Should a CEO serve as a Director on other companies' Boards? From the perspective of the CEO's own Board, does having their CEO serve as a Director on other Boards contribute to or detract from their own company's performance. The answer is not always simple or clear.
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Should CEOs Play the Board Game?
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the clarion call
June 2013
Should CEOs Play
the Board Game?
2. Roy Maurer and the Partners of
The Clarion Group
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The Issue
Should a CEO serve as a Director on other companies’ Boards? From the
perspective of the CEO’s own Board, it comes down to whether having their
CEO serve as a Director on other Boards contributes to or detracts from their
own company’s performance. The answer is not always simple or clear.
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The Challenges of Governance
Often Boards raise this question in an effort to set Board policy that will remain in
place over time, applying to all CEOs at all times. In our experience, this is
challenging.
Looking to external research for the answer reveals sources that support both sides
of the argument; there does not appear to be a definitive study. In the absence of
a researched answer, individuals often seek the advice of peers who have personal
opinions that are based on direct experiences or anecdotal accounts; these
experiences may be neither representative nor repeatable. Finally, even if there is
first-hand knowledge from experience, it is hard to measure the impact in a
quantifiable or objective way; performance effects are overlapping and nuanced
and it is very difficult to isolate this one aspect.
We believe the best decisions are reached by considering situational factors. This
means that there is no simple, clear-cut policy – rather, a set of guidelines that
should inform judgment specific to individual situations. We would argue this is also
in line with a certain measure of common sense. While this can certainly be messier
to govern, in truth individual company and CEO circumstances do matter.
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Pros and Cons
Here are some of the most commonly identified pros and cons of CEO participation on outside Boards.
Conduit for information, e.g., environmental shifts,
operating model alternatives, other policies and practices
Direct observation of new strategic approaches and their
results without risking own company’s performance
Leadership development and maturity through
experience
Network of peer relationships to draw upon for input,
advice
Signals an endorsement of individual CEO and their
company
Pros
May Contribute to Company Performance
Time required, when the job of CEO is already demanding
Redirects executive attention outside the firm
Difficult for Board to know if CEO external board efforts are
aligned with firm’s interests
CEO may subordinate organizational interests in favor of
personal career objectives
The elevated prestige may increase the CEO’s ability to
command higher pay in his own company
Potential conflict of interest
Cons
May Detract from Company Performance
Evaluating Situational Factors
The Individual’s Leadership Maturity
Will external Board involvement be developmentally useful for the individual in question? It makes sense that it would be most
helpful to CEOs in developing leadership skills, knowledge, and breadth of experience earlier in their careers – and that such
development would contribute directly to increased company performance.
On-the-job experience is the richest source of leadership development for senior executives, and breadth of experience across
multiple functions, business lines and industries is especially critical for preparing a CEO. This kind of breadth can be difficult to
accumulate, especially in smaller companies or in a single-company career. CEOs can further benefit by experiencing strategic
and fiduciary responsibility from the perspective of the board members they serve.
That said, there may be some diminishing returns over time as a CEO matures. Toward the end of a long career as CEO, it would be
quite reasonable for the Board to question individual leadership development as a rationale. On the other hand, entrenched,
mature CEOs can become stale in their perspective and openness to new ideas, and can be well served by exposure to inside
knowledge of what other companies are doing. Even mature CEOs can gain insight from new business models or different industry
strategies.
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Time Demand and Individual Leadership Capacity
Evaluating the dimension of Time Demand requires a thoughtful combination of both the leadership challenge inherent in the
company’s business situation at the time and the capacity of the individual leader.
There are some business situations that legitimately require the CEO’s time and attention, at least over a short period. Such things as
major industry crises (e.g., financial industry in 2008), company turnarounds, major mergers or acquisitions, and major strategic shifts
may require the leader to avoid external Board distractions.
However, individuals have deeply embedded capacities that go beyond their experience, training or education. Some leaders
have enormous physical and mental stamina and energy in the face of highly complex challenges, diversity of focus, competing
priorities, and multiple stakeholder responsibilities. Some leaders thrive on chaos and are bored if not sufficiently challenged. Others
do not. What is critical is the alignment between CEO self awareness and Board oversight awareness such that there is agreement
upon the extent and limits of individual CEO capacity.
While extenuating business circumstances may argue for zero
outside involvement (at least during a particular period of time), it
is quite possible that one or even two external Boards are
manageable and productive in the right business environment at
most times. It should require some rationale to justify involvement
on additional Boards; for example, the uniqueness of the external
company and its strategic value to the CEO’s firm. There is some
number of Boards that goes beyond the bounds of reasonableness
for any CEO and begs the question of motivation and intent.
The figure to the right can aid in wrestling with these first two
situational factors.
Personal Advancement versus Company Performance
This is a particularly difficult aspect to evaluate. Here is the
quandary: companies want CEOs who are motivated, striving for
success, results-oriented, influential, charismatic, respected and
sought after by others. Because competent CEOs are in such short
supply and high demand, the same profile that drives company
performance will naturally contribute to personal career
objectives.
Capacity of CEO
High
High
Low
Low
MaturityofCEO
Caution:
Significant
potential benefit
but requires
caution due to
limited capacity.
Yes:
Go for it unless
there are other
extenuating
circumstances.
No:
Not sufficient
additional benefit to
justify the risk of
exceeding
capacity.
Maybe:
Questionable
additional benefit but
high capacity CEOs
may require sufficient
challenge to retain.
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So, Do You Play?
But determining the motivational difference between a CEO wanting to contribute to
company performance versus personal career gain is almost always a subjective judgment.
Even if Boards could determine the true motivation, it is not clear what should be done about it.
Would Boards want to isolate their CEOs from networks of outside relationships as a means to
keep them longer? In our opinion, this is not a particularly useful rationale to keep CEOs off
other Boards and is potentially counterproductive.
If, however, it becomes obvious that a CEO is using one company to launch their career into
other companies, that is a different matter. If a Board senses that a CEO’s personal aspirations
are not aligned with the best interests of their company, it needs to be addressed head on.
Participation on other Boards would be a minor footnote in that conversation.
Competitive Conflict of Interest
When does an external company present a direct or veiled competitive threat? Companies in
other industries are typically considered acceptably safe. But even companies in the same
industry can be acceptable as long as they do not compete in the same markets with the
same products for the same customers. A company outside the industry that has close ties with
competitor companies could threaten or compromise the CEO’s own company.
Typically Boards look to hire CEOs with industry-relevant experience for good reason. If, in fact,
that industry experience contributes positively to a CEO’s ability to drive company
performance, the same logic extends to the knowledge and insights gained as a CEO serving
on the Board of other industry companies. The real issue is whether, in fulfilling fiduciary
responsibilities on an external company Board, a CEO strengthens a competitor company to
the detriment of his own.
Assuming there are no extenuating circumstances (business environment, company
challenges, etc.), and assuming an appropriate stage of CEO Leadership development and
maturation, we believe external Board participation contributes positively to the capacity of
CEOs and contributes positively to their company’s business performance.
Page 5