Why companies need a formal CFO succession plan
It is imperative that CFOs are continually developing their teams in a meaningful way and thoughtfully planning for succession.However, many businesses are not fully prepared.
All CFOs want to set their companies up for continued success after their departure. A critical, but often overlooked, part of this is ensuring there’s a plan to hand over the role to the right candidate.
Good succession management for CFO roles is a strategic enabler for any business: It preserves leadership continuity, minimises the risk of disruption, and helps allay shareholder concerns about changes in management and the finance function. A well-executed succession also secures the legacy of the outgoing CFO.
The numbers would say this issue is particularly important. According to the Russell Reynolds Global CFO Turnover Index, approximately 50 per cent of ASX200 CFO appointments in recent years have been internal appointments.
While this percentage varies year to year and across different market conditions, it is imperative that CFOs are continually developing their teams in a meaningful way and thoughtfully planning for succession.
However, many businesses are not fully prepared. According to Deloitte’s 2Q 2024 North American CFO Signals survey, about one quarter of 200 CFOs say that their companies do not have a formal CFO succession plan. Interestingly, almost one-third of that cohort are large companies with annual revenue of US$10 billion or more.
Why is this? One reason could be that traditional approaches to succession planning can be incredibly slow-moving, with a bias towards internal candidates and away from high performers who work outside of finance or outside of the business altogether.
There may also be uncertainties over what will be required of the hypothetical successor, given the remits of many CFOs are rapidly expanding to include responsibilities like sustainability reporting, tech implementation, and talent management.
There’s also the fact that two-thirds of respondents to our CFO Signals survey say the primary responsibility for creating and maintaining the CFO succession plan rests with the CEO, HR, or the company’s board of directors, suggesting it may get lost amid other priorities.
So, what can CFOs do to help support the development and continual management of a living, breathing succession plan that is always fit for purpose? The first play is to set or update the succession criteria.
Don’t just think about the skills a candidate needs to do the job of CFO today, think about the skills they’ll need three years down the track. This will require contemplation of both the changing business environment and the needs of the organisation at a particular point in time.
Next, to execute on the succession strategy, a future-ready succession pipeline of three or so possible successors should be intentionally cultivated. Skill gaps at the individual and cohort level should be identified, with CFOs coaching and giving feedback to each internal candidate to enhance job readiness.
This may mean making some bold moves, like setting up job rotation systems so potential successors can be put in the position to gain the necessary experiences to be considered CFO-ready. They should also be assigned to high-profile projects, where practicable, to build leadership skills.
Mentorship is also important, particularly in relation to certain topics or responsibilities that can be more difficult to gain meaningful experience in before taking on the CFO role – such as investor relations or debt refinancing.
It is also a good idea to expose potential candidates to running other parts of the business, with finance leaders increasingly being asked to act as enterprise leaders in different roles across many organisations.
Beyond the broad leadership and technical skills required to do the job, CFOs should also show the ropes to successor candidates. That is, acquainting them with the detail needed to perform the CFO role while also exposing them to new experiences like interacting with the rest of the C-suite and the board.
Once a new CFO has been chosen, the old CFO should use the last 100 days or so to wrap up and leave a clean slate. This may mean making some tough choices on people and budgets, but it’s important not to hand a successor a bad set of books, least of all for the legacy of the departing CFO. Additionally, CFOs should not enter any earth-shaking M&A deals whose consequences they don’t have to live with.
Part of this is preparing for the transition openly and honestly, communicating clearly to staff who will be next in charge in finance, and making clear to the successful candidate that they have the licence to make the role their own. After a six-to-nine-month safety net period, former CFOs should step back, only offering solicited advice from afar.
One succession planning technique often contemplated — the creation of a deputy CFO role — can pose an interesting dilemma. In some instances, this is actively used as a tool for broadening the exposure of the leading internal candidate to the full breadth of enterprise challenges and stakeholders they are likely to face in the future.
In other instances, some choose to avoid creating the role as it is viewed as too public a declaration of the heir apparent that could cause challenges, rifts or confusion. For an outgoing CFO, forward planning requires a genuine concern about the colleagues — and company — being left behind and this is what should ultimately sit at the core of any succession plan.
Confidently identifying a successor can be challenging when the nature of the job continues to shift but getting it right can create a legacy that will continue long after a CFO has stepped away.
Stephen Gustafson and Stephen Tarling are CFO Program Leaders at Deloitte Australia.
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