How
functional leaders become CEOs
By Michael Birshan, Thomas Meakin, and Kurt Strovink
Limited operational experience is not
necessarily a barrier to the top job. Here’s what CFOs and others must do to
jump to the next level.
Holding a functional leadership role isn’t the most direct route to
becoming a CEO. Fewer than 15 percent of the CEOs in a data set we’ve been
scrutinizing for more than a year ascended to the corner office after serving
as a functional leader such as chief financial officer, chief marketing officer
(CMO), chief strategy officer, chief technology officer (CTO), or general
counsel. Nearly all the rest had been operators—CEOs at other companies,
leaders of major operating divisions, or chief operating officers.
The case for a functional CEO is strongest
when his or her expertise is core to a company’s critical business challenges.
Organizations in the midst of a major digital transformation might benefit from
a CTO in the top spot, and a CMO-turned-CEO could be just what the doctor
ordered for a company rethinking its brand portfolio. Similarly, companies
undertaking a growth plan based on M&A or a major cost-reduction effort
often look to CFOs.
Regardless of the expertise they bring to
bear, functional CEOs have a common set of challenges, rooted in their relative
lack of operating experience. To understand both the challenge and the
opportunity for functional CEOs, we scrutinized the former CFOs in our data set
of 599 CEOs. CFOs represented two-thirds of the functional CEOs,1so they provided the most robust fact
base for analysis. In our experience, the issues that CFOs-turned-CEOs wrestle
with are emblematic of those faced by other functional executives.
Broadening
the base of leadership
Lack of general management experience is a
challenge for all functional executives. Many of the CFOs-turned-CEOs in a
sample reviewed by our colleagues —a full three-quarters of those promoted to
CEO at the FTSE 250 companies—compensated for this lack of experience by
spending time outside the finance function. Sometimes nonfinancial experience
comes from line roles; in other cases, CFOs burnish their skills by taking on
additional functional roles in strategy or by joining the boards of other
companies. Broader experiences like these appeal to boards choosing CEOs, and
they can also build decision-making instincts for CFOs when they encounter
issues that can’t be resolved through numbers.
More than 90 percent of the
CFOs-turned-CEOs in our data set were promoted from within an organization
rather than hired from outside. Deep knowledge of personalities and corporate
culture can help the new CEO motivate employees as he or she articulates a
vision for the company. Insider status also often necessitates a reset of relations
with former peers on the management team, some of whom may also have been
candidates for the CEO post. About three-quarters of the former CFOs in our
research reshuffled their management teams within two years of taking office,
compared with two-thirds for all new CEOs.
Building
on strengths
CFOs have some natural strengths that can
facilitate effective transitions into the CEO role. Former CFOs are often better at developing detailed
strategies, have a deeper understanding of the drivers of business value, and
can communicate that to investors. Extensive experience in budgeting and forecasting
builds an appreciation of objective analysis, which CFOs typically bring to
bear early in their new role. For example, former CFOs were almost twice as
likely as the average CEO to conduct a strategic review in their first two
years in office.
The CFO role provides
experience, and breeds skill, in allocating capital to support the
organization’s strategy. This is key to outperformance, as research by our colleagues has shown. Effective
resource reallocation requires CEOs and their management teams to develop a
detailed view of the attractiveness of different business lines and customers.
They also need to be attuned to the biases that can distort allocation
decisions, combating through measures such as adopting a common set of metrics
to evaluate funding opportunities or committing to annual reallocation
thresholds. CFOs’ experience leading planning processes makes them especially
suited to these tasks.
Slower growth, rising cost pressures, and
business-model challenges from digital players steeped in analytics have made a
robust financial skill set a big plus for any executive making the transition
to CEO. Capabilities once seen as the preserve of the finance function, such as
the roles that finance and analytics play in setting strategy, are now priorities
for all senior leaders. Functional executives who aspire to the CEO’s chair
should look for opportunities to show analytic leadership, deploy their own
expertise, and broaden their leadership foundation.
http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-functional-leaders-become-ceos?cid=other-eml-alt-mkq-mck-oth-1704&hlkid=afcc43621c7641abac6617f7fa21b1a4&hctky=1627601&hdpid=a3e448fd-e17d-494b-9702-3faeef295df6
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