How CFOs manage their relationship with the board can help or hinder their relationship with the CEO, especially when there’s a strategic or other type of difference between the two top executives, board specialists say.
CFOs tend to start their relationship with the board from a good vantage point because of their role providing updates and projections to directors, but how they navigate that relationship can be tricky in some cases, the specialists say.
If a CFO suspects unethical behavior by another member of the C-suite, for example, it’s imperative the finance chief report that to the board; burying it can lead to severe consequences for everyone associated with the company, says Dean Gels, CFO of LRN Corporation, an advisory firm on ethics and compliance issues.
Research by Gels’ firm has found oversight structures tend to be a challenge for boards. Although directors agree ethics and compliance should be front and center, there’s also recognition that these issues are often put on the back burner because of crowded meeting agendas, he said.
Chain of command
It’s always a delicate dance when a CFO, despite having regular board contact because of their reporting role, pushes the board relationship beyond financial matters.
“CFOs need to respect both the chain of command of the company as well as the reporting lines of communication to the board,” Gels said. “It’s a complicated situation with no easy answer, but erring on the side of prudence, caution and in line with an organization’s stated ethics about board contact is the best bet.”
CFOs who have issues with their compensation or have ambitions to become CEO can face a minefield if they overstep.
If the CFO’s leadership ambition would be viewed as contentious, the CFO should share their interest with the lead director and head of the nomination or governance committee for discussion by the board in executive session without the presence of the CEO or management, said a financial industry specialist who asked not to be named because of their work with companies.
It’s easier if the CEO envisions the CFO as a candidate to take over as the chief executive. In this case, it helps to have a board member or two be involved in the CFO’s leadership development process, which is a discussion the CEO should have with the board, said Bruce Armstrong, operating partner at Khosla Ventures, a venture capital firm, and a board member of several companies.
If compensation is the issue, the CFOs first conversation should be with the CEO. That includes situations in which the CFO wants a compensation review off-cycle, Armstrong said. But if the CEO refuses or ignores the request, then the CFO should seek counsel from the head of HR and the general counsel. Only after those discussions should the CFO reach out to the audit chair, compensation committee chair, board chair or lead independent director, depending on the board structure, he said.
Under any circumstances, Armstrong said, the CFO’s dissatisfaction with the terms of their employment, if not addressed directly by the CEO, is a matter for board consideration. If the CEO doesn’t raise the issue to the board, even with a negative evaluation, it raises serious questions that the CFO should raise with the lead director, he said.
One problem CFOs face in dealing with boards, especially when the CEO serves as the chair, is getting independent information, said the financial industry specialist.
“With the dominant role of CEOs on boards and, indeed, in helping to choose and shepherd board nominees through the nomination or election process, the independence of boards is increasingly in question,” the person said. To prevent that from becoming a problem, “independent interaction of the board with management officials is critical,” he said.
That means CFOs should find a way to have an independent working relationship with the board but without going outside the recognized chain of command.
Given the importance of the CFO-CEO relationship, it’s important they work together on all crucial issues and have a way to resolve differences between themselves in a constructive way, specialists say. This can be seen particularly clearly when a board has an activist investor. If handled poorly, the activist can disrupt the dynamic at the core of a well-functioning board, says Armstrong. That makes it imperative the CFO and CEO be closely aligned in their interaction with the member.