Medical Device Link.

COVER STORY

Wanted: Tomorrow's CFO

What medical device company CEOs should really look for when hiring a CFO.

CPA or MBA? Today's successful chief financial officer (CFO) looks very different from his or her counterpart of the past.

"If we go back historically, the role of the CFO was one of maintenance and value protection," says C. Ray Holman, chairman and CEO of Mallinckrodt Inc. (St. Louis). "If we look at it going forward, it's a job of risk management and value creation. The role has become much more important in any large enterprise—much broader, much more integrated with the entire organization."

Michael Kelly, managing director for the global healthcare practice in the Minneapolis office of Korn/Ferry International, a large worldwide, healthcare recruiting firm, agrees: "CFOs historically were more accounting oriented; now, there is a premium on CFOs with strategic business skills."

And Michael J. Riley, former CFO of the U.S. Postal Service, United Air Lines, and Lee Enterprises Inc., wrote in Directors & Boards (Winter 1999): "With boards increasingly focusing on protecting and maximizing shareholder interests, the role of CFOs is changing at many companies. The CFO has always been regarded as the Boy Scout of an organization—telling the CEO and the board the accurate picture about the numbers. . . . Savvy board members are [now] using CFOs to gauge the big picture about how their corporation is faring, what the best long-term strategy for the business is, and as an independent financial check against sales and marketing initiatives."

So, what should CEOs look for when hiring their next CFO/business strategist?

Financial Finesse Counts

Of course, financial expertise as well as personal integrity still surpass other traits as the top two qualities sought in a CFO, according to a 1999 survey of CEOs by CFO magazine. When Mallinckrodt's Holman hired the company's current CFO, Michael A. Rocca, in 1994, it was because Rocca had an "impeccable background and credentials," says Holman. "He had all the so-called 'holes' punched in his CFO card. He had experience in accounting, controllership, internal audit, investor relations, treasury, and a two-year international assignment in Europe."

Financial skills don't necessarily have to be learned in the medical device arena. "Of course it's best if the CFO understands the dynamics and nuances of running a medical device enterprise," says Cecil Gregg, executive director of RHI Management Resources (Menlo Park, CA), which provides senior-level accounting and finance professionals on a project basis. "But a balance sheet is a balance sheet. Most skills are transferable from other industries. And bringing in someone from another industry can add a fresh perspective."

Kelly adds, "Details regarding the medical device industry, reimbursement, FDA, etc., can be acquired on the job. Other skills are more important."

Indeed, Rocca, who worked in a high-tech background at Honeywell before signing on with Mallinckrodt, says: "I felt quite well prepared [my first months at Mallinckrodt]. Honeywell is a high-tech, global company with a multigroup, multidivisional structure and a lot of activity in mergers and acquisitions, divestitures, and shareholder relations."

Rocca's background ties in nicely with another quality that CEOs should look for in CFOs: familiarity and comfort with technology.

Technology Is Hot

"When hiring a CFO, ideally, you'd hire someone who has had the identical experience that's required for your position," says Holman. "Realizing that is rarely possible, we seek a strong background in financial management as well as an appreciation for innovation and technology. The CFO must have a good general understanding of the technology, the products, the clinical applications, and the customers in order to be effective in his or her job."

Creating and selling products for a medical device company is different from selling products simply to meet customer expectations, continues Holman. CFOs need to understand technology so they can better comprehend all aspects of development, manufacturing, and marketing, as well as how products are used by consumers, and then can translate that knowledge into optimizing the cost structure.

Rocca also cites experience in technology's accompanying research and development, engineering, and scientific areas as crucial.

"Embracing technology and supporting its advancement as it relates to that company within that industry is essential," says Gregg. "CFOs must determine how technology can improve the product development process and streamline costs.

"Further, the dot-com craze will have a huge impact. CFOs must be prepared to account for an e-commerce business for their companies," Gregg explains.

Talk It Up to Create Value

"One of the CFO's chief responsibilities is creating value for the company's shareholders," reports Rocca. "First and foremost, you have to deliver on the numbers, hitting financial return objectives and developing the business. Second, you have to communicate to the investment community about your company's earnings, strategies and outlook because investors own the company. You need to provide adequate information so that investors can make intelligent decisions.

"A company that has a weak earnings profile or doesn't provide meaningful information to investors will face a significant discount in value," Rocca continues. "Companies can lose 1 to 2 P/E points or more in some cases simply because they are not providing adequate information."

"CFOs must have a thorough understanding of the business and be able to communicate effectively with the various outside constituencies, including shareholders and Wall Street," says Kelly. "There are plenty of opportunities to communicate with these audiences at investment banking meetings, analyst conferences, and so on."

"There's also a need to communicate more effectively within organizations," says Gregg. "The CFO's role involves much more interaction with other departments than it has in the past. As a strategic partner to the CEO, the CFO must be able to tie technology not only into the accounting and finance functions, but into marketing and sales, engineering and product development, manufacturing, and other departments within the company to increase productivity. Then, he or she must develop and clearly communicate the company's strategic initiatives and goals and create and build consensus throughout the organization to ensure bottom-line results are met."

So CFOs must communicate compellingly with investors, colleagues, and the company's board of directors. "The CFO still has to help the board understand finances," Riley says in Directors & Boards. "When a business makes a strategic decision to approve a new marketing thrust, to significantly increase capital, or to permanently cut costs, finance people usually see the connection to debt, short-term earnings, and current cash flow. Board members rarely see this, and it is the duty of the CFO to translate decisions into numbers and then the numbers back into concepts. [Directors] want answers from the CEO and, increasingly, independent confirmation from the CFO."

Before today's companies seriously contemplate any significant move—whether an initial public offering, merger or acquisition, new product line or reconfiguration, or reorganization—the CFO is consulted to ensure the decision makes the most sense for the company, its customers, and its owners.

Recruiting Skills Also a Plus

In addition to overseeing the organization's financial assets and spending, implementing technology, communicating with investors and boards, and influencing the myriad important business decisions a company makes each year, CFOs must have another talent: the ability to attract and retain a good staff.

"CFOs must be able to recruit talent that allows them to focus on strategic planning and initiatives," says Gregg. "If CFOs could clone themselves, they would. Many traditional responsibilities are being delegated. Vendor relationships are being delegated to the purchasing department. Day-to-day financial management activities are going to the controller. Certain one-of-a-kind projects—such as reengineering a technology or process—may be outsourced so that someone else can concentrate on them full-time or give an objective, fresh opinion based on the data collected."

Mallinckrodt's Rocca would probably like a few clones of himself, and he's worked to ensure he has experienced, capable specialists assisting him. "M&A activity takes up a fair amount of my time," says Rocca. "I'm also focused on regenerating top-line growth, earnings growth, and new product development and funding decisions. Today, CFOs set directions and guidelines and rely on their staff to handle day-to-day activities. This is true for financing, tax planning, forecasting, and other more-traditional responsibilities. That's why good people skills are a must—to be able to identify and hire the best financial professionals so they can ensure that daily operations run smoothly, and the CFO can concentrate on developing and executing new strategies for the company."

A survey by the Robert Half International financial hiring index found CFOs forecast a net 7% increase in the hiring of finance and accounting professionals in the first quarter of 2000. This increase follows on the heels of a net 10% increase in hiring they forecast for the fourth quarter of 1999.

One More Rung

Based on the range of responsibilities today's CFO oversees, it's not surprising that an increasing number of people are using such positions as rungs on the ladder to a company's top spot. The CEOs of numerous major medical device companies—including Mallinckrodt's Holman as well as the CEOs of both Baxter and Becton Dickinson—held positions in the finance departments on their way to becoming the head of their respective organizations.

"Because today's CFO is much more centered on strategic management and must understand the entire business, not just finance, it's a great path to the top job," explains Gregg. "In the past, many CEOs came from sales and marketing positions. Now, it's CFOs who are taking those top spots."

Adds Rocca, "You see it [the CFO being named CEO] happen all the time. Because of the expanding role of the CFO, he or she is often the right-hand adviser to the CEO—if not the number-two person in the company—involved in every major decision the company makes. So a strong CFO is well prepared to assume the CEO role if and when he or she is presented with the opportunity."

And the role and responsibilities of the CFO seem positioned to continue their expansion. "The role can only increase in importance in the future as business becomes larger and more complex, global, and competitive," says Holman. "It will require individuals who can understand not only the big picture, but all the details as well so they can sift through those details to make the proper decisions."

Stacey L. Bell is a contributing editor to Medical Device Executive Portfolio and a former editor of Medical Device & Diagnostic Industry.

Illustration by Steve Rawlings

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