The Well-Worn Path from CFO to CEO
Published In: EnergyBiz Magazine September/October 2013
If you want to take the fastest route to become chief executive of a major energy company or utility, serve as chief financial officer. As just a few examples, Lynn Good, Duke Energy's CFO from 2009 through 2013, took over the reins from former CEO Jim Rogers on July 1. Pepco Holding's CEO Joseph Rigby, Xcel's CEO Ben Fowke and Southern Company's CEO Tom Fanning all moved up after being CFOs.
Many energy firms have learned that CFOs can deliver return on investment, possess the breadth of knowledge, have proven experience working with regulators, and often drive strategy.
A decade ago, many energy companies pursued executives with operational know-how, but recently "the complexity of the financial side has ramped up so dramatically that boards would like to see a CFO or financially astute executive taking over the role of CEO," according to Chris Crawford, president of Longnecker & Associates, a Houston-based executive compensation firm. Boards don't want to be embarrassed or face having to refile earnings reports and they want to stay one step ahead on Sarbanes-Oxley requirements.
"Accounting is the language of business," said executive coach David Rohlander, who wrote "The CEO Code." CFOs understand how businesses generate profit and loss, know how to allocate resources, and boost capital.
Most of the CFOs named CEOs have had business and operational experience and "don't just come up from the financial side," said Michael Chesser, CEO of Great Plains Energy from 2003 through 2012 and who is now serving on two boards. Operationally, CFOs often oversee power plants, engage with employees in the field and drive in trucks with linesmen. They often also serve as chief strategy officers. Combining their business with strategic experience prepares them to become CEOs, he said.
When Chesser did an exhaustive search and recruited Terry Bassham as CFO at Great Plains Energy in 2005, he said "You don't bring a CFO into the company without having the potential to be CEO." As CFO, Bassham "created a positive culture in the organization, engaged employees, showed strategic dexterity, executed a comprehensive energy plan, and conducted major capital investment in existing plants," Chesser said. Bassham also dealt extensively with the board, which was impressed by his skills. Bassham replaced Chesser as CEO at Great Plains in 2012.
CFOs ascend to the CEO role in many industries, but Crawford suggests it's more pronounced in the energy field. Energy businesses grapple with tax credits, global assets, capital investment, incorporating in different countries - all complex issues within the wheelhouse of CFOs.
In addition, most CFOs perform the number two leadership role in the organization. At most energy companies, CFOs are "involved in every critical strategy meeting and the DNA of the business. They focus on how much money is being spent, and what businesses should we invest in or divest," Crawford said.
When Joe Rigby, CEO of Pepco Holdings, started climbing the corporate ladder 30 years ago, he said, "You had to be an engineer or lawyer to get the CEO job." When he interviewed for the Pepco CEO position in 2009, his experience with creating value, developing strategy, and building financial expertise secured the role.
Rigby said serving as CFO laid the foundation to become CEO. For example, he "shepherded the strategy planning process, interacted with the Street, the rating agencies, equity investors and the board." Representing the company, internally and externally, boosted his credentials.
But to thrive, CFOs turned CEOs must adopt a new set of skills. Most of all, CEOs must "take ownership of the culture of the company, and that's not in the purview of the CFO," Rigby said. Moreover, the CEO must command all the facts that influence the company's performance and display integrity at all times.
Lynn Good, former CFO of Duke Energy, epitomizes the CFO who mastered skills on the job to move up. Good possessed "operational experience, was head of commercial businesses, dealt with unregulated assets and international assets. As CFO, she was head of strategy," said Andrew Bischof, a Chicago-based industry analyst with Morningstar. Furthermore, Duke has faced some regulatory difficulties in the past, and Good's regulatory exposure should strengthen that process.
But not all CFOs make effective CEOs. Some CFOs lack the polish or the dynamic zeal to lead a staff. They might not be able to think innovatively or collaborate with boards and shareholders. Mario Moussa, a Philadelphia consultant, said that some CFOs have shortcomings that prevent them from becoming CEOs, including "a narrow, internal focus, discomfort with ambiguity, poor communication skills and the inability to mobilize a large organization behind a vision."
The CFOs who stumble as CEOs face "a fundamental weak spot: interpersonal communications," Rohlander said. Too often CFOs interpret the numbers, but fail to read people and respond to stakeholders and employees with the same acuity with which they analyze balance sheets.
The utilities that recruit external CEOs are often in turnaround and need to identify an outsider to jumpstart the organization. External hires as CEOs offer a different and often unorthodox way of thinking, aren't beholden to insiders, and can entertain new solutions to what needs to be fixed, said Crawford. For example, outside of utilities, Louis Gerstner reinvented IBM even though IT wasn't his forte, and Ed Whitacre moved from AT&T to shake up GM's stagnant culture.
Hiring a proven CFO as CEO makes good business sense, Bischof said. CFOs "have the regulatory relationships in place and have a track record in producing strong returns on assets. You'd only go outside if things weren't working well." But former CEO Chesser envisions that experts in marketing and customer communication could ascend to CEO in the future. "They'd look at customers in different ways than traditional utilities," he said. "They don't look at them as ratepayers but potential sources for new revenue."