Should sitting CEOs serve on outside boards, given the time commitment required for board service today?
When the pandemic turned the business environment upside down, many boards met daily, sometimes even more than once a day. This time commitment raises the question of whether CEOs can afford to serve on outside boards.
The frequent meetings during the COVID-19 crisis covered immediate decisions needed as companies transitioned to remote work where possible, implemented health precautions to protect front-line workers who had to be on site and tried to find alternatives to suppliers, particularly those overseas, among other challenges.
While it's unlikely that board service this year will require the same time commitment and work as it did in 2020, these special circumstances highlight the dedication a director needs to guide a company through a crisis. It's one of the reasons directors say CEOs should limit their board service, if they need to join an outside board at all.
Jim Hunt, a director of Brown & Brown, Inc. and Penn Mutual Life Insurance Company, says CEOs have seemed to “self-police” in recent years, calculating how many boards they can serve and still be effective at their own companies. He cites recent statistics from the S&P 500 companies that found 59% of CEOs do not sit on any boards other than their own, up nine percentage points over 10 years. In addition, fewer than 4% of CEOs sit on more than one board, down from about 16% over the same period of time.
“A CEO is paid an awful lot of money, and responsibilities to the company are pretty significant. If every board you're on takes 210, 220 hours a year, that's basically a month,” says Charles Elson, a board member of Encompass Health and executive editor-at-large for Directors & Boards. “And when a company is in trouble, it could be two months of work. You can't run your business full-time and run someone else's business at the same time. It's distracting.”
So if not CEOs, where should nominating and governance committees look for new governance talent? Hunt notes that digging deeper into the C-suite can identify fresh faces, while looking into nonprofit boards can bring additional diversity of thought to the boardroom.
Regardless of where board members are sourced, corporations should compensate directors with company shares at a rate of three times or more of cash pay. This is meant to encourage directors to make decisions from a place of ownership.
“Having your board pay in most companies today features more stock than cash is effective because if you do your job effectively as a director, stock that you are required to hold for your term appreciates dramatically in value,” Elson says.
Additionally, Hunt and Elson say board compensation should be in line with market data from corporations in the same industry that are comparable in terms of size and revenues.
Hunt adds that directors shouldn't feel awkward discussing their pay as robustly as they would any other compensation issue.
“I think boards may be a bit shy about discussing board compensation because board members are paying themselves and they don't want to appear to be paid greater amounts if the shareholders aren't being paid (in terms of share price appreciation and/or dividends). They don't want to appear to be paid greater amounts if the executives and staff are not appropriately compensated,” he says. “That said, I think we need to give board pay the same thoughtful consideration and analysis that we give executive compensation. I'd like us to be just as thoughtful about it as we are with the rest of our colleagues being paid by the enterprise.” â–