Do CEOs make the best directors: many believe so, but there is no reliable research evidence to suggest that this is true.

• Author: Larcker, David
• Position: BOARD COMPOSITION

BY MOST ACCOUNTS, the best directors should be those who are currently the CEOs of other corporations. Current (or "active") CEOs have an important mix of managerial, industry, and functional knowledge that equips them to advise and monitor other companies. They are uniquely positioned to gain the trust of and communicate with the CEO in a way that directors who lack this experience cannot. They can contribute to multiple areas of governance that are important for a firm's success, including development and vetting of the corporate strategy, risk management, internal talent development and CEO succession planning, performance measurement, and shareholder and stakeholder relations.

CEOs also have important intangible attributes such as leadership and decision-making skills, the ability to prioritize, the ability to lead in a crisis, and a strong work ethic. To this end, a survey by the National Association of Corporate Directors finds that CEO-level experience is the single most important functional background in recruiting a new director: 97% of respondents in the NACD's survey consider it "critical" or "important" professional experience when recruiting board candidates, a response rate far higher than for any other background.

For these reasons, it is not surprising that some of the most visible CEOs in America serve on the boards of other large corporations. For example, Charles Moorman (CEO of Norfolk Southern) is on the board of Chevron, Patricia Woertz (CEO of Archer Daniels Midland) is on the board of Procter & Gamble, and David Cote (CEO of Honeywell) served on the board of JPMorgan Chase. CEOs who sit on outside boards indicate that they gain considerable insights from these experiences that benefit their own organizations.

Precipitous decline in service

Over the last 10 years, however, the number of active CEOs serving as directors at other companies has declined quite precipitously. According to Spencer Stuart, active CEOs represented 41% of the pool of newly elected independent directors among S&P 500 companies in 2002. By 2012, that percentage fell to 25%. Active CEOs now sit on an average of only 0.6 outside boards, down from 1.2 a decade ago.

What accounts for this change? For one thing, more companies have adopted guidelines that limit (or prohibit) outside directorships for their current CEO. Almost three-quarters of companies now limit the number of outside board seats that their CEOs may serve on. These types of policies...