As founding entrepreneur of scrap metal company Hartwell Pacific, Stephen Hartwell Greer had to hire and fire a number of CFOs. Why? “The people that we hired from large multinationals had a difficult time in a fast growth start-up,” he explains. They were so used to having infrastructure around them and also failed to win over the existing staff, who resented the parachuting in of a big-shot, highly compensated finance chief.
Greer wrote about his experiences in the well-received book Starting From Scrap
(Burford Books, 2010), which he wrote after stepping down in 2008 as chief executive for Asia of the recycling division of Smorgon Steel Group (now OneSteel
), the Australia-listed conglomerate that bought Hartwell Pacific in 2003. Now a senior adviser at distressed debt and private equity firm Oaktree Capital,
he spoke to CFO Innovation
’s Cesar Bacani.
There was quite a bit of CFO turnover at Hartwell Pacific, which you started in 1993.
To be honest, the CFO decision was very much investor-driven. Our investors were saying, “I’ll sleep better at night if we have a CFO. Go get me a CFO. Pay whatever you got to pay.” It really disrupted the pay scale too, and so you’ve got to keep [the CFO’s compensation] a secret. But people get to know about it, and then they think, Who’s this fancy-pants guy who doesn’t have to work as hard as we do? He leaves before us and tells us to get everything ready for him by the morning. It really was a clash of cultures.
I think CFO sometimes is [just] a fancy title that people really relish. One mistake we made along the way was that we kind of skipped having a financial controller and tried to jump right to CFO. The reality is, we needed a financial controller but we kept hiring CFOs, and the CFOs come and say, here’s my business card. They don’t want to get their hands dirty, they want to have a financial controller working for them.
I think that for a fast growing start-up, you probably want a really good nuts-and-bolts financial controller and you get the CFO the year before you go public. Unfortunately a lot of people who work in large corporations as financial controllers, when they take the risk of coming to a start-up, what they want is the CFO title. So you give it to them. Then they go, wait a minute, I’m the CFO. Where’s my financial controller?
The first CFO you hired was a local man who worked at a well-known multinational. What happened there?
I was very impressed with him because he could speak with me on a high level, but that frankly was all he could do. When he had to deal with the junior people on the lower level, they could talk circles around him.
My honest experience is that the CFOs that we hired from large multinationals had a difficult time in a fast growth start-up because they are so used to having so much infrastructure around them. There’s a problem with IT, call the IT guy; there’s a problem with the balance sheet, let’s bring in the balance sheet expert. Got a tax problem? Call the tax guy. If you’re in a small fast growth company, you’re that guy. You have a lot of hats on your desk, so you got to be very flexible. Same with the CEO, same with everybody else.
When there’s a fire, you don’t call the fireman – everyone grabs a hose. That’s the kind of mentality in an entrepreneurial environment. To me that’s exciting and interesting. You get to cross pollinate and do a lot of different things. I don’t want to be in a silo. But some people want to be in a silo. If that’s someone who wants a very structured environment, they will fail. As successful as they will be at a multinational, they will fail in an entrepreneurial start-up.
Doesn’t the entrepreneur himself perhaps contribute to the failure because he has ideas of his own and would not listen to professional advice from the CFO?
It’s a common problem, yes. Usually what happens is, people hire accountants in start-ups and all of a sudden, they get to a level of success and sophistication that they need a CFO to attract capital and maybe go public. The CFO comes in and says, This is the way it’s done in a professional company, and there’s a clash.
The entrepreneur has to get it. He has to want to be an entrepreneurial executive who wants his company to become a successful corporation. He has to be ready to move on. That’s very hard for a lot of entrepreneurs. I’m kind of proud to say that I was able to do that. That was very important to me. I always knew that day was coming and I wanted it to come. I grew up around a public company, so maybe that was part of it. My father worked for Heinz for 37 years, so I always thought, in terms of large corporations, this is how they work.
CLASH OF CULTURES
You mentioned there was a “clash of cultures” at Hartwell Pacific when you first hired a CFO.
It’s like doing a liver transplant. Sometimes the body rejects the liver, right? The CFO would come in and probably have a lot of things going for them. But they would come in and say, ok, I’m going to call a meeting and bring in all these experienced financial accountants and people in the business, and I’m going to let them know that I’m their new boss and this is how we’re going to do things.
It’s a big mistake. What they have to do is step in and win these people over, because they know the business and they know where all the rats and where all the skeletons in the closet are, and if they want, they can make the CFO fail. They all want to know why they weren’t promoted to that position. Why is this guy paid so much more than we are? He doesn’t know more than we do. He’s not better than we are, he has some fancy degree maybe, or he’s worked for some MNC, but that’s just his luck.
You have to earn their respect. There’s always a lot of challenge [with hiring CFOs] – you’ve got to find somebody who’s got the right management personality to come into a foreign organisation, a team that’s gelled and worked well together for a long period of time and say, I’m your new boss. I think the people who depend on business cards too much, they think the business card is how they’re going to get their respect, the title is how they’re going to get their respect, and my answer to that is that it’s to work, that’s how you’re going to get their respect.
Why didn’t you promote from within?
I think [the existing staff] could have done the work per se, but in the eyes of investors and things like that, they weren’t of that calibre. We might have been better served to maybe promote one of them to be financial controller, bake that for a while, and then bring in a CFO later on. Probably I should have held my ground a little stronger with the investors and said, we need the right person. You might have a high level of turnover at the lower level. You bring in one person and you lose five people with 10 years of experience who know everything about your company.
Except that in this case, the five stayed on and it was the one that kept being changed.
I kept saying to these guys, Stop killing my CFO. The CFO will come to me and say, you need to talk to my employees, they’re not supporting me. And I would say, you talk to them, they’re your employees.
But in the end, you did find a CFO who stayed.
Our strategic partner, which was a public company in Australia, injected a person. That was the right move, because all of a sudden, it was not a completely foreign body. It was someone from headquarters. All of a sudden, the local junior management just sort of dealt with it. As long as it was a local hire, someone they considered to be one of their peers, they felt like they were almost as qualified as this person.
It seems compensation is such a big issue when hiring a CFO for a start-up.
I would say compensation is the most complicated part of business. Normally you start with bookkeepers and accountants and you find the good ones and you promote them, and the bad ones you fire. Eventually you have a qualified team of bookkeeper accountants and senior accountants. And then, all of a sudden, there’s that tagline, everybody wants the CFO title because of the pay check and so on. What you can’t do is increase everybody’s pay; you’d get massive wage inflation. So you ask yourself, how can I maintain this and still satisfy the investors’ [call to hire a CFO] . . . It’s complicated.
So you try to keep the CFO’s compensation a secret . . .
You try to, it doesn’t work and they all find out, and they’ll get mad . . . It’s a nightmare. I think probably the better answer is transparency and being able to explain yourself as to why this person needs to be paid [that much]. Sneaking around is never the right answer.
I’m proud to say some people in my company went from making 30 thousand baht a month in Thailand to 200,000 baht a month. That’s because they worked their way up and they were successful. But at the point where they get to 50,000 and 60,000 and you bring someone at the top and pay them 200,000, they’d say, wait a minute, is this guy four times better than I am?
With a fast moving start-up, you keep increasing people’s wages incrementally, but when you bring someone from outside, you address the public market, through a head-hunter. And all of a sudden it’s like, hey, I can’t believe what one of these guys make. But that’s what they make and if you want one, you got to pay it. The market drives that decision.
BECOMING AN ENTREPRENEUR
Your book recounts how you built a company from zero to a US$250 million a year enterprise, warts and all. What advice can you give to someone who wants to become a successful entrepreneur?
There’s a saying I believe strongly in: “Bad economies are good times to start good businesses.” One reason is that your ideas are tested more stringently. So a lot of times in a good economy a lot of businesses will work, and then when the bad times come all of a sudden you realise that your great idea wasn’t such a great idea. It wasn’t as competitive as you thought and the margins that you assumed were in the market don’t exist. And so if you can get something going in a difficult economy, then what happens is when there’s a good economy, your business thrives. In other words you can thrive in any environment.
Secondly, it takes a good two to three years to get to positive cash flow in any start-up. In that two to three years, if you’re in a booming economy, you have wage inflation, rent inflation, all kinds of various cost inflation that challenge you. Not to mention your capital expenditures are much higher because you’re waiting in line to buy new equipment, instead of buying used equipments at bankruptcy auctions. Maybe your economic opportunity seems greater because you’re in a booming economy, but you could end up with a situation where you have invested more, you have higher costs, then that economy turns down, and you get a big fat loss.