Engines of Growth;
Benchmarking CEO-CFO Collaborations

articleCEO 100 List

In seeking to drive stock-price gains and maximize shareholder value, CEOs and CFOs are teaming up to improve communications with the investment community, attract superior executive talent, and fine-tune the investor mix. Here is an assessment of collaborations at 100 companies that are outpacing the pack.

In conjunction with Chief Executive, we have tracked in recent years the investment performance of the CEO 100 -a set of companies that posted superior stock-price gains over a three-year period. Working from a premise that stock-price performance is driven in part by talented chief executives, we have learned much about the factors and strategies that enhance shareholder value. We now seek to determine how chief financial officers factor into the mix at high-performance companies. In examining how CFOs work with CEOs to maximize stock price, we track the impact of such factors as the delegation of specific responsibilities from chiefs to their financial lieutenants. We also outline best practices both in operations and in other, less-quantifiable areas, such as communications with the investment community, and how CEOs and CFOs support and learn from each other.

Many of the conclusions that emerge from this research contrast with conventional wisdom. Paradigm shifts usually do.

Our research reveals:

Exploring CFO opinions in depth, we feature a pair of top performers and examine their relationships with their superiors. At Atmel, (No. 8 in the top 100; see list), we profile CFO Kris Chellam and CEO George Perlegos. At Midlantic (No. 13), we focus on the collaboration between CFO Howard I. Atkins and CEO Garry J. Scheuring.

As with the CEO 100, we will track the investment performance of this group of companies, exploring whether stock-price performance is driven not just by skillful CEOs, but by successful CEO-CFO collaborations. As with any embryonic model, we fully expect the definition and benchmarks of success to change as we learn more about the process, and as executives continue to experiment with alternative ways to influence share price.

Terms of the Survey

We began our research by identifying the 100 fastest-growing U.S. and Canadian stocks with a market capitalization of more than $500 million. Working from the Value Line database, we confined our search to companies with the same CEO and CFO in place during the three-year period ended December 31, 1994. The stock prices of these companies jumped a whopping 289 percent over the period, compared with the benchmark Standard & Poor‚s Composite Index, which posted growth of just 10 percent.

On a questionnaire, The CEOs and CFOs of these companies were asked to indicate factors with the most significant impact on stock-price growth. Among the possible responses were qualitative factors, such as communications with shareholders and CEO leadership in such communications. Quantitative information came from financial databases, including Value Line. We tallied this information against stock-price growth to determine a correlation coefficient-a measure of the relationship between these sets of variables.

Under such a scoring system, 1.0 indicates the strongest possible relationship, while -1.0 indicates the strongest inverse relationship, one in which changes in a variable translate into identical changes in the opposite direction for another. Coefficients of less than 0.25 generally are considered to be statistically inconsequential for this size sample. If all coefficients fail to measure up, however, it may be noteworthy if one or more of them is significantly greater than the others.

We calculated three separate lists of coefficients: one from a survey of 42 CEOs, one from 24 CFOs, and 11 from companies where both CEOs and CFOs responded to identical questions. All three groups posted average annual revenues of around $1 billion. All findings were cross-checked against proprietary research by Mitchell and Company.

Interpreting Responses

Perhaps our most surprising finding is that business performance alone generally fails to explain movements in stock price for this group. The graphic below shows the correlation coefficients between operational factors and our CEO-only population. It‚s plain that industry stock-price growth, with a coefficient of .3398, is the only factor with even a minimal statistical significance. Our proprietary research underscores the weak relationship between operational performance and stock price. In addition, it shows that no two companies are affected by their business performance in the same way.

Company variableCorrelation to
stock-price growth
Earnings-per-share growth-.0073
Revenues-per-share growth.1362
Cash-flow-per-share growth-.0255
Book-value-per-share growth -.0495
Dividend-per-share growth-.1563
Gross-margin growth -.0360
Net-income-margin growth.0841
Industry stock-price growth.3398
Company stock-price-growth minus
industry stock-price growth


What does matter? Generally, there seems to be some relationship between a company‚s recognition of the role of superior stock performance in attracting and retaining employees, and the stock performance itself. The correlation coefficient for CEOs who strongly agree with the proposition that stock-price appreciation yields recruiting advantages was .3769-weak but statistically significant. The CFO response was similar, generating a coefficient of .3129.

Trailing the field were such factors as stock-price growth‚s importance as a cost-of-capital advantage over competitors and that growth‚s importance in driving corporate expansion.

Refining the Shareholder Mix

The combined CEO-CFO group yielded the survey‚s most statistically significant finding. The correlation between stock-price appreciation and the priority a company assigns an effort to attract a better mix of investors was .5046.

This, too, is consistent with Mitchell and Company research, which shows shareholder mix to be the single most effective method of expending stock-price on a sustained basis. Unfortunately, in fine-tuning the investor mix, few companies get beyond a broad search for "loyal, friendly, long-term holders" or the identification of institutions that hold their competitors but do not hold them.

We recommend a more precise, quantifiable approach. In one recent study, we found that a billion-dollar company that spends $3 million on a well-focused effort to assemble an ideal shareholder community can add between $400 million and $800 million to its market capitalization within two years.

Meanwhile, our research also reveals that compensation programs tied directly to share-price improvement versus competitors-as opposed to plans that reward solely for improvements relative to operational factors-can be a key factor in driving stock prices higher.

To be sure, these results contradict conventional thinking. Why? Research published in other business periodicals tends to focus on the contributions to stock-price appreciation of such factors as cash flow, Economic Value Added, and earnings growth. Inadvertently, these studies describe how larger companies in mature markets tinker at the margin with stock price.

By contrast, we systematically benchmark best practices at companies with stock prices that grow at a clip some five times that of most previously surveyed populations.

Tag-Team Collaborations

Our survey outlines in broad fashion how CEOs and CFOs work together to drive stock price. We also compare the perceptions and priorities of these two types of executives.

We asked 42 CEOs and 24 CFOs what drives stock price. Here‚s how they responded:

Fast company growth from 1992-199424%24%
Expectations for future performance20   18   
Improved profitability as measured by returns17   15   
Management credibility14   16   
Outperforming analyst expectation in prior three years13   13   

Not much difference. Meanwhile, the findings were similarly parallel in comparing CEOs and CFOs from the 11 companies at which both executives responded to the same set of questions:

Expectation for future performance23%20%
Fast company growth from 1992-199420   22   
Improved profitability as measured by returns17   13   
Management credibility16   15   
Outperforming analyst expectations in prior three years15   11   

Both sets of figures show that in driving stock price, CEOs and CFOs rank highly fast growth in the most recent three-year period and the management of expectations for future performance. It is important to "objectively paint a positive growth story for the future that is achievable and credible," says Oracle Systems‚ CFO Jeff Henley. "People like positive surprises rather than negative ones."

Delegation Drivers

We also looked at specific communications and operational responsibilities delegated from CEOs to CFOs, and tracked these items versus stock-price performance.

of CFOs
Managing the investor-relations staff78.2435
Being the primary, day-to-day spokesperson to
the investment community
Preparing investment community presentations70-.1315
Targeting new investors65.2737
Developing and implementing specific stock-price
improvement strategies
Benchmarking the effectiveness of financial
communications activities

At a majority of companies we surveyed, it is clear that the CFO usually is the point person in dealing with the investment community. Sometimes, this is delegation by default. "The CEO delegates to me the task of being the primary, day-to-day spokesperson to the investment community because we do not have an investor-relations executive," notes Jeffrey Ornstein of Superior Industries.

While companies at which the CFO targets new investors, manages the investor-relations staff, and benchmarks communications activities tended to post somewhat better stock-price performance, it is important to emphasize that none of the correlation coefficients related to these three factors has statistical significance.

According to the survey, respondents in our CFO-only group spent an average 10 days a year working with the CEOs to polish their communications with the investment community. Robert Klatell of Arrow Electronics says he advised his CEO on conference calls with analysts, communications about the sale of securities, and preparation for presentations and road shows, including those with large or institutional shareholders and analysts.

Of course, coaching works in both directions. What did CFOs tell us were the most significant lessons they learned from their CEOs?

Clearly explain the company‚s strategy17%
Be consistent13   
Linking strategic direction to stock performance9   
Looking at the long-term impact of
strategic decision
Stay basic in focus and invest in performance9   
Be a leader, and innovate with good performance9   
Be sure you can deliver the growth
investors expect

It is common sense that broad strategic interpretation heads the list of what CFOs learn from their bosses. By nature, chief executives are concerned with the big picture, while their finance counterparts tend to have a much narrower focus. Meanwhile, stock-price appreciation depends partly on attracting and satisfying a contingent of investors who are in it for the long haul, observes Stanley Meresman of Silicon Graphics. It is the CEO who must convince outsiders to buy into a company‚s vision.

Continuous Improvement

Where can CEOs improve in driving stock price? The top three CFO suggestions were: focus on operating performance (17 percent), be less optimistic in talking to investors and customers (13 percent), and clarify communications with investors (13 Percent). Wanting to convey expertise may lead some senior executives to be too quick on the draw with responses, says Britton Murdoch, CFO of Airgas. "Sometimes it is better to say you do not know or that you will get back to someone."

What can CFOs of high-octane companies impart to their peers outside the top 100 in driving stock price? Be honest and candid about expectations (26 percent), and promise only what you can deliver (22 percent) were the two most frequent responses. "A key to this job is having credibility," notes Thomas Congoran, CFO of Healthsource.

Overall, honest communication and mutual respect emerge as the most critical factors in CEO-CFO collaboration. "We both have to be aware of what the other guy is doing and realize the strengths and weaknesses of the respective parties," says Peter Schwartz, CFO of Computer Associates.

Familiarity is also important. Says Marvin Moses, CFO of ALC Communications: "John (Zrno) and I worked together at two companies. We can criticize each other. It‚s like any team; you get better with practice."

Sources of Confusion

Much of the preceding is based on common sense. Yet when it comes to maximizing share price, many CEOs continue to wander in the dark, maintaining allegiance to outdated concepts. Many have not read the recent literature from the academic community that debunks the links between cash flow and other operating factors, on the one hand, and share price, on the other.

Some misconceptions are perpetuated by word-of-mouth from one chief executive to another. Moreover, too many CEOs are overly influenced by sell-side analysts. Few talk directly to the portfolio managers who make decisions about their stocks.

Perhaps the most glaring omission, however, is that many CEOs fail to systematically identify, benchmark, and refine their best practices for stock-price growth. Although they may have spent millions on re-engineering and cutting costs, seldom do stock-price strategies bear transformational scrutiny.

In some ways, this is a classic Catch-22 scenario: The failure to develop accurate measures means most CEOs who are underperforming in this area do not know it. In coming up to speed, many might make better use of a resource that is right under their noses-their chief financial officers. At the fastest-growing companies, the CFO is much more than a numbers cruncher. The position represents a motherlode of specialized expertise and an extension of the CEO in dealing with the investment community and executing stock-price strategies.

© 1995 Mitchell and Company
© 1995 Cief Executive Magazine

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