Turnover among Fortune 500 chief financial officers is waning, with a 32 percent decrease in the overall turnover among CFOs in 2006, compared with a 19 percent increase in 2005, affected largely by a decline in the rate of promotions by 68 percent. However, overall turnover still remains high compared to a few years ago.
According to the third annual study by global executive search and assessment firm Russell Reynolds Associates, CFO turnover is at its lowest rate in three years, and it is the first time since the inception of this study that the rate has fallen. Only 13 percent of Fortune 500 companies changed CFOs in 2006, compared with 19 percent in 2005, 16 percent in 2004 and 13 percent in 2003.
Despite the overall turnover slowdown, CFO resignations increased by 41 percent from 2005. The churn rate also decreased for controllers (28 percent) and treasurers (31 percent).
“The regulatory demands on CFOs clearly continued into 2006,” said Chris Langhoff, a member of Russell Reynolds Associates’ Financial Officers Practice. “As the role of a CFO continues to evolve, the responsibilities have multiplied. The time spent on regulatory issues with outside stakeholders has increased dramatically while the CFO must still support his CEO as a business partner and execute more traditional financial disciplines.”
Consistent with this shift, responsibility change (20 percent) was one of the leading reasons seen for CFO turnover, demonstrating that the position of the CFO now carries more risk and liability than in previous years.
Controlled Controllers
The turnover of financial controllers also decreased (28 percent), with 13 percent changing positions in 2006 compared with 18 percent in 2005. The change was driven primarily by resignations (36 percent) and a shift in responsibility (26 percent). That said, in contrast with CFOs, controllers have seen a 35 percent increase in the rate of internal promotions.
“The niche role of a financial controller gives those who excel in this area extra negotiating power and Fortune 500 companies often try to keep this talent within the company by promoting controllers or improving their compensation package,” said Susan Walser, a member of the practice.
In addition, turnover for treasurers also declined and remained at the lowest rate of the senior finance roles. Treasurers were not promoted on a regular basis and the incidence of promotion declined by 43 percent last year.
“As a group, many treasurers are not afforded an opportunity for advancement due to limited impact on operating results and the distance that they remain from the business,” said Walser. “The turnover rate is comparatively lower because treasurers do not suffer from the same operating risks as CFOs and, to a lesser extent, controllers.”
Overall, the 2006 study showed that of those companies that registered a change in CFO, controller or treasurer, 68 percent appointed an in-house executive, as compared to 32 percent that appointed external candidates.
Another factor contributing to the turnover of financial officers is the increased activity of the major private equity firms. Once a company is acquired by a private equity firm a change in chief financial officer is often one of the first moves of the new ownership.
“Private equity firms often appoint CFOs who they know, trust and who have experience turning companies around at new portfolio companies,” said Langhoff. “Thus, we expect to see an increase in turnover, especially in private equity-backed companies, in 2007.”
Russell Reynolds Associates’ Financial Officers Practice members believe that the lasting regulatory impact has had unanticipated human capital repercussions. While companies are working hard to retain their top talent, succession planning for the top financial roles in Fortune 500 companies is now top of agenda. As more financial officers are opting out of the traditional career path, companies will need to prioritize the recruitment, retention and development of the next generation of financial talent.