CFO Succession Planning: The Complete Guide from Egon Zehnder

Imagine a scenario where a company's Chief Financial Officer (CFO) unexpectedly announces their departure due to personal health issues. The company scrambles to find a replacement, leading to hasty decisions, disruptions in financial operations, and diminished stakeholder confidence. This situation underscores the vulnerability of an organization without a CFO succession plan.

In contrast, a well-constructed CFO succession plan builds trust among board members and investors and ensures uninterrupted leadership and strategic financial management. Having a plan in place to support your organization through unexpected times is not just a “nice to have” – it’s a must. 

Scenarios that Underscore the Need for CFO Succession Planning

CFO succession is a critical process, yet many organizations don’t allocate enough time to it.  While succession planning should be ongoing, there are  key times that highlight the need for proper planning:

1. Planned Retirement or Resignation

The planned retirement or resignation of the current CFO is typically anticipated well in advance, allowing the CFO to communicate their plans and enable the organization to prepare a succession strategy that ensures a smooth transition. 

However, there can be surprises that make this more difficult to plan for (e.g., unexpected health issues or personal reasons precipitate a sudden need for resignation). These situations often catch companies off guard, highlighting the importance of having a robust succession plan that can be activated immediately in the case of an emergency.

2. Career Advancement/Leaving for Another Company

Succession may also occur when a CFO moves on to greater responsibilities within the same company or another organization. (Did you know that the majority of CFOs aspire to be a CEO?) Such transitions offer growth opportunities not just for the departing CFO but also for rising leaders within the organization who are ready to step into the CFO role.

In addition, CFOs are in demand– 43% report being approached more often for new opportunities.

3. Organizational Change and Strategic Shifts

Changes in company strategy, mergers, acquisitions, or significant market shifts often necessitate a change in CFO. A new strategic direction might require skills and experiences different from those possessed by the current person in that role, prompting the search for a successor with a different set of competencies. In such cases, CFO succession is critical to align financial leadership with the new strategic objectives of the company. This direction is often prompted by the board of directors or a new CEO coming in.

In certain industries, regulatory changes or enhanced compliance requirements might necessitate a leadership change in the finance department. New regulations might demand specific expertise that the current CFO does not possess, prompting the need for a successor who can effectively navigate the new regulatory landscape.

4. Performance-Related Issues

Then there are times when CFO succession occurs due to performance issues where the financial strategies or executions are not meeting the organization’s goals. Whether due to misalignment with corporate strategies, inability to adapt to market changes, or underperformance, a company may seek a new CFO to revitalize its financial health and strategic direction.

The Key Players in CFO Succession Planning

Much like in CEO succession planning, there is a core team of leaders in developing the plan. From the board, there is the audit chair and the board chair.

The audit chair evaluates potential CFO candidates based on their deep involvement with the organization’s financial reporting and internal controls, ensuring the candidates' technical competencies meet the company’s strategic needs.

Meanwhile, the board chair leads the board of directors, aligning the succession plan with the organization’s long-term goals and governance standards, and collaborates with the audit chair to ensure the plan serves the best interests of shareholders and the company.

In addition, the current CFO will also play a role in succession planning–though it will be more limited.

Their primary function is to facilitate knowledge transfer rather than to lead the succession process. This limitation helps maintain objectivity and focuses the CFO’s efforts on preparing the successor through direct engagement, such as detailed discussions about the nuances of the role and sharing experiences from their tenure. Ultimately, the current CFO supports the succession planning process by outlining the strategic needs and skills required for the role, ensuring a smooth transition. Their input is crucial in defining the scope of the position and ensuring that the next leader is fully equipped to uphold the financial integrity and strategic vision of the company once they’ve moved on to their next role or retirement.

Rounding out the planning team is typically the Chief Human Resources Officer, the General Counsel and the CEO.

Want to learn more? Read about what makes a good private equity CFO here. 

What Is the Recommended Timeline for Effective CFO Succession Planning?

Effective CFO succession planning is a deliberate process that should begin well before the anticipated need arises. At Egon Zehnder, we typically recommend starting two-to-three years in advance to ensure a smooth transition. This extended planning process allows the organization to more effectively and thoughtfully manage several crucial stages in succession.

While some organizations may opt out of engaging in longer term succession planning, assuming they will be able to build the talent from within, internal candidates are a key part of any good CFO succession plan. Promoting from within for CFO succession is advantageous for maintaining strategic continuity and enhancing corporate culture. It ensures a seamless transition and quick integration, preserves institutional knowledge, and aligns with organizational values, reducing the costs and time associated with recruitment and onboarding. 

The identification of potential internal candidates involves a thorough evaluation of their qualities and skills. A successful CFO must exhibit a blend of technical expertise, strategic thinking, and leadership qualities that align with the company's long-term goals and culture. 

There are specific milestones the succession planning team can expect in the process:

Year One: Initial CFO Succession Candidate Identification and Preliminary Assessment

Begin by identifying potential internal candidates within the organization who have shown leadership potential and financial acumen. Engage with HR and senior leadership to create a list of potential successors based on past performance, leadership qualities and future potential. 

Conduct a comprehensive skill gap analysis to determine the current capabilities of identified candidates versus the skills needed to succeed in the CFO role. This analysis should include technical competencies, leadership skills, and strategic thinking capabilities.

Create personalized training and development plans for each candidate to address identified skill gaps. Include mentorship programs, formal training, and rotational assignments across different departments to provide broad exposure and on-the-job learning.

Year Two: CFO Succession Candidate Development and Benchmarking

Continue executing personalized development plans, providing candidates with ongoing training and leadership opportunities. Regularly assess progress through formal reviews and adjust development plans as necessary.

Compare internal candidates against market standards and benchmarks to ensure they are competitive with external CFO candidates. This may involve consulting with external advisors to provide objective insights and comparisons.

Increase candidates’ exposure to the board and senior leadership to begin testing their strategic capabilities in higher-stakes environments. Facilitate interactions with key stakeholders to assess fit and readiness for the CFO role from a leadership perspective.

Year Three: Final CFO Succession Candidate Evaluation and Transition Planning

Conduct advanced assessments to evaluate the readiness of the top candidates, including simulations of CFO responsibilities and involvement in strategic planning sessions. Gather feedback from various stakeholders, including direct reports, peers, and board members, to inform the final decision.

Make the final selection based on thorough evaluations and readiness assessments. Plan the announcement to minimize disruptions within the organization and ensure a clear understanding of the transition process among all stakeholders.

Once the successor is chosen, begin the transition process by gradually transferring CFO responsibilities to the successor under the guidance of the current CFO.

Support the successor with a tailored onboarding process focused on integrating them into their new role effectively.

Important Note: Always Have a CFO Succession Contingency Plan

Throughout the succession process, be sure to maintain an updated contingency plan in case of unexpected changes, such as an early departure. This ensures the organization remains prepared and resilient in the case that succession does not go exactly as planned.

We Have a Shorter CFO Succession Timeline – Now What?

Realizing that your organization hasn’t initiated CFO succession planning earlier enough can be frustrating; however, there are effective steps you can take to mitigate the risks associated with a delayed start and ensure a smooth transition. First, assess the current situation to determine how critical the need is for a new CFO, which differs based on a) the need to replace a sitting CFO, or b) a CFO suddenly leaving the organization. Then identify any internal candidates who may be immediately viable and evaluate whether external recruitment is necessary. During this assessment, prioritize candidates who not only have the required skill set but also exhibit a capacity for rapid adaptation.

What are the Top Challenges in CFO Succession Planning?

Despite the need for succession planning, there are numerous challenges that can complicate this process. 

1. Timing Misalignments

One of the most significant challenges in succession planning is the misalignment of timelines between the anticipated need for a new CFO and the readiness of potential successors or a new hire. This misalignment often arises from a sudden departure for a new role or promotions happening off-cycle internally. A few strategies for overcoming timing issues includes:

• Proactive Planning: Begin the succession planning process well in advance — ideally two-to-three years before a transition might occur.
• Regular Review: Incorporate regular reviews and updates to the succession plan to ensure it remains aligned with current business realities and leadership developments.

2. Internal Biases

Internal biases can significantly affect the objectivity of the succession planning process. These biases might favor certain candidates over others based on subjective preferences rather than objective qualifications and skill development capability. A few strategies for overcoming this issue include:

• Diverse Selection Panels: Include diverse groups from different departments and levels within the company in the candidate evaluation process to provide a range of perspectives.
• Use of Role Criteria: Develop and adhere to a clear set of role criteria for evaluating potential successors to minimize the impact of personal biases.
• Partnering with an Objective Outside Firm: When it comes to high-importance roles, having an outside, objective view could help overcome biases. These firms are trained to identify and nurture talent from both internal and external pools.

3. Resistance to Change

Resistance to change, especially from within senior management or the board, can stall the succession planning process. This resistance often stems from comfort with the status quo or fear of the unknown associated with new leadership. Strategies for overcoming this issue include:

• Communication and Engagement: Regularly communicate the benefits and necessity of succession planning to all stakeholders, emphasizing the risks of inadequate planning.
• Inclusion in the Process: Involve resistant parties in the planning process to gain their buy-in and help them understand the strategic importance of preparing for future leadership needs.
• Transparent Communication: Maintain an open and honest dialogue throughout the succession planning process by sharing relevant information with all stakeholders. This transparency builds trust and ensures that everyone understands the goals, processes, and outcomes expected from the succession planning efforts.

4. Inadequate Candidate Development

The lack of proper development programs for potential successors, which can leave candidates unprepared for the CFO role when the time comes, can significantly hinder the succession planning process outcomes. A few key strategies to overcome this issue include:

• Structured Development Programs: Implement structured development programs tailored to fill the specific gaps in each candidate’s skills and experience.
• Mentorship and Rotation: Provide mentorship opportunities and rotational assignments across different business units to broaden candidates' experiences and prepare them for the broad scope of CFO responsibilities.
• External Search: Opening the CFO search to outside candidates when no one internally fits the bill might be a necessary step to take. It’s important that this option isn’t ignored in the process.

5. Difficulty in Evaluating Potential

Assessing the potential of internal candidates to grow into the CFO role can be difficult, especially when current performance needs to be balanced with future potential. Some tips for overcoming this issue include:

• Use of Assessment Tools: Leverage sophisticated assessment tools and services to evaluate leadership potential and readiness more accurately.
• External Benchmarks: Compare internal candidates against industry benchmarks to ensure they possess the competencies needed at the highest levels.

The Role of Accelerated Onboarding in CFO Succession

Newly appointed CFOs face several challenges. Once a candidate is selected, it is critical to set them up for long-term success. This can be done through accelerated onboarding, which is designed to help new leaders integrate swiftly and effectively into their roles. When done well, this process goes beyond standard orientation to encompass deep dives into the company's: 

1. Culture
2. Strategic Objectives
3. Operational Nuances

This approach addresses likely integration challenges and ensures clear expectations and effective communication between stakeholders are in place, ensuring the new CFO reaches full impact by deploying:

• Strategic alignment sessions: These sessions involve detailed briefings on the company’s strategic plans, financial health, and ongoing projects. This immediate immersion helps the new CFO to quickly align their strategic vision with the company’s objectives.
• Stakeholder engagement: Introducing the new CFO to critical stakeholders early in the transition process is crucial. This engagement includes meetings with top executives, board members, and key clients to establish trust and communication channels.
• Tailored development plans: Based on the initial assessments, a personalized development plan should be crafted to address any gaps in knowledge or experience specific to the new CFO’s background and the company's current challenges.

Once the process has been initiated, it’s important to continuously monitor the progress of the new CFO and the effectiveness of the onboarding process. Feedback loops should be established to capture insights from the CFO and the executive team, allowing for real-time adjustments to the onboarding strategy. 

Learn more about Egon Zehnder’s proven, accelerated leadership onboarding process.

3 Best Practices to Consider in CFO Succession Planning

For decades, Egon Zehnder has been working with C-suite executives on leadership development, succession planning, and role success. From those years of experience, we’ve identified three best practices to consider in your planning process:

1. Prioritize Internal Candidate Development

Assessing and developing internal candidates is a cornerstone of effective succession planning. This process involves more than identifying potential; it requires a holistic approach to nurturing and expanding their competencies. Egon Zehnder's approach includes:

1. Assessing Potential: As a leader, it’s critical to create an environment for your team to foster their strengths and ensure people are in roles where they can leverage their full potential. Egon Zehnder’s proprietary Potential Model assesses individuals across four traits that translate to a leader’s future ability: curiosity, insight, engagement and determination.
2. Skill and Competency Evaluations: Regularly assess each candidate's skills and competencies relative to the demands of the CFO role. This includes both financial acumen and soft skills like leadership and communication.
3. Performance Tracking: Monitor the performance of potential successors in various scenarios and projects to evaluate their ability to handle the complexities of the CFO role.
4. Benchmarking Against External Standards: Utilize industry benchmarks to ensure internal candidates meet or exceed the qualities seen in successful CFOs outside the organization. This helps in preparing them not only for the current challenges but also for future organizational needs.

2. Consider the Value an External Candidate Could Bring to the Table

While nurturing internal talent may be the preferred approach, an external perspective can be invaluable. Considering external candidates allows organizations to:

• Inject Fresh Insights and Practices: External candidates can bring new ideas and practices that challenge the status quo and drive innovation within the finance department.
• Broaden the Talent Pool: Assessing external candidates widens the selection pool, providing a broader perspective on available talent and ensuring the best fit for the organization’s strategic goals.
• Benchmark Internal Talent: Comparing internal candidates with external prospects can provide a clearer picture of internal talent's competitiveness and readiness for the CFO role.

3. Marry Internal and External Insights

A balanced view that incorporates both internal and external insights can significantly enhance the decision-making process:

• Holistic Candidate Evaluation: Use a combination of internal assessments and external benchmarks to gain a comprehensive understanding of each candidate's strengths and areas for improvement.
• Objective Decision-Making: By integrating these insights, companies can make more informed, unbiased decisions about who is truly ready to step into the CFO role.
• Alignment with Organizational Vision: Ensure that the chosen candidate, whether internal or external, aligns with the long-term strategic vision and cultural values of the organization.

The Value of Partnering with an External Firm for CFO Succession Planning

Partnering with an external firm for CFO succession planning provides substantial benefits and is often crucial due to the complexities of the CFO role that internal resources may not be able to effectively address. External firms offer a unique blend of unbiased assessment and comprehensive evaluation, utilizing advanced, proprietary tools that might not be available otherwise. This ensures that the selection process is based on merit and alignment with strategic goals.

Let’s take your CFO succession planning to the next level – explore our services to see how we can assist your organization in developing a robust CFO succession plan.