Calling The Shots: Why CFOs Make The Best CEOs Just as the demands on CFOs have expanded, the CEO skills gap has shrunk as well and become easier to close over the past ten years. However, the transition from CFO to CEO -from inward-looking to outward-facing- will not always be simple.

History always serves up interesting insights, and the tale behind the rise of the Chief Financial Officer (CFO) is no different.

For most of the 20th century, the role of the CFO did not exist. The truth is that financial considerations did not play as significant a role across enterprises as they do today and hence, company heads had little reason to turn to their back-office "financial managers" -as the position was called for most of the 20th century- for any strategic advice related to the running of their business. This person was primarily responsible for creating the budget, bookkeeping, and overseeing tax reporting, and that's about it.

It was only when the US government introduced new financial regulations and considerations that these back-office financial managers started rising in the ranks of the business– a trend that only began in the 1960s, and became mainstream in the 1970s. Thanks to regulatory bodies like the Securities and Exchange Commission and the Federal Accounting Standards Board, the entire face of corporate reporting and accounting was transformed when the need to highlight business and stock performance more accurately became of utmost priority. Indeed, regulatory changes of the 1970s truly set the tone, and mandated that companies start taking financial considerations more seriously.

In the decade that followed, with the rise of mergers and acquisitions, companies started realizing the power of financial performance in gaining an edge over the competition. And voila: the importance of the CFO was established as finance and accounting professionals acquired a front-row seat and tasked with improving performance and weeding out inefficiencies– a fundamental aspect of not just surviving, but also thriving. They helped companies to embrace new financial techniques, restructure liabilities, and other legal ambiguities, while also building and sustaining shareholders relationships.

The story is markedly different today, as an increasing number of CFOs are taking on the mantle of the Chief Executive Office (CEO). Though the main difference between these roles is their strategic responsibilities (the CEO oversees the entire business, while the CFO oversees the financial performance), the fact is that, in most large companies, CEOs and CFOs are taking on roles with overlapping responsibilities that can be confusing to people outside the organization.

Traditionally CEOs of B2B companies were typically chosen from among those with strong operations, engineering, or technical backgrounds until well into the beginning of the new millennium, whereas CEOs of consumer-facing companies came from strong marketing or sales backgrounds. Because of their rising capacity to comprehend the subtler aspects of the company, while bringing forth an aptitude for interpreting numbers, there is a growing -and I must say logical- trend of CFOs being considered for the position of CEO. According to recent studies, the CFO-CEO transfer rate peaked in 2007 and 2008, with 20% and 17% of all transitions occurring in those two years alone, respectively. A second, slightly more modest peak can also be seen in 2012, when 11% of CFOs from 2004 became CEOs.

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But that's not all. The outlook for the global economy in the short to medium term is paved with greater uncertainty. Fluctuating energy prices brought about by geopolitical and other macro-economic challenges have led to significant supply disruptions, large currency fluctuations, commodity prices rises, public government deficits and cost-cutting, inflationary pressures in some countries, and ongoing environmental challenges.

All this is taking place against the backdrop of an inexorable longer-term shift of power gravitating from the West to the East, born by the growth of Brazil, Russia, India, and China (the BRIC countries), which are in turn facing their own growth challenges, with the rise of new emerging economies. These macro-economic trends have a significant impact on the way in which businesses operate, the priorities they face, and the strategies they develop to succeed on a global platform. This is the global environment in which tomorrow's CFOs will operate. It presents challenges that they must embrace, and opportunities they must leverage.

To gain a deeper understanding of the reasons behind the dynamics that make CFOs more likely to become CEOs, the first factor that leadership considers is economics. Financial acumen is more likely to be in demand during times of hardship– a theory that was proven with the passing COVID-19 pandemic. This includes a range of skillsets related to various company verticals, such as strategic leadership, performance management, policy regulation, stakeholder management, corporate communications, digital technologies including big data, and analytics.

But hang on, there is more. CFOs now have an increasing personal stake in, and accountability for, regulatory adherence and compliance. They invest more personal resources dealing with regulatory matters, and in engaging policy makers to ensure new regulatory requirements provide benefits to the business. The CFO position has also expanded in scope because of the increased external exposure of businesses to the whims of the financial markets and greater shareholder scrutiny. Companies in highly regulated sectors like banking and utilities are more likely to hire a CEO with prior finance experience due to increased regulatory requirements, particularly relating to reporting and accounting standards. The CFO function has developed into a practical business partner for operations, bringing the position closer into line with the rest of the company.

Just as the demands on CFOs have expanded, the CEO skills gap has shrunk as well and become easier to close over the past ten years. However, the transition from CFO to CEO -from inward-looking to outward-facing- will not always be simple. By nature, the CEO position is one of the most demanding in the entire business. Tomorrow's CFOs will need to play a role in preventing overly onerous and burdensome regulation. They will need to lobby on behalf of the business, put in place business processes and protocols that negate the need for more regulation, and influence relevant policy development. They will also need to ensure that the finance function has specialist expertise to resolve regulatory challenges.

Above all things, CFOs who aspire to become CEOs must possess the will to steer their business in a clear direction, while still maintaining an open mind, as well as an intense desire to learn. Even though these traits can be learned through experience, if they are not already present, they should immediately be integrated into the CFO's current toolkit. As Indra Nooyi, PepsiCo's former CFO who rose to take over the CEO position in 2006, succinctly put it, "In many ways, being a CEO is like leading a jazz orchestra. You improvise, you pick up the cues from other players around you. CEOs have a framework, but they've got to create the symphony with a bunch of people who're all wanting to improvise on their own. CFOs tend to be very good at the symphony– they just need to be taught to work the jazz orchestra."

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