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February 25, 2013 - Agenda

Fewer CEOs Are Serving on Outside Boards

Marc Hogan

There’s nothing like serving as a public company director for getting an inside view of corporate leadership. That’s why many governance experts think it’s an excellent way for C-suite executives to keep their management skills honed. Yet the number of sitting CEOs who sit on outside boards keeps shrinking.

According to the Spencer Stuart 2012 board index<http://common.money-media.com/php/image.php?id=118872&ext=.pdf>, the average S&P 500 CEO sat on 0.6 outside boards in 2012, half the 1.2 average a decade earlier. What’s more, 54% of S&P 500 CEOs sat only on their own companies’ boards, compared with 48% in 2007.

The latest numbers continue a pattern that began immediately after the 2008 credit crunch, when more and more high-profile CEOs began eliminating their outside board service altogether. Directors and recruiters say that although CEOs can gain valuable experience serving on other boards, the emerging norm for a CEO is service on only one outside board — and none at all if either the company or the outside board is in a difficult situation.

“There has to be a really compelling reason to let the [CEO] serve on a board that will be additive to your own shareholders,” says Robin Josephs, lead director of iStar Financial and a board member at Plum Creek Timber and MFA Financial. Josephs says that at two of her three companies, the CEO serves on one outside board.

The increasing demands on chief executives and directors alike have led many CEOs to decline service on other companies’ boards and, if they accept, to sit on no more than one, says David Kollat, lead director at Wolverine World Wide and a board member at Limited Brands and Select Comfort.

“From a board’s perspective, it is almost always desirable to have CEOs from other companies sitting on the board, because they generally bring useful perspective and enrich the conversation,” Kollat writes in an e-mail response to questions. “The problem is, these sitting CEOs often have date conflicts and/or limited time to reflect deeply on the strategic issues facing the company.”

To be sure, the ranks of active CEOs who serve on boards other than their own have been dwindling for years. The average S&P 500 CEO sat on two outside boards in 1998, a number that had fallen to 0.8 by 2006 and 0.7 by 2008, according to Spencer Stuart. And beyond the S&P 500, plenty of companies’ CEOs have never served on outside boards.

Yet such CEOs may be robbing themselves of what some say can be valuable on-the-job training.

Rose Marie Bravo, a director at Tiffany, Estée Lauder and Williams-Sonoma, has said that her board service at Tiffany made her a better CEO when she was running Burberry in the late 1990s. In a video interview last year with Russell Reynolds, Bravo, who was not available to comment for this article, called her outside directorship “a wonderful learning experience.”

In the video, Bravo recalled, “My very foresighted chairman [at Burberry] said to me, ‘You absolutely should do this. This is a wonderful opportunity.

You will learn immensely and it will add value to what you’re doing at Burberry.’ He was so right.”

Finding a Fit

If a sitting CEO serves on an outside board, that board should be in a “complementary” industry, according to Stephen Miles, founder and CEO of the Miles Group, a consulting firm that advises boards about succession.

“One board is useful because it gives them the outside perspective, and it allows them to sit in the board seat versus the CEO seat,” Miles writes in an e-mail response to questions. “The caveat here is that they need to not just be on ‘any’ board. They need to be on a board that adds value to them.”

In other words, some say, CEOs should serve on the boards of companies that, while obviously not competitors, share challenges that the CEO’s own company might face. That might include a company in similar functional areas or with capabilities the CEO’s company is trying to build. It’s probably a company at least as big as the CEO’s, or a particularly innovative smaller one, experts say.

Even more crucial than the outside company’s core competencies could be the competency of its other board members. “The talent in the room is actually the most important thing,” says Steve Mader, vice chairman and managing director of Korn/Ferry International’s board services practice. “What you get the most from is not how another business goes about its business specialty, especially if you’re a CEO. What you get the most from is what everyone else in the room has to offer on any given topic.”

Mader adds, “Choose the people, don’t choose the business model.”

But CEOs must weigh the advantage of working with brilliant colleagues against the potential disadvantage of having to navigate a crisis. David Larcker, a professor at Stanford Law School and senior faculty at the university’s corporate governance center, says that while most CEOs would say that serving on an outside board is highly valuable, everything changes if either company comes up against a big challenge.

“Where it gets really complicated for a sitting CEO is if something happens,” Larcker says. “You’re a takeover target. You have a big restatement. You’re replacing a CEO. That’s harder to predict and takes up a lot of time.”

For that reason, Charles Elson, a board member at HealthSouth and director of the corporate governance center at the University of Delaware, thinks the decline in CEOs’ outside board memberships is a positive trend. “There are only so many hours in the day, and you’re paid a lot of money to run your company,” he says. “What are you doing running another one?”