We have been fortunate over several decades of investing to have met hundreds of CEOs, across a vast range of industries and businesses. The benefit of time, and seeing the relative outcomes these leaders have produced, has given us some pattern recognition on the common threads as to “what great looks like” when it comes to CEOs.
One of the biggest impacts we can have on our portfolio companies is helping them recruit great executives. We have seen time and time again, the power of having the right people in the right seats, knowing that the skills required to scale changes at different points along the growth curve. Without doubt, we have found the most challenging role to fill is that of the CFO — intellectually demanding across multiple disciplines and departments, also requiring deep ‘soft’ skills to effectively manage a range of stakeholders. The modern role of the CFO is far more encompassing than than it ever has been, only made more difficult by the fact every business and team needs different things when it comes to the CFO role.
Over the years, we have observed some common traits of what we consider to be great CFOs, regardless of the size of the business and the team around them. Using the same framework as I used in my my post on “What makes a great CEO”, the four attributes below are what in our mind separate the good from the great.
A Great CFO is…
… ‘The Navigator’;
Great CFOs are the chief navigator in the organisation. This role is very much aligned to the traditional nautical role of a navigator. Not the person who determines the course (although they no doubt have play a part) but, once the course is set, the one that is charged with the responsibility of charting the course, tracking the journey and ensuring hazards are avoided along the way. Their primary responsibility above all else is to know and communicate the financial position and performance of the company at all times. They need to report and chart the course with meticulous accuracy. They ensure that the business has the necessary financial and operational information for decision-making across the organisation.
1/ A passion for systems & processes(!) — Systems and processes seem like an unusual thing for anyone to be passionate about, but the best CFOs we have worked with have this passion and they invest ahead of the curve. Not many things make them much happier than producing daily dashboards of key metrics, monthly P&L and cash flow flash reports within 3 days of month end, and financials for board packs within 7 days. They embrace technology, building a unified platform of software tools and automation from the earliest stages of business maturity to ensure the business at all levels has real-time information.
2/ The metrics that matter— We strongly believe that what you measure improves. Great CFOs will identify and keep the team laser focused on the metrics that matter — the metrics that guide company strategy and decision-making.
3/ Financial risk obsession — No matter the stage of the company, we have seen a common characteristic in great CFOs — they obsess over financial risk and efficiency. They never get complacent — every dollar always counts. In the early days, this manifests as vigilantly managing the cash balance and the cashflows. As the business matures, it is building and maintaining a bulletproof balance sheet and cashflow profile.
… Possesses innate commercial instincts;
In response to the question about whether he uses a computer, legendary investor, Charlie Munger, responded: “Are there dangers in getting too caught up in the minutiae of using a computer so that you miss the organized common sense? There are huge dangers. There’ll always be huge dangers. People calculate too much and think too little.”
Whilst we believe in the importance of CFOs embracing technology, this has to be coupled with commercial common sense. In our experience great CFOs have an innate commercial instinct which sets them apart. It’s their super power. It seems to be highly correlated with them possessing a systems thinking mindset that they apply to a commercial setting. They can clearly and elegantly connect strategy hypotheses to the financial outcomes.
1/ See the wood from the trees — Most good CFOs are good in the detailed financial information. The best CFOs in our experience have the ability to then step back and ‘see the wood from the trees’. They revel in the detail but don’t get lost in it. They can glance at a spreadsheet and get an instinct that something isn’t right.
2/ Capital allocators — The strong commercial instincts become critical in major capital allocation and spending decisions. They are the protector of the balance sheet and the gate-keeper to resource deployment, but importantly they can balance rigour with risk. They always push to assess and understand the return on any given investment but also know outcomes are inherently uncertain. In performing this role, they have a financial discipline which is devoid of emotion.
3/ Pace of growth— Great CFOs understand that capital is not the only constraint to growth. On several occasions in recent years we have seen fast growing technology businesses make major operational mistakes after raising large sums of capital. They go from being capital constrained to unconstrained. Rapid hiring and a proliferation of projects ensues and almost always ends badly. The best CFOs understand a business’s ability to scale across people, culture, platforms and systems. They carefully manage this pace growth and the cadence of change. They not only know what is required to scale but what the organisation can handle.
…Clear, courageous communicators;
The best systems and processes, and strong commercial instincts are all meaningless without the ability and courage to communicate clearly and courageously.
1/ Quality of communication — The quality of navigation is bound by the quality of communication. The best CFOs can distill and communicate the most relevant information and insights to the people in the organisation who need it. Board packs, flash reports, operational dashboards — great CFOs design these with precision, clarity and elegance. They know their mission critical role is to provide this information to the org to help make the best decisions possible.
2/ Courage — Great CFOs are the exemplar of courage and the willingness to be vulnerable in the organisation. They are the champion of transparency. They share bad news early. They embrace the importance of having conversations about hard things. They always acknowledge when they don’t know and they never fudge an answer.
3/ Trust and transparency — Great CFOs are consciously demonstrating these qualities to the rest of the organisation because they know it will inspire others to do the same. Along with the CEO, they are primary steward of creating a culture which fosters trust and transparency.
…A true leader;
The leadership role of the CFO is critical. It can also be drastically underestimated, perhaps because it is often less overt. The CFO’s leadership role can vary greatly based on personal style but we look for following three elements:
1/ Partner to the CEO — “Whenever they speak Michael Jordan, they should speak Scotty Pippen.” Michael Jordan. In the documentary The Last Dance, Michael Jordan, one of greatest basketball player in on of the greatest team NBA of all time of all time acknowledged that he couldn’t have done it without Scotty Pippen. This is how we think about great CEOs and great CFOs — as two parts of a great team. Great CFOs share the responsibility of leadership with the CEO. In their own style, they inspire the organisation and demonstrate their passion for the mission. But critical to their role is to be the trusted partner to the CEO. When investing in any businesses, we spend a lot of time understanding the relationship between the CEO and CFO — what are their complementary skillsets, personality types, leadership styles. How often and well do they communicate? Simply — how good is the CEO/CFO team?
2/ High level of emotional intelligence — One of the most important and overlooked qualities of great CFOs is a high EQ. This is often what sets apart the great from the good. A critical part of the role is sitting in the middle of a range of stakeholders with different perspectives, incentives and motivations, and finding a way forward.
3/ Fiercely objective and truthful — This attribute is the most important to us. It is the culmination of the first three major attributes. It is the strength to remain fiercely objective and truthful at all times. Someone that will steadfastly report the truth and will not be persuaded, influenced or coerced to stray from it by a CEO, a board, investors or anyone else. They bring ultimate and unwavering integrity to the navigator role. The more complex the business, the more important this attribute becomes. If all CFOs had this characteristic, we would have never had the Global Financial Crisis, or the Enron and Valeant Pharmaceuticals fiascoes.