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CFOs lured by high pay in private equity sector

By Jessica Tasman-Jones

This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards

An increasing number of chief financial officers who stayed loyal to their companies during the pandemic are leaving their jobs, with some lured away by lucrative offers from private equity-backed businesses.

Over the past 12 months 20 per cent of FTSE 100 CFOs left their jobs, compared with 13 per cent in 2019, says Ben Jones of Russell Reynolds Associates, an executive search firm.

Turnover was subdued during the pandemic which led CFOs to stay in post.. “Now that those pressures have receded, some of the frothiness we are seeing in the market is pent-up demand and a natural changing of the guard,” Jones says.

In the US, CFO churn rates in S&P 500 companies rose from 14 per cent in 2019 to 15 per cent in 2020 and 18 per cent in 2021.

For some CFOs, stock market rises in 2020 and 2021 made an early retirement more attractive, says Josh Crist, co-managing partner of CristKolder Associates, a specialist in the recruitment of financial officers.

In the UK, demand for CFOs from private equity companies is increasing, says Stephen Tarrant, a partner at Eton Bridge Partners.

Private equity deals often result in a change in CFO, says Tarrant. Globally, these hit a record $1.1trn in 2021, almost double 2020’s total of $577mn and higher than the previous record of $804bn set in 2006, according to Bain and Company.

Last year, 66 per cent of CFO appointments occurred in private equity-backed companies compared with 26 per cent in public companies, according to the annual CFO Pathways report 2022, to be published by Eton Bridge Partners in July.

The equity available in PE can be more attractive than that on offer with a PLC of a similar size, although that is often dependent on a successful exit, which is not guaranteed, says Tarrant. What is regarded as successful can vary but it is usually related to a profitable sale or a money-making initial public offering.

In a survey on remuneration at private equity portfolio companies conducted by KPMG, 65 per cent of managers said the biggest motivation was equity awards .

Although market uncertainty could make successful exits more difficult, Tarrant believes that private equity-backed companies will remain attractive because the sums involved can be “potentially life-changing”.

PLC packages are much more generous in the short term and have grown substantially, although they come with increased public scrutiny, Tarrant says.

There are other reasons why CFOs might be attracted to private equity-backed companies, including the chance to help build a less mature business, says Tom Cunningham, partner at Heidrick & Struggles.

But CFOs can be drawn in the opposite direction. “We find that it’s all about the characteristics of the role and the challenge for those involved,” he says.

Increased turnover means that boards have to be far more thoughtful about succession planning, incentivisation and development, Jones says.

According to Russell Reynolds, over the past year 44 per cent of appointments in the FTSE 100 have been internal candidates, with more than 60 per cent of new CFOs in the FTSE 100 taking the role for the first time.

Crist says that boards should consider adding more structure to CFO succession planning, with the audit chair in the lead.

Mentorship between board members and executives can also help CFO succession, he says. This could involve giving stretch assignments to high-fliers, putting people in front of the board or inviting them to board dinners.

The CFO job is increasingly strategic. As a result, says Cunningham, the qualities that boards seek have changed.

“The CFO is now in many cases being seen as a deputy CEO, so they have a much broader reach across the firm. They therefore have to be experienced in understanding all of the underlying levers within the business,” he says.

The challenges faced by boards and executive teams are changing business models and performance, says Cunningham, pointing to Covid-19, geopolitical tensions, climate change and different consumer behaviour.

“From a CFO perspective, not only is it their role to ensure that they’ve got the adequate financial resources in place to navigate those types of issues, but they are clearly there to help the business achieve its strategy and drive sustainable shareholder value creation.”

This article is based on a piece written by Amanda Gerut for Agenda.

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