by using aggressive accounting techniques, such as creating off-balance-sheet entities to hide debt. Others became virtual profit centers in their own right, routinely managing earnings to produce the exact numbers that Wall Street expected.

These days, it's back to basics, with CFOs focused on scrutinizing the numbers with a gimlet eye and on reining in other executives. Audit committees and regulators expect CFOs to take a hard line with everyone, including the boss. "My job is still to say, 'No, no, no!' whenever something doesn't make sense financially," says Tom?. Under pressure from regulators, CFOs are poring over the books as never before, and putting into place their own regulations to protect themselves and their companies. "I spend about 50% of my time really digging into nuts and bolts," says Barbara A. Yastine, CFO of investment bank Credit Suisse First Boston (CSR). "I'm a bulldog on a lot of that stuff."

Workloads have soared. Audit committees are calling more frequent meetings and asking more probing questions. Disclosures are getting fine-tooth reviews by regulators, investors, and litigation-minded plaintiffs' attorneys. And the SEC is ever ready to pounce: Capital One Financial Corp. (COF) CFO David M. Willey resigned on Mar. 3 after the agency warned it might pursue him for alleged insider trading. Through an attorney, Willey denies any wrongdoing. Meanwhile, CFOs have less time to produce their statutory reports, which must reveal far more than before. "It's a lonely job to begin with," says Stephen L. Key, a former CFO for Textron Inc. and ConAgra Foods Inc., who now works as a corporate director and helps manage privately held companies. "It has not become more fun, but rather less fun."

CFOs are building a paper fortress around themselves. Annual filings are now up to a third thicker and packed with arcane disclosures as CFOs publish just about anything of interest to shareholders. "And shame on us for not having put these things in before," says Rockwell Automation Inc. (ROK) CFO Michael A. Bless.

The strain is spilling over into their personal lives. For their families, the spectacle of other CFOs doing perp walks "has been unnerving," says Bank of America CFO James H. Hance Jr. "My wife asks me daily if I'm looking at every transaction we're doing. And when she reads about things in the newspapers, she asks: 'Are you doing this?"' Another CFO, who asked not to be named, said she had put all her assets in her husband's name because of worries about her liability. Adds Kevin M. Sheehan, CFO of $14 billion travel and real estate outfit Cendant Corp. (CD): "Considering the awesome responsibility, it certainly doesn't help me sleep at night."

Searches for new CFOs have been taking longer than ever, with six months not uncommon. Last year, Ford Motor Co. (F) turned to former CFO Allan Gilmour to fill the post temporarily. Now, Gilmour is keen to step into an oversight role and find someone else to handle the mountain of paperwork created by Sarbanes-Oxley. But so far he's been out of luck: Talks with IBM (IBM) CFO John Joyce broke down recently, say sources. "People at the top of their game are doing well right now" and that's making them reluctant to move, says Barry I. Bregman, who heads the CFO practice at search-firm Heidrick & Struggles.

The status of CFOs is rising sharply: Some believe they are becoming co-equals with their CEOs, as the dynamics of America's executive suites change profoundly. Many CFOs now have unprecedented access to the boss, who checks with them constantly -- even on the smallest matters. "I'm in [CEO Henry R. Silverman's] office a dozen times a day," says Sheehan. "In the old days, if something wasn't a big deal, he might make the decision. Now, we are [both] involved."

To measure just how challenging the world of the CFO has become, BusinessWeek teamed up with Deloitte Consulting, soon to be renamed Braxton, to commission an exclusive survey from Research International of the largest 1,500 companies tracked by Standard & Poor's. With 519 respondents -- including 214 CFOs and 75 CEOs -- it provides a snapshot of a key management function in rapid transition.

Our survey indicates that fully 91% of CFOs feel their job is getting harder, and 62% say they're working longer hours. However, not many plan to quit, perhaps because their standing is rising. More than one-third, 36%, say they're on a more equal footing with the CEO than before, while just 28% say they are far from being peers.

We also found evidence of growing tensions between CFOs and CEOs. Each group feels that it is taking charge of reform efforts: 64% of CFOs say they're the leaders, while 47% of chief executives think CEOs are. What's more, it's clear that many CEOs still don't grasp how exasperated their hard-pressed CFOs feel. Nearly half the CFOs, a sizable 45%, told us they are less satisfied with their jobs than they were a couple of years ago. But fewer than a third of CEOs believe that to be the case.

The real shocker was that nearly a third of the CFOs don't think that the new rules enshrined in the Sarbanes-Oxley Act or imposed by the SEC and other regulators make another Enron less likely.

If they were always apt to be perfectionists, CFOs nowadays must be downright obsessive. Poring over every line of fine print in thick quarterly and annual filings keeps many of them in the office for 12-hour stints. The pressure has been particularly intense in the energy industry, whose long list of problem companies was led by Enron. "Our decision-making needs to be near-perfect, if not perfect," says Ruth Ann M. Gillis, former CFO of $15 billion electric utility Exelon Corp. (EXC) "You are making decisions today that perhaps in three months or even three years might become the subject of further scrutiny."

Even if CFOs' own behavior is above reproach, they're not home free. They have to rely on information from scores of people whose errors could compromise the numbers. Awkward questions by regulators could soon follow -- even earnings restatements that rile investors and hammer the stock. "Mistakes get made, and they're on your watch," says Key, chairman of the audit committee that's laboring to restore credibility at Aurora Foods Inc. (AOR) The maker of Duncan Hines baking mixes shook up its executive suite and restated results in 2000 after an in-house probe turned up questionable accounting practices. Says Key: "Even if you do the best job in the world, mistakes will get made."

To minimize such risks, CFOs are putting more process and structure into corporate financial work. Formal rules and procedures now prevail in areas that formerly received little attention. For example, within three days of the Enron scandal breaking, Cendant rushed out a press release detailing all its off-balance-sheet entities. While these had been disclosed in earlier SEC filings, Sheehan wanted to give shareholders a rundown of them in plain English. Then the company decided it wouldn't hire any accountant who had worked on its external audits in the preceding five years. Making section leaders attest formally to the truth of their figures, as Home Depot's Tom? did, is now commonplace. At Consolidated Edison Inc., a New York-based utility, CFO Joan S. Freilich has some 20 people sign her quarterly releases in advance -- up one-third post-Enron.

Even if they don't relish becoming in-house financial cops -- just 13% of our respondents see themselves that way -- the stringent new rules are giving CFOs enormous clout. If there are objections to what she wants to do, admits Yastine, "I say: 'I'm the one signing Sarbanes-Oxley."' At $24 billion drug store chain CVS Corp. (CVS), CFO David B. Rickard says he believes that CEO Thomas M. Ryan "values more highly today the skills I bring as CFO." Says James R. Young, CFO of Union Pacific Corp. (UNP) in Omaha: "[CEO Richard K. Davidson] and I don't necessarily agree on everything." When the pair recently differed about whether to commit to a pricey software development effort, he says, Davidson deferred to his judgment that the return was too skimpy. Davidson says he welcomes Young's cool head because he needs a CFO he can "bet my house on."

Audit committees need a similar crutch, given their increased legal responsibility for corporate governance. That's creating a tighter bond between them and CFOs. For one thing, audit committees now spend a lot more time with CFOs than before. At Milwaukee's Rockwell Automation, says Bless, the latest meeting lasted 4 1/2 hours, double the usual time. And in such meetings, it's the CFO's take on the inner workings of their company that directors hear, not the CEO's. They get access to data, says Alcoa Inc. (AA) CFO Richard B. Kelson, that in the past "maybe only internal management saw." Soon after Sarbanes-Oxley came into force last fall, for example, Sheehan says Cendant's audit committee had three meetings. In one, Sheehan and other top execs gave a detailed review of Cendant's real estate and hospitality ventures after the committee asked for more information on those businesses' earnings and economic and political risks.

It also falls on some CFOs to upgrade the quality of directors. Medical products maker Baxter International Inc. (BAX) put its audit committee members through a financial literacy test last year to make sure they were up to snuff. Then, to fill in the gaps, the company's finance and tax staff trained them on such matters as deferred taxes, revenue recognition, and new disclosure rules. "The rules have become increasingly complex," says CFO Brian P. Anderson. "It's incumbent upon us to ensure that our audit committee is prepared."

For many a company, recruiting another CFO to serve on its audit committee is the easiest way to comply with new rules requiring a "finance expert" as a member. However, such folks can be especially demanding. Not long after joining the audit committee at Merck & Co. (MRK) in 2000, for instance, Bank One Corp. (ONE) CFO Heidi G. Miller asked for detailed information on such matters as quality-control practices in manufacturing and patient safety in clinical drug trials. Recalls Merck CFO Judy C. Lewent: "She was basically saying, 'I want to understand all of the audit and audit-control functions, not just those that pertain to the classic finance function."'

All the same, CFOs' attempts to make themselves and their companies bulletproof aren't infallible. Even innocent missteps can still clobber a company's stock and unleash plaintiff's lawyers and regulators. In this post-Sarbanes-Oxley era, suppose a company blunders in its accounting but quickly explains the error to the SEC. "What happens? We haven't seen a test case," says BofA's (BAC) Hance. "Do we get sued endlessly by shareholders? Does the SEC beat you to death? Do you go to jail?" And then there's the murky matter of what now exactly is a "material" event, a financially important development that must be formally disclosed in regulatory filings and press releases. Says Hance: "It used to be reasonably clear -- [an event] that was enough to move the stock price." Now, he says, even the most inconsequential corporate development can move a stock price.

Regulated industries are particularly susceptible to the law's unintended consequences. Consider the four weeks of "high alert" that Exelon's Gillis went through last fall after the Federal Energy Regulatory Commission raised questions in early September about how Exelon had accounted for a restructuring. The company had to notify the SEC about FERC's query, so it then had both on its back. As the stock plunged 15% from Aug. 29 to mid-September, executives including CEO John W. Rowe raced to mollify investors. They even had to brief state regulators, because the brouhaha could have spawned changes in the prices Exelon could charge. The flap ended when FERC agreed that Exelon's accounting was just fine. "It has been a very trying year," says Gillis, who in November became president of the company's business-services unit. "You have investor anger and political pressure and increased regulatory oversight. It has made the job of the CFO many, many more times complicated."

Making matters worse, CFOs have less time to do more work. They're now expected to churn out financial reports in Internet time. Most companies will have just 75 days after fiscal 2003 ends to publish their annual reports, vs. 90 days before. Next year, they have 60 days. And the pace for quarterly reports is even more punishing: 45 days this year, 40 next and 35 in 2005.

For ambitious CFOs -- who would like to wear the CEO mantle someday -- these trying times may provide an opportunity. The higher profiles with boards of directors could be just what they need to vault themselves into the top job. Lewent has long been thought CEO material, for instance. While continuing to tend to Merck's finances, she recently took operating responsibility for sales and marketing in Asia. Lewent won't say whether this puts her in the running to someday succeed CEO Raymond V. Gilmartin. How does she like the tough new environment? "I find it challenging but not distressing," she says.

With all the pressure they're feeling, it's not surprising most CFOs are convinced that their jobs have become crucibles. "It really causes you to step back and think about what's truly important," says Rockwell Automation's Bless. As they walk tightropes that rise higher with every new rule and regulation, today's CFOs know that if they slip, they're in for a long, hard fall. By Joseph Weber with Michael Arndt in Chicago, Emily Thornton in New York, Amy Barrett in Philadelphia, and Dean Foust in Atlanta


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