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Caution has been the order of the day for corporate America in recent years. Following the bursting of the stock market bubble, the terrorist attacks of September 11, 2001, a subsequent recession and a rash of corporate scandals that led to new government regulation, public companies have been consumed with a desire to minimize risk. That has meant avoiding bold strategic moves, such as transformational mergers and big investments, in favor of cutting costs and building cash reserves.
Lately, though, companies are starting to emerge from their panic rooms. Mergers and acquisitions, for instance, are on the rise. Last year saw $2.2 trillion worth of M&A activity globally, twice the level of just three years earlier and the highest total since the bubble-inflated record of $3.4 trillion in 2000, according to research firm Thomson Financial. Corporations also are responding to investors that want them to put their bulging cash reserves to use, either by investing for growth or by instituting dividends and share buybacks.
As they rouse themselves to action after years of standing pat and hoarding cash, companies are turning increasingly to an unlikely source -- their chief financial officers. As guardians of corporate financial health, CFOs have played a big role in the great balance-sheet cleanup of the past five years. Often emerging as the right hands of their companies' CEOs, now they are set to become much more closely involved in business strategy and operations. And perhaps unsurprisingly, many are becoming CEOs in their own right: Several recently appointed chief executives are former CFOs, including Richard Zannino of New York publisher Dow Jones & Co.; Harry You of McLean, Virginia, consulting firm BearingPoint; and Robert Kelly of Pittsburgh-based Mellon Financial Corp.
With finance chiefs becoming ever more important, Institutional Investor asked shareholders and analysts to tell us who are the most outstanding CFOs in the U.S. We surveyed some 900 portfolio managers and stock researchers at more than 330 money management firms, asking them to name the best CFOs in the industry sectors for which they are responsible. We also asked the same question of every sell-side analyst who received a vote in our latest All-America Research Team survey. The voting ended in autumn 2005. In all, 1,270 respondents voiced their opinions (for more on methodology, click here). Our third annual ranking of the top CFOs in 62 industry sectors is presented here.
Voters naturally praise those finance executives who keep clean books and effectively communicate with the market about their companies' performance. But they also show a growing appreciation for CFOs who transcend the traditional number-crunching, cost-controlling role and embrace responsibility for improving operations, driving revenue growth and executing big acquisitions. Among the sector winners who exemplify these traits, say voters, are CVS Corp.'s David Rickard; John Milligan of Gilead Sciences; Intel Corp.'s Andrew Bryant; United Parcel Service's D. Scott Davis; and David Colby of WellPoint.
Ironically, this new role for CFOs stems in part from the recent years of risk avoidance, when they had to make increasingly difficult decisions about how to allocate capital. It also derives from the need to cut costs and comply with new rules and laws regarding financial reporting, such as 2002's Sarbanes-Oxley Act. CFOs more and more have been called on to analyze the potential risks and returns of strategic decisions so companies can avoid critical mistakes. And as companies have sought to become leaner and less centralized, many have eliminated the position of chief operating officer, opening the door for CFOs to assume some of these critical responsibilities.
"The jobs of the CEO and CFO are intertwined in many respects," says new Mellon CEO Kelly, who until January 31 was CFO of Charlotte, North Carolinabased bank Wachovia Corp. and who wins the Banks/Large-Cap category for a third year running. "Ultimately, both have the same goal of creating superior long-term value for shareholders."
Adds Colleen Cunningham, president of Financial Executives International, a professional organization for corporate CFOs and treasurers, "When companies consider acquisitions and investments these days, finance is taking a much bigger role in the decision-making process."
And rarely has corporate America been in a better position to go hunting for new business. Despite rising interest rates, soaring energy prices and a hurricane season of biblical proportions, the U.S. economy managed to grow by 3.5 percent last year. Companies posted record profits in 2005, on an absolute basis and as a percentage of GDP, according to Standard & Poor's. And they are sitting on record levels of cash: Reserves currently equal more than 6 percent of U.S. stock market capitalization, versus less than 2 percent a decade ago, according to S&P. Interest costs, despite the Federal Reserve Board's persistent hikes in short-term rates, remain at historically low levels.
That good news is finally sinking in. The latest quarterly CFO Outlook Survey conducted by FEI and Baruch College's Zicklin School of Business showed the first rise in economic optimism among CFOs since June 2004. Two thirds of the 297 CFOs surveyed expected their companies to increase capital spending by an average of 9 percent in the coming year.
"I'm reasonably optimistic," says Honeywell International CFO David Anderson, who finishes second in the Electrical Equipment & Multi-Industry sector this year. "It's a great time to be working on growth and expansion."
Surely, an additional reason for renewed optimism is the sense that the worst of the work needed to comply with Sarbanes-Oxley is now completed. The bane of many a CFO's existence in 2004 and early 2005 was Section 404 of the corporate governance law, which obliges companies to independently certify their internal financial controls. CFOs have often grumbled that the costs of complying with this part of the law far outweigh the benefits to investors. The average bill for a company, according to FEI, is some $4.4 million. But for big companies that figure can run much higher. Intel's Bryant, for example, says his company spent $25 million and devoted more than 200,000 man-hours to the exercise. But with the mammoth initial documentation of their business and reporting processes behind them, CFOs should find things easier on this front. Most appear to have grudgingly accepted the new legislation.
"Maybe we went a little overboard with Section 404 -- but with Enron and WorldCom, I think we had to," says WellPoint CFO Colby, who is ranked first in the Managed Care sector for a third consecutive year.
Many are eager to move on. "The good news is, we can now return to more of the value-added things we contribute to our work," says Honeywell's Anderson.
Often that work pertains to M&A. Many of the CFOs chosen by survey respondents as standouts in their industries have distinguished themselves by executing acquisitions. CVS's Rickard, for example, earns high marks for smoothly integrating the more than 1,200 Eckerd drugstores that his company bought from J.C. Penney Co. for $4.5 billion in 2004. Colby has presided over dozens of acquisitions for WellPoint, which has been among the leaders of consolidation among health insurers.
The roles demanded of CFOs in mergers vary widely. For Rickard and Colby, the biggest part of their involvement has been the evaluation of potential targets and the negotiation of the deals. Though both help set up the integration plans for the acquired companies, both say they largely leave the execution to dedicated teams within the respective company. "We set up stand-alone project teams to work on the integration. I oversee the process but remain largely focused on the core CVS business," says Rickard, winner for a second straight year in the Retailing/Food & Drug Chains sector.
At smaller companies, CFOs often take a more hands-on approach. Gilead Sciences' Milligan, the winner in the Biotechnology sector, was actively involved with the due diligence and negotiations to acquire Triangle Pharmaceuticals in 2003. And he also took the lead on integrating the information systems, R&D programs and manufacturing facilities. "I was in the trenches of that acquisition," says Milligan.
In doing such work, CFOs are interacting more deeply and frequently with CEOs and becoming more attractive candidates for chief executive jobs. Executive recruiters and management consultants say that CFOs are more often thought of for CEO vacancies today than at any time in the past. Peter Darbee, for example, was promoted last year from CFO to chief executive of utility PG&E Corp. John Kispert, whom voters deem the best CFO in Semiconductor Capital Equipment for a third year running, was promoted in January to president and COO of KLA-Tencor Corp., a move that puts him in line to potentially succeed KLA chief executive Richard Wallace.
Mellon's Kelly is a classic example of the new breed of multitalented, widely experienced CFOs. He started his career in accounting before moving to Toronto-Dominion Bank, where he worked in both retail and commercial banking, including a stint heading the company's Waterhouse Investor Services brokerage division. First Union Corp. tapped him as CFO in 2000, and he played a central role in that company's merger with Wachovia one year later. In a press release outgoing Mellon chief Martin McGuinn described Kelly as the "ideal candidate" to lead the company because of his background in "focusing on strategy, operational excellence and growth, both organically and via acquisition."
Kelly himself says there are plenty of similarities between the two posts. "You have to be a good communicator in both jobs," he points out. "You have to relate well to customers, investors and staff. Both jobs focus on the customer experience and the most-efficient ways to deliver value to the customer."
Other CFOs are embracing his example. "The role of the CFO is to be a partner with the CEO and the board -- and to do that effectively, we have to be involved in strategy formulation," says UPS's Davis, now a three-time winner in the Airfreight & Surface Transportation category.
So too are investors. "It's not enough just to manage the financials anymore," says one survey respondent. "The CFO has to be involved in the strategic positioning of the company."
That's a lot more exciting than being cautious.
D. SCOTT DAVIS, United Parcel Service
Year named CFO: 2001
Number of employees: 407,200
Earnings: $3.87 billion
Stock options: $2.6 million
Davis: "In the past, CFOs were more focused on historical record-keeping. Now they're more forward-looking and involved in capital-allocation decisions. With businesses so much more complex and global, they have to be."
One voter: "He doesn't overpromote his business, and that's important for a large company that has to really work to find growth. He's a straight shooter."
Early last year, United Parcel Service reported disappointing earnings for the fourth quarter of 2004, and its share price quickly dropped by 2 percent. CFO D. Scott Davis sprang into action, communicating the company's position to the market. Atlanta-based UPS, it turned out, had decided to invest more to grow shipping volumes and respond to increasing competition, even if that meant a temporary hit to profits. The company's shares soon bounced back and recently hit a 52-week high.
"Scott did a great job managing the Street through the blow-up last year," says one portfolio manager. "He explained that they were going to focus more on volumes and a little less on margins." UPS and Davis certainly delivered. Worldwide volumes rose nearly 7 percent in the fourth quarter of 2005 and by 4 percent for the entire year, far exceeding growth rates for the previous four years.
Davis exemplifies today's multitalented, broadly experienced CFO. After four years as an auditor with Arthur Andersen, he became CFO and later CEO of software company I.I. Morrow Corp., which he continued to run after UPS acquired it in 1986. In 1991 he moved to UPS and worked in treasury, finance, accounting and M&A before leaving in 1998 for a stint as CFO of reinsurer Overseas Partners; he returned to UPS as CFO in 2001. Last month, Davis became a UPS director, and some admirers believe he's a candidate to succeed CEO Michael Eskew. Says one survey voter, "He is clearly the heir apparent at UPS." -- A.O.
DAVID COLBY, WellPoint
Year named CFO: 1997
Number of employees: 42,000
Earnings: $2.5 billion*
Stock options: Undisclosed
Colby: "We don't have copyrights or patents on our business processes. What we do, people will try to imitate -- so we try to do it a few basis points better than everyone else."
One voter: "Colby is not just a numbers guy but a good strategic thinker. He is very good at putting industry dynamics into perspective."
David Colby knows M&A.
The current WellPoint is the product of a merger in late 2004 between Anthem and the previous WellPoint Health Networks -- both companies were among the most active consolidators of BlueCross/BlueShield health insurance plans in the industry. Former Anthem CEO Larry Glasscock took the helm of the combined company and asked Colby, who had been WellPoint's CFO, to be finance chief (Anthem acquired WellPoint and took its name). The deal vaulted Indianapolis-based WellPoint, which now has 33.9 million policyholders, past UnitedHealth Group as the country's biggest health insurer.
"We have had good success with our M&A activities," says Colby, who earned an undergraduate degree in biophysics at Columbia University. The company closed on its latest purchase -- WellChoice, which runs the BlueCross plan in New York state -- in December. Colby is intimately involved with planning merger integrations, helping to set financial and operational milestones -- and leaving execution to dedicated teams of lower-level executives. The approach is working. WellPoint's share price has nearly doubled since the Anthem deal.
Investors also credit Colby with helping to maintain stable financial results during the late 1990s, a tumultuous time for health insurers when public opinion of them plummeted. Many smaller companies went out of business or sought refuge in the arms of successful consolidators. "WellPoint cruised through those problem years," notes one portfolio manager. -- A.O.
* Audited earnings.
ANDREW BRYANT, Intel Corp.
Year named CFO: 1994
Number of employees: 99,900
Earnings: $8.7 billion*
Compensation: $1.3 million
Stock options: $14.5 million
Bryant: "When I became CFO, [ex-Intel CEO] Andy Grove told me that my priority should be the Intel stockholder."
One voter: "When things are going well, Bryant is even-keeled. When they're not, he doesn't sugarcoat it."
When Intel Corp. founder and former chairman Andrew Grove appointed Andrew Bryant as the giant chipmaker's finance chief 12 years ago, he made no bones about the job description.
"He said he had people to attend to customers, employees and other constituents," recalls Bryant. "But he needed the CFO above all as an advocate for the owners of the company."
Shareholders say that Bryant has been just that for the Santa Clara, California-based technology leader. The former Ford Motor Co. and Chrysler Corp. finance executive, who joined Intel in 1981 as controller of one of its divisions, has paid particular attention to managing the company's cost structure so cyclical dips in profit margins are not too severe. Historically, Intel's gross margin would peak in the mid-60s at the top of a cycle then dip to the high 40s as the company invested in new generations of microprocessors. Shareholders credit Bryant with more efficiently allocating capital so margins are less volatile; they now tend to hit bottom in the low 50s.
The reserved CFO also wins praise from survey respondents for going out of his way to make sure investors and analysts comprehend how Intel is doing financially. Says one voter, "He is clearly a shy person, but he always makes a good effort to help you understand how the business is performing." -- A.O.
* Audited earnings.
JOHN MILLIGAN, Gilead Sciences
Year named CFO: 2002
Number of employees: 1,800
Earnings: $813.9 million
Stock options: $20.2 million
Milligan: "In biotech companies management teams can be small, so people have to contribute in a lot of different ways."
One voter: "Milligan has helped Gilead develop from a small, entrepreneurial company to a mature business with more stable sources of revenue. He isn't stuck on the numbers and costs. He understands the importance of R&D as the cornerstone of future growth."
John Milligan doesn't need his Ph.D. in biochemistry to prepare financial statements, but his background provides the Gilead Sciences CFO with an understanding of his business that few finance chiefs possess. So, too, does his experience as a Gilead project manager dealing with everything from research and regulation to manufacturing.
"From prediscovery to approval drug development is one of the most complex things going," says Milligan, who joined the Foster City, California-based biotechnology company in 1990 as a research scientist and went on to serve as a project manager and head of mergers and acquisitions before becoming CFO.
Knowing the business cold has enabled Milligan to play a big role in Gilead's strategy and growth, most notably its 2003 acquisition of Durham, North Carolina-based Triangle Pharmaceuticals for $464 million. The CFO oversaw the predeal due diligence and negotiation, as well as subsequent integration efforts.
The acquisition has been a big win for Gilead, which has combined Triangle's HIV drug Emtreva with its own treatment, Viread, to create one of the most effective and oft-prescribed HIV drug therapies. The company's stock has nearly doubled, to about $62 per share, over the past year. -- A.O.
DAVID RICKARD, CVS Corp.
Year named CFO: 1999
Number of employees: 145,000
Earnings: $1.21 billion
Compensation: $4.4 million
Stock options: $4.2 million
Rickard: "Integrity is the one essential characteristic CFOs have to have. I've dealt with CFOs who weren't very smart, but they were honest and hardworking -- and as a result, they were very effective."
One voter: "Good communication skills are still at a premium for CFOs. Rickard is an example of someone who is particularly good at it. He's candid, smart, and he knows his business."
CVS Corp., the country's second-biggest drug retailer, has a pretty straightforward line of work. As a result, its CFO, David Rickard, sticks to the fundamentals. And investors love him for it.
"This is a simple business," says Rickard, a former CFO of RJR Nabisco who joined CVS in September 1999. "The key driver is inventory. We watch our daily and weekly sales trends and mix, and we keep on top of gross margins and expenses." He shares much of that data with investors and analysts. "It's comforting," says one appreciative voter.
CVS has been bulking up to compete with giants like Walgreen Co. and Wal-Mart Stores. In 2004 the Woonsocket, Rhode Island-based company paid $2.15 billion to buy 1,268 Eckerd drugstores from J.C. Penney Co. In January it forked over $2.93 billion to Albertson's for 705 of the grocery chain's Osco and Sav-On stores.
"People expected snafus, and we haven't had many," says Rickard, who was closely involved in negotiating the deals but has left the job of integrating the acquisitions to dedicated teams. CVS posted record sales and earnings of $37.0 billion and $1.2 billion, respectively, last year.
Rickard also plays a wider role in his profession. In 2004 he was appointed to a key advisory committee of the Financial Accounting Standards Board, a job he regards as very important. "It is so difficult to satisfy all the constituencies in the financial reporting process," he explains. -- A.O.