More Board Members Getting Hired as CEOs: An Unwise Corporate Trend

More Board Members Getting Hired as CEOsOver the past year, the Fortune 1,000 has seen a significant jump in the number of directors being appointed as the CEOs of companies on whose boards they serve: Ten directors stepped in as permanent CEOs from October 2009 to October 2010, compared to only three tapped as chief during the 12 months prior. One additional director was named interim CEO this year, bringing the total for the past year to 11, according to research from Heidrick & Struggles. In August alone, three directors sat down in the CEO's seat: Dan Akerson at GM, Fred Chang at online retailer Newegg, and James Shelton of nursing home pharmacy giant Omnicare (OCR).

So why has the number of directors being tapped for CEO posts more than tripled in the past year?

"The main reason is a lack of proper succession planning by companies," says Anita Skipper, corporate governance director of Aviva Investors. "The need for prompt management changes during the financial crisis may also have compounded the trend. Boards are more risk-averse. If no one from management can quickly step into the CEO's position, the 'safe' alternative is to choose someone well known to the board, who understands the strategy and business, and may have previous experience as a CEO."

Furthermore, adds John Weckenmann, senior counselor of international client development for Ketchum's Global Corporate Practice, "Boards are being held more accountable and when a CEO steps down, it has become natural for the board to draw from within its own ranks to fill the CEO position. Presumably, there's a greater sense of assurance in doing so, 'We know what we're getting', as well as a greater sense of ownership of the situation, 'We're not going to leave this to chance.' "

Oversee the CEO Job Search, Don't Join It

So what's the upside of putting a board member into the top job?

"The new CEO takes less time to get up and running, which likely translates in to higher profits for shareholders," says Gordon Burnes, vice president of marketing of OpenPages, an IBM (IBM) company. Then too, it's relatively easy to install a board member with an interim appointment, giving the board a few months to figure out if the person is right for the job and what the alternatives are, says Robert Mittelstaedt Jr., dean of the W.P. Carey School of Business at Arizona State University. "If the board decides to go another way, it looks normal that the interim person steps out of the role. This is not nearly as bad as bringing in an outsider quickly to later find out you made a mistake," he adds.

However, having a board member step in as CEO is really a stopgap measure: It may make sense in isolated situations, but better succession planning is the long-term answer, says Burnes.

Bill Ide, partner at the law firm of McKenna Long & Aldridge hopes the current trend is short lived.

"Boards need to oversee and not have members competing to be the next CEO," she says. "Succession planning must get stronger and CEOs must be subjected to stronger oversight so the failures of management in late 2008 and 2009 do not occur with the need for a quick fix of inserting a board member as CEO. This is one of the worst ways to fill the CEO seat."

Indeed, the trend of directors stepping into CEO roles could become dangerous, adds Skipper of Aviva Investors. "The CEO is unlikely to push for a succession plan, and any board directors hoping they will be the next CEO are unlikely to do so either," she says.

Then too, boards that pick their own members for CEO roles risk disillusioning internal candidates who were passed over, and who may actually have a better grasp of the business, says Burnes. Companies may also miss out on the fresh perspective they could have gotten by bringing in an executive from outside the organization, adds Weckenmann.

Internal Candidates Should Be on the Radar in Advance

Truth is, the qualities that make for a good director may not be the same as those that make for a good CEO. "Companies do not often recruit board members with the same skill set and criteria as are used in recruiting a CEO," points out Nicole Sandford, a partner in Deloitte & Touche's Board Advisory Services practice and Northeast corporate governance leader.

Is this the best way to fill the CEO seat? It's a question worth serious examination, especially considering that the average time in one of those top jobs is believed to be less than five years, according to John Alan James, corporate governance expert and professor at Pace University's Lubin school of Business.

"It's best to be ready to name a permanent CEO, but that is never going to be possible 100% of the time," says Scott Chaikin, CEO of Dix & Eaton, a communications consultancy.

One lesson which emerges from this trend is that companies need to make a much greater effort to introduce their internal CEO candidates to the board in advance, and to establish their credentials -- otherwise boards will increasingly look to those they know, which will mean more CEO candidates emerging from among the outside directors," says Peter Hagan, managing director of consulting firm LECG.

Paul Winum, leader of the CEO Succession practice at consulting firm RHR International, says CEO succession should be a continuous process and part of the standing agenda of every board. "Board members and executive staff should always be cultivating CEO talent from within their organizations and benchmarking that talent against talent outside the company," he says.

Lastly, there is this take-away message for executives, says Deloitte & Touche's Sandford: "Treat board members with the respect owed to representatives of company shareholders and to -- potentially -- the next CEO. He or she may just wind up running the company some day."

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This is the cancer amongst us.Where once an owner who started a company had a dream and vision, succumbs to the greed of corporate america.History shows us what happened after america blinked.The industrial revolution was spearheaded by the railroads.Where ever the rail went,industry followed.Utilizing the german technology of the bessemer blast furnaces to create steel and its own logging industry,began to pave the way.The off shoots created mining towns and steel mills.But the one thing that was constant in big business was paying slave wages.So the growth in america was slow.American workers already had begun to utilize their right under federal law to unionize for better wages with the railroads.With the introduction of the steel mills in northern Indiana in the late 1800's early 1900's created the boom.On the land that was considered uninhabitable by the land companies, along the shore of Lake Michigan,was sold dirt cheap with incentives to the steel mills.Indiana Harbor lead the way but not with much foresight.Workers came from all over the US and the world to work there for slave wages.And were left to fend against the harsh winters by theirselves.US Steel out of Pittsburgh came from the east with much greater vision than their counterparts.Indiana Harbor built housing for their management, but not the workers.Herbert Gary,the president of US Steel,was a very shrewd,cold hearted man.But even he knew that in order to run a non-stop steel producing mill,you needed workers.Not only did he build housing and recreational areas for his management,he created housing for workers to.At first he created sleeping rooms for a dollar a week while they created permanent housing.So he began building a city to house the workers.But workers couldn't afford the permanent housing to bring their families there.American workers began unionizing all the mills,the coal plants and mines.All mining operations.They unionized the oil refineries that moved in to.The result?American workers had a little money to save which brought the banks.They had a little money to spend which bolstered stores and all small starting businesses.They had a little money to invest.They invested in their companies and others.Soon manufacturing plants sprung up all over america making everything americans needed.What happened is when America blinked.That brought forth the rise of corporate america.Companies got so big that owners could not run them,or wanted to run them by theirselves.So they began to hire CEOs,management and consultant firms and groups,lawyer firms and groups.That consumed 25-35% of an owners profits.And that was on top of the 10% of the profits to pay for the american workers.So of course the first order of business was to destroy the unions to condone their own salaries.But that leaves 15-25% the owner still loses.So now they cut wages,hours and make workers part-time.Avoiding paying medical insurance and pensions.That leaves 5-15% corporate america cannot cover as their own expense.That brings the marketing gimmicks.The bag of chips include the weight of the bag.The burger is now 1/4 pound before cooking.Now they outsource the jobs overseas utilizing cheap labor.And these are the non-union jobs.Only 12% of working americans are union now.The other 88% of non-union jobs going overseas is not because of unions.It is because of corporate america using corporate tax loopholes,avoiding paying corporate taxes,excise,import,export and duty taxes.Harley Davidson became corporate.The owner lost his rights to run the company.When they seen that corporate america was running their product into the ground dooming it,they invested heavily to buy it back.All american companies should learn from Harley Davidson while they still have a company left.They had better while we still have a country left.And that applies to both parties and the president.History proves it.

November 04 2010 at 11:23 PM Report abuse +5 rate up rate down Reply