CEOs on other firms' boards offer little benefit to their own companies
August 1, 2002
For more information, contact: Benjamin Haimowitz, HHaimowitz@aol.com
But curbs on outside service may bode ill for the future vibrancy of company boards and thereby undermine corporate performance
Management gurus have long cited the benefits that come from CEOs' serving on boards of other firms than their own - for example, in having the chance to observe other CEOs in action or make personal contacts of value to their company.
But a study presented at the 2002 annual meeting of the Academy of Management (Aug. 11-14, Denver) suggests otherwise. Service on other companies' boards, it finds, is a measure of what the authors call "executive slack," - essentially, a lack of pressure or challenges.
As the authors put it, "CEOs serve on outside boards primarily for their own benefits - the prestige, connections, stimulation, and compensation. That is, service on outside boards is a prime use of executive slack."
The study reaches that conclusion through an investigation of new CEOs' board memberships in 1983 and 1993, two years that were strikingly different from each other in terms of the climate for top executives. Between those dates occurred two developments that brought what the authors call a "dramatic shift" to the corporate world - first, the takeover wave of the mid- 1980s and second, "the dramatic ascendance of institutional shareholdings of corporations, along with the increased voice of these institutions in judging and shaping company performance."
As a result of these developments, CEOs who took office in the 12 months before June 1993 faced considerably more pressures and challenges than CEOs who assumed their positions 10 years earlier.
And this contrast, the study finds, made a tremendous difference in the propensity of new CEOs in the 800 largest U.S. companies to join boards of other firms.
In the 1993 cohort of 117 new CEOs, close to 60% joined no corporate boards in their first year, compared to just a little over 20% in the 1983 cohort of 92. About 22% of the 1983 group joined two boards in that first year, compared to about 7% in the cohort ten years later.
And similar patterns persisted into years three and five of the two groups' tenure. For example, in year three, 40% of the 1990s group belonged to no outside boards, compared to about 18% of the 1980s group.
In addition, "the more recent cohort of CEOs exhibited a significantly lower tendency to serve on boards of strategically unrelated companies." Only 31% of the board seats held by the 1993 CEOs in year one were with such companies, compared to 49% for the earlier cohort.
The conclusion to be drawn from these findings: "Outside board seats may indeed serve little value to their firms. As a consequence, CEOs and their own boards might consider, as many have started to already, the degree to which CEOs should be permitted to join outside boards."
But such curbs, the authors warn, could bring serious problems of their own.
"The demand for outside directors," they write, "is increasing dramatically; yet, our study suggests the supply is shrinking. Such conflict will need to be addressed. It may mean, for example, that boards will just have a tougher time finding willing CEOs. It may also mean that boards will need to focus not just on what the CEO can provide them as an outside director, but what they - as an outside board - can provide the CEO in terms of strategic relevance that will help the CEO in his or her job.
"Finally, boards might also consider other alternatives for outside directors. While CEOs are perceived as being ideal directors, other senior executives might make great directors yet be more likely to have the executive slack necessary to sit on the board."
Lead author of the study is Donald Hambrick of Penn State University, who was joined by Ann Mooney of Stevens Institute of Technology and Sydney Finkelstein of Dartmouth College.