Are finance chiefs the fall guys of the economic downturn? Although blame for the recent batch of finance and accounting mishaps has been widely spread among senior management -- not to mention outside auditors -- finance chiefs do seem to be getting more than their fair share of criticism. The taint of being associated with a failing company represents a considerable career risk for a CFO. The issue for finance chiefs: how to manage the peril. In ''To Pursue Other Interests,'' assistant managing editor David M. Katz looks at whether finance chiefs are taking the blame for a busted economy. In ''Power Bases,'' battle-scarred CFOs talk about managing risk when an employer starts heading south.

''To Pursue Other Interests''

Increasingly, CFOs seem to be taking the rap for poor corporate performance.
David M. Katz, CFO.com | US
May 7, 2002

The pattern has become all too familiar. A company issues a statement, announcing it is a) restating earnings, b) laying off a whole lot of workers, or c) fighting a shareholder lawsuit. In a few days, another release comes out — this one noting that the company CFO is departing. Usually, the company's management asserts that the finance chief is leaving "to pursue other interests."

Coincidence? Maybe. The fact is, finance chiefs do leave jobs to do other things. In the past year alone, a number of CFOs have resigned good positions to spend more time with their families, go back to school, or switch sectors. Long-time energy industry finance executive Edward Moneypenny, for instance, quit his job at Covanta Energy because an opportunity arose in a different sector (at retailer 7-Eleven).

But when the departure of a finance chief comes directly on the heels of bad company news, "pursuing other interests" often means "looking for work." And a whole lot of CFOs seem to be looking for work these days. Although numbers are hard to come by, it appears that finance chiefs are resigning — or being dumped — at a brisk clip.

Admittedly, blame for the recent batch of accounting scandals has been widely spread among senior management types — not to mention outside auditors. And in a number of these cases, CFOs ought to shoulder a great deal of the responsibility. In the Enron fiasco, for example, CFO Andrew Fastow managed the off-balance-sheet investment vehicles that ultimately brought the company down.

But the recent rash of CFO exits has some observers wondering if there's a larger trend here. The question some privately ask: are finance chiefs the scapegoats of a busted economy? Notes Stephen Wasko, CFO of Perceptual Robotics in Evanston, Illinois, reporters like "to put a face on some aspect of a story." These days, the face most often put on the story of corporate ineptitude — or worse, malfeasance — appears to be that of the CFO.

Decoder Ring Needed
Spotting this trend is easy. Getting corporate executives to talk about it is not. The reality is, few management teams are willing to flat-out state that there's a link between poor corporate performance and the departure of a CFO.

Take the case of pharmaceuticals giant Bristol-Myers Squibb. The company suffered a disastrous first quarter, with earnings plummeting 56 percent from what they'd been a year earlier. In the wake of the Q1 results, CEO Peter Dolan announced in April that CFO Frederick Schiff was leaving the company. In explaining the move, Dolan stated that he had previously "begun working on CFO succession" as part of the company's plan to improve its performance.

That's about as close as you'll get to a company pillorying a finance chief for bad numbers. And even here, Dolan never specifically fingered Schiff for the company's troubles. In fact, in the very next sentence in the press statement, Dolan noted that Schiff was leaving Bristol-Myers Squibb to — surprise — pursue other interests. (CFO.com tried to contact Bristol-Myers Squibb about this story, but did not get a response.)

Figuring out what corporate press releases actually mean — and not just what they state — can be tricky stuff. It's hard to tell, for instance, whether Larry Reinhold's choice to exit as Critical Path's finance chief last August was voluntary. Early in his tenure at the Internet messaging specialist, the former PricewaterhouseCoopers consultant uncovered questionable revenue recognition practices at the company. In fact, two of the company's executives eventually confessed to concocting the scheme, which was apparently intended to boost Critical Path's reported income.

Under Reinhold's urging, Critical Path restated earnings downward in February 2001. At the time, David Hayden, executive chairman at Critical Path, praised Reinhold for unearthing the bookkeeping ploys. "I want to commend him [Reinhold] for having taken immediate action," he stated. "We are proud to have Larry on our team."

Larry didn't stay on the team for long, however. After Critical Path took yet another revenue restatement — a $1.3 billion impairment write-down — the company announced a management shakeup. At first, Reinhold was named to the team in charge of shaping the company's "new leadership."

For some reason, though, Reinhold didn't end up being part of that new leadership. His departure was announced August 21 — just weeks after Critical Path reported it was firing 450 employees and closing two-thirds of its worldwide facilities. In that statement, management had fairly gloomy things to say about the company's prospects, reporting that it had "low visibility into future revenues due to the uncertain economic environment."

The Curse of Visibility
Was Reinhold's departure linked to the worsening news at Critical Path? Hard to say. A spokesperson for Critical Path said the company declined to comment about Reinhold's employment. And more than six months after leaving the company, Reinhold himself wouldn't discuss his experience at Critical Path (citing his current co-defendant status in litigation against the vendor). Still, his advice to newly hired CFOs about how to manage their career risks is revealing. "Always be prepared for surprises," Reinhold told CFO.com, "no matter how thorough your due diligence before taking the job."

When recruiting a new finance chief, Reinhold notes, executives may describe a situation as "ideal" or at least "very favorable." But he cautions, they might "be less forthcoming about challenges in the businesses you may face."

Even when a CFO leaves a company on decidedly good terms, veteran finance chiefs say, care should be given to how that departure is handled. It's crucial, for instance, that a finance chief makes sure an employer sets the exit apart from any negative company news. Otherwise, assumptions get made, reputations tarnished.

One finance chief, who spoke to CFO.com on a not-for-attribution basis, regrets having gone along with his former employer's decision to announce his departure about the same time the company was reporting poor quarterly results. The CFO concedes his boss might have wanted to avoid the "one-two punch" that would surely have come from stringing out the two announcements. While the finance executive says he could have pushed harder to get the company to announce his resignation sooner, he says he wanted to exit "in a classy way."

Sometimes, class has a price. Although the company did report that the CFO was leaving voluntarily, the timing of the announcement made it seem otherwise. Says the former finance chief: "You start cursing the visibility you have."

Such visibility comes with the territory, however. As Perpetual Robatics' Wasko points out, over the past decade, CFOs have evolved from being mere "uberaccountants" into "significant business partners." With the added responsibility, Wasko says, CFOs have assumed a bigger share of the credit — and the blame — for corporate performance.

Should I Stay or Should I Go?
Recruitment experts say the surest way to avoid taking the rap is to get out of a troubled company while the getting's good. But gauging whether a business is truly in a death spiral or merely going through a rough patch can be a tough call. Making the decision even tougher: a CFO's reputation can be boosted substantially by engineering a successful turnaround. And no finance chief wants to be known as a quitter.

Perceptual Robotics' Wasko, for instance, doesn't consider himself a turnaround specialist. But he made the decision to stay the course when he found himself in choppy waters at his previous job.

Wasko signed on as CFO at metal-processing company Connector Service Corp. in 1998. Over the next three years, the Connector finance chief faced a barrage of problems. The biggest headache: Connector was moving from a pure services business to one with a stake in its operations. Under the company's old business model, if Connector produced a new stamping dye, a customer would pay for the product's license up front. That "kept the barriers to change low" for clients by making it easier for them to switch to different services providers, Wasko notes.

The change in strategy, however, resulted in a more asset-intensive business — and heftier near-term cash requirements. Responding to the business's changing finance needs, the company's management began to borrow, rather than raise private equity capital. "We did a lot more creative stuff with banks," says Wasko.

While the change in direction spawned some short-term financial pain, Wasko says, it made sense in the long term. But he admits he was under less pressure to produce immediate results because Connector was privately held. Would he have stayed on in such trying circumstances at a public company? "Thinking about me personally," he says, "if I had a good handle on the plan, I would have."

Diligent Due Diligence
Indeed, CFOs have a better chance to succeed in a new job if they know the situation going in. "I think it's tremendously important that a CFO do a great amount of due diligence" before taking on a job, says Jeff Naylor, CFO of Big Lots, the Columbus, Ohio-based closeout retailer.

The most basic thing a prospective CFO should find out, Naylor advises, is whether an employer has a "sustainable business model." That model should include products and costs that aren't carbon copies of those of competitors. Big Lots, for instance, differentiates itself by the way it buys products and sources real estate, Naylor says.

Big Lots is able to sell items cheaper, he explains, because the retailer buys goods that are discounted due to packaging changes, excess production runs, and the like. "We will typically buy from a competitor that has moved from a smaller facility," says Naylor, "and we'll lease that real estate — usually at very attractive rents."

By Naylor's lights, that's a sustainable differentiation. Still, he acknowledges he did his homework before taking the job at Big Lots. "I did an enormous amount of due diligence going in," he notes. "A misstep can have a dramatic impact on your career."

Power Bases

A CFO needs to be made of stern stuff to take on a CEO bent on aggressive revenue reporting.
David M. Katz, CFO.com | US
May 7, 2002

Backbone and leverage. The successors to Shields and Yarnell?

Actually, CFOs say there's nothing funny about backbone and leverage — particularly if you don't have either. Yet grit and clout are crucial to survival — particularly when a chief executive starts to push for better numbers than a finance chief feels comfortable booking, according to a number of veterans of failing companies.

And make no mistake: That's not an uncommon scenario. According to an exclusive CFO.com poll, more than 40 percent of respondents say they have engaged in aggressive accounting practices to improve their company's reported financial performance. In another poll, about one in five respondents admit that they've misrepresented their company's performance with aggressive accounting. (See the results for yourself in "Funny Numbers," at right.)

Ironically, the economic downturn seems to have decreased the leverage finance chiefs possess — at a time when they most need to be able to hold their ground against unreasonable requests. The relative scarcity of good CFO jobs makes it harder for finance executives to vote with their feet, explains Joel Getzler, president of Getzler & Company, a New York-based turnaround consultancy.

At companies where CEOs push for aggressive bookkeeping, a scrupulous finance chief might be torn between producing the desired numbers or delivering a true picture of the company's situation. And entrepreneurial chief executives often don't want to see desirable revenue reports disputed, says Getzler. "The CFO is under tremendous pressure to help make profits be there," he adds.

Pressure Gauge
Then again, the abundant bad news about Enron and other financial scandals might give CFOs the ammunition to defend their positions. "It gives CFOs a much better environment for saying that this whole idea of financial reengineering is not getting us anything," says one finance chief who did not want to speak on the record. "A lot of CFOs that felt they were pushed too far have a lot of vindication."

Still, it's unclear how much of an effect cautionary accounting tales will have on CEOs if profits plummet and their own jobs are suddenly at risk. In that event, suggests Getzler, friends in high places might be better career insurance for a CFO.

For instance, he says, he knows of a finance chief at a major insurance company who was able to sharply disagree with the CEO on a matter before the board. That's because the CFO was friendly with the chairman and had "major lines of communication with board members on the auditing committee," Getzler adds.

Since the CFO had routinely talked to board members, he avoided the appearance that he was going over the CEO's head, Getzler says. The result? The CFO still has his job.

Smoky Signals
To mitigate career risks during tough economic times, CFOs need to be alert to warning signals about their own standing, as well about the company's culture, experts say. Here are some bad signs:

• Lack of respect from other senior executives. When the CEO and other senior managers make significant capital investments in the business without telling the CFO, there's a problem, says Stephen Wasko, CFO of Perceptual Robotics in Evanston, Illinois. Something also could be amiss if the top officer makes financial presentations to the board without asking the CFO to be present. As soon as such things happen, the finance chief should say, "Give me the straight story about why I've been excluded," adds Wasko.
  
  
• Loss of standing with the board of directors. Gauging how well a CFO is doing with the board is a subtler matter than sounding the depths of senior management, according to Wasko. "The signals might be tougher to discern because you don't see them that frequently," says Wasko. "But if the board is asking for outside, independent information, interpretation, and analysis, and not asking for the CFO, there's something wrong."
  
  
• Lender discontent. "The more you can get lenders on your team, the better off you are," says Miles Stover, a principal with Crossroads LLC, an Irvine, California-based turnaround management firm. But poor or untimely communication with bankers — not to mention faulty projections — can quickly alienate CFOs from their good graces. And the consequences can be dire. "I have absolutely seen lenders terminate a CFO," says Stover.
  
  
• A complacent culture. "If you've found irregularities and concerns and the CEO says, 'We've been doing it this way for years, so its OK'," says Ted Martin, CEO of Martin Partners, a headhunting firm in Chicago, "that's an indication that the CEO doesn't want to hear bad news."
  
  Another sign of corporate inertia is the lack of honest, regular post-mortem meetings, says Laura Resnikoff, an associate professor at Columbia University. It's also a bad portent if the meetings amount to a rubber-stamping of existing procedures by a group of "good old boys," she says. Adds Resnikoff: "Part of what happened in Enron is taking to the nth degree this 'wanting to fit in'."

You're Not CFO Material

Wondering whether you have what it takes? Here are ten signs that you're never going to make it to the big chair.
Marie Leone, CFO.com | US
April 20, 2003

The numbers are firm, and they're not encouraging. You may very well be a skillful, seasoned finance manager, but many other people — both inside and outside your company — can say the same. And in every company, there's room for only one CFO.

The first, most important step you can take toward landing a CFO job is to get your name on the short list — or, more to the point, not to get your name crossed off the list. We spoke with CEOs, executive recruiters, consultants, and others who consider the merits of prospective CFOs at both public and private companies. Many candidates, they told us, are weighed in the balance and found wanting; heed their advice, and you need not be among them.

Of course, one black mark from this list — or even more — won't necessarily ban you from the executive suite for life; all of our "ten sure signs" can be addressed, in time, if you're willing to invest the effort. You might also argue that a number of our signs conflict with each other. Should you stand up to the boss, or should you tone down the ego? Should you get more involved with operations, or should you lighten up on the bean counting? Finding the right mix of skills for your career is a lifelong pursuit; here's a good milepost to see where you stand.

Have any "sure signs" of your own? Send them to MarieLeone@cfo.com.

1. Deep Down, You're Still a Bean Counter

"There's more to being a CFO than getting the numbers right," asserts Marc Pfefferle, a principal in the Carl Marks Consulting Group, a turnaround firm based in New York. Financial technicians, however skillful, can't rise to the top without practical operating experience, says Pfefferle. Good CFOs have always been strategists, whatever the size of their company, he adds; only a bean counter would fixate on the profit-and-loss statement while ignoring day-to-day indicators like cash flow.

The CFO is more than just "the funnel that all information passes through," adds Raymond Vennare, president and CEO of ImmunoSite, a private biotech-research firm in Pittsburgh. The finance chief must distill all that information, insists Vennare — becoming, in effect, an analyst who understands what the market is telling the company and who determines what the company should be telling the market.

So, if it behooves candidates to break the bean-counter mold, does it matter if would-be finance chiefs have a CPA? Yes, maintains Jim Cederna, president and CEO of Pittsburgh-based manufacturer Calgon Carbon. Even without the latest round of regulations from the Securities and Exchange Commission, says Cederna, public companies would be hard-pressed not to have a CPA at the finance helm — unless the team already boasted a very strong controller. (And lately, as we've noted, good controllers have become a scarce commodity.)

For private companies, notes Vennare, it's more important to have a CFO who understands the industry, but a CPA is always a bonus.

2. You Can't Handle Office Politics

When a company has many capable financial executives competing for attention, says Chip Clothier, "one of the things that allows an executive to rise to the CFO spot is the ability to manage the politics of the business." Adds Clothier, the managing partner of executive search firm Howe and Associates, a winning CFO possesses the "executive presence" to juggle the concerns of corporate constituents — the CEO, unit managers, directors, Wall Street analysts, bankers, and the finance department — without being skewed one way or another.

"Corporate constituents have to trust the numbers and the CFO," says Pfefferle. That means more than simply managing the organization downward; a CFO must also "manage upward," presenting facts and ideas to the CEO and the board. On occasion this might mean standing up to the boss; on rare occasion (headlines aside), this might even put the CFO's job in jeopardy. A finance chief who decides to play it on the safe side, or is outmaneuvered because of a lack of political savvy, will likely find himself or herself in a weaker position the next time around. Certainly, the company will suffer.

Too many people pay homage to their bosses rather than engaging them, explains ImmunoSite's Vennare; the finance chief needs to be able to argue a point with the CEO and not shrink away the next time they meet. "I love a CFO who doesn't mince words or worry about my feelings when he's got observations that need to be aired," says Cederna. The CEO and CFO form such a "tight-knit team" — bonded partly by respect and trust, and partly by chemistry and other intangibles — that a vacant CFO spot is very attractive to an incoming CEO. In fact, the privilege of hand-picking his own finance chief was one of the factors that drew Cederna to Calgon Carbon.

For a CFO to be a successful strategist, says Melissa Halpert, a managing director at institutional investor Providence Capital, he or she need to understand the board, not simply to ask the right business questions. That requires a significant storehouse of management experience as well as financial expertise. "A good CFO knows the board's modus operandi," remarks Halpert, who adds that the finance chief should strengthen the board by using its members' expertise to enhance the business.

3. You've Got a Swelled Head

Dealing with the CEO requires self-assurance, notes Pfefferle, but all too often, bright managers are cocky, strong-willed, and overconfident. Executives with big egos tend to overlook little things, or things they deem insignificant, says ImmunoSite's Vennare, who has "turned down [prospective] CFOs because of their egos." Swelled heads can lead to missed opportunities, adds Pfefferle, when information about those "little things" ceases to flow through the organization.

Even well-intentioned finance chiefs can be hurt by their egos. When he was the incoming CEO of another biotechnology firm, Vennare arrived just in time to squelch a disaster. The CFO had been hired by Vennare's predecessor because of her biotechnology expertise — a good move for a small private company, says Vennare. Yet her myopic view of the industry, and her refusal to survey new advancements in the market, caused the CFO to trust only her own company's technology. Instead of farming out a complex imaging project to the industry leader, the CFO cobbled together a business plan and started raising funds for a two-year, $8 million IT infrastructure project that almost destroyed the company, according to Vennare.

The worst kind of arrogance, say most of our sources, is the type that covers up insecurities. Why? Finance managers with this particular failing squirrel away information as a power play, releasing only half-truths or partial facts so they remain in control of their team — but again, leading to missed opportunities for the company. Worse, they have a hard time accepting blame or admitting errors. (A thorough regimen of "360" reviews can often provide a cure.)

4. You've Got No "Heart"

Cowardly lions need not apply. Most executives have their fair share of basic integrity, says Pfefferle, but a CFO needs enough "heart" to stay the course under pressure.

To some extent, says institutional investor Halpert, a CFO's job is to rein in the CEO. Cederna calls the fortitude to expose potential scandals "managerial courage"; in other words, having the mettle to "do the right thing." It's more than just speaking up, he adds; "it's having the confidence to fix things, too."

If a public scandal emerges at a company, will the finance managers who work there carry a stigma when they leave? Not according to executive search expert Clothier, who says that only a small minority of managers share the taint of their companies. Unless an executive is indicted, it shouldn't be stumbling block for a good candidate, maintains Clothier, although the job seeker should expect extra scrutiny from search firms and prospective employers.

"There's always more to the story" than you'll see in the news," adds Lee Shull, a managing director for interim-CFO firm Resources Connection. When you're looking into a scandal, says Shull, "you really have to determine the candidate's level of involvement." In fact, adds Shull, Resources Connection just hired a financial manager from a company made infamous by accounting improprieties — but only after Resources Connection and the client were comfortable that the candidate wasn't part of the malfeasance.

5. You're Too Content with the Status Quo

Letting things brew and dealing with them later is an approach best confined to the office coffeemaker; it's certainly not the mark of a successful CFO candidate. Sometimes, taking the initiative with a business problem means stepping out of the finance role to become, for example, an operational catalyst.

While CFO at a private scientific research company, Stewart Griffin identified a major new piece of equipment — an automated microscope-slide feeder — whose return on investment was disappointingly low. The variation in slides from one client to the next, it seemed, nearly wiped out the saving that the automated feeder was intended to generate; each batch of slides had to be painstakingly recalibrated.

Griffin, who took on the task of making this expensive slide feeder pay its way, determined that a further investment was needed — standard slides, which the company would provide to its clients. The standard slides cost his company another $7,000 — and returned a $300,000 saving to the research lab.

Writ large, this is the same approach that a successful turnaround artist might take to overhaul a troubled company. Turnarounds are a bit of a specialty, of course, and you're unlikely to find yourself tackling such a job until you've spent some time in the trenches.

6. You Don't Care Enough about Operations

Finance chiefs have to travel to plants and facilities, attend industry conferences, and visit clients, says Calgon Carbon's Cederna, so they understand what's behind the numbers. There's no other way, he maintains, for them to become "true business counselors and advisors." Worthy CFO candidates don't view finance as an isolated function, adds Pfefferle; they see past the numbers to explore how corporate finance can help usher in business improvements.

A prospective CFO also needs to dig into the company's core competencies, says ImmunoSite's Vennare, who demands that his finance chief understands the company's business and financial model, not to mention its relationship with the capital markets. "If the CFO is still learning about my business, the learning curve is already too long," notes Vennare. He adds that a candidate hoping to join the C-level should be more of a teacher than a student. "If I wanted a CFO who was just good at finance," quips Vennare, "I would have hired a graduate student with good marks in finance."

Other sources we spoke with agree: A CFO who is short on basic operational knowledge won't have enough information to make the best financial decision. Of course, the CFO shouldn't get bogged down with operational details — or with financial details, for that matter. To some degree, a finance chief must rely on unit managers to direct the appropriate information up to the C-level. (Maintaining a close connection with operations may be more critical than ever due to some of the reporting requirements of Sarbanes-Oxley.)

7. You're the "Quiet One"

If you can't step up in front of a large group and speak about your company's finances and business, you won't make a good CFO, counsels Clothier of Howe and Associates. Eloquence may not be essential, but you've got to be good on your feet. "You rarely see a wallflower become a CFO," asserts Clothier, especially when you consider how often the finance chief must stand in for the CEO.

That was the case for Jeff Burkel. Almost immediately after being hired as the CFO of Blattner Brunner, an advertising agency, Burkel and executive vice president Scott Morgan were asked to handle some duties for the CEO, who was busy arranging a majority-stake buyout of his partner. Their job was to "be the face of the company," explains Burkel, who says the duo became agency ambassadors to clients, bankers, and lawyers, as well as industry and community groups.

Burkel's negotiating dexterity turned out to be as important as his financial skills. Within a month, he was sent to a large pharmaceutical client to make his agency's case for a major rate hike, in the face of adamant objections by the client. Eventually, Burkel drove home the point that the increased rates reflected a higher level of service. The agency held on to its client — at the new, higher rates.

Regardless of deft negotiating and public speaking skills, a CFO will rarely match the crowd-pleasing persona of a CEO. "I feel for CFOs who have to follow the CEO on stage," remarks Calgon Carbon's Cederna. Successful chief executives are great in front of crowds, so when the CFO joins the CEO in a tag-team presentation, the finance chief usually comes off second-best. Nevertheless, the CFO should have the confidence and expertise to weather any crowd.

8. You've Got a "Financial Disconnect"

Bringing old and new financial relationships to the table is essential for anyone who's stepping into the top finance job. So is a thorough understanding of financial "triggers"; during the past year, many companies with poor cash flow or sinking stock prices took a hit when loan covenants were broken due to downgrades in corporate credit ratings.

For public companies, experience with SEC filings is extremely important (all the more, now that CFOs are required, literally, to sign off); so is a solid relationship with corporate lawyers and commercial bankers. Specific expertise — say, with reverse IPOs or with mergers and acquisitions — is more of a case-by-case requirement. (Providing earnings forecasts, on the other hand, may no longer be an issue for the many companies that are getting out of the guidance game.)

And since the finance chief is the point person with bankers and the SEC, adds Cederna, it's important for CFO candidates to have some treasury and accounting background. As we've mentioned, the CFO shouldn't be bogged down in the details but should be expected to manage the accounting and treasury staffs from a position of experience.

Private-company CFOs need to be well-versed in venture capital portfolios, the motivations of the company's investors, the expected return on investment, and how long the investors intend to keep their money in the company. Finance chiefs at private companies often go so far as to develop a proprietary database that slices and dices the investor base by dozens of criteria, including narrow special-interest markets.

9. You Pay No Attention to the CIO Behind the Curtain

Information technology — and the IT department — shouldn't mystify you, let alone intimidate you, says Shull of Resources Connection's Shull. Given the pressure to deliver more information, more quickly, to the CEO, to the SEC, to analysts, and to business-unit managers, adds Shull, you won't find too many top CFOs who are in the dark about IT. (In fact, if your IT IQ doesn't measure up, you might just want to consider another career.)

Several chief executives say that they rely on their CFO to keep abreast of current technology and leverage it to the company's advantage. Others, like ImmunoSite's Vennare, say that a tech-savvy CFO is not a big issue, as long as the correct balance of other skills is in place. "You don't need a software engineer as a CFO," he reasons, "but the candidate should have played in that market if that's your core business."

Nevertheless, ad agency CFO Burkel contends that a finance chief has to be comfortable enough with technology to understand the project requests coming from the IT department. Notes Burkel, you can't always spend money on a consultant "to tell you whether your CIO is making sense."

The Sarbanes-Oxley Act has also compelled many CFOs to become more tech-savvy, simply to meet more-robust disclosure regimes. One effect of Sarbanes-Oxley, write Aberdeen Group analysts Alan Yong and Alex Veytsel in their report "Baring the Financials: More Than the Current Financial Systems Can Bear?", is that public companies must be able to extract granular details about material transactions and events from their financial systems.

Although the act doesn't explicitly mandate new or updated financial systems as a compliance method, they add, the "spirit of the law will haunt public companies that lack a financial platform that captures, analyzes, and distributes detailed data." The authors also mention something about handling all these details "in a shrinking timeframe." Even if CEOs don't yet demand that their CFOs embrace technology, it seems that lawmakers do.

10. You're Not a Leader

Without the intangible ability to lead — the mortar that makes the whole greater than the sum of its parts — an aspiring CFO will fall short of the mark.

On a strategic level, leaders excel in the areas you might expect, namely constructive persuasion, talent assessment, leadership development, team building, and organizational design, says Professor Jay Congers of the London Business School. In a new book of essays titled "Leaders Talk Leadership," Congers also asserts that a good leader knows when to cannibalize strategies, products, and organization and when to strengthen continuity and stability. It's a delicate balancing act, adds Congers, in which adapting quickly is the hallmark and "years of experience will no longer be enough — and, in some cases, may prove a hindrance."

Turnaround guru Pfefferle looks for CFO candidates who are results-driven, not process-driven. Finance executives who are too inflexible about their protocols and reporting structures often allow those processes "to turn into an end in themselves." That inflexibility not only stunts the growth of the finance department and the company, he maintains, but also shuts the door on the manager's ability to rise to the next level. Adds Pfefferle, "Successful CFOs see beyond the processes to prevent tomorrow's problems."

And finally, adds Pfefferle, finance executives need to be able to admit their errors, correct them, and avoid repeating them. Prospective CFOs who don't see it that way may simply have "The Wrong Stuff."

Have any "sure signs" of your own? Send them to MarieLeone@cfo.com.

You Shouldn't Take the Job

Thinking about accepting that offer? Here are ten signs you'd be better off taking a pass.
Craig Schneider, CFO.com | US
January 23, 2003

Larry Reinhold wasn't looking for trouble — he was just signing on for his first job as a CFO.

In January 2001, however, after only three weeks at Critical Path, he discovered questionable revenue recognition practices at the San Francisco-based Internet messaging company. At Reinhold's urging, Critical Path soon restated earnings downward. Its stock price fell, not surprisingly, and shareholders filed lawsuits against management. Reinhold stayed on for the next eight months, helping the company implement financial controls and clean up the accounting mess.

Jim Greer, during his own job search, was only asking what most other candidates would ask: Would you tell me about the previous CFO? The answer was, well, that there had been three previous CFOs in the past 15 months.

Yet from his interviews with the CEO, with HR, and with other managers and staffers at the organization — a well-known nonprofit medical-research institute — he determined that he could make a significant contribution quickly, and that the job was a good fit. Turns out, believes Greer, that he was right.

If you're actively looking for a new position yourself, consider these ten signs that you should keep looking. They'll help you walk that "fine line between due diligence and investigation," as Reinhold calls it, without "turning a job interview process into a forensic auditing engagement." After all, the managers and board members you're looking over today may be working by your side tomorrow.

Have any "sure signs" of your own? Send them to CraigSchneider@cfo.com.

1. Hidden CFO Histories

One of the first questions that many candidates ask their prospective employers is why their predecessor is no longer with the company. One of the first signs of trouble is when they receive a non-answer in return.

Joe Varraveto, now the CFO of eUniverse, has heard boilerplate responses plenty of times. "The business had outgrown them" was one old line that Varraveto heard from a former prospective employer. If the responses are pretty guarded, he continues, there may have been a larger issue with the former employee or with management as a whole. Depending on your read of the situation and your risk tolerance, it may not be worth the extra due diligence to find out the truth.

Michael Carus, CFO and general partner at New York-based venture capital firm JVP, thinks that candidates should push a little harder. "Why are they no longer there? Is it because of a skill-set gap?" You certainly need to find out, adds Carus, whether the previous finance chief was pressured to do something unethical. (You might be surprised how many CFOs say they have engaged in "aggressive accounting," often at the behest of the CEO.)

The predecessor's length of time on the job may also be reason for worry. "If he was in the job less than a year, that's a red flag," says Tucker Mays, co-founder and principal of Stamford, Connecticut-based OptiMarket, an outplacement firm for senior executives. Two years or less, he adds, is "kind of an orange flag."

2. CFO = Miracle Worker

The role of the CFO is more valued today than ever before. That can be both a blessing and a curse. Watch out for that job where they "want you to 'walk on water', which happens more and more in tough job markets," says OptiMarket's Mays. "You have to be realistic." Also beware the job whose description is so general that you really don't know what to expect.

Beware, too, the CEO who sees you as something less than a partner. "Does that CEO want a strategic counterpart," says JVP's Carus, "or are they looking to offload work? Are they open to advice and different ways of seeing," or are they looking for someone to "put the financial puzzle together for them?"

Then there's the bait-and-switch. A few months before Ron Rubin took his current job at Tatum CFO Partners, he interviewed for what he believed would be a position as a COO. When the HR director began talking instead about the CFO position, saying that the company needed someone "to pull them out of the hole" and to raise funds, Rubin made a fast exit. A follow-up call from the CEO confirmed that the job was to help raise venture capital — and as a consultant, not an officer of the company. (The company, adds Rubin, "has very recently filed for bankruptcy.")

Sometimes even the floor plan provides a clue — particularly the proximity of the CFO's office to that of the boss. Why? Greer has a theory: "The distance from the CEO's office is inversely proportional to the organizational perception of the importance of the job."

At a former employer, Greer actually took it as a personal challenge to help the accounting department grow in stature, but other CFOs may want a bit more support and trust from their fellow employees. At the start of Greer's campaign, the department was generally looked at as "the people that say 'no'," he says. "You get to feel that you're wearing a target around the office." (Or perhaps it's just a brightly colored grindstone. That's the impression of many overworked CFOs who'd like to "Take This Job and Split It.")

3. D&O Exclusions

Before a CFO signs on with a public company, checking for directors' and officers' insurance is standard. But even when Robert Schleizer finds at least $2 million in coverage (he prefers $5 million), not all D&O plans will do.

Schleizer, who's also a partner with Tatum, is particularly wary of D&O plans that carry a lot of exclusions — like those at one former client, which he learned about only after he was the CFO and a board member. Past litigation between the company founder and a majority shareholder, he explains, meant that the insurer for the new plan would not cover future disputes and actions of the board if litigation involved shareholders with more than 30 percent ownership.

In order to appease everyone, the insurance company included a hold-harmless agreement — a provision that assumes the liabilities of the past. But the policy's new plan exclusions meant that directors and officers still assumed greater risk for future liability. Adds Schleizer, "Had I not already been on the board, I probably would have not joined the company." (Find out how D&O insurance has become more expensive and less inclusive than ever.)

4. CEO = Dingbat

For many CFOs, the key to finding the right job is finding the right boss. Jim Greer learned that lesson the hard way at a former employer, when he took a job where he knew the chief executive was "a little off-balance."

Many of his peers might do the same today. Some finance chiefs look at their boss's idiosyncrasies as part of the challenge, but tackling a CEO's personality and behavior problems, warns Greer, are leadership issues for the board to deal with, not the CFO. "Life isn't worth it," he says of the experience. "Three years of your life, no matter what they pay you, is not worth putting up with a dingbat."

Other CFOs may want an incompetent boss just so they can look better by comparison. But Larry Reinhold, who intends one day to be a CEO himself, looked for just the opposite. When he started interviewing again after leaving Critical Path, he had the opportunity to pursue a chief executive position — but he decided to spend more time in an operational CFO role, getting first-hand training under "a competent, proper CEO." (Some CEOs believe a good first step is for a CFO to train her own successor.)

Many finance chiefs tap into the membership base at Financial Executives Institute and the Financial Executives Networking Group, which may include former employees of the company who are willing to provide an insider's perspective. Getting a few opinions of the boss and the working environment can help guard against a bad situation.

After his experience with Critical Path, Reinhold played it even more carefully. He passed on several job opportunities where the chemistry wasn't right or where the CEO seemed "inexperienced."

Eventually Reinhold interviewed at Wilson Greatbatch Technologies, a maker of power sources for implantable medical devices — where he knew no one. Reinhold sought out people who knew the CEO personally, "and all corroborated that the man is of the absolute highest integrity."

5. Premature Recognition

When it comes to sniffing out a finance department that's using creative accounting to boost its numbers, even a CFO candidate has to make some assumptions along the way.

For example, says JVP's Carus, suppose that receivables and revenue are listed with identical amounts. Those two line items could reflect an aggressive accounting practice in which revenue is recognized too early. But they could also signal that the company has delivery issues that are keeping customers from making timely payments. Or the company could be "selling into an industry that is going down the drain," adds Carus — that is, the business may rely solely on a handful of struggling customers. (Think "dotcom.")

Of course, especially for a job candidate at a private company, uncovering some of these specifics may simply not be possible. In hindsight, Reinhold still isn't sure how he could have identified the problems at Critical Path any sooner. "I don't know what else I could have done," he says, since the issues he discovered were ones that "a prospective CFO candidate would never have access to."

Reinhold notes, however, that people can be a lot more accessible than documents. Prior to taking the job with Greatbatch, he interviewed the controller about the company's level of conservatism in accounting and about its relationship with outside lawyers and auditors. "I didn't come in and say, 'I want to see sales contracts'," he says, "but I did interview the people who were down a level in keeping the books and records and preparing the financial information." (For more, see RevenueRecognition.com.)

6. Trial Balance = Doorstop

When you have the opportunity to meet with the prospective company's controller, ask to see a copy of the trial balance — and not just so you can confirm for yourself that total debits equal total credits. The trial balance, in Greer's words, is "the hinge document" between all the drudgery and detail of the general ledger system and the financial statements. And when the trial balance is too thick, it's the CFO who may come unhinged.

"If it's as big as a Manhattan phone book, I lose interest real fast," says Greer. "If it's over an inch thick, they probably have a really screwed up accounting information system." And if that system needs a huge overhaul, the new CFO will be doing a huge amount of the hauling. "Unless I'm interviewing at General Motors," concludes Greer, "it shouldn't be that way." (For more on the efforts of CFOs to close the books quickly, see "Virtual Close: Not So Fast.")

7. Taxing Experiences

Some private companies are chock full of surprises. Just ask Tatum partner Jon Steging, who arrived for one meeting with a client to find that the Internal Revenue Service was in the lobby, literally shutting down the company for not paying its Form 941 deposits for payroll taxes. "That turned out to be an assignment I didn't want to take," he says.

Not every sign is as clear as a big yellow "IRS" on a blue jacket. Steging had been referred as a consultant to the privately owned business; there were accounting issues, he was told, that prevented it from getting statements out on time. In fact, the company had cash issues, and it was a little more than a year behind on its payroll-tax deposits.

If a smaller company has cash-flow problems, the payroll tax can be an early indication that something is amiss. When Steging's partner Robert Schleizer was interviewing for the role of CFO at a trucking company, he learned that its payroll tax was not current — and that management didn't know how much they owed. He signed up anyway, on a consulting basis, but since "they didn't have the money to do what I asked them to do," says Schleizer, he walked away entirely after two months.

As for Steging — and his client who'd already had a visit from the IRS — "I referred him to a tax accountant who had a law degree as well." (See how the tax efficiency of public companies measures up (provided they pay up) with the CFO PeerMetrix Interactive Tax Efficiency Scorecard.)

8. The CEO Stays in the Picture

During the interview process, a CFO shouldn't have trouble arranging whatever one-on-one meetings might be needed. And so when Tatum's Schleizer was referred to a private company recently, he assumed that he would be able to talk with the controller, the heads of marketing and operations, and salespeople.

Schleizer did meet with the CEO, but he learned that he couldn't interview the other senior managers unless the boss joined them. Suffice it to say, Schleizer didn't stick around long enough to find out why. "If I can't talk to key employees without the CEO being present," he says, "that's a tip-off."

Leaving was the smart move. The difficulties were "a lot more than the guy let on," Schleizer later discovered. "I have no problem going into difficult situations," he adds, but "you don't want to be surprised — get a lawsuit in the mail the next day, for instance. You can't deal with that when you're dealing with operational difficulties." (Some companies do get it right; find out more in "What Works: Building a Strong Finance Team.")

9. "Mary Works in A/P"

Sometimes, you can hear a lot just by listening. In the lobby of a prospective employer, while waiting to meet with the CEO, Jim Greer heard the repeated page, "Mary, you have a call on line 1." Says Greer: "Find out if Mary works in A/P. If she's ducking phone calls, it could be indicative of a severe cash problem."

You laugh — but after he accepted the position as CFO of the venture-backed manufacturer, Greer might have wished that he had the benefit of his own advice. Yes, Mary was employed in the accounts payable department; yes, there were cash problems, especially after the VCs stopped funding the company; yes, Mary was dodging phone calls because she didn't want to deal with irate vendors. And yes, after Greer took the job, he started getting the calls himself.

Some CFOs welcome the challenge of a troubled company. eUniverse's Varraveto says that many of his more job-security-conscious peers would likely have walked away from his job when he took it two years ago. "If you looked at the business financials, they were not entirely that healthy," he says. "The company had not started to monetize its assets." Notes Varraveto, "Risk of failure was probably high." That goes for the CFO as well as the company. (For more about taking on a troubled company, see "Meet the New Boss.")

10. The Auditors Have a Thing or Two to Say

If there's one thing a CFO candidate shouldn't take for granted these days, it's the opinion of the outside auditor.

Larry Reinhold never spoke with Critical Path's outside auditor, PricewaterhouseCoopers — in part because he was tapped for the job while a partner at PwC. Though Reinhold never audited Critical Path himself, knowing that members of Critical Path's management served on the audit team gave him comfort. (For that matter, everything seemed to check out: Reinhold knew Critical Path's president and outgoing CFO, the management seemed experienced, the board members were big-time VCs, analysts were bullish, and many people didn't know Enron from an end run.)

The next time around, when Reinhold interviewed at Greatbatch, he made sure to speak with the external law firms and outside auditors. In addition, he gave extra attention to "areas of integrity and ethical behavior."

When a company's outside auditors speak with a prospective employee, they aren't going to badmouth a client outright, but they might have a warning or two. "Auditors generally enjoyed talking to me about their client companies," says Greer. "I'm not sure they're supposed to, but it was usually a good source of information."

For a CFO who can reads between the lines, that good source can reveal some bad circumstances. If the auditor says, for instance, that they've been doing a lot of work on their cash flow or cash statements, "it tells me maybe cash is a big problem," notes Greer. These days, that would be enough for Greer to lose interest very quickly.

It might also be wise to see if the audit committee is displaying active and effective oversight, says Ernie Lorimer, a partner at corporate law firm Finn Dixon & Herling. If it's not, the incoming CFO may well need to unwind a series of hedges or some off-balance-sheet transactions that aren't fulfilling their purpose, or didn't have much of a purpose in the first place. Furthermore, an ineffective audit committee that "is not backing that effort," adds Lorimer, "will make the CFO's judgments less tenable."

For that matter, independent directors may have a completely different take than management does on the company's state of business. "If the board sees it differently, you can pretty much be assured that there are going to be big issues down the road," says eUniverse's Varraveto. (Although today, some companies that are "Tuning In to Cash Flow" often find that they may be better off than they seemed.) But sometimes, says Varraveto, "you can't reconcile it"; you have to "walk away."

Have any "sure signs" of your own? Send them to CraigSchneider@cfo.com.

Your Finance Department Is Second-Rate

Not certain how your finance department stacks up? Here are ten markers of mediocrity.
Marie Leone, CFO.com | US
February 20, 2003

You can't benchmark the performance of one finance department against another, says Blythe McGarvie, CFO of the Paris and New York-based BIC Group. The same numbers, she argues, are handled by different companies in too many differently nuanced ways for direct comparisons to be practical. Many finance chiefs, consultants, and academics are willing to make those comparisons — but they disagree on where to draw the lines.

McGarvie and the others we interviewed for this article, however, all agree on several indications that do provide a certain measure of a finance department's effectiveness. (Within this article, "finance department" refers to all those areas over which the CFO holds sway.)

Steer clear of these treacherous areas, and you have no guarantee of success; run afoul of them, on the other hand, and your finance department simply cannot be considered among the best. Your company and your career may fare poorly as well.

1. Slow Closes

A properly skilled staff should produce a complete financial statement within ten days of the quarter's end, says Miles Stover of Crossroads LLC in Irvine, California. Seven days, he adds, should be long enough to produce a preliminary "flash" report suitable for internal distribution.

Stover, who's been an interim CFO on behalf of Crossroads at multibillion-dollar conglomerates and at tiny private concerns, grants an exception for companies with annual revenues under $50 million — but even for these companies, he maintains, the quicker the better.

Dave Peralta, CFO of software provider Arbortext in Ann Arbor, Michigan, doesn't hold to such a strict rule of thumb, but he agrees that "the longer it takes to close, the more inefficient the department becomes." Tasks tend to expand to fill the available time unless the finance chief has the discipline to fix a date, then push the department to meet it.

Efficiency aside, why else should you concern yourself about a leisurely close? It can be a sign that policies may need some tweaking — say, because closings are held up by laggard invoices that trickle in on the last day of the month. There's a simple remedy for that one: Move up the deadline to earlier in the month to give your staff some breathing room.

Sometimes, of course, appropriate policies and procedures are in place, but they're being ignored by employees outside your department. "That's when the CFO needs to put in some calls to get things back on track," offers Peralta. (For more on the efforts of CFOs to close the books more quickly, see "Virtual Close: Not So Fast.")

Now there's slow, and there's very slow — it's not simply a process problem when the close is a full quarter behind. Witness power producer Mirant, which filed its 10-Q for the period ending June 30 on November 7, and pharmaceutical giant Bristol-Myers Squibb, which plans to file its third-quarter 10-Q in February 2003.

"If this was just a process problem," says James Owers, a finance professor at the J. Mack College of Business at Georgia State, management might have felt compelled "to bring in a new cast of characters in the CFO function." Owers notes that these tardy filings indicate wider problems — restatements coupled with investigations by federal regulators, in the cases of Mirant and Bristol-Myers Squibb.

2. Outrageous Audit Fees

Insiders and outsiders have different opinions about whether high fees spell trouble for the finance department. Kris Onken, CFO of Logitech International, a manufacturer of personal digital devices based in Fremont, California, maintains that rising audit fees are often an indication that a company's business is becoming increasingly complex. At a previous employer, she saw audit fees jump 25 percent while the company worked through growing pains.

Daniel Weinfurter, president of Parson Consulting in Chicago, counters that high fees, including those for non-audit services, can be traced to an underperforming finance department that requires an abnormal amount of "cleanup." Weinfurter, whose Chicago-based firm specializes in ferreting out corporate finance problems, warns executives to keep tabs on the fix-it bills for such things as slow shipments, bloated inventory, out-of-control receivables, and big write-offs for items that should have been handled earlier in the reporting cycle.

Paying a CPA $500 per hour to correct general-ledger mistakes is throwing money away, adds Miles Stover. Accounting errors should be corrected in-house by a staffer who makes $60 per hour. (Another option, many firms have found, is to have their outside audits performed by one of the many "Second-Tier Audit Firms.")

3. High DSO

Days sales outstanding (DSO) — the average time taken by a company to collect payment from its customers — can be calculated using figures from the 10-Qs or 10-Ks of a public company. When DSO rises, it also appears on the radar screens of company shareholders.

Daniel Weinfurter says an increase in DSO usually stems from a lapse in the accounts receivable process. Collection calls, for example, might not begin until 30 days after the past-due date. A related headache manifests itself as high customer adjustments, which can lead to higher DSO as well as hinder the usefulness of forecasts.

Although the CFOs we spoke with consider such adjustments to be "business as usual," all agree that when the number of adjustments creeps up month after month, something's amiss. Perhaps it's simply a warning of sloppy quality control on the assembly line, but faulty control procedures in the finance department are more common and more directly controllable.

There's no rule of thumb for DSO, mainly because industries vary greatly in the speed with which they collect. Tracking your receivables aging pattern is one useful yardstick; even better would be to compare your company's DSO with that of its peers. (To keep tabs on DSO and many other metrics, most publicly traded U.S. companies can compare themselves with their peers by entering company tickers in the CFO PeerMetrix interactive scorecards.)

4. Multiple Payments

Are your vendors seeing double? When they bill you once and you pay them twice, you may ensure that your company's credit is stellar, but it's not great for cash flow. Kris Onken remembers when, as a newly hired controller for a previous employer, three different vendors notified her of double payments. "I can only imagine how many more were out there that never reported it," she laments.

Your accounts-payable system is probably not to blame. Most standard accounts-payable software incorporates a safeguard that matches up each check with an invoice. Even off-the-shelf small-business software that retails for under $100 usually has that invoice-matching feature.

"Double payments, or slow payments, often have their origins in operations," observes Dave Peralta, and to some degree the finance department must rely on the diligence and discipline of the operating units. Bill Hurley, practice director at Parson Consulting, notes that new, sophisticated procurement systems have added another layer of complexity to the payment process. True, these trading systems may standardize the information gathered from vendors — but if an accounts payable employee runs into a snag while negotiating four or five software filters, an exception can take weeks to resolve.

Whether double-payment problems begin with poor compliance by operating units or with haywire procurement systems, the buck stops with the finance department. (That's a big reason so many companies are "Working on the Chain.")

5. Earnings Restatements

According to the U.S. General Accounting Office, during the past five years 10 percent of all publicly traded companies restated their earnings because of accounting irregularities. About 250 companies, the GAO estimates, will restate by the end of this year, far more than the 92 companies that restated in 1997.

Most restatements aren't a harbinger of fraud, simply the result of common accounting errors or oversight. Parson's Weinfurter maintains, in fact, that two-thirds of all restatements are caused by trip-ups related to revenue recognition. A restatement usually won't bring a company to its knees, adds Logitech's Onken, but "it's still a black eye." (Or is it a knockout punch? In a poll conducted for our special report "CFOs: The New Patsies?," more than 60 percent of respondents thought that an earnings restatement was the biggest threat to a CFO's career.)

Many errors that might lead to a restatement are caught by internal audits and corrected. When they slip by, says Professor Owers, it's a strong signal that the accounting and financial functions are having a problem with accounting judgments.

6. Manual Entries

The sole proprietor of John's Coffee Shop can automate his books for $80 with an off-the-shelf software package. Not only will he free himself from manual entries, his accountant tells him that he'll be able to shore up his financial controls.

For larger companies, however, ridding the finance department of manual entries and stand-alone spreadsheets is proving to be a Herculean task (think "Augean stables").

Parson's Hurley says that 99 percent of his clients — these are Fortune 500 firms, mind you — still work with spreadsheets or disparate financial systems. Only the Fortune 50, claims Hurley, are really breaking away from their reliance on spreadsheets, since only these companies have the resources to connect far-flung systems with middleware and to wean employees from spreadsheets by retraining them.

Spreadsheets are still handy for running "what if" scenarios as well as budgeting and forecasting exercises. But when the subject is financial controls, notes Crossroads' Stover, relying on stand-alone spreadsheets instead of financial systems "violates the audit trail." More opportunities exist for mistakes — or wrongdoing — and widespread use of spreadsheets means that a company's financial-database history is useless.

Balance sheets and income statements, Stover maintains, should be posted within a systems environment. (For more, see "Core Values," our ERP buyer's guide.)

7. Lack of Transparency

Accounting is a straightforward science, says Arbortext's Peralta, and transparency is a non-negotiable item for both internal and external reporting.

From an internal perspective, the department must respond to questions with timely and logical answers. When the mechanisms that deliver reports are too confusing, or when the systems that should be running routine reports are spitting out incorrect or incomplete information, that inefficiency should raise a red flag.

Deal with it promptly: While poor report generation creates an unproductive finance department, it also hamstrings business units that depend on updated financial data. When operating units don't get the information they need to support their management and planning decisions, they're not likely to keep quiet.

As for external reporting, Professor Owers gives straightforward advice: Meet disclosure requirements and do it quickly. He praises broadband services and products purveyor Scientific Atlantic for management's quick announcement about the financial impact of the bankruptcy filing of Adelphia Communications, a 20-year customer of Scientific Atlantic. Footnotes, Owers counsels, should follow the spirit and not just the letter of the law. (Easily said — but faced with tough new reporting requirements, many CFOs are having difficulties with "The Fear of All Sums.")

8. Dubious Structures

First, and most dubious: If your internal audit team reports to the CFO, you would be hard-pressed to find an executive, regulator, or Sunday-morning talk-show pundit who did not bristle at the potential conflict of interest.

Every CFO we interviewed for this article insists that this line of report is a grievous governance deficiency that's wide open for exploitation. (The flip side, as exposed by our article "There's a Monster in Finance," is that the newfound power and independence of internal auditors poses its own threat for finance chiefs.)

Then there's the case of the company whose treasurer and controller each reported their own cash number — different numbers, that is. (Apparently the discrepancy stemmed from an inflated cash sum reported by the treasurer, who ignored the float on the cash balance.)

It turns out, says Michael Feder, a partner in the Chicago office of turnaround firm AlixPartners, that the two executives were aggressively competing for face time with the CEO and CFO. A little competition is fine, but it should never trump a clear delineation of duties.

Another crack in the structural foundation is improper division of duties. For example, internal audit rules usually require that the employee that receives checks doesn't post them, and that the employee who prepares checks doesn't sign them.

Finance chiefs agree that its often impossible for very small companies to separate the administration of payables, receivables, and bank-statement reconciliation among three different people. For companies of more than 100 employees, however, it should be mandatory.

9. Overly Cozy with Sales

At its root, this is a problem of revenue recognition, and of training the sales department about just how serious an issue this can be. Just last week, Computer Associates landed back in the headlines over new allegations that it had shifted revenue from quarter to quarter, a practice that could violate generally accepted accounting principles (GAAP).

Accountants from Logitech International, declares CFO Kris Onken, are routinely sent out into the field "to put the fear of God into the sales staff." ("Routinely" used to mean about twice a year, but since Sarbanes-Oxley it's been four times in four months.) Onken insists that the finance department is responsible for educating the salesforce about when to book revenue — "but there can be no doubt who is boss."

What's on the syllabus? It's a refresher course in revenue recognition rules, for new and existing employees, including "what if" scenarios and a question-and-answer period. In addition to the sales and marketing staffs, Onken's team trains other supply-chain workers such as order-entry and shipping employees.

Sales employees should understand the nuances of different contracts, and other supply-chain workers should have at least some familiarity with them. For example, one Logitech agreement states that the company will ship products to a customer warehouse, but the inventory title is not transferred until the customer actually pulls products from the warehouse — so revenue cannot be recognized until that time.

In a good organization, say many CFOs, the sales and marketing departments should be aggressive about order flow, and the accounting department should lend a helping hand when it can do so appropriately. But when "lending a hand" leads to postponing sales problems — or even straying from GAAP — a company might pass "second-rate" and drop to the bottom of the barrel. (For more, see RevenueRecognition.com.)

10. Staff Turnover

Where there's churn, there's trouble, says Stover, and it's usually associated with burnout or poor management. Accountants are precise by nature, adds Onken, and the CFO has to cater to that part of their personality.

Procedures that aren't sharply defined, processes with too much wiggle room, moving targets for deadlines, inadequate staffing, systems that don't support job functions — all are incentives for employees to walk.

Some CFOs believe that substandard transaction systems are the most common cause of dissatisfaction in the finance department. Accountants detest the idea of manually extracting numbers from a system that should deliver them automatically.

Bill Hurley looks instead to procedural breakdowns as a major cause of discontent. The practice leader for Parson Consulting points a finger at departments that wait until the last day of the month to run the numbers, instead of updating receivables, payables, inventory, and cost of goods sold on a daily or weekly basis.

No one likes to "do the big cleanup" — especially when it's the one thing that seems to arrive on schedule, month after month. (For more on best practices and motivating employees, see "What Works: Building a Strong Finance Team.")

The best reason to keep staff turnover low might be to help communication flow more freely within the finance department. When your finance professionals and other staffers are unhappy or untrusting, word of potential problems may not reach your ears until it's too late.

Squibb Kick: Did Bristol-Myers Boot its Finance Chief?

Shakeup continuing at health-care products maker. Also: Siemens gets new CFO for U.S. operations, and how are Andersen's partners faring at other companies?
Lisa Yoon, CFO.com | US
April 17, 2002

>> Pharmaceuticals giant Bristol-Myers Squibb announced that CFO Frederick Schiff, a 20-year veteran at the company, will be leaving his post. CEO Peter Dolan said Harrison Bains, vice president for tax and treasury, would serve as acting finance chief until company hires permanent replacement… One April 3, Dolan kicked off a series of changes in the corporate offices of company. At time, CEO said: "These management changes are clearly necessary in light of the company's recent performance." Dolan's been particularly worried about wholesaler inventory levels in company's U.S. pharmaceutical business. Apparently, incentives for wholesalers led to the surplusage.

Is Schiff being blamed, in part, for drug-maker's performance? Hard to say. All company said was Schiff, who was promoted to CFO from SVP, comptroller spot a year ago, was leaving "to pursue other opportunities." Noted Dolan: "As I said previously, I am taking steps to strengthen our company's organizational structure as part of our plan to improve performance. As part of this process, I had begun working on CFO succession."

But one analyst found Schiff's departure "surprising," according to Reuters...Richard Evans of Sanford Bernstein called Schiff "a capable CFO" and doesn't think "this insulates anyone else at the company from culpability over the inventory issue," the news service reported...

Bains has been with Bristol-Myers Squibb for 13 years, serving in several finance positions, including investor relations and internal audit. Other recent departees from Bristol-Myers-Squibb: Richard Lane, president of company's medicine business, and Tim Cost, former VP of investor relations…

Sales at drug maker for Q1 2002 will likely decline approximately 7 percent from Q1 2001. Last year, company paid up to $2 billion for a stake in ImClone Systems and its cancer drug Erbitux. Three months later, FDA refused to approve Erbitux. Like many other drug makers, Bristol-Myers Squibb has also had some difficulties developing new medicines to replace ones whose patents have expired.

>> Siemens Corp., U.S. operations of German electronics giant Siemens AG, named Klaus Stegemann CFO. Stegemann was previously CFO of angiography, fluoroscopy and radiographic systems business of Siemens AG Medical Solutions in Germany. Try fitting that on a business card… Stegemann replaces Gerald Wright. Wright was named CFO of Siemens Canada earlier in year…

Stegemann's main role will be to help see company through global economic slump, particularly in telecom industry. Industry watchers say Siemens has been hurt by performance of its mobile-phone busines. Stegemann also expected to help strengthen ties with corporate parent…

"Klaus brings to our U.S. organization the financial strategies and tools to successfully navigate Siemens through an increasingly competitive environment," says Siemens CEO Klaus Kleinfeld. "I am confident he will help us forge a stronger dialogue between the global groups, U.S. operating companies, Siemens Corporation and Siemens AG, to meet our stringent performance metrics in the U.S."

A Siemens lifer, Stegemann worked on projects in both the U.S. and Germany with company's transportation systems, automation and drives, power generation, industrial solutions and services, and medical businesses. Also spent some time at Siemens AG Corporate headquarters… Earlier in his career, Stegemann served in various positions in accounting, reporting, and planning at several major Siemens businesses in Germany…

Speaking of Germany: management at SAP Systems Integration AG said Monday that CFO Joerg Vandreier resigned, effective June 30. In a brief statement, IT consultancy -- majority-owned by German software maker SAP AG -- said only that supervisory board has accepted Vandreier's resignation with regret.

>> Hotspot FX Inc., privately held electronic trading network for foreign exchange markets, announced appointment of Bernie Siegel as CFO… Most recently Siegel served as CEO and CFO of Yazam Inc., an early-stage technology investment firm. There, he oversaw company's worldwide expansion, several strategic acquisitions, and investments in more than 30 IT companies…

Prior to Yazam, Siegel held CFO positions at financial-services firms Wit Capital Group, TD Waterhouse Securities, and Fleet Financial Group's Securities broker-dealer. At Wit Capital, Siegel helped raise over $75 million in private equity capital from institutional investors such as Goldman Sachs... In 1999, Siegel took Wit public… Siegel is a CPA and a certified fraud examiner. These days, that can come in handy.

Short Takes
>> Martin Welch III, former chief financial officer at Kmart, received $1.3 million in severance pay, according to published reports…

>> Andersen partners who leave to become corporate CFOs wind up fetching smaller base salaries than their peers from the other Big Five accounting firms. This, according to forbes.com, citing a study by headhunter Foster Partners.

The Turnaround Specialist

New CFO Laureen DeBuono has stepped into a hornet's nest at Critical Path. Good thing she knows a good lawyer.
Jennifer Caplan, CFO.com | US
March 8, 2002

Laureen DeBuono may be the ideal turnaround CFO. She's smart, meticulous, and she's a damned good securities lawyer.

After earning a bachelor's degree from Duke University, a master's from Stanford, and a law degree from NYU, DeBuono launched her career at Bronson, Bronson and McKinnon, a San Francisco law firm. But it wasn't long before she decided to enter the nonbillable world, moving first to Varian Associates, a Palo Alto, California-based semiconductor equipment manufacturer. In 1987, DeBuono joined household-products maker Clorox, where she became more involved in the actual running of the business. In fact, in her next position as vice president general counsel at Nellcor Puritan Bennett Inc., a medical-device manufacturer, DeBuono helped negotiate that company's $2 billion sale to Mallinkrodt Inc.

Soon after, DeBuono leveraged the Nellcor Puritan Bennett sale. In 1998, she landed the top finance post at ReSound Corp., a manufacturer of hearing devices and communications products. At the time, ReSound was not so sound. "The company had about $150 million in revenues but no market cap, no analyst coverage, very little cash in the bank, and a lot of businesses that were not rationalized," she recalls. "But we were able to clean it up quite successfully." Later, DeBuono oversaw ReSound's sale to GN Great Nordic, a Danish telecom company, in late 1999.

In September, DeBuono signed on at yet another struggling company — this time, the aptly named Critical Path. When she joined the Internet messaging specialist as interim CFO in September 2001, Critical Path was in serious trouble. The company had gone through several CFOs, and earnings had fallen well short of fourth-quarter estimates. Worse, some managers at the company admitted to having improperly booked revenue, and the company was forced to restate earnings for the prior two quarters. In the aftermath of the restatement, Critical Path was slapped with 52 — count 'em, 52 — shareholder lawsuits, along with an SEC investigation. The company was also carrying some $300 million in debt, yet barely generated $27 million in revenues in the first quarter of the year.

Under DeBuono's tenure, however, Critical Path has stabilized. The company reduced its debt load to around $38 million, and is now sitting on about $70 million in cash. The Net operator has also expeditiously settled its cases with shareholders and the SEC, proving that it doesn't hurt having a CFO who knows his or her way around a legal brief.

In January, Critical Path management rewarded DeBuono for her hard work, naming her Critical Path's permanent finance chief. DeBuono recently spoke with CFO.com's Jennifer Caplan about lawyers as CFOs, what it takes to save a sinking company, and the challenges of managing through an accounting scandal.

It's uncommon for a CFO to have a legal background. Do you feel your knowledge of the law has made you a better CFO?

My legal background has been critical in making me the type of CFO that I am. As a lawyer, I believe you develop the best possible analytical and risk-assessment skills that you can — even better than in business school or going directly into an accounting situation.

My move to becoming a CFO has been relatively deliberate — but evolutionary. It's been quite an easy move for me from legal into the finance area. After all, I have been working within companies for the past 20 years.

Prior to joining Critical Path, you were at ReSound Corp., a manufacturer of hearing devices, which was struggling financially. You went into that company, turned it around, and sold it off. Has your experience at Critical Path been similar?

Yes, ReSound was very similar to Critical Path in that, when I came in, we still had balance-sheet and convertible-debt issues to resolve, we needed to raise additional cash, and we still had pieces of the restructuring left to do. So the skills that I had developed at ReSound were right on. I won't say it was easy, but I had all the experience to do it.

Becoming a "turnaround CFO" can be a double-edged sword. You take a big professional risk by going into a company that has the potential to tank. At the same time, if you are successful, you become a hot commodity. Would you say the risk is worth taking?

It definitely has been worth it. We have been extremely successful with our turnaround. If you look at our balance sheet, we had $69 million in cash at the end of Q4, and we retired almost all of our debt — we now have about $38 million left on the books. We've reduced our workforce by 50 percent, closed two-thirds of our facilities, and have been able to rationalize our product base.

There's always some risk involved with a turnaround situation. But I do think that the rewards outweigh the risk. I do believe that Critical Path will be successful and that the reward will come.

Critical Path got in trouble because of some questionable revenue-recognition practices. The company's new management team now faces the challenge of rebuilding an ethical culture at the company. How have you played a role in that area?

As a CFO, you are right in the middle of crafting what the corporate culture should look like in terms of policies and procedures. We have spent a lot of time over the last six months rebuilding our corporate policies as well as our financial and accounting practices. I feel extremely confident that we now have the right policies and procedures in place to be successful.

We are also in the process of putting into place a new code of ethics that we think culturally is important for each employee to follow. That code applies not only to how we act with our customers and with each other as employees, but also to how we account for things.

Part of the reason corporate ethics sometimes get bent is that managers feel overwhelming pressure to meet Wall Street's earnings expectations. What do you think CFOs can do to insulate themselves from that pressure and create internal incentives for ethical behavior?

It's extremely important that CFOs and investor-relations departments maintain an arm's-length relationship with the Street. Analysts must understand that they have to put their own models together and do their own work in terms of looking at the company and reporting on it. Often times, companies have such symbiotic relationships with analysts and bankers that they simply exchange too much information. Going forward, we have decided not to do that. We are now being very conservative in our guidance to the Street and we are telling analysts that they need to do what is necessary themselves to give a recommendation on a stock.

Two of Critical Path's CFOs came directly from PricewaterhouseCoopers, the company's auditor. Do you think that close relationships between management and auditors make it easier for managers to stretch the numbers while auditors turn a blind eye?

I have always been a firm believer that your service providers must be kept very separate from the internal management of a company — be it audit firms, law firms, or anyone who provides a service. I also believe that it is extremely important that there is an arm's-length relationship between the audit firm and the finance department. It is just common sense and good business practice. A CFO should not come from the auditing firm, just as the general counsel should not come from your law firm. There must be a clear separation.

Do you think it would help if companies were legally prohibited from hiring CFOs who have worked for that company's audit firm?

I'm not sure legislation is the answer. But I do think that FASB, the SEC, and other groups need to look into how we can best resolve conflicts of interest that are pervasive among companies. I do believe that some clear guidelines should come down from the regulatory groups to help get rid of some of those conflicts.

How are you making sure that revenue is being booked according to GAAP, and what checks and balances have you put in place to help you do that?

I should point out that the issues that Critical Path had in the past did not emerge in the finance department but rather from the sales department. In a couple of instances there were contracts that were signed by the sales group recognizing revenues in the wrong way. It was the finance group that identified those issues and brought them to light.

Our revenue-recognition policies have been overhauled. Contracts are now signed by no one but me. Also, before any deal is inked, finance and legal must review the contract, and then I must sign every contract in the U.S. Only when we know that we are recognizing revenue in the right way — oftentimes we do bring in PwC if we need outside help — do we approve a contract.

It seems you're now going from crisis-management mode to a greater focus on generating revenues. Has that been a difficult transition for you to make?

You're right, there is a transition point when you've got to shift focus towards revenue generation. It's not a hard transition, because you're essentially using the same skills in a different way. Most of our work in finance going forward is structuring contracts in the right way so that we can bring revenue in. But it's still about managing the budget and planning processes so that we know firmly where we are in terms of expenses on a monthly and quarterly basis.

Meet the New Boss

He's here to save your company. But don't expect miracles.
Tim Reason, CFO Magazine
January 1, 2002

United Airlines. Providian Financial. Warnaco. Xerox. Gillette. Campbell Soup. Just a few of the companies that have hired so-called turnaround CEOs in the past year.

The list is growing daily — and little wonder. In these recessionary times, the promise of salvation by a white knight exerts a powerful hold on corporate directors of troubled companies. "Boards want to be seduced by someone whom they have been told is a turnaround artist. They're looking for someone to help them out of a desperate situation," explains associate professor Laura Resnikoff, who teaches a course in turnarounds at Columbia Business School. Investors like them, too: The appointment of a CEO with turnaround credentials rarely fails to boost even the most moribund stock.

But experience suggests that the phrase "turnaround CEO" is only rarely accurate. More often it's simply optimistic (think Ford's Jacques Nasser) or even a complete misnomer (think Sunbeam's Al Dunlap). Few of them (think IBM's Lou Gerstner) return a company to its former luster. At best, most of them succeed only in slowing the fall and providing a reasonably soft landing for investors, whether through sale, merger, or even Chapter 11 filing. In fact, a May 2000 article in the Harvard Business Review estimated that 70 percent of all turnaround efforts are failures.

But thanks to the itinerant nature of their careers, turnaround CEOs are usually off to the next assignment before the success or failure of their previous charge is known. "These guys get their halos way too early, before we've had five to seven years to see what they did," says Resnikoff.

So how should their records be fairly assessed? What really separates the successes from the failures and the patch-up jobs? And what are the chances that their next turnaround will be the one that solidifies their reputations?

To find out, CFO examined the careers of three CEOs who have made names for themselves as turnaround guys: Norm Blake, CEO of Comdisco Corp.; Allen Questrom, CEO of J.C. Penney Inc.; and Robert S. "Steve" Miller Jr., CEO of Bethlehem Steel Corp. Collectively, their résumés include 20 attempted turnarounds, with only eight outright successes, five question marks, and several failures. And while the jury is still out on their latest efforts, their track records serve as fair warning to any company expecting "happily ever after": turnarounds are inevitably painful, invariably different from what was envisioned, and often too difficult for one individual to achieve.

Three Leadership Styles
What Blake, Questrom, and Miller have most in common is that they have made careers out of troubled companies. Without question, their arrivals have been greeted with great relief (on Wall Street, if not necessarily in the employee ranks). That's not surprising considering the messy situations they tackle, says Resnikoff. "Many troubled companies drift for a long time," she says. "Someone who is willing to assess the problem and take action is recognized for his leadership."

But that's where the resemblance among the three men ends. Miller, for example, defines his primary objective as stabilizing a company--he usually adopts the title "interim CEO," and describes himself as an expert in crisis management, not turnarounds. "My role is to arrest the decline and create a foundation for rebirth and growth," he says. In fact, he adds, "I would not be a good hire for a company that is doing well--I'd probably mess it up."

He's also quick to point out that his success rate is considerably less than 100 percent. Proud of his work at Chrysler, Morrison Knudson, and Aetna, the 60-year-old Miller considers his efforts at Federal Mogul, Waste Management, and Reliance Group Holdings either mixed bags or outright failures. That's no surprise, as he is famous for accepting assignments within 24 hours. "I come in without any due diligence; if you have to study a company for a month before you commit, you're probably the wrong person for the job."

Blake, in contrast, calls himself "more of a builder than a fixer." Quick to express contempt for "Chainsaw" Al Dunlap, Blake winces at being dubbed "Pink-slip Norm" for cutting staff by 53 percent during his first three years at USF&G Corp. "Anybody can fire somebody," he says. "The real tough stuff is building a new business on top of a broken one."

In practice, Blake, 60, seems more likely to spruce up companies for sale. He sold USF&G to The St. Paul Cos. after eight years, sold Promus Hotels to Hilton after only a year, and is now orchestrating the sale of Comdisco's top-performing businesses in bankruptcy court.

Of the three, Questrom, 61, seems most willing to see the building process through to completion. He has spent 30 of his 37 years in business working for various divisions of Federated Department Stores, including a 7¹/2-year stint rebuilding the parent company. And analysts believe his singular focus on retail will be an asset in his new role as CEO of troubled J.C. Penney. "Even Questrom's competitors refer to him as one of the best merchandisers in the business," notes Wachovia Securities analyst David M. Maura in a recent report. That's key, says Resnikoff, in an industry where "there is an opportunity to disappoint your customers every minute."

Phoenix or Turkey?
Obviously, none of these CEOs intends to disappoint stakeholders. But what constitutes success is another area of disagreement.

According to Dominic Di Napoli, head of PricewaterhouseCoopers's turnaround practice and co-author of Workouts and Turnarounds II, a true turnaround involves not just stabilizing the finances but also analyzing the company, repositioning it, and building its market share. He concedes that failure to complete all the stages "doesn't mean that the turnaround guy didn't do a good job. To the extent it was impossible, he did the next best thing, which is to preserve value."

By this criterion, the work of Blake and his former CFO at USF&G, Dan Hale, was a success. During their eight years there (Blake's longest turnaround effort), "USF&G's market cap increased 320 percent," says Hale, adding that net income increased an average of 46 percent annually between 1992 and 1997.

Those results were achieved through deep staff cuts, the divestiture of $1.2 billion worth of unrelated investments, and the subsequent buildup of USF&G's commercial and specialty lines into profitable units. Ultimately, however, USF&G was forced to sell out to The St. Paul Cos. because its personal-property-and-casualty (P&C) business couldn't compete with newly formed giants like Citigroup (the merger of Citicorp and Travelers). "We were trying mightily to acquire something of size right before the sale," recalls Hale. "We really needed to acquire or be acquired."

Most observers agree with Blake's decision. "If he hadn't sold, USF&G would not be a stellar company today; a midsize P&C wouldn't be able to compete," says Keith Buckley, a managing director at Fitch. "He made a good strategic move in selling the company so that it became someone else's problem."

The Federated turnaround had an even happier outcome — except perhaps for its architect. Bankrupt when Questrom joined in 1990, it became the nation's largest department-store chain with its acquisition of R.H. Macy & Co., and in 1996 boasted a net income of $265.8 million on sales of $15.2 billion. Of its competitors, The May Department Stores Co. alone made more profits.

In the end, only Questrom himself left unsatisfied. He sued Federated over the company's estimate of its increase in equity value, on which his departure bonus was based. Federated's estimate netted Questrom $16 million, whereas he sued for $47 million. A federal judge ultimately dismissed the suit, but Questrom is appealing.

For Miller, success in his latest assignment is going to require outside assistance. Bethlehem Steel's $3 billion in pension liabilities is a common problem for U.S. steel companies, and one that prevents them from acquiring or merging with one another. Solving the pension issue will take nothing less than an industrywide turnaround, he says.

To that end, in a move reminiscent of his work at Chrysler, Miller is pushing for a federal-government bailout of the legacy health-care costs (which would erase barriers to consolidation) and protectionist tariffs. In early December, he increased the pressure on the government by announcing merger talks with U.S. Steel and encouraging as many as five other steelmakers to join in potential consolidation."My first duty is to the shareholders," he insists, "but their future is linked to a much stronger steel industry."

Promoting from Within
Whatever the eventual outcome, the finance department plays a critical role in every turnaround. Blake, who was one of Jack Welch's financial planners at General Electric, traditionally eschews COOs altogether, and relies heavily on his CFO. For finance types, however, the arrival of a turnaround CEO can be both a curse and a blessing. Invariably, incumbent CFOs are blamed for some of the companies' problems: "If you look at a troubled company, you will find a weak financial organization," insists Blake. And rare is the incumbent CFO who survives the first round of the inevitable management shakeout.

The good news is that fix-it pros like Blake, Questrom, and Miller have a history of promoting from within finance — after they send the top player packing. At USF&G, Blake immediately eliminated almost 70 percent of management, including the CFO. But he also elevated controller Edwin G. Pickett to the top finance slot (Hale stepped in 18 months later). And at Bethlehem Steel, Miller offered departing CFO Gary Millenbruch's spot to treasurer Leonard Anthony just days after taking over. "The external financial community was very high on Len, and I took great confidence from them that I could promote him and not miss a beat in our external financial relationships," says Miller.

For his CFO, J.C. Penney CEO Questrom selected Robert Cavanaugh, the onetime CFO of the company's promising Eckerd Drug Stores division and a former J.C. Penney treasurer. That background, says Cavanaugh, was critically important for a company that needed to "maintain liquidity and flexibility." And although Cavanaugh considered himself an outsider when he returned to the parent firm, his years as treasurer were a plus for Questrom. "Somebody who knows the lay of the land is a good asset to a turnaround CEO," says Resnikoff. "For some people, troubled companies are a career enhancer."

At Waste Management, where Miller served not one but two stints as interim CEO, that someone was Donald Chappel, a controller whom Miller elevated after taking over in October 1997. Says Miller, "I promoted him because he was a straight shooter and he knew where all the bodies were buried." That was important, notes Miller, because "the company had been pushing the envelope on its reported earnings." Chappel helped Miller take a $1.4 billion write-off — the largest in corporate history at the time. "We wrote off two thirds of the net worth of the company in one fell swoop," says Miller.

Chappel was subsequently sidelined by what Miller considers "my biggest corporate belly flop ever," when Miller merged the company with USA Waste and turned over control of the combined entity to executives of the smaller company. "I handed the company over to management that was totally incompetent," recalls Miller. Nine months later, the board fired the entire management team and reinstalled Miller and Chappel as CEO and CFO.

Trump Cards
Miller, who served double stints as interim CEO at Federal Mogul as well as Waste Management, is not the only CEO whose experience demonstrates that extracting value from a troubled company is often a drawn-out, repetitive process. Blake says he "looked long and hard" at exiting the personal P&C lines before selling USF&G — a move he admits "would have been a second turnaround."

"Very few people get it right the first time," notes Professor Resnikoff. "The question is whether CEOs are serial restructurers because they are not good at it, or simply because restructuring is such a hardship." While there are certainly those turnaround CEOs who view turnarounds as lucrative hit-and-run assignments, says Resnikoff, most are simply dealing with "an iterative process that gets harder and harder." No surprise, then, that when it gets too hard, many turnaround CEOs opt to sell a stabilized or recovering company.

For an increasing number of companies, the next step is not a sale but bankruptcy. So far this year, a record 230 public companies with more than $182 billion in assets have taken that route, according to BankruptcyData.com. Included in that figure are Comdisco and Bethlehem Steel — despite the fact that turnaround celebrities are traditionally loath to put their marquee-name companies into Chapter 11. "The weird thing is that the bigger the companies are, the better chance you have to save them," notes Joel Getzler, president of turnaround boutique Getzler & Associates, in New York. "They have more assets and some cachet." By contrast, one study notes that the average company emerging from bankruptcy is usually half its former size in revenue, people, and assets.

Until now, Blake had avoided a bankruptcy filing. He hoped to avoid it at Comdisco, where averting bankruptcy amounted to a race between the sale of some of Comdisco's businesses and short debt maturities. "Unfortunately, the economy and other factors were not conducive to making those sales," says Blake, who was almost immediately forced to draw down on Comdisco's bank lines to meet its commercial-paper obligations. "When I came on, I told the board there was a 50 percent probability that I could save the company."

And now that he's taken the Chapter 11 route, he is not happy about the situation. "I hope I don't have to do it again," says Blake ruefully.

The main problem with bankruptcy, says Miller, is that "you don't have control over your destiny in Chapter 11, and you're always asking [the court], 'Mother, may I?'" Having joined Bethlehem Steel on September 24, Miller initially announced he had no intention of declaring Chapter 11. But a deal with GE Capital for a new $750 million revolver to replace its $660 million revolver (providing $90 million in incremental liquidity) couldn't be signed in time.

Even as Miller was calling Anthony at home on September 30 to promote him to CFO, business worsened. Year-to-date before the terrorist attacks, Bethlehem's orders were down 13 percent; since then, they have been off an additional 20 percent. Chapter 11 proved to be the only way out. Under the revised $450 million debtor-in-possession deal struck with GE Capital, explains Anthony, the company was able to pay off a large portion of its previous drawdowns and was left with $190 million in incremental liquidity. In other words, he says, "we were able to raise more money in Chapter 11 than outside."

A Matter of Balance (Sheet)
Raising money doesn't seem to be an issue for Questrom these days, although the former CEO of Federated and Barney's is no stranger to Chapter 11. While J.C. Penney is clearly suffering from an image problem and burdened by a high debt ratio, the company has a reasonably full war chest to fund its heavy spending on advertising and the centralization of merchandising operations that are the keys to its turnaround.

Questrom, who joined Penney in July 2000, can thank CFO Robert Cavanaugh for that financial flexibility. When he rejoined the parent, Cavanaugh's first concern was "to ensure that our operating people did not have to be concerned on a day-to-day basis with debt retirements." And since then he has made good on his promise.

Under Questrom and Cavanaugh, J.C. Penney has taken charges of more than $600 million and closed about 10 percent of both its drugstores and department stores. Last June, it also sold off an insurance subsidiary for $1.3 billion, leaving the company with $1.7 billion in cash and $5.47 billion in debt. Then, in October, Penney issued $650 million of 5 percent convertible notes.

The result? "I don't believe there is one company in American history that has begun a turnaround with 45 percent of its long-term debt in cash," says Cavanaugh. "The convertible [note sale] showed that even after September 11, the capital markets have confidence in Penney's ability to turn around."

Analysts agree. "We view the market reception of the deal, the ease by which the company was able to access the capital markets, and the increased financial flexibility afforded the company as positive developments," Wachovia Securities's Maura notes in his recent report. All this suggests, not surprisingly, that turnarounds are often a matter of time and cash. "J.C. Penney's $2.35 billion cash position gives the company's new management team the time it needs to execute its turnaround strategy," says Maura.

That's the Good News
Unfortunately, time is not on everyone's side in a turnaround. "Whether Bethlehem is a surviving name is a question," admits CFO Anthony, although Miller's game of chicken with the federal government may yet deliver the very consolidation the entire industry needs. Likewise, says Comdisco's Blake, "longer term, if we go through bankruptcy and reemerge, that doesn't preclude the fact that some remnants might, in phoenix-like fashion, become reliable and profitable. But it is a long way to go before you can make that determination."

On the other hand, if Questrom and Cavanaugh are able to sustain J.C. Penney's apparent recovery in the current economy — and analysts are bullish on their chances — it will breathe new life into what Resnikoff calls "the allure of the heroic CEO." Whatever the outcome, one thing is certain: the allure of the next assignment will probably ensure that not all of these turnaround CEOs will be around for the finale.

Tim Reason is a staff writer at CFO.

Brave New Whirl
They know finance. Bethlehem Steel Corp. CEO Robert "Steve" Miller Jr., a former Chrysler CFO, got his start at Ford, a renowned incubator for finance executives. Norm Blake, now CEO of Comdisco Corp., cut his finance teeth at GE Capital. And J.C. Penney Inc.'s Allen Questrom got his undergraduate degree in finance and marketing from Brown University.

Such expertise is crucial for CEOs who come in on short notice and in a time of crisis, says Columbia Business School associate professor Laura Resnikoff. But the pressure of a turnaround also forces even the most talented CEOs to lean heavily on their finance staff. They "walk into a company cold and don't know where the coffee machine is," says Dominic Di Napoli, head of PricewaterhouseCoopers's turnaround practice. So it's understandable that they don't "know the financial systems and how the ledgers roll up."

In addition, turnaround CEOs must often focus first on the needs of angry stakeholders. "The CFO has to work well with the CEO so the CEO has even more time to go out and spend face time with all the constituents," explains Resnikoff. At Comdisco, Blake has even taken the unusual step of naming incumbent CFO Michael Fazio as COO, so he'll have someone to run the business while he is in bankruptcy court.

Still, despite their celebrity status, turnaround CEOs know how to earn the respect of finance staffs. At USF&G Corp., for example, Dan Hale remembers how he and Blake "worked hand-in-glove" during that turnaround. "It wasn't that Norm was making finance decisions," says the former CFO, "but he was making sure he was informed." And at J.C. Penney, CFO Cavanaugh remembers that some of Questrom's earliest recommendations "were things that many in the finance area had been saying for some time." —T.R.