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Published: May 29, 2007

 
 

The Empty Boardroom

CEOs, the most desirable board members, are now in short supply. And that’s good news.

 

Illustration by Elwood Smith

We get the call more and more frequently at our executive search firm, about 400 times a year now. The head of the nominating committee of an S&P 500 company is searching for a qualified director, one with CEO experience, preferably as the head of a similar, but not competitive, company of roughly equal size. Ideally, the candidate should be a woman or member of a minority group who has run a global business. A firm understanding of technology would be a definite plus, as would expertise in financial matters.

And that’s when our job of managing expectations begins.

Over the past five years, responding to a perceived crisis in the effectiveness of corporate governance, corporate board watchers have exhaustively investigated and speculated on what goes on inside the boardroom. Beyond the laws, rules, and best practices now being institutionalized, academics and consultants have weighed in, recommending that boards pay more attention to improving their organizational behavior, group dynamics, balances of power, and decision-making processes.

But too little attention has been paid to the process of getting the right people into the boardroom in the first place. There’s been scant commentary on the potentially larger crisis in corporate governance: the dearth of willing and able CEO-level directors.

In other words, in today’s post-Enron, Sarbanes-Oxley–constrained governance environment, it’s become harder and harder for corporate boards to get what they want when recruiting directors. What every nominating committee wants for its board is, in effect, a jury of the CEO’s peers — a board made up of people with equivalent experience. But the number of active chief executives available to serve on corporate boards has dwindled in recent years, as the time commitment and reputational risks for board directors have steadily mounted. Many current board directors are deciding not to stand for reelection. And many active CEOs (nearly half the CEOs of large publicly held companies) have agreed to limit the number of outside boards on which they can serve.

The result is not surprising. According to our latest annual survey, the 2006 Spencer Stuart Board Index (SSBI), S&P 500 companies continue to rank “active CEOs” near the top of their wish list; 71 percent of the respondents identified them as important to have on the board. Yet less than a third (29 percent) of all new directors appointed in 2006 fit that criterion, down from nearly half (47 percent) five years ago.

There have always been many more board positions than sitting CEOs; simple math tells you that. But in recent years, with the supply of candidates shrinking just as demand for seasoned, independent expertise is growing, the imbalance has become even more pronounced. Today, according to the SSBI survey, there are roughly nine director positions for every sitting CEO in the S&P 500. However, whereas eight years ago these CEOs sat on an average of two outside boards, today’s typical CEO sits on only one — or none at all. For boards, the CEO supply crunch has become severe.

There is no doubt from where we sit that boards across America and around the world have taken note of this predicament. The dramatic increase in the number of searches we’ve been retained to conduct is one measure of their concern. In 2003, the year after the Sarbanes-Oxley Act was passed, we saw a 33 percent surge in director searches at Spencer Stuart. Prior to that watershed event, many CEOs could fill a director position with a phone call. If the CEO did not have someone in mind, a sitting director could reach out to his or her network and come up with a qualified candidate. It was a different, arguably more insular, world.

 
 
 
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Resources

  1. Ram Charan, Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage (Jossey-Bass, 2005): CEO advisor Charan charts the steps that boards can take to evolve from ceremonial to liberated to progressive.
  2. Julie Hembrock Daum, Tom Neff, Julie Cohen Norris, “Spencer Stuart 2006 Board Diversity Report,” February 2006: Companies have gotten the message on board diversity, but the numbers have yet to catch up. Click here.
  3. Paul F. Kocourek, Christian Burger, and Bill Birchard, “Corporate Governance: Hard Facts about Soft Behaviors,” s+b, Spring 2003: Well-honed guidelines for boards that want to use “debate, dissent, and active engagement” to foster better performance. Click here.
  4. David A. Nadler, Beverly A. Behan, and Mark B. Nadler, eds., Building Better Boards: A Blueprint for Effective Governance (Jossey-Bass, 2005): Cogent example of the new wave of books proposing a constructive working relationship between CEOs and their boards.
  5. Thomas J. Neff and Robert L. Heidrick, “Why Board Service Is Still Attractive,” The Corporate Board, vol. 27, no. 158 (May/June 2006): Despite new board burdens, the right opportunities continue to tempt a majority of the 350 directors whom Spencer Stuart surveyed. Click here.
  6. Spencer Stuart Board Index, “The Changing Profile of Directors,” 2006: Spencer Stuart’s annual research survey of S&P 500 boards. Much of the data in this article comes from this report. Click here.
  7. Spencer Stuart Governance Lexicon, “Corporate Governance in the United States of America,” January 2007: As active CEOs take on fewer directorships, boards are looking harder and farther for a defined set of skills or specific experience relevant to their companies’ strategy. Click here.
  8. For more articles on strategy, sign up for s+b’s RSS feed. Click here.
 
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