Why boards love to promote COOs and CFOs
When the board of listed funeral-provider InvoCare headhunted Andrew Smith from luxury retailer Oroton, where he was chief financial officer, there was an understanding that if all went to plan, he would eventually be promoted to the CEO role.
But Smith’s background was in an industry far removed from funerals. To teach him the ropes, the board made him InvoCare’s CFO for one year, and its chief operations officer for two.
It’s a route to leadership the company likes, Smith tells LeadingCompany today. His predecessor had a similar path to the corner office.
“[InvoCare’s board] thought having someone with a strong financial background was a good starting point. Then they could take that commercial approach to an operational function,” Smith says.
“It was very useful. I came from a finance background, so I got to start in a finance role where I could understand the business model. Then, the operational role was really great for building relationships at the coalface of the organisation. It made the transition so much easier.”
InvoCare isn’t the only company to favour these two executive roles as an ideal training ground for leadership. Yesterday, we revealed the results of our research into the backgrounds of the ASX100’s CEOs. Of their immediate last non-CEO position, 23 of the 100 held the COO position, often at the same company (the vast majority of the ASX100’s leaders were internal appointments). Not far behind the COOs, 16 of the leaders held the CFO position.
Boards promote COOs and CFOs because they’re the positions in the C-suite most likely to have a good understanding of the legal environment listed companies operate in, says Brian Gardner, the general manager at Donington Group.
“In listed companies, CEOs are strongly accountable to the board to deliver results to shareholders. This means they need strong corporate governance backgrounds, an ability to work with boards, and to understand revenue and profit.
“These skills tend to come from COO or CFO roles. They both provide a strong base. If you want to head an ASX-listed company, those are probably the two directions you could come from.”
LeadingCompany’s analysis of the pre-CEO positions of ASX100 leaders found two with marketing backgrounds, and none who were chief information officers or heads of human resources.
This makes sense, says career strategist Kelly Magowan. “It’s just been the traditional career path.”
“[COOs and CFOs] are generally male-dominated roles, which have very measurable output. They’re not intangible like human resources, which can mean it’s easier to inspire confidence,” she says.
Roles such as human resources, sales or marketing don’t often provide leaders with enough profit-and-loss and corporate governance experience, and very seldom do boards appoint people without those skills, Gardner adds. Examining the backgrounds of the ASX100’s CEOs shows company boards are keen to avoid any surprises, preferring to appoint CEOs they know can hit the ground running. When not appointing former COOs and CFOs, companies opted for divisional heads, who proved their worth by leading large divisions successfully.
“They need to be sure the place is in a safe pair of hands,” Gardner says. “That’s why I differentiate between listed and unlisted boards. Listed boards face a lot of downside if they don’t do their job properly. This can make them a little more risk-adverse.” In private companies, boards may be more willing to take risks, and relationships may be more important to getting the top job.
All the CFOs on LeadingCompany’s list had qualifications in accounting, commerce, business or economics (barring one whose tertiary qualifications we couldn’t find). “Generally, CFOs have come through some formal financial management process,” Gardner says. “Often you will see that they’re chartered accountants or chartered public accountants. Obviously the role requires a very strong number competency.”
COOs have more varied backgrounds. Long experience in a particular industry is often a good way to get promoted to COO, as is a strong ability to execute business plans.
“They’re at the right-hand of the CEO,” Gardner says. “Often the CEO will handle strategy with the CFO while the COO will actually run the business.” This often makes COOs logical successors.
In America, a recent survey by executive recruiter Crist|Kolder examined the leadership turnover of 669 leading American companies, and found 46.7% of chief executives held the COO role immediately before their promotion. This figure was even higher when it came to internal appointments, where 52.6% of CEOs were promoted from the COO role.
The appointment of COOs is on the rise in America, where they have clawed ground back from chief financial officers, who made popular CEO choices during the global financial crisis.
But the appointment of COOs to the top position is likely to decrease in the long-term, with many companies are choosing ditch their COO positions, the survey found. Only 35.4% of S&P500 companies had a COO – the lowest figure since Crist|Kolder started counting in 2000.
The reasons for this aren’t clear, but if it persists, it could radically alter the backgrounds of America’s future CEOs.
Change is coming to Australia too, Magowan says, and is evident anecdotally in the leadership development programs run by ASX-listed companies, which are increasingly being opened to people from a range of professional backgrounds.
“In the past, change didn’t happen so quickly,” she says. “So you needed a really strong bricks and mortar foundation.
“These days, companies are realising a diversity of skill sets can help them be innovative. They realise anything that can be systematised, automated or outsourced will be. That’s a new mindset.
“I’m not saying all people with finance or operational backgrounds can’t do that. But organisations are seeing the need for diversity.”
Myriam Robin
Myriam Robin is a journalist with LeadingCompany. You can follow her on Twitter at @myriamrobin
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