CHICAGO — Chief executives officers fill 53% fewer corporate directorships outside their own companies than they did in 1990, a reduction that has potentially weakened corporate governance through the loss of their experience, knowledge and insight, according to James Drury Partners Inc.
James J. Drury III, chairman and CEO of the Chicago-based executive and board recruitment firm, calls the “CEO flight” alarming. He blames a number of factors, including the pressure corporate governance activists have put on CEOs to reduce their outside board activities and concentrate more on their own companies.
Only 265 out of CEOs of the Fortune 500 list of the largest U.S. companies served on outside boards in 2006, down from 358 in 1990, according to a report from the firm. James Drury Partners based its research on Securities and Exchange Commission filings between Jan. 1, 1990, and June 30, 2006.
In addition, the CEOs who still serve on outside boards “have reduced their commitments from an average of 2.2 boards to 1.4 boards, representing a decline of 36%,” the report said. The total number of board seats filled by CEOs fell to 375 in 2006 from 794 in 1990. If the trend continues, there may be no CEOs serving on outside boards by 2016, according to the report.
Of the 10 largest companies, eight CEOs sat on no outside boards in 2006, and the other two served only on one outside board each. That compares with 1990, when eight of the CEOs running the top 10 companies served on outside boards, some serving on three or four, the study found.
CEOs are reducing their commitments to other boards as they “face mounting pressure … to focus virtually all of their attention on running their own companies,” Mr. Drury said in his analysis. “Some may see this as a healthy development, but it is not without a cost. With more and more CEOs limiting their services on other companies’ boards, a vital source of knowledge and ‘real world’ experience is missing from today’s boards. As a result, board deliberations are often less well-informed,” and corporate CEOS “lose access to a potentially helpful personal adviser.”
CEOs “are the only directors who have current, real-time experience grappling with the same modern day business issues that confront the CEO of the company on whose board they serve,” Mr. Drury wrote.
Amy Borrus, deputy executive director at the Council of Institutional Investors, Washington, said the decline in CEOs serving on other boards is not necessarily detrimental to better board functioning.
“The council policy is that current CEOs should serve as directors of only one other company if the CEO’s company is in the top half of its peer group,” Ms. Borrus said. “CEOs may be too busy with their day jobs and too deferential to other CEOs to make their case on boards.”
Kent S. Hughes, managing director at Egan-Jones Proxy Services, Haverford, Pa., said, “I realize the very valuable service that experienced CEOs bring to boards of directors, but, on the other hand, many CEOs and directors have been ‘overboarded,’ which spreads them too thin. CEOs are, or should be, held to an extremely high standard of performance, and being on too many boards does a disservice to … (either) the company that the CEO heads or to the one or more boards on which he or she sits.”
The Drury Partners report notes that an over-controlled, “over-managed, over-inspected environment may be hobbling talented CEOs” and keeping them from taking business risks. “The growing structure of governance policies, procedures, reviews and approvals is believed (by many CEOs) to be lowering the level of risk that boards and CEOs seem willing to embrace in the interest of progress.”
