Thought Diversity In Boardrooms Is Just Good Business


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Savvy investors are paying more and more attention to board composition and thought diversity in boardrooms for one reason you rarely read about.

Somewhere along the way it became standard operating procedure for many boards and search firms to recruit new board members predominantly from the ranks of sitting and retired CEOs and CFOs.

In 2015, for example, The Heidrick & Struggles Board Monitor reported that 73 percent of all new board appointees to Fortune 500 boards were sitting or retired CEOs or CFOs.

You read that correctly: 73 percent (FYI, the number improved a bit in 2016, but it is still roughly 7 out of every 10).

An Understandable Evolution?

It’s true that CEOs and CFOs are often intellectual and business standouts with unmatched leadership experience and industrial wisdom. And, though it perhaps goes without saying, sitting and retired CEOs and CFOs can be tremendously value-added board members.

That said, it’s worth respectfully noting that: (1) there is precisely zero evidence that CEOs and CFOs make better board members than others; (2) evidence abounds of CEOs and CFOs who lack sufficient time to commit to board service; (3) many CEOs and CFOs struggle with the transition from running companies to overseeing them (i.e., they have trouble putting their noses in, but keeping their fingers out); (4) particularly in the pre-IPO and small-cap ecosystems, CEOs and CFOs who have mostly operated larger companies often have a hard time acclimating and contributing to the boards of smaller, high growth companies; and (5) I join countless others in knowing eminently qualified board candidates with backgrounds in sales, marketing, finance, operations, human resources, information technology, capital markets, education, science, government, accounting, compliance, and law (not to mention superbly qualified U.S. veterans) who are functionally foreclosed from today’s board candidate pool.

Moreover, anyone who spends appreciable time in boardrooms knows that there is a laziness and self-interested aspect to what has become a needlessly shallow candidate pool for new board members. That is, CEOs, nominating and governance committee chairs, and executive search firms know that it’s far less work and less risky to propose a well-known CEO or CFO for a board seat than it is to support the candidacy of, say, a VP of marketing from an unheralded company, irrespective of whether the latter might be the far more apropos choice for shareholders.

Toward A More Constructive Dialogue on Boardroom Thought Diversity

This is a multifaceted issue, but here are a handful of observations aimed at facilitating a more frank discourse in this regard.

Large-caps can learn from small-caps. Smaller public companies are typically more focused on “surviving” than “thriving.” Small-caps are also often capital constrained, and consequently, can’t compete with some of the board stipends offered to many sitting and retired CEOs and CFOs by larger companies. When you combine austere operating challenges with diminished resources, it’s not surprising that when small-caps search for new board members they are often more focused on finding what their boards’ lack, regardless of the title and company name attached to the candidate. Instructively, smaller public companies manage to thrive with far fewer CEOs and CFOs on their boards.


Stale, male, and pale is just bad business. People intuitively like to keep company with similar people. Accordingly, there is no surprise that CEOs, for example, often like to have other CEOs on their boards. Unfortunately, this perpetuates boardrooms filled with middle-aged, white men – the antithesis of thought diversity. Shareholders rarely benefit from monolithic decision-making; according to McKinsey, they benefit from the opposite.

Institutional investors can’t have it both waysIf you listen to leaders from large institutional investors that collectively manage trillions of dollars at corporate governance conferences, they each proudly trumpet the importance of race, culture, and gender diversity on boards. Yet these are the same investors who vote their proxies resoundingly year after year for C-suite board members (i.e., largely homogeneous candidates). If those same institutional investors actually put their money where their mouths are, “stale, male, and pale” would be a thing of the past pretty darn quickly. It’s time for large institutional investors to either walk their talk, or perhaps talk a bit less.

You might be asking the wrong question. Those who believe that boardroom thought diversity is overrated will typically point to the sterling shareholder return metrics of companies with boards largely comprised of sitting or retired CEOs and CFOs as evidence of “if it’s not broken . . .?” Fair enough. But isn’t that a naïve, incomplete rendering of the issue? The better question to ask about such companies is: “I wonder how much more value they could have created had their board of directors been more representative of their stakeholders?”

Board matrices are “garbage in, garbage out.” Many of the boards I interact with proudly point to their board search matrices as evidence that they’ve undertaken thoughtful, inclusive board searches. In some cases, they’re right. In other instances… less so. Here are several suggestions based on watching high performing boards begin new director searches: (1) if your company is going to use a search firm, make sure your board matrix is thorough and complete prior to retaining them – it’s challenging for those with no vested interest in your company to know better than you and your shareholders which perspectives your board is missing; (2) the nominating and governance committee should solicit input from key stakeholders regarding what types of skill sets they think would be additive to the board and actively listen to the responses – undertaking board searches in a vacuum is time-wasting and value-eroding; (3) don’t ever fill in a board matrix with candidate titles (even in parentheses), rather fill it in with the skills and experiences the board seeks; and (4) prior to concluding your board matrix, make sure to consider the board composition of competitors (particularly those peers that are outperforming your company).


Final Thoughts

If your company’s fulsome director search process legitimately leads to a candidate who is a sitting or retired CEO or CFO… terrific. Similarly, if the search leads, for example, to the aforementioned VP of marketing, then stand tall, effectuate the appointment, and then thoroughly explain the same (in plain English) to shareholders in your proxy.

The smartest investors I know are fine with sitting and retired CEOs and CFOs serving on corporate boards and the continuing consideration of them for future board seats.

But savvy investors are increasingly not fine with candidate pools for prospective directors that are substantially limited just to CEOs and CFOs.

And, they’re right.

This post was originally published on LinkedIn Pulse.


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A globally recognized small-cap expert, Mr. Epstein has advised, governed, and invested in hundreds of small-cap companies. His capital markets and corporate governance acumen are products of a singular perspective – a former corporate attorney, operating executive, institutional investor, and, now, board advisor. As Bloomberg Businessweek commented regarding Mr. Epstein’s category-defining corporate governance book, “attention, directors of small-cap companies. Help is on the way.” 

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