topleft
topright

Login or Register


Red-Hot Thread

"The corporate brand is not only used to improve competitive positioning and express company aspirations, it can also be a powerful tool to motivate employees."

CFOZone Experts

Opinions and views from expert CFOZone members.


May 11
2010

Do CFOs add or subtract value as board members?

Posted by SherylNash01 in Sarbanes-Oxleycorporate governancecorporate boardscareer/management

SherylNash01

While shareholders and Sarbanes-Oxley demand more independent directors on boards, a new study shows companies with boards that have at least one key insider, the CFO, are better at financial reporting than those without that executive on their boards. But that doesn't necessarily mean that all companies should appoint their CFOs to their boards, not at least without taking other considerations seriously into account. In fact, most companies probably should still look elsewhere for the expertise that CFOs supply.

The study found that companies with CFOs on their boards have more effective internal controls over financial reporting, higher accrual quality and a lower likelihood of restatements.

The study measured the quality of financial reporting by examining the incidence of material weaknesses reported under Section 404 of Sarbanes-Oxley. The provisions require companies to document and test internal control over financial reporting, and the company's independent auditor to independently test those controls and opine on internal control effectiveness.

"One overarching benefit we saw was that there was an improvement in financial reporting when a CFO was on the board," Rani Hoitash, a professor in the department of accountancy at Bentley University and co-author along with professors Jean Bedard of Bentley and Udi Hoitash, of Northeastern University, Chief Financial Officers on Their Company's Board of Directors: An Examination of Financial Reporting Quality and Entrenchment, (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589653), told CFOZone.

From 2004 to 2007, 12 percent of those with a CFO on the board reported problems with their internal controls, compared with 15 percent of those without their CFOs on the board, according to the study. Companies with their CFOs on their boards were also 15 percent less likely to restate their results.

These results imply that having a CFO on the board is more likely to align management's interests with those of shareholders. One reason, the study says, is that CFOs are more likely to share information with other board members about the status of the financial reporting function, and secure sufficient resources to invest in the establishment, documentation and testing of internal controls.

Yet only 8 percent of the more than 7,000 companies studied had their own CFOs on the board.

Of course, SarBox says a CFO can't serve on his or her company's  audit committee because of the obvious conflict of interest. But as Hoitash points out, "they can have input."

And SarBox also requires a board to have financial expertise. A CFO obviously fits that bill.

But having a CFO on the board is not without its drawbacks. CFOs serving on boards are more highly compensated than those in other companies, earning an average of $218,715, or 34 percent more in total compensation than their nondirector peers did. There was also a 35 percent lower turnover rate, 8.2 percent compared to 12.7 percent, among CFOs who sat on their own companies' boards, an advantage that sometimes existed despite a decline in earnings. Hoitash said the findings were evidence that CFOs who serve on boards are more firmly entrenched than those who are not.

That can be a good or bad, depending on a company's performance. While in many cases where companies are performing poorly, they will fire the CFO without addressing the underlying causes, Hoitash noted that the opposite is true in cases where the CFO is on the board, and that's obviously not a good thing either. "If the CFO is on the board and the company is performing poorly we found that they sometimes don't leave, because they have power and influence," he said.

The question is, will they use the power to do good or bad?" asked Hoitash. If they see themselves as part of the board and work to achieve goals, that is clearly a good thing. However, that power could also be used in their interest to the detriment of shareholders.

That makes some observers wary of appointing CFOs to boards. Instead, say these observers, they should merely attend all board meetings so as to share their expertise without becoming entrenched. "Look back in history, what transgressions brought us to Sarbanes-Oxley and other regulatory reforms?" asked Marc Palker, a certified management accountant and director of CFO Consulting Partners. "Once the CFO was granted stock options in the same manner as the CEO, there was a possible partnership for crime," Palker added.

Others go even further by recommending that CFOs not attend meetings devoted to discussions of the company's finance functions. In that case, "it might be appropriate to hold them without the CFO present," said Sue Mills, a consultant with Tatum, an executive services firm that provides interim CFOs.

Bottom line: CFOs don't belong on boards unless they cannot otherwise get financial expertise. In that case, Hoitash said, "you might want" to consider the idea.

Comments (2)Add Comment
Norman Carniol
...
written by Norman Carniol, May 17, 2010
Hello Sheryl,
I agree with you. My business experience has taught me more. A CFO comprehension of cash flows, ROI, risk vs reward, and understanding of a particular company's strengths and weaknesses - is valuable when a Board is making decisions that may impact it long term. I am not only referring to the negative but also the financial planning aspects. My own background in finance has assisted me as much as being an attorney, in deciding both the direction of the mortgage lenders that I have led and Greenpoint Agency, the "credit insurance" agency I presently run. Sometimes a Board will miss the opportunity to reduce risk and lay it off on a third party. In my experience that is an unnecessary risk. In addition to insured mortgage loans, even commercial accounts receivables and intermediate term credit receivables can be insured against delinquency.default. Broad policy decisions to use "credit insurance" when available can even decrease the cost of borrowing, in addition to enabling bigger working capital lines of credit for the borrower, and reducing accounts receivable defaults.
0
...
written by coach handbags, May 18, 2010

Marriage is an umbrella. With it, when the storm, you will be comfortable ,but in some natural flatly light weather, http://www.coachoutletmalls.com/the more umbrella the unavoidable.s 2010

Write comment
You must be logged in to post a comment. Please register if you do not have an account yet.

busy
Copyright © 2009-2014 CFOZone. All rights reserved. CFOZone is a property of PSN, Inc.