External Board Membership: Gains & Pains

CFOs that hold directorships for others swear by the benefits, but the majority that don’t serve on boards have good reasons for shying away.

Running finance at a large, publicly traded company is, of course, a big job that requires long hours. That means lots of time away from the family. There’s also hell to pay for mistakes like blowing a forecast or signing off on errant financials. The CEO, the board of directors, and Wall Street are exacting masters.

So, why on earth would a CFO want to expend time and focus serving on the board of another company?

There clearly are sound reasons, considering how many finance chiefs do take on the extra gig. Among those at the 673 companies included in this year’s edition of either the Fortune 500 or S&P 500, as of mid-August there were 250 of them, or 37% of the total, serving as directors of another company. That’s according to research by executive recruiter Crist Kolder Associates.

And a majority of those (143 of the 250) do their outside service for a public company. That’s generally more attractive than joining a private board but also more time-consuming, entailing a time commitment of about 200 hours per year, say CFOs who hold those roles.

Still, the number of finance chiefs serving on public boards hasn’t budged in the past decade — in 2007, 141 CFOs at Fortune 500 or S&P 500 companies were doing so. What has changed, over time, is the availability of such board seats. For many reasons, including the consolidation of industries and a relative paucity of IPOs in recent years, the number of U.S. public companies has been dwindling since the late 1990s.

Further, the number of seats per board has been trending down lately, at least partly for cost-saving reasons, says Ellen Richstone, a retired CFO and CEO who chairs the audit committees of four public boards and is a board member of the New England Chapter of the National Association of Corporate Directors (NACD).

Added together, these trends — a steady level of public board memberships despite the declining availability of seats — mean that CFOs now comprise a greater percentage of the universe of corporate directors than they have historically.

But, given the heightened pressure on board members today arising from shareholder activism and increased regulation, in one sense CFOs as well as other corporate executives are actually seeking out fewer board opportunities. It used to be common for individual executives to be on multiple boards, but now it’s rare, says Crist Kolder president Tom Kolder.

When Kolder started out in the recruiting business 20 years ago, he says, he might make about six calls to potential candidates, and three or four would be at least intrigued enough to have a dialogue. His most recent board search was typical of how that scenario has changed: “We were combing through no less than 100-plus profiles with the hope of getting that same kind of acceptance rate,” he says.

All that said, many CFOs are still extremely interested in board service. So, back to the question at hand: Why?

Stimulation, Contribution, Betterment

It’s tempting to presume that money is a motivation. Board service at a large public company brings median total compensation of about $260,000 annually.

But it’s unlikely that many big-company CFOs, who after all are highly compensated for their day jobs, are motivated by the prospect of extra cash. And if they are, they probably shouldn’t be. At the least, they should also have a passion for the experience, says Frank Gatti, who was on the board of a public company for seven years before retiring from his CFO post at Educational Testing Service (ETS) in 2011. “I think it does happen sometimes, but if you accept a board seat because of money or because you’re going to get stock or options, I really think that’s a mistake,” he says.

For Greg Beecher, finance chief at automation-equipment supplier Teradyne since 2001 and a board member at MKS Instruments, much of the allure is intellectual stimulation. “When you’re inside a company for many years, you can see how everything that happens is going to unfold before it unfolds,” he says. “Being on a board gives me a different environment to interact with other interesting people.”

Directorship also helps Beecher strengthen his “synthesis skills” — the ability to encapsulate the complexity of a business and translate it in a way that’s understandable to directors and others. It has also helped him see the value of reaching out to the more vocal directors prior to a board meeting, so that he “can fully respond to their concerns in an organized fashion rather be under the gun with the full board.”

Beecher is equally interested in making a contribution. After a long career in which he’s worked on M&A deals, divestitures, restructurings, oversight of high-growth businesses, and getting more cash out of mature businesses, he says, he wants to use all that experience to help a management team communicate its vital goals to their boards.

The opportunity to contribute his experience is a primary motivator as well for Joseph Reitmeier, CFO of commercial heating and cooling company Lennox International and a board member at Watts Water Technologies. For example, Reitmeier helped Watts navigate relationships with third-party distributors and implement some aspects of Lennox’s distribution model that the company developed through experimentation.

But Reitmeier also views getting board experience now as greasing the skids for a longer-term goal. “I’m not ready to retire just yet,” he says. “Maybe in 10 or 15 years. But when envisioning what I might do in retirement, if I had a couple board seats it would keep me active.”

Kolder points out that more CFOs today are viewing themselves as CEO candidates. Some hope that getting board-level perspectives on assessing and refining strategies will help prepare them to compete for the top management post one day, Kolder says, although he notes that it remains uncommon for finance chiefs to make that move.

Another worthy appeal of board service is the opportunity for CFOs to learn how to improve communications with their internal boards. “Understanding what goes on in a boardroom and why questions get asked allows you to better anticipate the needs, wants, and requirements of the [internal] board,” says Richstone, who, like Gatti, served on outside boards when she was still an active CFO.

Concrete Business Benefits

Not only can board membership allow a CFO to hone certain skills, it also can help improve the business.

For example, Reitmeier saw Watts making use of robotics process automation for high-volume but routine transaction processing, and now that’s something Lennox is looking into.

Heath Mitts, finance chief at TE Connectivity, a maker of connectors and sensors for harsh environments, learned valuable intelligence about doing business in China from hoists and riggings company Columbus-McKinnon, where he is a director.

When Mitts was running finance for IDEX, another sensor company that he left to join TE last year, Columbus-McKinnon began a greenfield project in China. IDEX had manufacturing operations there but had struggled to evolve into a primarily local supplier, a business model that at the time was coming to be seen as more lucrative than running an export operation. Many companies doing business in China were at some point along that learning curve, but Columbus-McKinnon was starting out as a local supplier. “Seeing how they set that up was interesting and helpful,” Mitts says.

Frank Gatti had an “ah-hah” moment of sorts as a director at educational technology company Blackboard, which he joined just before its IPO in 2004. The two founders were young, and the one acting as CEO was in particular need of professional development. Board members provided him with mentorship and knowledge in their areas of expertise and steered him to some organizations designed to help young entrepreneurs develop into more mature and effective executives.

Those efforts underscored the need for a robust management succession plan: who would take over in an emergency? Using a matrix approach that integrated succession planning with strategic and risk considerations, the board implemented an annual assessment of succession not only for the CEO but for his direct reports and their direct reports.

“When you lay out that type of matrix, you find out that you don’t always have names to put in every one of those cells,” Gatti says. “That means you have to think about whether to groom someone or bring someone in from the outside.”

Meanwhile, his employer, ETS, was a 50-year-old company that was thought at the time to be perhaps three years from bankruptcy, so succession planning hadn’t been a recent priority. But having helped polish the process at Blackboard, Gatti took the opportunity to mimic it at ETS — not only for the CEO and two levels of reports, but for all the teams that reported to Gatti, which included facilities, security, business continuity, disaster recovery, and two business units.

Eventually ETS righted itself, and as people left the company others were prepared to step in, which was the case when Gatti himself retired.

Caution Ahead

As noted, CFOs who are on outside boards are in the minority, and there are understandable reasons.

First, in most cases the CEO must sign off on the extracurricular activity. That’s unlikely to happen when the finance chief hasn’t been performing that role for too long or the company is having problems. Some CEOs may simply be against the idea, period. And CFOs who have spent most of their careers with one organization or have not developed a network may have insufficient contacts to land a directorship.

Then there’s the time commitment. “It’s a balance, but it adds to your workload,” says Mitts. “A couple years into it I’m more efficient, but there was a ramp-up period in the first year when I put a lot more time into it.”

But there’s still much to do, for someone dedicated to being a good director. When Mitts is traveling for his own company, TE Connectivity, if he happens to be in an area near a Columbus-McKinnon site, he sometimes arranges for a meeting to see what the company’s teams are doing. “It’s not just about showing up for meetings and voting yea or nay,” he says. “Don’t assume you’re just in a figurehead position.”

Indeed, directorship requires greater diligence today than ever, notes Beecher. “It’s changed so much from 10 to 15 years ago, when a powerful chairman could control everything,” he says. “Now you have to take shareholder activism seriously, and more time is spent on matters like cybersecurity, business continuity, financial risk, and financial statements.”

(It’s easier for retired CFOs. In addition to her four public boards, Richstone is on one private board, and on top of her involvement in the NACD she’s an advisory board member for the American College of Corporate Directors and a member of the Women Corporate Directors Group, among several other board-related organizations. But all of those commitments combined don’t nearly equate to the time she once put into being a full-time CFO, Richstone says. They may add up to a full-time job — but one with 40-hour work weeks, not the 60- and 80-hour weeks that used to be common for her.)

While shareholder activism is primarily a concern for large companies, the small-company equivalent is aggressive plaintiffs’ attorneys, says Glenn Muir, who was finance chief for medical equipment maker Hologic for 22 years until his 2014 retirement. He now chairs the audit committees of three public boards.

“With every IPO, we all want the stock price to go up,” he says. “Unfortunately we live in a world today where if the price goes down, you’re likely to be hit with a class-action shareholder suit instigated by an attorney.”

Such litigation usually claims that the IPO prospectus contained insufficient disclosures or misleading statements. What’s especially disturbing to directors is that the lawsuits name as defendants not only the company and its investment banker, but often individual directors as well.

In fact, multiple class-action suits have been filed in the past year against ReWalk, maker of a bionic walking assistance system and one of the companies where Muir is a director.

Everyone planning to join a board should think about that potential liability, find out the company’s indemnification policy for board members, and have an attorney review the directors’ and officers’ insurance policy, Muir and others counsel.

But all of that may not be sufficient to fully protect directors in the event of litigation. “I think that over time it’s going to affect the quality of the pool of available directors,” says Muir. “Those with the most experience and financial resources [already] shy away from boards to a certain extent. You have to be very careful.”

Even aside from litigation, directorship carries the potential for reputational risk. When deciding whether to join a board, “consider whether these are people you want to be associated with,” says Richstone. “When the going gets tough, will you want to be in the boat with them?”

Do’s & Don’ts

For someone who has evaluated the risks and still wants to be a director, how can that goal best be accomplished?

First, a CFO needs to possess the characteristics that make for a good board candidate. For recruiter Tom Kolder, those include having a broad perspective; business acumen that extends beyond one’s functional area of expertise; an understanding of strategy and tactics; and an appreciation for the difference between management and directorship.

Richstone counsels “spending time where directors spend time.” That could mean attending meetings of director organizations, audit-committee programs offered by auditing firms, and director institutes that some law firms provide. And there are programs like one Richstone herself recently ran as part of her board duty for her NACD chapter, called “Bootcamp for Aspiring Public Company Directors.”

“When you’re trying to get on your first board, they may be looking to see whether you’ve made extra efforts to get some education and training,” she says. “It differentiates you.”

Also, form or maintain relationships with executive recruiters, although only about 20% of board seats are filled by searches, according to Richstone and others.

Beecher suggests that a CFO enlist assistance from the CEO, who likely has more external contacts. “No one wants to bring an unknown onto a board,” he says.

And, according to Richstone, don’t appear too eager. “It’s not like looking for a job,” she says. “If you’re too available, they won’t want you.”

CFO directors also offered some words of caution for directorship hunters. Mitts says to be wary of boards where activists, debtholders, or certain investors demanded and won board seats. “It could be fairly dysfunctional in those situations if the board isn’t aligned to the shareholders it’s supposed to be representing,” he says.

Scheduling could be troublesome too, Mitts notes, if both the CFO’s company and the one whose board he or she sits on have the same fiscal year. Also to be avoided are conflicts of interest, such as taking a board role at a company perceived as a competitor.

When a board seat has been secured, the best advice is to treat it as seriously as a full-time job, proportional to the time spent on each. “If you don’t feel as passionate about the product or service of the board’s company as that of your own, it might not be the right board for you,” says Gatti. “You need to care.”


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