The danger of a CEO’s double-dip
As we move into the year, companies and their leaders are under greater scrutiny than ever. In one of my meetings with institutional investors recently, someone asked whether chief executive officers should sit as independent directors on the boards of other companies. CEOs who sit on too many boards risk getting overloaded and splitting their time, energy and commitment to the extent that they do none of their jobs well. Get the balance right, though, and CEOs on outside boards can bring benefits to all the organizations with which they are involved.
An example of the thorny issues at play: While serving as CEO and chairman of Avon, Andrea Jung sat on the boards of Apple and General Electric. Her outside board commitments became a point of contention as her performance at Avon came under question. Jung stepped down as Avon’s CEO and chairman last year but continues to serve on the Apple and GE boards.
A number of other high-profile CEOs sit on the boards of well-known companies: Netflix CEO Reed Hastings sits on the board of Facebook, as does Donald Graham, CEO and chairman of the Washington Post Co. Xerox CEO and Chairman Ursula M. Burns is a director at American Express and ExxonMobil. Apple’s board has Millard Drexler, the chairman and CEO of J. Crew, and Robert Iger, president and CEO of Walt Disney.
The debate centers around the sliding cost-benefit scale for CEOs who sit on boards other than their own. Here are some things to keep in mind while judging what’s best.
A director who works on the front lines of business can bring a great deal to board discussion. Who better than a sitting CEO to understand the vagaries of the economy and the challenges of trying to navigate through it?
Here’s the catch: In challenging economic times, boards that ask their CEOs to dedicate their attention solely to the companies they run are not out of line. The CEO is hired to do a job, and if his time, loyalty and paycheck are split, boards and investors wonder whether he is giving the best he has to the company. If a CEO takes up too many outside board seats, his board and investors are well within their rights to question him.
Sitting as an outside board director requires skills that differ from those of a chief executive. It is a light-touch, hands-on role rather than an active, hands-in role. In a recent edition of “In the Boardroom with Lucy Marcus,” I spoke with Alcatel Lucent’s CEO for the UK and Ireland, Lucy Dimes, about sitting as a non-executive director on other boards. She agreed that watching other CEOs in action as they managed their relationships with their boards was useful for building her skills. Also, taking the role of an outsider in the boardroom gave her a different perspective on her job as a CEO.
A company having a reputation by association can be helpful, but potentially complex. For example, a company trying to demonstrate that it is focusing on its media strategy might appoint a big-name CEO from a company that is well respected in the media sector. The problem is that that the very reason the CEO is on the board could be a conflict of interest for the director. If the board ends up discussing an issue that might directly or indirectly involve the outside CEO or his company, that CEO is obliged to step out of the discussion, thus making the benefit of his appointment moot.
Also, there is the risk of “director contagion.” That’s when the actions of a director inside or outside the boardroom bring distraction or disrepute to the companies he’s advising. If the CEO sitting on a board is having trouble with the company he is running, there is a real risk that the taint could rub off on the boards on which he serves.
Board service done well can take a lot of time. Emergencies happen, and meetings can be called at the last minute, Board members who can’t help risk being perceived as not pulling their weight.
The key to all this is finding balance. Done right, CEOs serving as outside directors can benefit the companies they run and the companies on whose boards they sit. The challenge is ensuring that they give their best to both companies without going overboard.