Archives for posts with tag: Due Diligence

The Wall Street Journal has a weekly half page devoted to my former professional as a CFO. In a recent edition, they highlighted a new trend of corporate Board of Directors getting actively involved in their firm’s search and hiring of a new Chief Financial Officer. The reasons cited included the increased importance of the CFO role in everything from regulations such as Sarbanes-Oxley reporting, to  strategy and deal-making. A final reason was that former CFO’s are increasing looked upon as candidates to become a firm’s CEO.

My reaction to all this? Well, it’s about time! Time that CFO’s are getting the respect so many deserve, as they are often quiet and low key, yet are often the second most critical person in a public company. But more importantly, it’s about time that Boards of Directors are actually acknowledging this and getting involved in this hiring activity.

Historically, in many old line firms, the path to CFO was internally determined. Often it was a matter of paying your dues and moving up through various financial roles in treasury or controllership. If a business and its industry remained stagnant over the 20 plus year period it took to groom a CFO, that was a fine strategy. But businesses and their industries are not stagnant. Competition changes, mergers occur and technologies leap ahead. So the perfect internally- grown candidate of the past may not be best suited for a new environment.

The second way CFOs, and most other internal Officers were chosen, was solely by the Chairman or CEO. This was usually decided by the CEO alone who then informed the Board of his choice. The Board then dutifully elected the person to be CFO. Perhaps the Board knew a little about the person from HR succession charts but the Board rarely got involved in the selection or even with a token interview. This, in my mind, is wrong.

All public corporate Officers, including CFOs, are legally “elected by and serve at the pleasure of the Board”. Directors need to perform some due diligence on this critical personnel task. To do this properly, Boards need to spent time, not just in Board meetings or group dinners, with the senior officers. In fact, I would suggest that most of the countless, large, quarterly Board dinners I ever attended were worthless. Private one-on-one dinners between the various Directors and members of senior management would be invaluable to both parties. This would also allow the Board to have a much better of idea of who they were electing to be the next CFO or CEO. And if the current CEO objects because he or she is paranoid of what a Board member could learn in private from one of his team, then the Board better look very hard at that CEO!

Directors of large public company Boards are paid over $200,000 a year. Many of the problems Directors encounter when senior officers, like CFOs or CEOs, either abruptly resign or are fired for cause could be eliminated if they spent more time upfront getting to know these key people. So, Directors, get involved in hiring new, CFOs and, in some cases, other corporate officers. But also spend some quality time with the senior officers you have in place; it will be well worth your while.

The Wall Street Journal recently ran a story “Making Sure the Boss is the Right Fit”. The article cites some recent examples where seemingly exceptional leaders, from places such as Google, failed to mesh with the people or culture of their new firm.

We could go on with dozens of examples of this problem. The wizard from Apple who tried to transform J.C. Penney or the revolving door of leaders that Hewlett Packard had in the last decade.

One fascinating comment in the article was that it should take a lot more than interviews to avoid costly mistakes when hiring a new leader. And we will come to that. But one failure that both companies and potential executive candidates are guilty of, is not enough of or the right kind of interview. The higher the position is, in my mind, the more number and diverse the interviews should be.

My old private firm boss, Don Brown, had 7 interviews with a very qualified and ultimately successful candidate (that I had personally found!)  That seems like a lot and it is. But we had individual interviews, two on one interviews, two separate, private dinner interviews and even a dinner with spouse interview. Dinner interviews are especially critical and revealing. In an hour or so in the office, you can gloss over  a number of issues that can be much more fully explored or discussed in a two to three hour dinner. I am not saying that 7 is the right number, but too often in our fast paced world of business, we don’t spend enough time with interviews.

Which brings us to who should or could be included as part of the interview process. The direct boss, of course, and a couple other superiors who could be Board members. Also, a wide sample of the people who will report to the new hire. In the case of a potential CEO, the list should include the CFO, the heads of a couple businesses, the head lawyer and, my favorite, the head of HR. But smart firms also add to this list. Perhaps some very bright up-and-comer who is not shy. Maybe a soon to retire old, salty veteran who really knows the firm, its people and its culture. With a mix like this both the firm and the candidate could learn something about the possible fit.

But the hardest thing to analyze with any candidate is their fit or ability to adapt to the company’s culture. In my book, The Business Zoo, we talk extensively about this. Leadership and Culture, another famous business writer said, are the flip side of each other. A strong and dominate culture can destroy a new, very differently focused, leader. A weak or fading culture can be remade or revitalized by a new, strong leader. But most situations are somewhere in the middle. Candidates should study the hiring firm’s culture through the interview process and by doing their own research. With the internet this is certainly easier. Articles in business magazines or trade journals or a firm’s own written histories can tell you a ton. And the hiring firm needs to do research themselves, and not just with a search firm, on the candidate’s style and approach to people and problems as well.

Think of it like due diligence in a major purchase of a merger. The upfront, extra time and costs invested to improve the new leader’s chance of being successful is minor compared to the cost of a failed new leader and its impact on the company.

Leaders need to fit or adapt to a firm’s culture or they will fail; not the other way around!

Take more time and make more effort when hiring new leaders and when being hired.