Going the Way of the Dodo: CFOs on the Board of Directors
J Robert Brown Jr. | Wednesday, October 17, 2012 at 09:00AM The WSJ recently discussed the disappearance of the CFO from the board of directors of large public companies. In fact, the disappearance was nothing new. As the article noted, the number of CFOs on the board of Fortune 500 companies had declined from 37 in 2005 to 19 in 2012. While this represented a 50% decline, it also represented a fall from a meager 8% to an even more meager 4%. In other words, CFOs have been a rare presence on the board for a significant period of time.
In fact, the trend has been less about the CFO and more about the general decline of all non-independent directors. According to a study of the 100 largest public companies by the law firm Shearman & Sterling, 93 of the companies have a board with at least 75% independent directors and on 56 of the companies, the CEO is the only non-independent director. In other words, the trend in board composition of the largest companies is to have all independent directors except for the CEO.
The WSJ article further noted that "[g]overnance advocates, of course, back the idea of fewer CFOs serving on their respective company's board." But in fact it is not that simple. The article left out another critical fact. As the Shearman & Sterling Report determined, 71 of the 100 largest companies combine chair of the board and CEO. Only 12 companies have an independent director serving as chair.
In other words, the largest boards consist of independent directors with the CEO serving as chair. Independent directors are for the most part directors with no significant relationship with the company. As a result, the CEO is the only director on the board with detailed knowledge about the internal activities of the company. This provides a certain degree of control over information. By serving as the chair, the CEO also determines the agenda of the board meeting and the information that will be provided to directors.
The presence of the CFO or any other executive officer on the board provides an additional source of information for independent directors. In other words, there is a benefit that can flow from the presence of executive officers inside the boardroom. Moreover, the benefit is likely to be greater where the CEO serves as chair.
Reader Comments (2)
Your post seems to moderate some of your earlier comments and writings favoring independent boards. Independent directors have been in vogue for years, and especially since the NYSE-NASD Blue Ribbon Panel of the mid- to late-1990's. (That seems a long time ago.) As we know, Sarbanes-Oxley Act and the stock exchange rules mandating a majority of independent directors have accelerated the trend. In preparing for class, I read a very interesting book by Henry Butler and the late Larry Ribstein entitled "The Sarbanes-Oxley Debacle." At pages 45-46, the quote Peter Wallison and make an argument that independent directors (especially in large numbers) do not help companies thrive, but rather survive. Using many of the same arguments, they note that independent directors are "part-timers" who know less about the company than the insiders, and therefore are less likely to take risk. "When asked to choose between a risky course that could result in substantial increases in company profits or a more cautious approach that has a greater chance to produce the steady gains of the past, the independent directors are very likely to choose the safe and sure. They have little incentive to take risk and multiple reasons to avoid it."
It is without question that independent directors have value, but has that value been over-mandated by Congress, the SEC and the stock exchanges?