Chief executive officers and chief financial officers are not equals—CEOs earn more, talk more, bully more—but they are nonetheless partners of a sort. CEOs define strategy, and CFOs figure out how to fund it.
But maybe things are not so cordial in the executive suites these days, after all. On Tuesday, the Business Roundtable released its latest quarterly CEO Economic Outlook Survey, which measures CEOs' expectations for sales, capital spending, and employment for the next six months. Based on answers from 118 CEOs of large U.S. companies in mid-February, the reading came in at 104.4, the highest level in the survey's brief, three-year history. The next day, Duke University and CFO Magazine released their latest business outlook survey. Of the 293 American CFOs surveyed on Feb. 27, only 46 percent were more optimistic about the economy than they had been in the most recent quarter. "This is the least optimistic that CFOs have been in the last two years," said Duke finance professor John Graham.
The surveys didn't ask CEOs and CFOs at the same companies to respond to the same questions. But it is clear that the CFOs and CEOs surveyed simply don't see eye to eye on a range of issues.
Take inflation. "With the exception of oil prices and raw material prices which are related to strong economic demand, both in the United States and China, we don't see much in the way of domestic inflation," said Pfizer CEO Henry McKinnell, as he discussed the results of the Roundtable survey with reporters. But CFOs are sniffing out plenty of inflation unrelated to oil and raw materials. In the Duke/CFO survey, 69 percent of the CFOs said that unit labor costs were rising; half said they were a small, moderate, or major problem. Fifty-three percent of CFOs cited high health-care costs as a top issue. As a group, they expect health-care costs to rise 9 percent in 2005.
Or the dollar. McKinnell said CEOs by and large pooh-pooh the weak dollar. "The softer dollar is helping American competitiveness, we're seeing more exports from the United States." In part because of strong exports, 89 percent of CEOs expect their sales to rise in the coming half-year. What say the CFOs? Nearly half of CFOs (47 percent) said the falling dollar would harm their companies, while only 27 percent said it would help.
What gives? Duke's Graham has a theory. While the CEO is the ultimate boss, "CFOs are the ones who write the checks, and they're a little closer to the ground." In other words, since they're signing the bills, they know that the mixture of rising interest rates and health-care costs, higher fuel prices, and a weak dollar signal caution. "I really don't understand how the CEOs can be that optimistic," said Graham.
I've got my own theories. First, many CFOs tend to have a background in accounting. And while many corporate accountants have been involved in fraud, the overwhelming majority are honest numbers dorks who have been schooled to match up assets with liabilities. Temperamentally and professionally, they're inclined to look at both sides of a ledger and hence have a more tempered view of things. Caution is part of the CFO's job description. CEOs, by contrast, are professional optimists. To lead a company, a CEO must be relentlessly positive, even in the face of contrary evidence. Very few CPAs become CEOs.
The second theory is a corollary to the first. CEOs are, in essence, salespeople for their companies' stock. Selling stocks rests on constructing a narrative about growth that downplays or ignores the factors that could trip up strategy and eat into margins. So, of course they say everything is getting better. Chief financial officers, by contrast, are much more likely to be dealing with bond investors and bankers, who tend to ask tougher questions and are more interested in cash flow and data than in strategy.
Third, the Chauncey Gardiner theory: that CEOs are just clueless spectators to the complex things going around them, while the CFOs actually make all the crucial financial decisions. At the trials of both former WorldCom CEO Bernard Ebbers and former HealthSouth CEO Richard Scrushy, the defense centers on the contention that the charismatic, aw-shucks CEOs had very little interaction with the crooked CFOs who deceived them and couldn't understand all that tough math and balance sheet stuff. Ex-WorldCom CFO Scott Sullivan testified that he spoke with Ebbers several times a day and socialized with him frequently. The way Ebbers told it, he barely knew the guy.
So, if the CEOs are always the last to know what's really going in the company, and the CFOs are the true masterminds of the Fortune 500,what do these results suggest? Perhaps we should regard CEO optimism as a contraindicator. After all, in the short history of the Business Roundtable survey, the CEO optimism index had its worst showing in April 2003. The S&P 500 is up almost 50 percent since then.