As corporate boards grapple with the challenges of navigating their companies through the COVID-19 pandemic, should they ask their CEOs to resign other company board positions to focus more on their own company’s strategy?
In a company filing on May 4, Cracker Barrel Old Country Store announced that CEO Sandy Cochran resigned from her position on the Dollar General board “because she believes it will enhance the company’s previously announced strategy of focusing its human and financial resources on navigating the COVID-19 pandemic.” Part of that navigation involves executing a strategy to offset significant losses Cracker Barrel has sustained this year due to the nationwide shutdown of restaurants because of concerns over coronavirus transmission. Ms. Cochran’s renewed focus on her own company is clearly the right decision. Her move may also renew debate over company policies that govern CEOs serving on other company boards.
Corporate boards can set limits on the number of outside boards their active chief executives can sit on. This has been a very sensitive subject over the years because allowing CEOs to serve on other company boards can act as a recruitment incentive. It can also yield benefits like providing the opportunity for a CEO to learn different management styles and expand contacts that can be helpful in the future. On the other hand, having a sitting CEO serve on outside boards can distract him or her from focusing on their own company, leading to lagging performance or worse.
More companies limited the number of outside boards their CEO can sit on as the work load of corporate directors increased following the 2008 Great Recession. And in fact, the number of CEOs sitting on multiple outside boards has been decreasing in recent years. Shareholders have helped those numbers decrease by voicing more opposition to CEOs serving on multiple outside boards. From January to August of 2019, BlackRock, the world’s largest asset manager, voted against 94 CEOs who were up for re-election to corporate boards other than their own, compared with 32 the previous year. Expect BlackRock to vote similarly this year. Other large shareholders will likely follow their lead. This may set up a dilemma for some boards.
As a fiduciary, it will be hard for boards to argue that allowing a sitting CEO to serve on multiple outside boards during a crisis situation is in the best interest of investors and stakeholders. As earnings numbers come in below expectations, there will be more pressure on CEOs who serve on outside boards to give up those positions to focus on their own companies—even if they serve on only ONE outside board. Will boards proactively ask CEOs to give up their outside board seats before something goes wrong and shareholders take action?
While directors can hope that CEOs would recognize the risks involved with sitting on multiple boards during this crisis and resign their outside board seats without prodding, boards will have to monitor things to determine whether they need to step in. Boards should at least be willing to “check-in” with their chief executive and make sure that any board commitments are not overwhelming and that their CEO is giving their own company the absolute best effort during this pandemic. By checking in, the board should gain insight into a number of things.
• It will give the board an opportunity to assess its relationship with its CEO—can the board effectively make constructive comments, criticisms and suggestions without damaging the working relationship?
• It will give the board an opportunity to review its policy on the CEO and others holding outside board seats and make any necessary adjustments.
• It will also gives the board and CEO an opportunity to develop a response to shareholders like BlackRock who may be against CEOs serving on outside boards.
• Lastly, it will give the board a chance to strongly persuade its CEO to resign any outside board seats that may prevent their focusing on the company business, if it comes down to that.
Given the circumstances, resigning a board seat to remain in the CEO position shouldn’t be a tough decision.