How To Hire A Cfo

Sooner or later every company needs one. Then it needs a replacement.

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YOU WOULD THINK THAT ROBERT L. Luddy would have known better than to hire a fly-by-night chief financial officer. After all, he himself had been a corporate controller for a year before founding Captive-Aire Systems Inc. in 1979, and -- in the beginning, at least -- he had been perfectly comfortable handling the company's books and bankers on his own. But by 1981, he realized that he could no longer do it alone. So he decided to hire a full-time CFO. And that's when his troubles began.

It is a task every founder must tackle sooner or later, and Luddy was better qualified for it than most. On the surface, moreover, the position did not look particularly difficult to fill. Sales at Captive-Aire, a manufacturer of kitchen-ventilation equipment based in Raleigh, N.C., were a modest $148,000 at the time. On the other hand, Luddy was convinced that the company was poised to take off, and he knew that growth would demand accurate and timely numbers for planning, not to mention lots of cash, most of which he hoped to raise through a line of credit on his accounts receivable. That, in turn, would require more numbers for lenders. He himself was preoccupied with engineering and marketing problems. As a result, Captive-Aire was slipping behind in its payables, and its books were a mess. Although it had an outside accounting firm for annual statements and had installed a computerized system to monitor inventory and receivables, the company had no general ledger with which to generate monthly income statements and balance sheets. So Luddy set out to find someone who could take charge of the situation, create order out of chaos, and provide the systems and the numbers that the company needed to grow.

The person he chose, the former chief budget officer of a large Canadian corporation, clearly had all the necessary tools. A man in his fifties, he was relatively seasoned as well. Luddy, who was then just 35, was eager to add a mature voice to a young management team, and he liked the man's style. "He seemed so assured and self-confident that you just had to trust him." Indeed, he inspired so much trust that Luddy hired him without even checking his references.

Nor did Luddy stop trusting his new CFO when employees expressed skepticism over the man's ability to pull numbers from a computer program that no one else could work. Luddy thought the numbers looked all right; at least they showed a profit. And they must have looked all right to the bankers, too, for the Canadian convinced them to lend Captive-Aire $300,000, more than 10 times as much as the company had ever borrowed before.

Luddy was delighted, and didn't give it a second thought when the CFO asked to set up a discretionary account at the new bank that was making the loan -- just a few thousand dollars he could tap as needed. In fact, Luddy didn't get worried until the Friday afternoon when he discovered that the entire loan was to be deposited in the CFO's discretionary account.

"It could have been a coincidence, but it hit my panic button," Luddy recalls. "I know I should have caught things earlier, but I was worried about a whole lot of things, and the loan was not the top thing on my mind."

The last time Luddy saw his CFO was the next Wednesday morning, when his outside accountant came in. "Your auditor is here, Bob," the paging system squawked throughout the offices of Captive-Aire, and the Canadian took a powder. "Perhaps he's gone to lunch," someone suggested. When the CFO didn't show up that afternoon, Luddy tried calling him at home, but there was no answer until the next morning.

"I stepped on a nail," the man explained. "I had to go to the hospital." But he wouldn't say which hospital, and when Luddy called around, there was no record of the Canadian being treated anywhere in the area.

That same morning, Luddy fired his CFO. Although the ensuing investigation produced no evidence of fraud, the episode "scared the living daylights out of me," Luddy says. Rather than risk getting burned a second time, he decided to take the financial reins himself, but the bank wouldn't let him keep the loan unless he hired a new CFO. This time he checked the applicants' references carefully and ran the finalist through two sessions with his auditor before settling on William Francis, formerly with the Big Eight accounting firm of Peat, Marwick, Mitchell & Co.

Francis turned out to be just what the banker ordered. He straightened out the books, streamlined the computer system, developed new credit policies and invoicing guidelines, and established manufacturing controls, all the while keeping the bank well informed and reassured. This took time, of course -- five years, to be exact -- but Luddy got what he wanted: the freedom to concentrate on sales. The result was a five-year revenue growth of 2,682%, compounded, allowing Captive-Aire to place 65th on INC.'s 1985 listing of the 500 fastest-growing private companies in America.

It is a sobering thought, that one of America's most successful young companies might have suffered an early demise from a corporate case of sudden infant death syndrome but for the fortuitous discovery of a bad hire. Yet the story illustrates just how important that particular hire can be. No matter what his, or her, formal title, the CFO performs the second most global role in an emerging company, and can make or break the business. Considering how ill-prepared most founders are to fill the slot, the wonder is that more companies don't go down the tubes because they have the wrong CFO.

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