Should your ex-CEO get a board seat: The pros and cons

Should your ex-CEO get a board seat: The pros and cons

Paul Little took logistics company Toll Holdings from a fledgling business with turnover of $1.5 million in 1986 to the $2.8 billion listed company it has become. But after stepping down as CEO six months ago with plans to rejoin the company board, he’s not sure if he’d be welcome back.

He acknowledged to The Australian Financial Review this morning that there is “an overhang of concern” surrounding situations such as his. He doesn’t share those concerns. “I think experience and know-how are far more significant to a company than perhaps protocol risks and other concerns.”

Little owns a $145 million, 5% stake in the company, and has indicated that if he isn’t asked onto the board, he may sell his holding.

“To be investing in any company and just rely on publically-available information to make your investment decisions is not what I’d like to be doing,” he told the newspaper. “I like to roll my sleeves up and get involved, so we just need to see which way it goes.”

Toll chairman Ray Horsburgh has met institutional shareholders to gauge their feelings on the issue, and is expected to make an announcement in October.

The cold dead hand

Julie Garland McLellan, a practicing board director and chairman, explains why shareholders often fear former CEOs on a company’s board.

“The phrase that springs to mind is ‘the cold dead hand’,” she says.

“The main concern is that the CEO is, firstly, very accustomed to being the executive with the ability to make decisions and have them implemented. To being in charge. In this sense, the absolute worst you can do from that perspective is go straight from CEO to chairman.”

Chairs and board directors who used to run a company can undermine the current CEOs, even without intending to.

“For example, if you say ‘Have we considered this?’, it’ll sound like ‘We should do this’, ” Garland McLellan says.

She adds that she thinks Little is displaying “a great deal of maturity” by recognising the concerns others may have. One factor in Little’s favour at Toll is that the company’s current CEO, Brian Kruger, is pursuing a different strategy, which Little has publically supported.

“It could signal a clear change that emotionally helps the incoming board member [Little] to say, things aren’t what they were and I’m not in the same position.”

“Often it’s an absolute disaster when a former CEO has a strategy, is intimately wedded to it, and insists it’s pursued.”

However, she was concerned about Little’s statement that he didn’t want to rely on publicly available information to protect his investment at Toll. “Being on the board actually makes it harder for the director to protect his or her interest,” she explains. “Under most good governance rules, directors wait 24 hours after publicly announcing any news before they can trade their shares. This means the market is informed and has time to react to the information before the directors do.”

“A lot of major shareholders make similar statements about wanting board seats so they can protect their own interests; they are potentially dangerous as they sound like a statement of intent to insider trade. Directors have a legal duty to serve the interests of all shareholders equally, or of the company as a whole…. They must never act when they are conflicted and a desire to protect your personal shareholding is a big conflict.”

The expertise and the experience

Despite the risks, the attraction of former CEOs is that they do add a lot of value to boards, Garland McLellan says.

“They really know not just what the strategy was, but the assumptions underlying it. They know who had the bright ideas, they have knowledge and relationships to pick up the phone and call a partner when things are difficult. That makes staying on the board quite a valuable thing, if you can do it.”

Some companies have successfully transitioned a CEO to a board role. It’s particularly common in family-owned companies, and works best when they stagger the leadership transition.

“People groom their children to take over the business, then progressively step back, for example, to executive chairman, then just chairman.”

“It works well because it allows for a gradual change in the relationship. If there’s a mature recognition on both parts it can work really well.”

Big companies have done it successfully too, even though it is quite rare.

“Jerry Ellis made the transition from senior executive of BHP [now BHP Billiton] to being chairman, and appears to have done quite well,” Garland McLelland says. “That was possibly because he had a strong CEO who he respected in John Prescott.” (Both Ellis and Prescott have since left BHP Billiton.)

“At that time, the company was going pear-shaped because of bad decisions that had been made, but at the governance level the behaviours were quite appropriate.”

It’s not about the rules

Corporate governance is rarely a set of dos and don’ts, Garland McLelland says.

She gives Harvey Norman as an example of a company that, until recently, succeeded despite having governance practices most shareholders would baulk at.

“Harvey Norman broke pretty much every governance rule in the book. The executive chairman [Gerry Harvey] was married to the CEO [Katie Page], and a major shareholder. But up until very recently, when they failed to recognise changes in technology, the company did very well.”

Garland McLellan says she thinks the reason for this is because the boardroom was full of very strong individuals. “There’s not one of them I couldn’t imagine saying, ‘No, Gerry’. Lots of boards don’t have that degree of toughness; that strain of independence which a board member needs.”

“Everything depends on the quality of the people and ability they have to come together and make good decisions. It’s really hard to regulate and write rules about that.”

“If you get it, even if you break the rules, you’re likely to have good corporate governance. If you don’t get it, you could tick all the boxes… but have absolutely no substance.”

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