CEOs on Outside Boards: A Declining Trend - Pros & Cons

The Evolving Landscape of CEO Involvement on Corporate Boards

Historically, a common practice within corporate America involved CEOs accepting positions on the boards of other organizations. This was often pursued to broaden professional perspectives, enhance influence, or simply for personal enrichment. Companies, in turn, actively sought CEOs for their specialized knowledge and capacity to engage with their own chief executive on an equal footing.

However, the prevalence of sitting CEOs serving on external boards is demonstrably declining. As the responsibilities and complexities of the CEO role have intensified, an increasing number of chief executives are choosing to abstain from outside board commitments. Furthermore, many boards are now implementing limitations on the external board assignments held by their own CEOs.

The Impact of Recent Events

A report from management consulting firm Korn Ferry indicates that the pandemic significantly accelerated this trend. The report cites evidence suggesting that the unprecedented demands created by the pandemic prompted many CEO-directors to resign from outside boards to concentrate on their primary organizations.

Currently, less than half of CEOs participate on an outside board, according to the aforementioned report.

Concurrently, numerous corporations are facing pressure to enhance gender and racial diversity within their board compositions. This is leading to a broader consideration of candidates from diverse backgrounds than in previous years.

A Double-Edged Sword

The reduction in CEO participation on boards presents both advantages and disadvantages.

Benefits of CEO Board Service

Here are four key advantages associated with CEOs serving on corporate boards:

• Enhanced Leadership Capabilities: Serving on another company’s board can contribute to the development of a more effective CEO. CEOs who refrain from board directorships due to concerns about overcommitment – and boards that restrict their CEOs’ involvement for similar reasons – may overlook a crucial benefit: board experience typically cultivates stronger leadership skills.
• Broader Perspective and Reduced Myopia: In an era of rapid digital disruption, businesses must operate at an unprecedented pace to maintain competitiveness. While prioritizing internal challenges is essential, CEOs can become limited by solely drawing upon their own company’s experiences. A board position provides exposure to diverse perspectives and broader industry trends.
• Increased Empathy and Emotional Intelligence: The need for heightened empathy within the C-suite is increasingly recognized. Recent global crises, including health emergencies and social justice movements, necessitate that senior executives demonstrate qualities such as awareness, vulnerability, empathy, and compassion, as highlighted by McKinsey.
• Positive External Impact: When a CEO possesses the capacity to contribute valuable insights to another firm’s board, it benefits the wider business ecosystem. A collaborative approach to corporate governance can lead to collective progress.

For instance, involvement on the board of a company transitioning from a traditional manufacturing model to a digitally integrated operation, offering Wi-Fi enabled products and smartphone services, allows for the application of specialized expertise, such as cybersecurity strategy.

Opportunities for Greater Diversity

A positive consequence of the decline in CEO board assignments is the increased opportunity for non-CEOs and individuals from underrepresented groups – including women and people of color – to secure board positions.

Korn Ferry’s research indicates a notable shift, with nearly two-thirds of the over 400 director seats filled last year being occupied by individuals other than CEOs. This trend is driven by a commitment to creating boards that reflect greater diversity in both representation and skill sets.

Progress in Gender Diversity

Equilar’s Gender Diversity Index reveals that women occupied 24.3% of all board seats in the Russell 3000 as of Q1 2021, a significant increase from 15% at the end of 2016. While gender parity is not expected until 2032, the report acknowledges substantial progress in recent years.

The Value of Diverse Board Members

Research from Stanford University’s Rock Center for Corporate Governance demonstrates that a substantial majority (79%) of board members believe that active CEOs are not necessarily more effective than non-CEO board members. While a CEO may bring prestige, many non-CEOs actively contribute valuable insights as directors.

Furthermore, increased board diversity not only represents a positive development in itself but also positions members for future leadership roles, potentially accelerating the advancement of women and people of color into executive positions.

Looking Ahead

Expanding board access beyond the traditional demographic of white male CEOs offers the potential for continued progress in diversity within business leadership. Considering all factors, the benefits of this shift appear to outweigh the potential drawbacks of reduced CEO involvement on outside boards.