CEOs and CFOs left their jobs in record numbers last year, and filing a financial restatement is proving to be an increasingly common way to be shown the door.
Of companies that filed restatements in 2007, more than 20 percent also saw the departure of their CEOs—up from only 16.9 percent in 2006 and 13.2 percent in 2005, according to a recent study by Audit Analytics. Chief financial officers fared even worse: nearly 25 percent of restating companies sent them packing last year, compared to 22 percent and 17 percent in the prior two years, respectively.
Ousting the top executives after something as serious as a restatement seems logical at first blush. But in reality, experts say, such departures are not always wise nor fair. CFOs, for example, may simply be cleaning up a financial reporting mess that happened before their tenure, or restating for reasons beyond their control such as regulatory clarifications, says Cynthia Jamison, national director of CFO Services for Tatum Corp. in Atlanta.
Jamison herself has had to endure a restatement. When she served as CFO for the Cosi restaurant chain, she says, she had to take a restatement because of a clarification to rules for lease accounting. Indeed, restatements for lease accounting were all the rage in 2005, when hundreds of companies filed them due to the rule change.
“When every company in the industry is doing it wrong, it’s really not the fault of the CFO,” Jamison says. “Whether [the restatement] actually turns out to be the fault of the CFO or not, oftentimes it taints the CFO.”
In her experience as CFO of seven companies, Jamison says she has had to bring news of a restatement to the board a half-dozen times, even though she wasn’t responsible for the underlying cause.
“You can feel the tension in the room go up when you’re telling them something they don’t want to hear,” she says. “You’re often shot as the messenger.”
“I think there is a tendency to take a very short-term viewpoint and hold the CEO responsible for things the CEO is not responsible for.”
— Frederick Lipman,
Association of Audit Committee Members
The retail and wholesale industries were most prone to CEO turnover from 2005 to 2007, according to Audit Analytics. Across all industries, the turnover rate was 13.4 percent (for all companies, regardless of any financial restatements). In retail and wholesale, however, the CEO turnover rate was 16.6 percent. Likewise, the average for CFO turnover was 14.6 percent, but 18.8 percent in retail and wholesale.
Audit Analytics found the sharpest increase in CEO and CFO departures in the finance and insurance industries. CFO departures shot up more than 50 percent from 2005 to 2007; CEO departures increased by a whopping 68 percent. That should be of little surprise, considering how the credit crisis has caused havoc on Wall Street.
Breaking Up
There are, of course, myriad reasons for C-level executives to move on. The Securities and Exchange Commission does require companies to disclose the departure itself, but they only need to identify the reason if it is dismissal for cause or disagreement; the majority of executive exits never specify a reason at all.
Experts widely cite two reasons for the increase in departures: More pressure from regulators and more pressure from the market. That pressure first falls on the board, which then puts the pressure on top management.
EXECUTIVE OUSTERS, PART I
Total number of CEO departures, as well as departures at companies that experienced restatements.
Years:
2005
2006
2007
Total CEO Exits
1,158
1,191
1,405
Total That Filed Restatements
196
246
206
Cash Flow Restatements
17
22
21
Rev. Rec. Restatements
40
31
32
Backdating Restatements
2
34
4
Source
Audit Analytics (July 2008).
Peter Gleason, managing director and CFO of the National Association of Corporate Directors, says that conflicting ideas about corporate strategy is always a reason for CEOs and boards to part ways, particularly in difficult economic times when stock prices fall and shareholders clamor for change.
“We are seeing a lot of shareholders who are pushing for greater performance and pushing for change in the strategy of the company and leadership of the company,” Gleason says. “Directors feel a change needs to be made to lead the company out of a flat line.”
Lipman
Still, that pressure on boards from rising shareholder activism can misfire if directors take aim at the CEO when the problem isn’t his fault, says Frederick Lipman, who sits on the board of the Association of Audit Committee Members. The chief executive can be left taking the fall for problems he or she did not create, while the real problems continue unaddressed.
“People aren’t happy with stock prices. A lot of times it has nothing to do with the operations,” Lipman says. “I think there is a tendency to take a very short-term viewpoint and hold the CEO responsible for things the CEO is not responsible for.”
In Jamison’s view, the pressures on CFOs today—regulatory requirements, globalization, technological change, and demands from the board, to name a few—generally outpace the resources and support CEOs receive. That leaves them somewhat vulnerable.
EXECUTIVE OUSTERS, PART II
Total number of CFO departures, as well as departures at companies that experienced restatements.
Years:
2005
2006
2007
Total CFO Exits
1,215
1,310
1,535
Total That Filed Restatements
256
283
244
Cash Flow Restatements
24
24
27
Rev. Rec. Restatements
51
47
52
Backdating Restatements
1
38
11
Source
Audit Analytics (July 2008).
“The demands on today’s CFOs are higher and more multifaceted than ever before,” she says. “They come at you very quickly, and pronouncements continue to change.”
In contrast, Jamison says, the corporate general counsel is often supported by a large team of experts and is expected to bring in outside expertise for really big jobs.
“It’s finance’s time in the sun, but I don’t think we’ve figured out how to do it,” she says. “What success looked like five or 10 years ago is really different from what it’s going to look like five or 10 years from now. I think there’s a level of sophistication and complexity that we’re growing into.”
Many boards need to change as well, she says, beginning with the appointment of more experienced directors, particularly on audit committees.
“You have a lot of people sitting on boards who shouldn’t be sitting on boards, especially on audit committees,” says Jamison, who chairs two audit committees. Audit committee members should have served as an operational finance executive, and they should have first-hand experience in the rigors of Sarbanes Oxley compliance, she argues.
“You really have to have lived with it to understand it,” she says. “When a CFO is struggling with resources or not getting the support he needs, the audit committee should be the one who sees that.”
All that said, things may be looking up for CEOs, according to the Audit Analytics study: It found signs that CEOs were departing at a slower rate in the last quarter of 2007. For CFOs, however, the turnover was still growing—and how the battered economy of 2008 might change the picture is anyone’s guess.
“You would think that the pressure would be letting up after 2005 and 2006, but it seems to be still increasing,” says John Smilley, director of legal and regulatory research at Audit Analytics. “With the increased pressure, which most people don’t see letting up, I would expect this trend to continue.”
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