Insead Professor Guoli Chen and University of Miami Professor Wei Shi have conducted some fascinating new research on mergers and acquisitions. They examined the nature of the relationship between the CEO and CFO, and how that affects merger performance. They studied 2,356 companies between 2002 and 2013. They discovered, not surprisingly, that the optimal pairing includes an optimistic CEO and a pessimistic CFO. Here's their description of the research:
We culled transcripts of conference calls between 2002 and 2013 involving both the CEOs and CFOs, and measured the executives’ optimism and pessimism by analysing their use of positive and negative words. Positive words included “achieve”, “assure” and “successful”; negative ones covered “flaw”, “penalise” and “unavoidable”. CEO optimism was calculated as the difference between a CEO’s use of positive words and negative words, and CFO pessimism was calculated as the difference between a CFO’s use of negative words and positive words.
Our data showed that CEOs generally used more positive words and were more optimistic than CFOs. CFOs used more negative words and were more pessimistic than CEOs. We then used the ratio of CEO optimism to CFO pessimism to derive what we call the CEO-CFO relative optimism. This value is then matched with the firm’s number of M&As and operating performance, assessed in our study as return on assets (ROA) a year later.
We found that the more optimistic a firm’s CEO-CFO pair was (high-optimism CEO with low-pessimism CFO), the more M&As it undertook. High CEO-CFO optimism also correlated with lower ROA a year after M&As. Conversely, low CEO-CFO relative optimism was associated with fewer M&As but higher ROA.
Does this mean that a pessimistic CFO is always a positive for organizations? Not necessarily. I often speak to audiences of finance executives about playing the role of the devil's advocate on the top management team. CFOs often embrace this role, seeking to poke holes in proposals and find the potential flaws and risks in any course of action. Such critical thinking can be quite helpful at times. However, CFOs can take such behavior too far, and then devil's advocacy no longer proves constructive. The CFO can become "Dr. No" - always finding reasons not to try new things, and always arguing why a new idea won't work. CFOs need to maintain a healthy balance when they look at the downside of new ideas. They should be critical, but they should also ask: How might we make this proposal work? What other options could help us achieve the same goal? How could we move forward in a less risky manner? They can't simply say no to everything. They have to help find other ways to move forward if the proposed course of action seems inadvisable. For more on how to play the devil's advocate constructively, you can read my article here. I also have a chapter dedicated to this topic in Unlocking Creativity.