Seismic shift in board composition: new opportunities for board service are opening up for next-generation leaders.

• Author: Carey, Dennis C.
• Position: Spencer stuart governance letter

FIVE YEARS AGO, at least half of the directors of a typical corporate board were active CEOs. Highly valued for their general management experience, big-picture view, and knowledge of current business challenges, sitting CEOs were the inevitable "ideal" candidate in nearly every board search our firm conducted at the time.

CEOs themselves saw the value in serving on outside boards and made time for these commitments. Taking advantage of the opportunities to network and observe different industries through board service, chief executives of S & P 500 companies served on an average of two outside boards five years ago. Large, well-run companies had no trouble filling open seats with well-qualified CEOs.

What a difference a few years can make. While demand for new directors is greater than ever, a seismic shift on the supply side has occurred. CEOs have scaled back their participation in outside boards dramatically and today serve on an average of less than one directorship in addition to their own. Even the most well-respected companies routinely are turned down by several CEOs before they are able to fill a director position. In short, demand for new directors vastly out-paces the supply of the most experienced, knowledgeable, and tested corporate leaders.

A transformed role

Ironically, the primary contributor to this imbalance between supply and demand is governance reform. Intended to enhance board effectiveness and independence from management, legislation and exchange listing requirements increasing the board's responsibility in many areas, particularly in the audit process, has transformed the role of the director. Boards and their committees meet more frequently and for longer periods than in the past; directors also are spending a great deal more time preparing for meetings and communicating with fellow directors and corporate staff between meetings.

Given their own demanding schedules, most CEOs simply do not have the time to serve on outside boards. And, increasingly, boards are limiting their CEOs from serving on more than one outside directorship, if not outright banning outside board service altogether. This is bad news for companies, which benefit from the exposure CEOs get to other industries, business issues, and leadership styles through outside board experience.

In addition to the time demands, the increased liability, reputational risks, and media scrutiny related to being associated with a poorly governed company are...