stanord closer look series 2
Are Current CeOs the Best BOArd MeMBers?
positive aspects o having active CEOs serve onthe board. Beyond their strategic and managerialexpertise, respondents value active CEOs or theirexperiences in dealing with a crisis or ailure and ortheir extensive personal and proessional networks.In terms o intangible attributes, active-CEO di-rectors were seen as being able to identiy with theCEO on a range o pressing issues, build trust withthe CEO, prioritize challenges, and demonstratecurrent knowledge o business issues.On the other hand, active CEOs are criticizedor not being as engaged as the company needsthem to be and or being unable to serve on time-consuming committees or participate in meetingscalled on short notice. Respondents also nd ault with active CEOs or being too bossy, poor collabo-rators, and or not being good listeners.Te tenuous benet o appointing active CEOsas directors is refected in part in the research lit-erature. Fahlenbrach, Low, and Stulz (2010) ndno evidence that the appointment o an outsideCEO contributes positively to uture operating perormance, decision making, or the monitoring o management by the board.
At the same time,the research suggests that the appointment o activeCEOs as directors might lead to increased CEOcompensation. O’Reilly, Main, and Crystal (1988)nd a strong association between CEO compensa-tion levels and the compensation level o the out-side directors who serve on the board, particularly the compensation committee. Tey argue that,consistent with social comparison theory, commit-tee members reer in part to their own compensa-tion levels when approving CEO pay packages. I committee members are current CEOs with highcompensation levels, this can lead to a distortedview o “air market value” and a propensity to ap-prove large compensation packages.
Te Heidrick & Struggles and Stanord Rock Center survey citedabove also ound criticism o current CEOs or be-ing “too generous with compensation.”For these reasons, it might be that the trend o re-cruiting ewer active CEOs and more retired CEOsas directors is benecial to governance quality. Aterall, retired CEOs have the same strategic, operat-ing, and leadership experience as current CEOs but without the time demands that distract them romtheir director duties. Tere is also common consen-sus that their leadership experience provides value well beyond their retirement date. Evidence to thiseect, however, is not overwhelming. According to the survey by Heidrick & Struggles and Stan-ord Rock Center, only 55 percent o respondentsbelieve that retired CEOs are better directors thanactive CEOs. Only 46 percent believe that retiredCEOs are above average.
Why thIs Matters
1. Many people believe that current CEOs arethe best board members. Is there convincing evidence that this is the case? I not, maybe itis time or companies (and the nominating andgovernance committees) to reassess the impor-tance o this criterion when looking or new board members.2. How much does the requirement or CEO-levelexperience limit the pool o available directors?Does this restrict the availability o diversity candidates who might be less likely to have thatexperience?3. I the availability o current or even retiredCEOs is low, should proessional directors (di-rectors whose primary job is to serve on boards)be used to ll this gap?4. In the Heidrick & Struggles and Stanord Rock Center only 26 percent o respondents believethat CEO-level experience becomes outdated within ve years. A ull 38 percent believe that itnever becomes outdated. Is there a “shel lie” toCEO experience? Do the positive qualities o re-tired CEOs deteriorate, or do they never becomeoutdated?
National Association o Corporate Directors (NACD) and Te Cen-ter or Board Leadership, “2009 NACD Public Company Gover-nance Survey” (2009).
Spencer Stuart, “Spencer Stuart U.S. Board Index,” (2010).
Heidrick & Struggles and the Rock Center or Corporate Gover-nance at Stanord University, “2011 Corporate Board o DirectorsSurvey,” (2011).
Rüdiger Fahlenbrach, Angie Low, and René M. Stulz, “Why DoFirms Appoint CEOs as Outside Directors?”
Journal of Financial Economics
Charles A. O’Reilly III, Brian G. Main, Grae S. Crystal, “CEOCompensation as ournament and Social Comparison: A ale o wo Teories,”
Administrative Science Quarterly