Former CEOs make savvy board members
Os are still getting the axe, and lots of them. By Booz Allen Hamilton’s count of 2,500 global corporations, 14.3 percent of CEOs left their jobs in 2006. A Spencer Stuart survey of the S&P 500 finds that in 2006, 14 percent appointed a new CEO. That puts the chance of a CEO shift in the year at one in seven – extraordinarily high levels, say experts who follow C-suite personnel trends.
But large and loud as the headlines proclaiming CEO vulnerability have been, many consultants say that the turnover is just the beginning of a story that is rewriting how CEOs interact with their boards and, crucially, who sits on boards, how much they do and what decisions they make (up to and including dumping a non-performing CEO). ‘You cannot look at CEO turnover in isolation. It has many ripple impacts throughout an organization,’ says Deb Wallace, a principal with Lincoln, MA-based BrinkPoint Consulting, which specializes in working with boards.
‘Firing a CEO is like swatting a fly on an elephant,’ agrees Dale Winston, CEO of search firm Battalia Winston. Focus only on CEO turnover and that misses the bigger story: boardroom upheaval.
One huge irony is that CEO firings may be helping to solve what had emerged as a pressing problem for boards of directors: the mounting difficulty in filling board positions. Don’t think this hasn’t become challenging: ‘More people turn down opportunities to sit on boards. It’s been getting harder to fill vacancies,’ says Winston. Many experts say that while liability is often cited as the reason why prospects spurn board seats, the reality is that such worries are receding. Between insurance protections and more activist boards who are energetically complying with Sarbanes-Oxley (SOX), potential liabilities aren’t top of mind for many.
What are the obstacles to board service? A dramatic increase in workload is a prime factor – many search firms now tell director candidates to expect to put in perhaps 250 hours per year, a number that may easily be double the expectations of a director a generation ago. ‘Demands on board members are at an historic high,’ says David Traversi, an executive coach (and a former board member himself).
‘People are beginning to see board service as a burden, as a real job,’ says Walt Shill, global leader of Accenture’s strategy practice.
Who has the time and energy to serve on today’s boards? A sitting CEO usually doesn’t. And the proof is that a growing number of companies are prohibiting board service on the part of their CEOs, says Steve Wagner, managing director of Deloitte’s Center for Corporate Governance. ‘At most, a CEO will be allowed to sit on one outside board,’ he adds. That’s down from as many as six boards a generation ago.
In the current climate, CEOs face so many demands on their time, including, importantly, ongoing interface with the board. They simply cannot promise to be available to respond to another company’s urgencies. Look at top CEOs: ExxonMobil’s Rex Tillerson and GE’s Jeff Immelt, to name two. And they serve on exactly zero boards of for-profit companies.
A difficult void to fill
Crunch the numbers and according to James Drury Partners, CEOs fill 53 percent fewer corporate board seats than they did in 1990 and the average CEO now sits on 1.4 outside boards.
That leaves a lot of empty seats to fill.
The empty seats multiply because, nowadays, there’s a strong bias against serving on too many boards, even on the part of non-CEOs. ‘The days of serving on ten boards are over,’ says Traversi. Kevin Conley, CEO of executive search firm Conley & Company elaborates in saying that ‘today’s limit is about four boards.’ In a few cases, that might be stretched to five but it’s rare to find directors on more. Once again, this is primarily because of the time commitments but also because there is mounting skepticism as to whether a director who sits on too many boards can adequately take care of business.
Recruitment is a two-way street
Another issue that is complicating filling board vacancies is that ‘People are doing much more due diligence before accepting a seat,’ says Beverly Behan, managing director of the worldwide board effectiveness practice for Hay Group, a global management consulting firm. Before, an offer of a board seat was viewed as an honor very difficult to reject. But now with the increased workload and the possibility of bad personal PR resulting from association with a company that stumbles, potential board members are looking as closely at the company that wants them as the companies vetting prospective board members. That’s a plus, adds Behan, who says that the average length of board service is around ten years; that is longer than the average tenure of a CEO (under eight years, per the Booz Allen Hamilton CEO study). Joining a board is a long-term commitment and, accordingly, it should be entered into with deliberation and caution.
More delays in filling vacancies arise because boards increasingly use a vacancy to bring a specific skill into the boardroom. ‘Whenever we fill seats we do a focused search to add a particular skill,’ says Strom. ‘There has been a central shift in board composition, where vacancies are filled with experts chosen to fill particular needs,’ says Wagner. ‘That’s a huge change.’ A generation ago, seats were filled with ‘the right kind of candidate,’ he adds. Now boards want to add someone with knowledge about a topic of concern to the company. That could be anything from outsourcing to setting up a global supply chain. The exact skills of course vary from company to company, the crucial point being that this narrowing of the recruitment focus immediately results in a dwindling candidate pool.
Does all this add up to a crisis in board service? Not necessarily. At least some experts say that while filling seats takes longer, there remains a plentiful array of candidates who still view board service as both stimulating and something of a coup. The key is to broaden the candidate pool. And it’s possible that isn’t such a bad thing, says Mary Ann Jorgenson, a partner at Squire, Sanders & Dempsey. ‘CEOs are not the font of all wisdom.’ In other words, the traditional reliance on CEOs for board service produced a particular kind of board, but maybe the new demands on 21st century boards necessitates a different kind of board member and, in particular, one with the time and energy to invest in a job that suddenly involves substantive oversight of the actions by the C-suite.
The other change that is broadening the pool concerns the fact that board candidates have historically been hand-selected by the CEO, who tended to show preference for picking friends. Now the board nominating committee is doing the deciding, generally with the concurrence of the CEO. But the buddy-buddy era of boards as pals of the CEO has definitely come to an end. And boards increasingly turn to professional search firms to sift through the pool of directors, which has attracted a wider group of candidates. The CEO and the board still need to get along, but unlike the days of yore, the selection process isn’t necessarily determined by nepotism.
The rise of the senior manager
Where is focus most acute in the search for board members? Experts say especially fertile ground is one or two levels down in the organization. ‘I urge clients to permit divisional presidents to sit on outside boards,’ says Conley, who admits that only about half of his clients green-light that idea. The pity for those who say no – usually because they want the full attention of rising executives – is that they are denying these executives what would prove to be a very rich experience. ‘Serving on a board gives an executive boardroom experience,’ says Conley. Increasingly, senior executives are judged by their ability to work in concord with their boards.
The sheer need for COOs, CFOs and presidents of operating units to fill board seats is helping to loosen restrictions on such service, say some experts, and more fuel comes about because these executives, too, frequently want to serve on outside boards. That conjunction of forces just may lead to much more widespread board service by second-tier executives.
Also high on the wish list in board recruitment are retired partners from Big Four (or Three) accounting firms, particularly prized for audit committee service. And search experts say there is a wealth of willing candidates who welcome recruitment, but adds that the one candidate class that is winning a declining number of nominations is academics. The reason: Too many lack the real-world experience a board member needs.
CEO still number one
But all this still leaves retired CEOs as the main source of new board members, say the search experts, which brings us full circle to the uptick in CEO departures. Perhaps they were let go or maybe they simply retired, but former CEOs have both the expertise desired in new board members and the time to serve. ‘They accept positions because they want to remain active,’ says Joe Griesedieck, the vice chairman of Korn/Ferry International. That just may be the ultimate boardroom irony; namely, that house-cleaning in the executive suite is producing the very candidates needed to fill boards.
According to numbers related by Wallace, retired and current CEOs still make up around 70 percent of Fortune 500 boards, and with the numbers of board seats held by current CEOs sharply dwindling, the plain conclusion is that service by retired CEOs is dramatically up. Is that a good thing?
‘Having many retirees could in fact be good for boards,’ says Winston, who also notes that ex-CEOs arrive with a certain degree of boardroom savvy garnered from a strong foundation in boardroom practices. But Winston adds that ‘pay increases’ could really sweeten the attraction for CEOs to serve on boards. ‘Board pay has not always kept up with the heightened demands,’ says Winston. Pay on Fortune 100 boards may be adequate – $200,000 is not unusual for a director – but go to small companies and you’ll find there’s a sharp drop-off in compensation.
But most experts say the tweaks in board compensation are happening in line with changes in board composition and workload. An overall stronger board may be the upshot. And that’s good because one point boards and CEOs agree on is that ‘CEOs want their boards to be a real resource, to add value,’ says Behan. ‘A strong board gives a company more credibility,’ adds Brian Drum, CEO of Drum Associates, a New York search firm. ‘A weak board is a disadvantage to the CEO.’
One revolutionary takeaway from all this upheaval: ‘In many organizations, the board itself is in the hot seat,’ says Wallace. CEOs cannot be blamed for board inadequacies, mainly because the board makeup is no longer up to them. Some experts go so far as to say that boards themselves are falling under a new, higher level of scrutiny that is beginning to include meaningful performance assessments.
Will boards measure up? Most outside experts are upbeat that today’s board, composed of diverse members who bring in varying skill sets, will pass the tests and be able to meet the myriad challenges. Optimism, frankly, is just about everywhere and that’s because never before have boards been so meticulously selected. According to those working in the field, all that work will pay off for boards that are able to produce results that really matter.
