The Birth of the CFO (A History)

For most of the 20th century, the role of the Chief Financial Officer (CFO) did not exist. Financial considerations played a much smaller role in corporations than they do today so there was no reason for companies to seek out the strategic advice of their back-office financial department. The “financial manager,” as the position was called for most of the 20th century, was primarily responsible for creating the budget, bookkeeping, and overseeing tax reporting.

Since the instantaneous data that we’re accustomed to today didn’t exist back then, budgeting and bookkeeping weren’t tackled until far after strategic decisions were made. As a result, the financial manager was largely removed from the decision-making process. It wasn’t until financial regulations and considerations became more complicated that financial managers were elevated to new heights.

Humble Beginnings:

If you look at the graph below, you’ll notice two interesting things. The first is the CFO’s arrival in the 1960s and the second is a dramatic uptick in CFO popularity starting in 1978:

(from chicagobooth.edu)

Since the early 1970s, regulatory bodies like the Securities and Exchange Commission (SEC) SEC and the Federal Accounting Standards Board (FASB) had been thinking of changing the corporate reporting and accounting requirements. The logic was that, due to the inflationary conditions of the 1970s, traditional accounting requirements were no longer a reliable source of information on business performance. Stock prices did not accurately reflect what a company’s assets and cash flow would suggest, and a change was overdue.

The highly diversified corporations at the time -- ones like Rockwell International, Sperry Rand, and Olin Corporation -- were among the first to add the CFO to their executive roster. The reasoning was simple: these diversified companies, more than any other, required the managerial advice of a finance executive to effectively cope with the various regulatory hurdles that came their way.

A Watershed Moment:

By 1976, the SEC issued Accounting Series Release #190, which required over 1,000 large public companies to use new accounting methods for reporting assets in 10-K filings. Three years later, the FASB issued Statement 33, which differed slightly from the SEC ruling, but extended the reporting requirements to insurance companies, banks, and many other financial institutions.

In order to deal with the legal ambiguity of these new requirements, many companies followed suit and began to promote their financial managers to their C-Suite Executive team. At the same time, CFOs began to promote themselves publicly as the answer to the new reporting challenges.

Melvin Howard, then-CFO of Xerox, ventured to predict that

“[i]n the 1980s..the overwhelming impact of inflation would mean that chief financial officers will play a far larger part than in the past in the overall decision-making process of their companies.”

Michael Eisner, who would become the CFO of Disney just a few short years later, claimed

“[o]f all the disciplines—operations, marketing, finance—the financial function will change the most in the 1980s. . . . This is because so many business decisions are impacted by inflation. And until the accountants can come up with a common language, someone must make a free translation from Greek into English, directing top management on how best to benefit from inflation.”

The best person to deal with that translation, he and others in his position argued, was the CFO.

The Snowball Effect

After the regulatory changes of the 1970s, companies had to take financial considerations much more seriously than they ever did before. Then, as mergers became particularly popular in the 1980s, companies learned that they needed to perform better or get swallowed up by the competition. CFOs became indispensable for identifying the weakest performing business units and helping them to grow and improve efficiently.

CFOs proved that they could help companies wade through the confusion of new financial techniques, restructuring liabilities, and other legal ambiguities. The CFO model became even more popular for managing relationships with shareholders in order to actually explain these regulations. In fact, for many years after the regulatory changes, the majority of CFOs included  a specific section in the annual reports that was meant solely to explain the future implications of the change to shareholders and investors.

The Turn of the Century

By the early 2000s, companies like Worldcom were expanding the role of CFO to include Presidential and COO responsibilities, tasks like actively managing relationships with shareholders and keeping tabs on market trends and expectations. Today, 70% of billion-dollar companies have expanded the role of their CFO to include strategic business analysis.

In years past, the limited supply of data would have hindered a financial manager from keeping tabs on the market and making accurate strategic decisions. But today, understanding the huge influx of data is so deeply woven into the DNA of a CFO’s job that it’s impossible to separate the two. The modern CFO has to understand the implications of these facts, how they relate to the company’s future, and how best to relay that information to shareholders, investors, and the public.

What’s next for the role of the CFO? Let me know your thoughts in the comments below.