Against this backdrop, it is logical that the audit committee chair is playing an increasingly significant role in the recruitment of the CFO, something we have observed primarily in Fortune 500 companies. Historically, the audit chair might have met and signed off on the CEO’s first choice for the position, but we are now seeing a greater degree of board engagement, and much earlier in the process. This would entail more than the audit chair giving his or her blessing to the CEO’s pick for CFO; it means involvement in assessing the merits of inside versus outside candidates, and weighing in on the two to three finalists for the position.
According to this new dynamic, seasoned independent directors, who in some cases are also functional area experts in their own right, provide input during the selection process and beyond to ensure that the working relationship with the board will be a constructive one.
But with this higher level of board engagement, care must be taken to avoid certain potential pitfalls. We know of one cautionary tale of a CFO who was hired at the strong urging of the audit committee chair, without a formal search process. The CEO acquiesced, but the individual proved a poor cultural fit with the CEO and the rest of the management team, and was terminated after a brief time. The lesson: It is important to remember that the management team is headed by the CEO. Aided by a thorough vetting process, the CEO should be the final decision maker on the recruitment of the CFO and other team members.
We view more highly engaged boards as a positive development, and the involvement of audit committees in CFO recruitment as a best practice. Given the far greater extent to which the CFO and the audit committee now work together on a regular basis, it is important for the committee to have an opportunity to apply its own key metrics upfront in the selection process. One criterion we have seen some boards add is outside board experience for any prospective CFO candidates. In addition to any critical skills and experience required, the “chemistry” has to be right if the CFO and audit committee are to work together effectively in an atmosphere of complete trust and candor.
As board engagement continues to gather steam, we expect to see greater involvement in areas that were once strictly within the purview of the CEO. Beyond the audit committee and the CFO, we anticipate that the next wave of such activity will be compensation committee involvement in the selection of the CHRO, who is now also a critical partner to the board.
The bottom line is that great boards should assist great CEOs in selecting those executives who regularly serve not only the CEO but key committees of the board.
Dennis Carey is vice chairman of Korn/Ferry International. His new book, Leading the Company, with Ram Charan and Michael Useem, will be published by Harvard Business Publishing in May. Reach him at email@example.com.