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CORPORATE GOVERNANCE - Digging Deeper

As CEOs limit their outside board engagements, corporations are turning to less-senior executives to fill open director slots. That may be a good thing for shareholders.

It wasn’t long ago that big companies in search of outside directors naturally turned to CEOs of other big companies whose management expertise and high profiles made them highly desirable candidates. But in the wake of the Sarbanes-Oxley Act of 2002 and other corporate governance reforms, which have made being a director more time-consuming and risky, CEOs are in short supply. Some companies, like General Electric Co., are even barring their CEOs from sitting as outside directors. Others, such as Brunswick Corp. and Verizon Communications, frown upon their chief executives’ serving on more than one or two other boards. In 2006 sitting CEOs made up just 29 percent of new independent directors of companies in the Standard & Poor’s 500 index, down from 47 percent in 2001, according to a recent survey by executive search firm Spencer Stuart.

That boardroom void has opened the door for other members of the C-suite who are seeking board experience to round out their résumés. What these new directors lack in experience — nearly one third of newly appointed board members in Spencer Stuart’s study were first-timers — they make up for in specific know-how that more broadly focused CEOs may not bring to the boardroom.

“There’s no question that boards are losing some great brainpower and some really great talent,” says Paul Lapides, co-founder and director of the Corporate Governance Center at Kennesaw State University’s Coles College of Business. “At the same time you’re getting people who have more time and are more involved in the detailed parts of the business, with more specialized expertise.”

These executives may also approach directorships with more energy, in part because the experience can help make them better candidates to one day be tapped as CEOs, says Charles King, head of recruiter Korn/Ferry International’s director practice. “They tend to be a bit more engaged than a CEO might be. They perceive this as a learning experience, a training opportunity. It gives them exposure to other companies and the way they do business, and it’s a very nice step up the ladder to the top position.”

Among those in highest demand for directorships are CFOs, operating chiefs, divisional presidents and chief marketing officers. Adding these executives allows boards to acquire specific expertise that can help them better represent shareholders. Boating and sports equipment company Brunswick, for example, added marketing savvy to its board by appointing Yahoo! marketing chief Cambria Dunaway as a director last year; AK Steel Holding Corp. bolstered its board’s financial acumen by bringing in William Gerber, CFO of staffing concern Kelly Services.

Human resources executives are especially sought after, as companies struggle to find talent and see their compensation practices come under heightened scrutiny from shareholders and regulators. Boards increasingly want directors who can help them design competitive pay packages that won’t raise red flags. In November, for example, building products maker Louisiana-Pacific tapped Lizanne Gottung, chief human resources officer at Kimberly-Clark Corp.

“It’s only been about seven months, and I can already tell you it’s been worth it,” says Gottung, adding that she now approaches her day job, which involves lots of contact with Kimberly-Clark’s board, with a new, broader perspective. “It is a lot of work and a lot of effort, but what I’m getting is at least as much as what I’m giving back.”

One concern about this boardroom youth movement is that executives who are lower on the totem pole may be naturally deferential and therefore less likely to challenge senior management. But that’s likely more a matter of individual personalities than job titles, says Carol Bowie, director of the Governance Research Services group at proxy advisory firm Institutional Shareholder Services: “You don’t get to be a CFO or COO by being a wallflower.”