The Audit Committee’s Role in the CFO Succession Process.
Ensuring a strong finance organization is every audit committee’s responsibility. Mary Lou Maher explains why CFO succession has to be a big part of the process.
A huge scroll unfurls to the floor, bounces once and then continues to unspool across the room and out the doorway. It's a classic comic exaggeration, but if we weren't in the digital age, this scenario might not be far off the opening of a 2014 audit committee meeting. The list of agenda items has gotten so long and difficult to cover, it's no wonder some items end up getting short shrift. With audit committees focused on financial reporting complexity, regulatory change, auditor responsibility, audit quality and more, the issue of CFO succession often takes an unwarranted back seat.
It's not because CFO succession and the need for a strong finance team aren't recognized; in fact, a recent FEI Canada survey of financial executives found a "near unanimous recognition of the need to be prepared for a sudden departure of senior leadership."1 Similarly, KPMG's 2014 Audit Committee Institute global survey found that 68% of Canadian audit committee members felt that "developing bench strength within the finance organization was one of their top challenges."
Despite this clear recognition from both management and audit committees that action is necessary on the CFO succession front, just 43% of respondent companies in the FEI survey "had a clear succession plan," and only 45% even had a "qualified successor" who could step in. KPMG's data indicated that only 42% of Canadian audit committee members were at companies with formal CFO succession plans.
Audit committees that find their companies in this position may be inviting unacceptable levels of risk—but how do they prioritize this issue in the current environment? First, they should be clear about responsibility. With the board generally responsible for CEO succession, it stands to reason that CFO succession should fall to the audit committee. Beyond that, you will want to consult your charter to see how your duties in this area are defined.
Audit committees should also consider the implications of inaction. If your CFO announces that he or she is leaving in two weeks, what will you do? Companies and boards that are not prepared get pushed into reactive mode, incurring investor doubt and potentially facing downtime. It's possible to operate without a CFO for a time, but why let it happen when a proper succession plan can ensure smooth transition and remove the risks associated with a prolonged candidate search and onboarding process?
Moreover, the quality of the finance team has immediate impacts on information quality, both the information available to the market and the information the audit committee receives, meaning a weak finance team that's unprepared for CFO succession can affect not only corporate success but the audit committee's ability to do its job.
When the audit committee affirms its responsibilities around succession and understands the risks of inaction, what should it do next to ensure a strong finance team is in place and succession prepared for? Here are a few steps to begin:
To maintain the flow of quality information, develop and maintain a culture of accuracy and transparency, and mitigate the risks of unforeseen CFO departure, you need a strong CFO, a dynamic finance team and a clear, executable succession plan. If all the pieces are in place, succession should never be an issue, but if your CFO succession planning has taken a backseat, it may be time to re-balance priorities.
1 FEI Canada [PDF 1.13MB], CFERF, Robert Half. CFO Succession Planning.