Should CFO Be on Board of Directors?
“Should CFO be on board of directors?” is a common consideration among companies with a board of directors.3 min read
“Should CFO be on board of directors?” is a common consideration among companies with a board of directors. Chief financial officers (CFOs) with extensive financial knowledge and experience may be the factor separating a high-performing company from an average one. Presently, CFOs are assuming more roles in companies, overseeing acquisitions and mergers, digitization, and cybersecurity. Also, they often take on the role of chief risk officer (CRO) in organizations that do not have one.
Benefits of Having the CFO on the Board
The main benefit of having the CFO on the company's board of directors is that he or she is mainly responsible for preparing the financial statements, which are important documents that are regularly produced for the general public and investors. These statements are approved by the board, meaning that they are accountable for any problems that may arise. Sometimes, a company's directors may fail to detect errors in the accounts.
An example of such a company is Centro Property in Australia. The directors of this company relied on its finance department and external auditors to review its financial statements, but the court nonetheless convicted it for failing to exercise due care and diligence. In such a situation, it may be useful to have the CFO on the board to ensure that he or she will be held responsible for the company's accounts.
In addition, having the CFO on the board gives the company stronger financial oversight. In 2010, academics from Northwestern University conducted a study on New York Stock Exchange (NYSE) and NASDAQ companies. They found that the financial statements of companies with a CFO on the board generally had fewer material weaknesses.
Other than the chief executive officer (CEO), the CFO is probably the executive with the clearest oversight of the organization and its operations and strategies. If the CFO can contribute to the business strategy of the company and play a vital role in important decisions, such as mergers and acquisitions, it can be significantly beneficial to have him or her on the board.
Disadvantages of Having the CFO on the Board
An increasing number of companies are reluctant to have their CFOs on their boards because of a number of issues. The issue of greatest concern is board independence. The main purpose of the board of directors is to lead and control a business organization. This role involves overseeing management and ensuring that the company is managed in the best interests of stockholders and stakeholders.
Usually, the CEO is already on the board and serves as its main representative. Adding a CFO or another executive director to the board may dilute board independence. Likewise, the audit committee, which has taken on a wider role in recent years, may have difficulty functioning independently with the CFO on the board. The role of this committee includes overseeing the company's financial statements and implicitly overseeing and analyzing the performance of the CFO.
In any case, whenever the company requires sound financial analysis to make major decisions, the CFO can always be asked to join board meetings to provide financial counsel. He or she can fulfill this role without being part of the board.
However, it is not uncommon for companies to have their former CFOs on their boards. By doing so, they can benefit from the knowledge and experience of a financial expert without having to deal with the conflict of interest that potentially results from having a current CFO on the board.
How a CFO Can Better Support the Board and Vice Versa
Regardless of whether or not he or she is on the board, a CFO should help the board of directors better understand the company's strategy and define value creation in relation to past financial outcomes and forecasts of future financial performance.
This works both ways. A CFO should try to establish better relationships with the board of directors, especially with the audit committee chairman, who can share external insights and become a sparring partner and thought leader. This can be achieved by:
- Becoming more confident when anticipating questions from the directors.
- Providing the required information to help the board make operating and strategic decisions.
- Collaborating with other executives more actively to provide the board with a unified perspective.
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