August 14, 2019

The Art of the Buzzkill: Pessimistic CFOs Make for Winning M&A

This HBR article addresses a new study that confirms what a lot of people already thought – if you’re going to do well in mergers and acquisitions, you need a visionary, upbeat CEO partnered with a CFO who’s always prepared to throw a bucket of cold water on the CEO’s fever dreams. Here’s an excerpt:

Why optimism and pessimism? Because they are cognitive characteristics that affect how you think and how you act. Optimists tend to focus on positive, goal-facilitating information, and discount unwanted facts. Pessimists are more sensitive to negative, goal-inhibiting information; they are more critical and vigilant in their efforts to avoid potential disasters.

The two traits have been shown to be aligned with the roles of CEO and CFO. CEOs are expected to be more optimistic and open to risks. The upbeat, visionary, public-facing CEO is by now a standard specification across industries. Satya Nadella, Jack Ma, and Mary Barra are just a few of the flag-bearers. Companies can’t engineer or sustain an upward trajectory with a leader who shies away from risks or who can’t see beyond the medium term.

But to parlay optimistic vision into healthy post-M&A return on assets (ROA) also requires a dash of pessimism. And that has to come from the CFO, whose job it is to scrutinize target firms, conduct in-depth due diligence, and pinpoint potential risks of any M&A. They are expected to be cautious and attuned to adverse conditions – basically, a gatekeeper who brings the high-flying CEO down to earth.

The study says that firms in which both the CEO & CFO are gung-ho on M&A do more acquisitions because optimistic CEOs don’t pay as much attention to risks associated with acquisitions in the absence of pessimistic CFOs – and it also says that these acquisitions don’t perform as well as those involving more downbeat CFOs.

John Jenkins