6.12 Duty of the CFO – to the CEO or Board?


Sometime in the first few weeks on the job, a new CFO should anticipate a low-key meeting with the Chairman of the Board or the Audit Committee to develop the trust and working relationship key to a well-managed and well-governed company. Don’t be surprised if in the course of the meeting, the Chairman pulls the CFO aside and reminds her that the Board expects the CFO to provide a sober, realistic view of the company’s progress that the Board can rely on. After all, the CEO is expected to be positive and upbeat at all times, whereas the CFO is expected to maintain a clear, unemotional view based on the facts. Sounds reasonable?

 In fact, the CFO should get a sinking feeling in her stomach, because the Chairman has put her in a very uncomfortable position. The CFO’s primary responsibility is to the CEO, and they must be completely in harmony with each other, with a shared vision and message. Trust is paramount, without which the relationship cannot succeed. (The movie Crimson Tide contains a memorable scene where Gene Hackman as submarine commander explains this concept in no uncertain terms to his first officer Denzel Washington). Investors and the Board test this relationship and if they are receiving mixed messages, it may be the first sign of trouble in the company.

 Yet the CFO also has a duty to provide plain, true and complete disclosure to the Board. As long as the Company is executing well, then complete disclosure paints a glowing picture of health. But what if there are problems that the CEO would rather not discuss? Does the CFO have an obligation to disclose? If so, does this come at the cost of damaging the essential trust between the CEO and CFO?

 Potential conflicts can be mitigated with open communication. The CEO and CFO must agree on the protocol for reporting to the Board so that there are no surprises. Early on in the relationship, the CFO should tell the CEO that the Board is expecting the CFO to report directly on all financial and operational matters under her review so that the CEO is aware of the dual reporting aspect of the CFO’s position. The CFO should make very clear to the CEO that the contents of any discussion with a director will always be disclosed to the CEO so that there are no hidden messages.

 The CFO should provide drafts of all reports to the Board to the CEO first. While the CEO can suggest improvements, the CEO must leave the final version to the discretion of the CFO, otherwise it is not her report. This sharing of communications will shine light on any differences so that they can be ironed out prior to disclosing to the Board. Importantly, it ensures that the CEO and CFO are, and appear to be, in harmony.

 So what happens if the CFO has a different point of view than the CEO? One of the subtle ways to highlight the differences without betraying trust is for the CFO to emphasize the key points and to explain the risks associated with the course of action contemplated. In this way, the CFO can support the CEO while providing more complete information for the Board to evaluate.

 This may also be the way for the CFO to gently correct the CEO if there are any errors made during the Board meeting. The CFO can offer to provide some “background” on a certain point which subtly corrects the error without drawing attention to it.

 If a disagreement arises between the CEO and CFO that cannot be bridged prior to a Board meeting, then the CFO can write a memo to file in which she notes the disagreement, her position and/or recommendation to the CEO and the result. While this does not absolve the CFO of any liability should the resulting action not turn out well, it would at least indicate to the Board on subsequent review that the CFO’s concern was expressed to the CEO at the appropriate time.

 Finally, does the CFO’s fiduciary duty to the company compel her to approach the Board if she perceives that the CEO’s actions or judgment are mistaken, which can often occur in early stage tech companies with young and inexperienced CEOs? Typically, the answer is “no”. It is the Board’s responsibility to evaluate the CEO, and the Directors should exercise their diligence as a matter of course. For the CFO to initiate that review independently would directly violate the trust between CEO and CFO described earlier, and so she must demur and let the Board find its own way. If the issue is important enough that the CFO cannot in good conscience remain silent, then the CFO must be prepared to resign first before expressing concerns to the Board.

 In sum, the CFO’s dual reporting responsibility to the CEO and the Board is recognized as a potential conflict. Complete sharing of all verbal and written reports allows the CFO to report to the Board without violating the CEO’s trust. Errors and differences can be gently managed at Board meetings, but material disagreements may require the CFO to resign rather than violate the CEO’s trust.


This article first appeared in the Fall 2012 edition of The Hire Standard – the newsletter of Corporate Recruiters, British Columbia’s leading recruiters of high technology talent.