The Wall Street Journal asked recently whether corporate executives are overboarded. In a report by research firm Equilar Inc., the Wall Street Journal reports that approximately 118 Fortune 1000 CEOs sit on at least three boards of other corporations, including there own. This “overboarding” purportedly overstresses CEOs and makes it truly difficult for the leaders to concentrate on their day jobs. Board positions last year required an average commitment of 228 hours, with pay exceeding $232,000 in 2010.From the Wall Street Journal: "With stricter regulations and greater legal scrutiny increasing the time a board seat demands, certain investors are questioning the value of CEOs serving on multiple boards. Critics say many senior executives are too "overboarded" to do their jobs and monitor management elsewhere. 'Boards are facing unprecedented challenges, and we need CEOs to focus on their day job,' says Anne Simpson, head of corporate governance for the California Public Employees' Retirement System, the nation's biggest public pension fund. 'We do not like to see a CEO getting overloaded.'
In a related story, critics of Disney's recent move to elevate CEO Robert Iger to Chairman of the Board indicates that institutional shareholders are concerned with not only overstressing CEOs, but with concentrating too much power in one leader. Some Disney shareholder are aghast to see the Disney board return Iger to the same position that was held by Michael Eisner (CEO and Chair of the Board) when he entered into the infamous Michael Ovitz employment contract that led to so much pain for Disney and its shareholders.After Disney announced its strategic decision to give Iger the additional role as chair, while also paying him over $31 million dollars for 2011, some of its shareholders cried foul, including Institutional Shareholder Services Inc. Disney nonetheless believes this move is in the company’s best interest. However, Institutional Shareholders Services issued a report disputing that combining so much power in Iger was in the shareholders’ best interest because, in 2004, the company decided to end this practice of dual responsibilities after the shareholders protested this structure, causing Michael Eisner to give up his chairmanship. ISS alleges this latest reversal compromises the independent board leadership.
While I generally agree that companies should "share the wealth" in regards to board positions, as it were, I hardly find it surprising that big business exists as an "in" club. Still, from a shareholders' perspective, there are other practical reasons to have experienced business persons sitting on the board of your company. First and foremost is profit generation, and I would think in the minds of most shareholders, they see experienced CEOs from successful companies as the most capable to maximize their investment. Theoretically, these CEOs/directors should be highly adept at making intelligent business decisions. Second, I would think shareholders elect certain board members under the guise that "CEO Joe," as a popular name in the business industry, will drive the stock price as an elected board member and my investment will see better returns (at least short-term). Whether the election of board members and a correlation in the rise of stock price exists, however, I cannot say with any certainty.
ReplyDeleteFrom a CEO perspective, it is logical to get onto as many boards as possible. Not only do you spread your name out amongst the business community and likely increase your acumen and/or reputation, but you are garnering yourself pretty lucrative wages for, at least what used to be, minimal effort or time (i.e. think what board members earn based on an hourly figure...whew). I think newer, more innovative companies will refuse to rely on "old boards" in the future, but for now I do not see much changing.
This issue seems to be one that reflects the difference between theory and reality. In theory it is good for CEO's to serve on many boards because they are able to bring their experience and ideas to each board on which they serve. Also, in theory as human beings CEO's know there are only so many hour in a day and would on take opportunities to serve on boards when they are able to handle it. Unfortunately, in reality this is not the case as the WSJ article indicates.
ReplyDeleteThe real question is what can be done to fix this? It is unlikely that a court will create an additional duty or requirement limiting the number of boards a CEO may serve on because it would be interfering with a CEO's or boards business judgment. Additionally it would be unlikely Congress would pass federal legislation interfering in this arena because of the amount of contributions they receive from these individuals and their corporations for campaigns. Therefore, it is up to the share holders to talk action. But, maybe they do not see this as much of a problem as we may think.
This is represented by what recently went on at Disney. Iger was elected into the same role as CEO and Chairman of the Board as Eisner had held earlier. The argument can be made that these are two different men and Iger may be able to use Eisner's reign as a what not to do guide, but then again history tends to repeat itself. It will be interesting to see how Disney and this issue of CEO's being overboarded in general develops in the future. The lingering question I am left with is: are shareholders naive or do they lack the real power to do anything to prevent CEO's from being overboarded?
Considering the liability that corporate directors face when breaching certain duties to shareholders, becoming "overboarded" seems almost nonsensical. These are, presumably, CEOs that make enormous amounts of money at their day job. If an executive commits himself or herself to the board of another corporation, the additional income falls substantially lower than their primary paycheck. And while this may be quick-cash for minimal work, the trade-off for potential liability is enormous.
ReplyDeleteCEOs are busy people anyway. And it seems almost unthinkable to monitor and remain aware of the operations and financials of up to three more corporations. Numbers collide, mission statements become muddled, and individual employees become dollars and cents. Unquestionably, sitting on other boards has some inherent value in appreciating an individual's personal stock, sharpening the competitive advantage on the industry, and improving one's business and leadership skills. However, conferences can do the same thing- keeping the tropical destinations throughout the world, but limiting a director's liability for overreaching and under-informing him/herself of the operations of a particular company.
In the end, it is an honor to be specifically picked from a crowd of your CEO peers to steer the future of huge corporations. However, CEOs should appreciate the liability that comes with underperformance, if shareholders decide to make a fuss. And just for argument's sake, if it was such an "honor" to serve on these boards, why are board members often solicited and chosen- rather than some application process? Are they looking for the next sucker?
Mike Bush
It would be best to see the boards regulate their executives, but this is a self-perpetuating problem. The boards of directors are responsible for drafting and approving their executives' employment agreements. They should include a provision which caps the number of boards on which an executive may sit. Of course, this will never happen because those responsible for regulating overboarded executives are likely to be overboarded executives as well.
ReplyDeleteI agree with ISS that the Disney board made a huge mistake by appointing Robert Iger to the same positions that were previously shared by his predecessor Michael Eisner. The article in the Wall Street Journal, indicated that Iger would be the only “inside director” on the board and this therefore would have no effect on the board’s ability to remain independent. However, because Iger will not only have the title of CEO of Disney, but also wear the title chairman of the board, I am sure that his vote will have much more sway with the other nine board members. Reiterating this notion, Denise Nappier (treasurer of the state of Connecticut) called the decision to grant concurrent titles to Mr. Iger "a regressive policy that could impair the board's role to oversee executive management on behalf of shareholders."
ReplyDeleteI second Erica’s thoughts on theory versus reality. Of course in any business you want the best of the best to serve on your board and oversee the operations of your company. Many executives/shareholders believe that because the individual was successful in their own business, that the election to the board of their company will automatically ensure that their company becomes highly profitable. But in reality if these “elite board member” are so sought after and serve on ten different boards, how effective can they really be? There time will be limited on each board that they serve on and their attention cannot be devoted to larger more time consuming operations without damaging/injuring the other companies boards that they serve on.
I also wanted to comment further on Tyler’s point regarding limiting the amount of boards that these executives can sit on. I think in reality this would be hard to put forth but I believe that if you truly want to get what you pay for, the amount of boards these executives are permitted to sit on should be limited. If an executive is restricted to serving on 3 boards, for example, they would have to limit themselves to the boards they believe they could have the biggest impact on and those that they truly care about. Further, they are already being paid enormous salaries and if they focus their attention on three instead of seven boards, those companies alone may become as profitable to compensate for the potential salaries lost by serving on other boards.
Ashley Joseph
This article does a good job at identifying the problems with overboarding: few individuals have the man-hours to efficiently serve on multiple boards and meet the daily obligations of a CEO. But what is the best solution? In addition to the comments of EArmstrong, possibly a push for stricter corporate bylaws that limit the number of boards a director can sit on or bylaws that mandates a mandatory number of hours required to be a board member would decrease overboarding. Of course, as Mr. Lansden notes, what impetus is there in the corporate structure to change? Maybe a few good corporate apples can get the ball moving and set a new standard for corporate governance. I am skeptical about shareholders playing any significant role across the corporate landscape. I personally do not care if a corporation is overboarded or not, just perform as professionals and produce the results (I have a feeling the average shareholder feels the same way). Hopefully, being a professional will entail limiting your skills to only the positions that time allows, but this is just a hope.
ReplyDeleteBoard's have a duty to maximize shareholder profit and one easy to do this is to put executives on the Board that have a reputation for being successful. Companies want the best of the best and an indication of success in Corporate America is how many Boards an executive is on at any one time. The question that this article raises is how many Boards can these executives be on without actually being negligent in their duties. As the article indicates "executives are too "overboarded" to do their jobs and monitor management elsewhere." I agree with the article that CEOs need to take a step back and focus more on their own individual company rather than sitting on numerous boards and having all the extra obligations.
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