Should CEOs Play the Board Game?
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the clarion group REAL. CLEAR. INSIGHT. the clarion call June 2013 Should CEOs Play the Board Game?
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Transcript of Should CEOs Play the Board Game?
the clarion group REAL. CLEAR. INSIGHT.
the clarion call June 2013
Should CEOs Play the Board Game?
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.
the clarion group REAL. CLEAR. INSIGHT. 2013 the Clarion Group, Ltd. All rights reserved. Page 3
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.
the clarion group REAL. CLEAR. INSIGHT. 2013 the Clarion Group, Ltd. All rights reserved. Page 4
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
Mat
urity
of C
EO
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.
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