Strategy

CFOs Filling the COO “Vacuum”

The once key C-suite appointment of chief operating officer (COO) is quickly disappearing from corporate America with all the attendant responsibilities falling to a company’s chief financial officer (CFO).

That means operational expertise — often considered a key skill set to lead a company as CEO — is now a core competency for financial executives looking to put themselves in the line of succession for a company’s top job.

“The number of COOs has been in a steady decline over the past 10 years and has morphed into an important, but short-tenured role, that remains key to CEO succession,” says Scott Simmons, managing director of the executive search firm Crist|Kolder Associates in Downers Grove, Ill.  “Over the long-term it’s a vacuum that many CFOs are being asked to fill.”

Several recent moves at Fortune 500 companies exemplify the changes in the COO role.

This month McDonald’s announced CFO Peter J. Bensen will take on global supply chain, development and franchising functions when the current COO retires,  with the company opting not to replace the role. Separately, Tiffany & Co also announced this month that its current co-CFO/COO James Fernandez will retire this year. The company named a new CFO, but “said that the COO post will be eliminated when Fernandez retires.”

Simmons says having a separate COO as a long-term management plan has become too unwieldy for boards of directors at many public companies.  “More boards are asking ‘Do we need this triumvirate, or can some of the responsibilities be directed elsewhere,’” he says. “Every time another COO retires they ask ‘Do we really need a third layer of management?’”

Increasingly the answer is “no,”  with only 30 percent of the largest public companies having a named COO, according to Crist|Kolder’s latest “Volatility Report.” Simmons says that previous studies had placed named COOs at 40 percent of the companies surveyed in the report. The disappearance of the operations role is also picking up pace, with 4.2 percent decrease in COOs in 2013, according to the report.

But rather than going away completely, the COO role has changed into a short-term placeholder position that is used in CEO succession planning, Simmons argues. A company will create the COO position when needed to give an executive the experience in managing lines of business before offering them the top spot.

Over the long-term, however, operational responsibilities usually fall back to the CFO to manage. This change often puts the CFO in prime position to take on CEO responsibilities, as long as they embrace their operational skill set, Simmons says.

“The CFO has been pulled into operations, and you are going to find those with the best experience and better skills to become CEO when they embrace that: running P&L and working closely with the lines of business,” Simmons says.  “CEOs and boards want and need a business partner, not just a bean counter.”