CEO directors: going it alone or clustering on boards?

Author:Horner, Stephen V.


CEO directors are active CEOs serving as outside directors on the boards of other firms (Fahlenbrach, Low, & Stutz, 2010). In their pivotal study of U.S. corporate boards, Lorsch and MacIver (1989) reported 63% of outside board members serving as active CEOs. Fich (2005) reported that number as 59% for the period 1997-1999 from a sample of Fortune 1000 firms. More than twenty years after Lorsch and MacIver's work, Fahlenbrach and colleagues show that figure to be nearly 9% during the period 1989-2002 ranging from a high of 11% in 1995 to a low of 6% in 2001. These changes reflect a trend reported by Lorsch and MacIver (1989) citing the growing complexity of the CEO Job and the increasing commitment required for director Service. Even as the number of active CEOs serving as corporate directors has declined over the past decade, the critical role they play in corporate governance has increased in importance.

CEO directors are greatly valued by appointing firms and external constituencies for their potentially unique performance of the governance functions of monitoring as prescribed by agency theory (Fama & Jensen, 1983), of connecting the firm to vital resources as described by the resource dependence perspective (RDP) (Pfeffer & Salancik, 1978), and of advising and counseling the CEO in discharging the service role of the board (Johnson, Daily, Dalton, & Ellstrand, 1996; Zahra & Pearce, 1989). Indeed, they are a unique category of director with attributes different from those of many other director types (e.g., insiders, non-CEO outsiders, grey directors, etc.) that uniquely add value to the firm. For example, Fich (2005) reported a positive response by financial markets upon appointment of active CEOs as outside directors on corporate boards noting, in particular, the value that CEOs of commercial banks bring to the appointing firm. In addition, a CEO director brings prestige to the appointing firm by "certifying" (Fahlenbrach et al., 2010) the firm to be worthy of her/his valuable time and prestige, and board service adds to the CEO director's own prestige by acknowledging the experience, knowledge, and expertise that comprise her/his human capital as a strategic leader (Fahlenbrach et al., 2010; Horner, 2015).

This study investigates how the existence on corporate boards of active CEOs influences subsequent appointments of other active CEOs. This "clustering" effect was noted by Fahlenbrach and colleagues (2010) who reported that existing CEO directors increased the likelihood of additional CEO directors. In contrast to these findings, Fich (2005) reported an inverse relationship of CEO appointments with the proportion of CEO directors already on the board suggesting the possibility that firms are reluctant to appoint directors with skills similar to those already serving. This study examines the nature of these conflicting findings, explores the circumstances that potentially influence clustering of CEO directors, and proposes the tendency of CEO directors to cluster on corporate boards.


Scholarly thinking about CEO directors comes largely from the finance and strategic management literatures. It can be summarized in terms of effects on appointing (focal) firms and characteristics of the source (home) firms and appointing (focal) firms. Effects on appointing firms reflect performance outcomes and governance processes. Regarding firm performance, Fich (2005) reported a positive stock market reaction to announcement of appointments of active CEOs as outside directors. Tian and colleagues (2011) also observed a favorable market reaction to involvement by CEO directors in CEO selection. With respect to governance processes, Faleye (2011) found managerial compensation to be higher and less sensitive to performance, although Fahlenbrach and colleagues (2010) using a broader sample and longer time frame found no relationship between the presence of CEO directors and managerial compensation. The presence of CEO directors may also impact the advising and monitoring functions of boards especially for firms with high governance needs such as small or growing firms or those with inexperienced CEOs (Fahlenbrach et al., 2010). CEO directors may also facilitate the spread of institutional governance norms. They subjected focal firm CEOs to loss of power through increased board power such as addition of more outsiders or separation of the chair and CEO positions when these CEO directors had experienced similar events at their home firms (Westphal & Zajac, 1997).

Finally in a set of mixed findings, the existence of incumbent CEO directors showed a negative association with appointment of new CEO directors to boards (Fich, 2005), while another study showed that the presence of CEOs directors increases the likelihood of subsequent appointments of new CEO directors (Fahlenbrach et al., 2010). In sum, CEO director research reflects an increase in market value in response to the presence of CEO directors (Fich, 2005).

In addition, the presence of CEO directors tends to enhance governance at fledgling firms (Fahlenbrach et al., 2010), may impact managerial compensation, and may also be a vehicle whereby corporate governance practices diffuse across firms (Westphal & Zajac, 1997). Furthermore, findings are mixed as to whether the presence of CEO directors impacts subsequent appointment of additional CEOs as outside directors (Fahlenbrach et al, 2010; Fich, 2005).

Characteristics of appointing firms play a role in influencing acceptance by active CEOs of director appointments. Similarities between the source (home) and appointing (focal) firm in terms of size, age, financial and investment policies, governance structures, and even geographic proximity (due to reduced time and travel cost) make them easier to understand and reduce the time and effort required to adapt to the new board (Fahlenbrach et al., 2010). A new director can need three to five years to adequately understand the firm (Bacon and Brown, 1975). Similarities between the two firms can reduce the opportunity costs of board service thereby reducing the employment risk CEOs may experience by taking on the added responsibilities of outside board service (Wiersema, 2002). In contrast to such costs, board service may bring benefits to the CEO director and her/his home firm through increased knowledge of business opportunities (Booth and Deli, 1996). In addition, board service enhances directors' compensation in...

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