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Published: September 25, 2008

 
 

Do CEOs Make Good Board Members?

Although it’s commonly assumed that high-profile CEOs will provide valuable oversight to firms by sitting on their boards, companies shouldn’t expect them to improve firm performance.

Title:
Why Do Firms Appoint CEOs as Outside Directors?

Authors:
Rüdiger Fahlenbrach, Angie Low, and René M. Stulz

Publisher:
Ohio State University’s Fisher College of Business, Working Paper No. 2008-03-009

Date Published:
July 2008

Functioning as an independent oversight group, the board of directors is expected to act in the best interests of a company’s shareholders. But boards that are heavy with outside CEOs are sometimes viewed as being in league with the company’s own executive leadership, lacking the distance necessary to provide unbiased oversight. This study examines why companies choose to appoint CEO directors and who their presence tends to benefit: the company’s shareholders, executives, or neither group. The authors looked at a sample of more than 26,000 board appointments at publicly traded U.S. firms over a five-year period. Of those appointments, the authors identified 1,731 board members who were CEOs, and found that they tended to accept board seats at large, established firms with financial policies and governance structures similar to those of their own firms. The companies appointing the CEO board members also tended to be located in the same region as the CEOs’ firms, presumably to cut down on travel time and costs. Surprisingly, the authors found that CEO directors had no effect on corporate performance — their presence on the board did not significantly influence operations, management oversight, or executive compensation. The only exception occurred when CEOs sat on each others’ boards, which had a negative effect on performance.

Bottom Line:
Although it’s commonly assumed that high-profile CEOs will provide valuable oversight to firms by sitting on their boards, companies shouldn’t expect them to improve firm performance.

 

 
 
 
 
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