Fuqua Professor Tracks the Reshuffling of the Boardroom

John Joseph's study shows that as boards have rid themselves of insider, only the CEOs remain

The Enron and Worldcom scandals helped stem the practice of packing corporate boards with go-along company insiders. Now the cards have been flipped, and increasingly, CEOs are the lone insiders on boards packed with outsiders.

In analyzing this trend in the Academy of Management Journal, Fuqua professor John Joseph’s study suggests that as boards have become more independent, CEOs have been put in a unique position. Looking at the operational histories of more than 200 Fortune 250 companies between 1981 and 2007, Joseph and his two colleagues were able to determine that as new CEOs took over, the predecessor’s coterie of insiders gradually was replaced by directors from outside the firm, making the CEO the only one on the board with inside company information.

“The question is always, who provides the better monitoring and strategic advice role: the insiders or outsiders?” says Joseph. “The general prevailing wisdom has always been outsiders.”

Increased scrutiny from investors and media has pushed boards to be more independent and transparent. As a result, outsiders are better informed than they used to be and more involved in strategic decision-making, exploring new markets, and guiding transactions. “The board hasn’t gone to sleep here. Far from it,” says Joseph. “The demands and responsibilities are much higher, in fact. However, inside directors can bring different perspectives, and board exposure can help their careers.”

A key finding of the study is that this migration wasn’t mandated by regulations, and yet more and more boards have embraced not just outsider majorities, but also super-majorities. Joseph is quick to point out that the power shift is usually incremental: As members retire or move on, they’re simply replaced with fresh faces. “It’s not let’s-kick-these-folks-offthe- board,” he says.

The benefits are obvious. For one, banishing other C-level insiders from the boardroom prevents the organization from becoming “double-headed,” says Joseph. “A single focus is beneficial.” The cautionary tale of Blackberry proves his point: A co-CEO structure doomed the former industry leader.

For IBM, transitioning from an insider board to an outsider board in the 1990s brought success. And Joseph points to other studies showing—perhaps not surprisingly—that CEOs with this board structure are rewarded with better pay.

Yet even as they enjoy more power, these CEOs are not immune to risk. Having more latitude to execute a single vision can be good or bad, he warns. “If things go wrong, it’s not always easy for the CEO to scapegoat other insiders.” Ultimately, though, the lone insider position could pay off— granting the CEO new power and influence.

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