A couple of years ago at a Rio Tinto annual meeting I witnessed the bizarre spectacle of the Australian Shareholders’ Association recommending that Leigh Clifford, the then CEO of Rio Tinto, not be re-elected to his own company’s board. Their reasoning was that he was also a non-executive director on another company’s board and they objected in principle to serving CEOs being non-executive directors elsewhere. As one more astute shareholder pointed out at the time, the ASA should have implemented their objection at the other company’s annual meeting rather than at Rio Tinto’s!
Despite the broad similarities in the corporate governance structures now in place in the Anglo Saxon world, one of the major practical differences in still remaining in Australia is in the number of serving CEOs who are also non-executive directors of other companies. In the US it is around 50% of serving CEOs of major companies, in the UK it is around 30%, while in Australia less than 10% of the ASX 100 CEOs sit on another board. If they do, it is typically only a situation which long serving CEOs appear to be able to enjoy, with Wal King of Leighton Holdings and Geoff Dixon of Qantas being two of the few examples.
While I do not accept the argument of some that ex CEOs always make the best directors, I do believe that a serving CEO can make a distinctive contribution to another board. Further, I would argue that one form of diversity which Australian companies seem to be denied is the benefit of a serving CEO from another company being able to contribute at their board table. Such has been the strength of the argument suggesting this is a benefit, that in the US concerns have been expressed that in 2007 only 33% of all new major company directors were active CEOs, compared with 41% in 2002 and 53% in 2000. The average CEO in the US now serves on an average of 0.8 outside boards, down from 2.0 in 1998.
Recently, I had the opportunity to speak to around 20 of Australia’s most experienced public company chairmen. Among the questions put to them was their view on the merits, or otherwise, of a serving CEO being on another public company board.
It is fair to say that those we interviewed typically had strong views on this subject. Several were strongly opposed or very uncertain about the merits of CEOs serving on another board. One paraphrased his views saying that he is not in favour of it unless it is to prepare the CEO for retirement. Another argument against the proposition is that the time commitment is just too significant, particularly when the shots are being called by another chairman or CEO.
A view expressed by a chairman who has served on boards with a number of serving CEOs, is that their contribution tends to be limited. His feeling was that they did not really examine the incumbent CEO in depth, they did not do the required committee work in many cases, they did not always spend the time preparing appropriately for board meetings, and, by definition, they were limited in their involvement and if the board is doing something “off schedule” they will rarely be there.
Those chairmen who were in favour of the idea were generally united in the belief that it should be restricted to one board only and agreed that the serving CEO should not get too heavily involved in the committee work of the other company. The arguments in favour of having a serving CEO on another board were various, but included the belief that being on another board gives exposure and experience to the individual and should be viewed as part of their continuing education process. A supporting point of view was that in taking on the obligations of being a director of another company the serving CEO can see what happens if the management of that company is not fully frank and open. The experience of being a non-executive director and having to share in the responsibility for the issues and problems, but being less well informed, was in the view of several chairmen, an excellent way of developing an awareness that transparency was a good thing for all and should leave the CEO better able to serve their own board because they more clearly understand their servicing needs. This group believed an external appointment should be made sooner rather than later.
There is also a range of opinion on whether putting a CEO on another board is a win - win both for the company whose board he or she is on and also for the individual. Some believed that for the CEO it was a massive win, in that it added to their perspective but perhaps the other company suffered, whereas others argued that both sides are better off. One of the main benefits seen for the company on which the CEO serves as a non-executive director is that that company has another source of contemporary management and general industry thinking from someone who is well informed. As one chairman noted, if a board is made up only of retirees then there is a risk that it can get out of date very quickly.
Several chairmen to whom we spoke had served as non-executives while in a full-time CEO role. Universally they felt that it had been a considerable benefit to them, but also a benefit to the company of which they were CEO, as well as the company where they were a non-executive. One noted that initially he thought he was going to be too busy to serve on another board but was encouraged to at least consider it. In retrospect, he believes he got far more than he could have imagined by sitting on another board and it reinforced his view that the CEO job in any major listed company is roughly 70% generic with all organisations have broadly similar problems. He saw his time as a non-executive director providing an opportunity to make relevant comparisons and get fresh ideas on how to deal with issues similar to those he was facing in his own company. He also felt that he could test and reinforce or reject ideas, and as a serving CEO he believed he was really in the flow and could provide relevant and current advice to the other CEO if requested.
Being a CEO is a challenging and lonely task. It is also one where even being a major business general manager or a CFO only partly prepares an executive for what is a unique role and one where success can only be achieved through effective delegation and where the focus is also heavily external. To assist a new CEO in coming to grips with these differences, we would argue that serving on another board can provide an excellent input and one where a marginal amount of time can produce considerable benefits in rounding off the CEO’s perspective.