Mr McFarlane, a Scot who made his name with Australia and New Zealand Banking Group (ANZ) and Standard Chartered, has won plaudits for overseeing the overhaul of insurance company Aviva, which he ran for a period following the exit of chief executive Andrew Moss.
Unlike at Aviva, FirstGroup has already begun a revamp, focused on its struggling bus division. But the appointment of the former Royal Bank of Scotland director has been seen in the City as a coup for the Scottish transport group, with some even speculating that in time he could help the group establish a presence in Asia.
Mr McFarlane replaces Martin Gilbert, the chief executive of Aberdeen Asset Management, who has been chairman of FirstGroup since its formation from Grampian Regional Transport 27 years ago.
He said he would leave after the company undertook a £615 million fundraising earlier this year.
John Sievwright, senior independent director at FirstGroup, said: "John is an outstanding leader with extensive international experience and a track record of leading strategic change and value creation that speaks for itself. I am delighted to welcome him to the group, where his experience will be invaluable as we drive forward our plans to improve our returns, resilience and growth prospects."
Mr Sievwright said Mr Gilbert had been instrumental in establishing the group as a leading transport operator in the UK and North America, where it bought Greyhound bus owner Laidlaw in 2007.
Mr McFarlane will join the board immediately, and become chairman on January 1.
He joined the board of Aviva in September 2011 and spent eight months in an executive capacity, devising a turnaround plan that saw it exit from several overseas markets.
He is also a non-executive director of Australian shopping centre operator Westfield Holdings.
Much of his career was spent outside the UK, including 10 years as chief executive of ANZ. Before that he was an executive director at Standard Chartered.
He was part of the team appointed to the board of RBS in October 2008 to help with its recovery.
Mr McFarlane said: " The group has short-term challenges which we will naturally need to overcome, but I am convinced it has significant opportunity to benefit from its market-leading positions and to deliver sustainable long-term value for shareholders."
Douglas McNeill, analyst at stockbroker Charles Stanley, said: "He is a big hitter. It is a good appointment."
He said it was unlikely Mr McFarlane would seek to pull FirstGroup out of the US. Rather, he suggested that in time Mr McFarlane's Far East experience could be put to good effect if FirstGroup sought to revisit its previous interest in Asia.