A recent study now shows that there are also financial benefits to the CEO's own company. A study of 460 Global 1000 companies suggests that companies whose CEOs sit on outside boards have higher returns on assets than those that do not. Why might this be so? First, such CEOs probably pick up useful ideas on how to increase returns. Second, being competitive individuals, they want to demonstrate to their peers that they are value creators, not destroyers and third, the prevailing ethos that decries attachment to non-productive assets is probably heightened for CEOs who see the damage done to other companies on whose boards they sit.
Joe Light reports in the Wall Street Journal:
"During the downturn, several chief executives, such as DuPont Co.'s Ellen Kullman and Raytheon Co.'s William Swanson, stepped down from outside directorships to spend more time with their own companies. But it turns out, CEOs with outside board seats sometimes perform better than those who don't have them, according to a study published in April in the Academy of Management Journal.
"Some boards and shareholders look at [outside directorships] as a luxury for the CEO or a boondoggle. But the data show that there aren't any negative implications," said Boston College management professor Marta Geletkanycz, who wrote the study with Arizona State University professor Brian Boyd.
Overall, Ms. Geletkanycz and Mr. Boyd found that companies' returns on assets were about the same no matter if the CEO had outside board seats or not. But under certain conditions, CEOs with outside board seats performed better than those with no outside seats
When the company was in a low-growth industry, was undiversified, or faced intense competition from rivals, it actually benefited from having a CEO on an outside board. For example, companies in a low-growth industry with a CEO on an outside board had an average return on assets 15% higher than rivals whose CEO didn't have one.
Ms. Geletkanycz said that CEOs might be learning about how other companies tackle challenges and applying them to their own companies.
Nevertheless, in the past couple of decades, CEOs have greatly reduced the number of boards that they are willing to serve on at once, said Jim Drury, founder of executive-search firm JamesDruryPartners LLC in Chicago. Many company boards have limited their own CEOs from serving on more than one or two boards at a time, he said.
Moreover, in the past five years, shareholders have grown especially wary of CEOs holding multiple board seats, said Paul Hodgson, senior research associate for GovernanceMetrics International LLC, a corporate-governance research and ratings firm. The responsibilities and time commitment of board members has increased significantly since 2005, which makes it especially difficult for acting CEOs to serve, he said. "There was a lack of confidence in CEOs who seemed overcommitted elsewhere," said Mr. Hodgson.
Because CEOs are accepting fewer directorships, they have become very selective, said Mr. Drury. "Unless it fulfills their objectives or their company's strategic priorities, they're going to say 'no,'" he said.
Boards of large companies are often concerned about conflicts of interest if a company at which their CEO has a directorship becomes a supplier or customer, Mr. Drury said.
A fall survey by executive-search firm Spencer Stuart found that 62% of companies limited the number of boards their own CEOs could serve on, while about 4% didn't let their CEOs serve on an outside board at all.
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