CEOs: Not the Best Directors

The new 2011 Corporate Board of Directors Survey from Stanford University’s Rock Center for Corporate Governance and Heidrick & Struggles has uncovered surprises about who makes the best board directors: it’s not necessarily the current CEOs that most companies seek out.

“The popular consensus is that active CEOs make the best board members because of their current strategic and leadership experience,” says David Larcker, professor at the Stanford Graduate School of Business. However, when asked about potential problems a full 87 percent said that active CEOs are too busy with their own companies to be effective directors. A third of the respondents said that active CEOs were “too bossy/used to having their own way.”

Major findings include the following:

• Despite the fact that sitting CEOs are highly sought-after for board seats, 79% of directors
  said that, in practice, active CEOs are no better than non-CEO board members.
• CEOs of companies that have experienced public ethical lapses are seen as far more “tainted” by the scandal than their boards are.
• Boards are struggling to evaluate whether prospective board members will be a good fit for the company.
• More than half of directors think that board turnover is too low. Forty-six percent of companies do not engage in succession planning for their board of directors. Nearly 20% of lead directors are chosen by the CEO or chairman.
• More than 80% of board members are somewhat skeptical of the value of “professional directors.”

As companies think about who to bring onto the board that can deliver the greatest value, Professor Larcker and Stephen A. Miles, Vice Chairman at leadership advisory firm Heidrick & Struggles offer the following suggestions:

1. Re-think appointing the “name” CEO to the board.
2. Weigh “failure” when evaluating a prospective board member.
3. Tread carefully when evaluating professional.
4. Take the lead director position much more seriously.
5. Evaluate and refresh your board.

For a more positive alternative, directors might do well to explore the Diverse Director DataSource, known as “3D,” which was spearheaded by CalPERS and CalSTRS and will offer shareowners, companies and other organizations a facility from which to recruit individuals whose experience, skills and knowledge qualify them to be a candidate for a director’s seat. See 3D Advisory Panel Named.