Serving on Boards Helps …
More than 25 years ago, William Sahlman wrote the HBR article “Why Sane People Shouldn’t Serve on Public Boards,” in which he compared serving on a board to driving without a seatbelt, that it was just too risky—to their time, reputations, and finances—for too little reward.
Board service has always been very demanding. When Warren Buffett retired from Coca-Cola’s board in 2006, he said he no longer had the time necessary. When you consider all of the retreats, travel, reading, meeting prep time, transactions, and committee meetings involved, it is a wonder anyone serves at all.
So why would a busy executive agree to sit on a board? Why is there is a cottage industry of executive search firms focusing on “reverse board searches,” where they proactively work to place executives on outside corporate boards? What do executives gain from serving on boards?
This question was at the heart of a recent study we conducted that is forthcoming at the Academy of Management Journal. In an effort to explore executives’ motivations for serving on boards, we looked at how board service is evaluated in the executive labor market. Specifically we studied whether or not board service increased an executive’s likelihood of receiving a promotion, becoming a CEO, and/or receiving a pay increase.
We hypothesized that being a board director would help an executive in two main ways: First, sitting on a board serves as an important signal or “seal of approval,” for an executive. It means that other people think this executive has potential and value as a result of being selected to serve on a board. Second, board service is an avenue for an executive to gain access to unique knowledge, skills, and connections, so firms actively use external board appointments as a way to groom and develop executives. As Mary Cranston, former CEO and Chairman of Pillsbury, LLP said in an interview, “Being on that board really helped me develop as a CEO because I had another CEO to watch. It was an incredible leadership school for me. On a board you’re together a lot, and you’re working on problems together and you have a shared fiduciary duty, so it creates very tight bonds of friendship.” Similarly, Sempra CEO Debra L. Reed has also said that sitting on the board of another company is “better than an M.B.A.”
To test our idea that board service would help advance the careers of executives, we created a sample of roughly 2,140 top executives in S&P 1500 firms from 1996-2012. We matched executives who were serving on boards with executives at similar firms and with similar job profiles who had never served on a board. We found that serving on a board increases an executive’s likelihood of being promoted as a first-time CEO to an S&P 1500 firm by 44%–and even if they weren’t promoted, we found that serving boosts an executive’s subsequent annual pay by 13%.
For instance, executive Glenda Jane Flanagan joined the board of Credit Acceptance Corp. in 2004, and in 2005, her total compensation from her home firm, Whole Foods Market Inc., increased by over $300,000. And consider the example of Jeffery W. Yabuki, who was the COO of H&R Block Services Inc in 2003. In 2004, he joined the board of Petsmart Inc., and later that of MBIA Inc. Just two years later, Yabuki was appointed the CEO of Fiserv, a Fortune 1000 firm. It appears that board service directly contributed to his promotion.
So what do these findings mean for today’s boards of directors and aspiring CEOs? The evidence shows that board appointments increase an executive’s visibility and give him/her access to unique contacts and learning opportunities. Further, these opportunities translate into tangible economic benefits, specifically promotions and raises, which help explain why a sane person would choose to sit on a board.
Further, our findings suggest that if firms are looking for external talent, looking at which executives have received board appointments in their home firm or at other firms is a strong signal that these leaders have potential. This finding is important as hiring external CEO candidates is becoming more common, CEO turnover is on the rise, and the majority of newly appointed CEOs have not previously served as CEOs. Ultimately board service is a key professional development tool in grooming potential CEOs that executives and boards alike are beginning to recognize and value.
Finally, our findings have implications for firms seeking new board members. Following the Sarbanes-Oxley Act, which was passed in 2002 and created a number of new governance rules for firms as well as stricter penalties for governance misconduct, the number of current CEOs willing to serve on outside boards has dwindled. In part, the workload of boards has sharply increased, so serving offers limited benefits relative to the risk endured by current CEOs. Further, many companies have also created rules limiting the number of external board seats that their CEOs can fill, which has reduced the supply of CEOs available to serve as directors.
To fill this void, firms may look to the executive ranks below the CEO level. Our research suggests that these individuals may be motivated to join outside boards to reap the benefits that increase their career trajectories.