How involved are CEOs in placing directors on their own boards?

AuthorTompkins, James G.
PositionNOMINATING COMMITTEE

Some might argue that the nominating and governance committee (NGC) is fundamentally the most important of the three main board committees, as it engages in processes to staff the board. While publicly available committee charters in essence provide a "job description" of the committee, what is more of a black box are the processes that directors engage in to fulfill their committee responsibilities, particularly the extent of the involvement of CEOs in placing directors on their own boards. In a study recently published by Contemporary Accounting Research, we and two other authors unpeel this onion through in-depth interviews with NGC chairs and members of U.S. publicly traded companies that had recently recruited a new director. (See "The Nominating Committee Process: A Qualitative Examination of Board Independence and Formalization," by Richard Clune, Dana R. Hermanson, James G. Tompkins and Zhongxia (Shelly) Ye, Contemporary Accounting Research, Volume 31, Issue 3,2014, online at http://onlinelibrary.wiley. com/doi/10.1111/care.2014.31 .issue-3/issuetoc.)

The role of the CEO in choosing his or her own directors is an interesting governance question. Many might assume that in a post-Enron era in which NGCs of non-controlled listed firms must be staffed with independent directors, this in turn would result in the CEO having at most moderate influence in the process. However, we find a significant spectrum ranging from heavy to little CEO involvement. Specifically, when we asked the interviewee to rate the influence of the CEO on (a) identifying potential director candidates and (b) choosing the final candidates, the range of responses to both questions was from 1 (not significant) to 5 (very significant), with a mean of 3.3 and 3.2, respectively.

Thus, even in the post-SOX era, there continue to be CEOs who wield enormous influence in bringing directors on the board. In fact, in our sample, 36% of the time, the candidate who was ultimately voted onto the board was recommended by the CEO.

Why would some NGCs allow the CEO to dominate the director placement process while others virtually shut the CEO out? Some of our interviewee comments provide clues:

* NYSE NGC chair: "The fact of the matter is that we have no [director] search process. The last three directors were identified by the CEO and put through a mock process."

* NYSE NGC chair: "We have an extraordinary CEO. The CEO is a genius with people and leadership skills. The two most...

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