Jake Miller was a newly promoted CFO for a promising startup. He was excited because the company’s CEO, Amy Bonds, asked Jake to present to the entire board of directors for the first time. Jake was thoroughly prepared to discuss the company’s financial performance for the first three quarters of the year, as well as the projections for the following year. After lengthy discussions with the VP of sales, Jake felt very confident in forecasting 15 percent revenue growth for the following year.
The presentation was going well until Amy told the board that she believed that anything less than 40 percent year over year growth would be a disappointment. Jake had known Amy for years and considered her to be an honest leader, but also a supreme optimist. However, he felt that a forecast of 40 percent, while not dishonest, was certainly irresponsible.
Although the above scenario is fictional, it represents a dilemma that many CFOs face in their careers: when and how to contradict a CEO in front of the board of directors.
The two of us have served as the full-time or part-time CFO for more than 10 companies each during our careers. Over that time, we have had the pleasure of working with several strong and effective CEOs. Each of these accomplished leaders was a positive, glass-half-full individual, able to effectively motivate and rally their teams around a positive message. These CEOs believed that they could overcome any obstacles thrown in their way and make the near impossible happen. Overall, our CEO/CFO partnerships worked well, even though we occasionally had to act as Debbie Downer (thank you Rachel Dratch from Saturday Night Live) because our role required us to ensure that the company was considering both glass-half-empty implications as well as the glass-half-full implications.
In general, discussion, debate and disagreement yield positive results. As a result, when we played the role of Debbie Downer, most often our CEOs appreciated hearing another point of view, and these differing opinions regularly led to beneficial follow-up discussions. Healthy discussion and disagreement are relatively easy to navigate in the day-to-day work environment. However, when the venue is a board meeting, the stakes are much higher, and the communication dynamics are far more challenging.
Board meetings are often stressful, and some CEOs feel pressure to present positive information and optimistic forecasts. This is especially true when a company is coming off a bad quarter or has recently learned of bad news.
During a board meeting, what should a CFO do if a CEO pushes the envelope and makes a material misstatement that a board member (or members) would likely consider in advance of a board vote or other board action? Should the CFO say anything at all? If so, how and when should the CFO speak up? This is the CFO’s Quandary.
To quote Albert Einstein, “If I were to remain silent, I’d be guilty of complicity.” If a CFO does not say anything in a board meeting, the board may reasonably conclude that the CFO agrees with what is being said. If the CFO does say something, they run the risk of running afoul of the CEO, and possibly other board members. This decision whether to speak up, when a CFO disagrees with what a CEO is stating at a board meeting, is amongst the most difficult decisions that a CFO faces. When a CFO contradicts a CEO at a board meeting, they realize that this could result in his/her termination from the company. However, the more likely near-term outcome is a loss of trust and respect between the two parties, an untenable situation for the company and leadership team.
Fortunately for a CFO, there are steps that they can take to lessen the frequency of facing the CFO’s Quandary as well as mitigate the fallout from these quandaries. More importantly, there are steps that board members can take to significantly mitigate the likelihood of a CFO’s Quandary ever occurring. These board member actions can also improve board oversight of the company and help board members carry out their fiduciary duties.
CFO Actions Prior to a Board Meeting
The CFO can take steps to avoid facing the CFO’s Quandary by taking the following actions:
- The CFO can work closely with the CEO to plan for board meetings. Most CEOs welcome support from their CFOs when planning board agendas and compiling materials for board meetings. This joint planning increases the likelihood that difficult issues will be raised at board meetings.
- When financial projections are included in board materials, a summary of the key assumptions and contingencies that support forecast should be prepared by the CFO and included in the board materials. As we know, financial forecasts are a critical part of a board presentation.
- If the CFO and CEO have very different views of a non-factual issue, the CFO should ensure that CEO is fully aware of the disagreement. If the issue is material, the CFO should notify the CEO that they cannot support the position. Depending upon the materiality of the issue, the CFO can agree not to raise the issue, and only address the issue if asked directly by a board member. If the issue is material, the CFO may need to tell the CEO that they have a fiduciary obligation to raise the issue, unless the CEO notifies the board that the CEO and CFO do not agree on the issue. We have seen this latter type of issue occur most often during a company acquisition or company sales process.
- The CFO must thoroughly review the entire presentation (financial and otherwise) before it is sent out to board members to identify and correct inconsistencies as well as try to anticipate board questions. We have seen the projected bookings in the sales section of board materials differ from the bookings numbers that were used in the financial forecast on many occasions.
- Many CFOs lead discussions with the executive team when preparing for a board meeting. The management team can practice answering potential questions that might be asked by board members. The CFO can also lead a pre-mortem analysis with the management team. We have seen the following questions used effectively:
- If we miss our sales projections for the quarter, what will be the most likely causes?
- If our major competitor comes out with a new product, how will we react? What can we do to protect our sales?
- If one of our major suppliers cannot meet delivery schedules, what are our alternatives?
- If we cannot onboard key new hires, how will we handle the workload? How can we prevent the hiring delays from negatively impacting our product development roadmap?
The Board Meeting
The relationship between the CEO and CFO is arguably the most important across the C-Suite. This relationship is built through mutual respect and trust, which helps the parties serve as true business partners. Both are fiduciaries of a company. The CFO should support the CEO fully, unless and until the CFO feels that the fiduciary line has been crossed. Unfortunately, this line may not be clearly delineated, and a CEO and CFO may disagree about when the fiduciary line is crossed. Let’s build on this.
Before speaking out and contradicting a CEO at a board meeting, The CFO must first decide whether the issue is important enough to speak to at a board meeting. For example, if a CEO responds to a board member’s question regarding how comfortable they are with a sales forecast and they respond that they are very confident and the CFO believes that the forecast has some level of risk, should the CFO say anything at the meeting? No. The answer to this question requires an opinion and the CEO is offering his/her opinion. The onus remains on the board to ask appropriate follow-up questions.
However, if the CFO believes that the risk is very high and feels that they need to say something because the board could be considering a vote or another board action, the CFO should raise the issue in the most non-confrontational way possible. Below are suggestions for wording. In all cases, we are recommending that the CFO’s response be framed as a “yes, and…”
- As the CEO has said, we can double our sales next year. However, to do so, we would need to increase sales productivity by 25 percent. This assumption is detailed on page 11 of the board materials.
- To further what the CEO has said, we can double our sales next year. This doubling can be found in our upside case. Our base case incorporates a sales increase of 40 percent year over year. The assumptions behind both cases are detailed on page 12 of the board materials.
If a CFO feels the need to contradict the CEO at a board meeting, they must stick to the facts or provide opinions that are fully supported by facts.
When an incorrect fact is given to the board, before speaking up, a CFO should pause before speaking. During that pause, the CFO should ask himself/herself if the fact is material and is it reasonable to assume that the board take action based on this incorrect fact.
For example, let’s assume that a board member asks the CEO what percentage of the quarter’s expected orders have been received quarter-to-date as of the middle of a quarter. If the CEO responds 90 percent and the CFO knows that the actual number is closer to 80 percent, should the CFO say anything at the meeting? This is a question where the authors disagree upon the answer. One of us believes that the difference is not material and that the board members are unlikely to make a bad business decision based on a 10-percentage point difference. Whereas the other believes that revenue errors should be corrected because revenue, by nature, is material for a company. The “yes, and” response can be framed as, “This is my error. The actual number is in the low 80 percent range. I was expecting a few orders to close by now, however they have not been received yet.”
However, if the CEO responds 90 percent and the CFO knows that the actual number is closer to 30 percent, the CFO must respond. The 60-percentage point difference is material, and the board could make a suboptimal decision with such misinformation.
In the spirit of framing a response as a “yes, and…,” we have used the following statement in the past: “Due to schedule conflicts, the CEO and I have not had a chance to review the firm orders received for the month together. However, we will do so immediately after the meeting and get back to you with an updated number. Based on what I have seen, 90 percent seems high.”
Immediately after the board meeting, the CFO should go to the CEO’s office to discuss the issue and explain why the issue was important enough to speak to.
New CFOs may not be comfortable disagreeing with their CEOs during a board meeting. If this is the case and the CFO finds himself/herself in a quandary, a second-best approach is to approach the Audit Committee chair after a board meeting to discuss the issues with which they are uncomfortable.
CFOs have a fiduciary responsibility and cannot be complicit by being silent. As CFOs we face the risk of losing our jobs due to the errors and misstatements of both ourselves and others that we do not catch and correct. We also must be prepared to resign or be fired from our positions if we disagree with the CEO in front of the board.
The examples below are from our own experiences. Rather than attribute the experiences to one of us individually, we will be attributing our experiences to both of us, using the pronouns we or us.
While preparing for a board meeting, the VP of engineering reported that the company was going to miss a product release date. His/her estimate was that the release date would be missed by 90 days at best. During the board meeting, the CEO reported that there were some challenges ahead in getting the new product to market. He added that the CTO had put together an elite team and they were confident that the product would be completed in the near future. We did not say anything at the meeting because we felt that the issue was communicated to the board and that the onus was on the board to further probe the issue.
During one board meeting, a board member asked about the sales growth rate we were experiencing in a customer segment. The CEO answered with a number that was far more than what our financial model was based upon. After the CEO spoke, we responded, “CEO, if our sales grow at that rate, this would lead to a revenue forecast next year of $10 million. Does this seem reasonable to you?” The CEO paused, then added that his number might have been a bit high. When we spoke with the CEO after the meeting about the comment, the CEO thanked us for “keeping him straight” and ensuring that the board’s expectations would better match the company’s performance.
We wish all quandary experiences ended the way that one did.
While preparing for a board meeting, an aggressive CEO belittled and bullied the VP of sales into agreeing to a sales projection that was far higher than what they were clearly comfortable with. During the board meeting, without the VP of sales present, the CEO reported that the VP of sales was on board with the projections for the coming year. Due both to the aggressive personality of the CEO and the fact that we were in the early stage of our career, we did not speak out at the meeting. However, shortly after the meeting ended, we contacted the Audit Committee chair to express our belief that the VP of sales did not buy into the sales projections. At the time, this was our first CFO job, and we lacked the confidence (and perhaps the stature) to challenge the CEO in front of the board. Later in our career, with more experience and credibility, we would have raised the issue at the board meeting.
During another board meeting, a board member asked the CEO to comment upon the state of the company’s morale. The company CEO answered that morale was great. Although this question required a subjective answer, we felt strongly that morale was so poor at the company that it was very negatively impacting company performance. This poor morale was factually evidenced by annualized employee turnover of greater than 100 percent, exit interview feedback and very poor GlassDoor reviews. After the CEO spoke, we stated, “We have a different viewpoint than the CEO. We think that morale is fair.” The board member then looked to the CEO and asked him, “If morale is great, why are many of your employees applying for jobs at my other portfolio companies?” (More about this comment below.) After the meeting, the CEO refused to speak with us, and the CEO/CFO relationship was irreparably damaged. Furthermore, our relationship was destroyed with another board member, who was close with the CEO.
The board member who asked the question about morale complimented us for speaking up honestly about the company’s situation and stated that his respect for us had risen. However, the damage was done, and we ended up leaving the company soon thereafter because the CEO/CFO relationship was irreparably damaged. Given a chance to change our answer, we would not do so. Silence is complicity and more damage would have been done to the company had we remained silent.
During an investor presentation, which included a potential new board member/investor, the CEO presented aggressive financial projections and claimed that the company hit its financial goals in the prior year. The CEO misled the investor by omitting key information. The company did attain its financial goals during the prior year after revising them downward twice. Because this individual was not a current board member, we did feel the need to contradict the CEO during the meeting. However, after the meeting, we followed up with the investor about open due diligence items and clearly communicated the target changes from the prior year. We did not speak about the financial projections because the investor was an experienced investor who knew that companies that are raising capital usually present their best-case scenarios. The onus was on the investor to probe the numbers.
After six weeks in a new position, while preparing for our first board meeting, we noticed that the quarterly bookings number included in the board deck, which was about to be distributed, was materially different from the number that we included in the draft board deck. We learned that the CEO had directed that the bookings number be changed. When we asked the CEO about the bookings change, he stated that the bookings number was changed to include a large non-binding expression of interest received via email from a new prospect. We suggested that this change in reporting may confuse board members because bookings are considered to be firm orders. We then suggested that a new line be added to the bookings section of the board materials to include the non-binding expression of interest. The CEO’s response was, “I am the CEO and I decide what a booking is. You will report what I tell you to report.” Needless to say, we immediately resigned.
Is there anything that can be done to fully eliminate the CFO’s Quandary? We doubt it. However, board members can take steps to help ensure that all the information that they receive is accurately being presented and complete. These steps will also reduce the number of times that a CFO finds himself/herself in the quandary.
Board of Directors’ Impact on the Quandary
We recommend that the board members consider taking the following steps. Each of these steps has been taken by specific board members whom we have had the pleasure of working with in the past.
- Expanded board meeting attendance. Invite the entire senior management team to attend at least a portion of the board meeting and ask questions directly of them. A CEO may find it more difficult to be overly optimistic when discussing the quality of a sales forecast when the VP of sales is in the room. Consider asking (i) the VP of sales about his/her confidence in attaining the forecast, and the risks to the forecast and (ii) the VP of product development about his/her confidence in finishing the development of the new product on time. We recommend that the board consider using pre-mortems here as well.
- Interact outside of board meetings with members of the management team individually. Meet individually with the management team members to learn more about their range of job functions, their views of the company, as well as the potential barriers and risks to company success. We feel that management team members have an obligation to answer board members’ questions about the company honestly. (More below on this.)
The Audit Committee chair of a public company met with us one-on-one in advance of the audit committee meetings and board meetings. During those one-on-one meetings, he asked us about any audit or business risks that we saw, the risks to the forecast, and other questions that were related to the company. (After the board member meeting, we would then meet with the CEO to provide feedback regarding our meeting with the Audit Committee chair.) During the board meeting, the Audit Committee chair would sometimes raise questions related to our discussion.
As mentioned earlier, we feel that management team members have an obligation to answer board members’ questions about the company honestly. However, if a management team member is asked a question that is not about the company, we believe that they do not have an obligation to answer it. For example, immediately after a board meeting, a new board member came into our office and asked if the CEO always must act as if they were the smartest person in the room. Because we felt that this board member’s question related to the board interactions, we changed the subject and never answered the question directly.
- Interact informally outside of board meetings with members of the management team together. As mentioned earlier, board meetings are often pressure packed. Informal meetings with the management team or a group of management team members can be an effective way to better understand the goings on at a company, in part, because the attendees may be more relaxed. While working at a struggling company, a board member invited the CEO & technical founder, us and the SVP of marketing to a follow-up meeting. The board member listed three words on the board: product, sales and marketing. The board member then asked the attendees to individually to rank these areas, from what was working best to worst. Not surprisingly, the team was not in agreement and a healthy debate ensued.
- Do not criticize the CEO in front of other C-Suite members. While this does not happen often, when a CEO is criticized (or worse, berated) in front of the management team, this creates a myriad of problems.
- The CEO may try to reduce the face time that other members of the management team have with the board.
- If the CEO is criticized based on an issue raised by the CFO, the CFO will be reluctant to speak out in the future, assuming that they are not fired later that day. In addition, the CFO may begin a job search, because his/her relationship with the CEO is likely damaged beyond repair.
- The management team may wonder if the CEO is on his/her way out. This uncertainty will change the team dynamics.
Recently, the CFO Leadership Council ran a LinkedIn survey asking CFOs when, if ever, a CFO should contradict the CEO in front of the board. The results of the survey, which was responded to by 425 CFOs, can be seen below. We were pleased to learn that 87 percent of CFOs felt that it was appropriate to disagree with the CEO in front of the board at times.
Unfortunately, there is no way for a CFO to avoid the quandary during his/her career. Most CFOs will be faced with this difficult decision one day. Because to be silent is to be complicit, keep your resume updated and remember that integrity wins out in the end.
We want to thank the many members of the CFO Leadership Council who shared their thoughts with us regarding this article.