Eyjafjallajkull (no, I haven’t just leant on the keyboard) is an Icelandic volcano. It brought European air travel to a standstill in 2010. Reports in late 2011 suggested it’s likely to be upstaged by a grown-up version called Katla in the not too distant future. Yet in Iceland, life goes on. People choose to live there. Benefits outweigh risks. Even its economy has bounced back from spectacular financial meltdown.

FDs operating in entrepreneurial SMEs make a similar trade-off – excitement, opportunity and variety in exchange for volatility, conflict and the occasional violent eruption. So what are the typical problems with CEOs? And what’s the best way to handle this kind of seismic activity?

How FDs must curse Douglas Bader’s observation that “rules are for the obedience of fools and the guidance of wise men”. It’s the entrepreneurs’ charter: they know they’re right most of the time, and no amount of evidence to the contrary will dissuade them. Such mavericks grow their businesses by overcoming obstacles, never taking “no” for an answer and hacking through red tape.

But it’s an approach that sets such CEOs on a collision course with FDs. For example: a trade magazine publishes an annual industry league table based on revenue. The CEO wants to rank as high as possible. But what “revenue” does the FD supply? For the last financial year? The last 12 months? Last month multiplied by 12? The best month’s turnover multiplied by 12? Including recharged expenses or VAT?

For the CEO, it’s about positioning the business, and his success story, well. For the FD, there’s a risk of misrepresentation. Perhaps no real decisions will be based on the tables. But there could be problems if the magazine’s rules change or growth flattens, and if they do win business based on a seemingly high turnover and the client checks things out at Companies House.

Always make your case. But enforcing the rules is seldom simple for a small business FD. CEOs want options, a clear picture of the consequences of breach and evidence that the best commercial position has been sought. They may still try to brow-beat you into doing the wrong thing – but an FD’s resistance is rarely futile.

Why do personal expenses bring out the “do as I say, not as I do” in owner-managers? The FD is asked to sound the frugal horn. It’s zero tolerance on employee T&E claims, yet when it comes to the CEO, anything goes. “Field research” holidays, golf club subs (it’s networking), flowers for Mrs CEO... and the FD has to justify it. A test of diplomacy ensues. The FD explains that the behaviour has no merit: no tax is saved; business performance is clouded; suspicions are raised unnecessarily. The CEO harrumphs.

Revisit remuneration to account for this kind of spending. Topping up compensation with benefits has nothing to commend it. If the CEO persists, just put it down to stupidity, stubbornness, shadiness or a toxic cocktail of all three.

Say something often enough and it becomes accepted as the truth. And every CEO wants to be known as a “high net-worth individual”. In smaller businesses, that “net worth” is usually tied up in their company. In other words, it’s very “net” and not necessarily as “high” as they’d like so it’s understandable they talk up its value a lot.

In some cases, the delusion descends to such an extent that the future is mistaken for the present. The business could be sold for six times revenue – so it’s worth £squillions, right? And if it’s worth that much, why wouldn’t we spend – even if that means borrowing – accordingly?

This is the stuff of nightmares for an FD. Dissent from the valuation could be construed as treason. Tacit approval risks spawning largesse.

Facts are your friend. Ground conversations in reality, but do so in a way that saves face. Making the CEO look stupid is not wise. Unless your garden really does need attention.

Smaller businesses tend not to have remuneration committees. Some don’t even have independent directors. So who sets the CEO’s pay? What constitutes a reasonable incentive plan? As FD, you have to provide the checks and balances to argue against excessive behaviour.

But it can be tricky. One example is the CEO who loves to proclaim how he/she doesn’t take a salary. In fact, he/she takes cash out of the business as dividends (probably for tax reasons). Or they will excuse their elevated pay as recompense for the hardship in the lean years when the business was getting off the ground.

Bite your tongue. If the CEO is the biggest shareholder, there’s no option. The issue tends to disappear as the company’s board expands. Caveat: if the cash going into the CEO’s bank account jeopardises the business, consider your options.

“It’s time we started buying some businesses.” The CEO might just as well have invited you for a foxtrot in a minefield. An M&A strategy might go very well, allow you to work closely with your CEO and be a pleasant experience for you both. Then again, it might not.

Deal fever is a dangerous thing, even for huge corporations. The most valuable call is often the one that says “stop” and quite often it’s the FD with the evidence to make it. Sadly, nothing drives overpayment like a CEO – their “must-win” personality frequently overrides better judgment.

M&A is an example of the “pet project” genre – situations where the sharp, commercial acumen that characterises most CEOs goes out of the window. Others include the corporate makeover, office refurbishment and the “white elephant” IT system that will solve everything.

You must speak up when it comes to “pets”. Help the CEO share your perspective. Present other options. Allow the options to become the CEO’s ideas. But make your point, it’s your job.

The degree of friction between CEO and FD depends entirely on the personality of the two individuals. But conflict is not always a bad thing. Tension helps align the top two, as each will have had to argue fiercely for a certain course of action, testing the other’s hypothesis.

A recent study found that at the heart of the conflict between FDs and CEOs is the dual nature of the finance role today – being both financial controller and business partner. Combining the two is no easy feat. But if the FD fails to demonstrate both attributes, the pairing will never work. So how should conflict be managed?

Do:

• Get to know your CEO and the other individuals in the business. A well-connected FD is more influential and can help shape the CEO’s plans.
• Be collaborative yet independent – this yields honest and supportive communication.
• Recognise the strengths of the CEO, but support the areas of weakness.
• Spend time outside finance. Knowing how the business operates gives you a better understanding of the challenges facing it.
• Ensure that the business understands the broader nature of your role. You’re a business partner, not just an accountant.

Don't:

• Be a technocrat. A good FD can talk confidently about business models instead of financial statements. Your world isn’t only spreadsheets.
• View finance as a function separate from the business. There has to be a joined-up approach to ensure fluidity and open communication.
• Live in an ivory tower. FDs with an open mind will be in a better position to shape the business plans of the CEO. Relationships with key investors, analysts and opinion-leaders really help.
• Be afraid to say “no”. Independence is crucial to safeguarding the business from uncalculated decisions.
• Lose objectivity. Get close to the business, but not so close it clouds your objective analysis. That is essential in helping the CEO build a sound business.

• Love and lava
  Finance & Management Magazine, Issue 200, June 2012, p.24-25

The ICAEW Library & Information Service provides full text access to leading business, finance and management journals. Further reading on the CEO and FD relationship is available through the articles below.