A new study, reported in CFO.com today, finds that when CFOs fall short of analysts’ profit forecasts, they put their careers at risk. The following excerpts from the article point to the importance of CFOs repackaging and positioning themselves before they find themselves kicked to the curb.
— If a company missed an analyst forecast once during a year, the “forced turnover rate” was 4.6 percent for the CFO versus 2.7 percent for the CEO; if the firm reported four misses, the CFO turnover rate climbed to 8.2 percent versus 6.2 percent for the CEO.
— “It’s pretty shocking — it looks like just the act of missing has negative consequences,” one of the study’s authors, Shiva Rajgopal of the University of Washington Business School, told CFO.com.
–The career penalties got worse after passage of the Sarbanes-Oxley Act, and they’re also worse for companies that publicly disclose quarterly earnings guidance…. After passage of Sarbanes-Oxley in 2002, the study found, short-termism worsened. From that time through the end of the study period (year-end 2004), when a CFO missed a consensus analyst forecast, bonus and equity grant cuts were larger, and the chances of being dismissed greater.
— Given the other trends in CFO careers, such as shortening average tenure, it is perhaps not a surprise that such emphasis is placed on quarterly earnings.
–One reason these results are disconcerting for public companies and their investors is that career penalties over missed targets could influence CFOs (and CEOs) to take unhealthy actions to meet the forecasts — even if those actions destroy long-run value or are fraudulent.