Going the Way of the Dodo: CFOs on the Board of Directors

The WSJ recently discussed the disappearance of the CFO from the board of directors of large public companies.  In fact, the disappearance was nothing new.  As the article noted, the number of CFOs on the board of Fortune 500 companies had declined from 37 in 2005 to 19 in 2012.  While this represented a 50% decline, it also represented a fall from a meager 8% to an even more meager 4%.  In other words, CFOs have been a rare presence on the board for a significant period of time. 

In fact, the trend has been less about the CFO and more about the general decline of all non-independent directors.  According to a study of the 100 largest public companies by the law firm Shearman & Sterling, 93 of the companies  have a board with at least 75% independent directors and on 56 of the companies, the CEO is the only non-independent director.  In other words, the trend in board composition of the largest companies is to have all independent directors except for the CEO.

The WSJ article further noted that "[g]overnance advocates, of course, back the idea of fewer CFOs serving on their respective company's board."  But in fact it is not that simple.  The article left out another critical fact.  As the Shearman & Sterling Report determined, 71 of the 100 largest companies combine chair of the board and CEO.  Only 12 companies have an independent director serving as chair. 

In other words, the largest boards consist of independent directors with the CEO serving as chair.  Independent directors are for the most part directors with no significant relationship with the company.  As a result, the CEO is the only director on the board with detailed knowledge about the internal activities of the company.  This provides a certain degree of control over information.  By serving as the chair, the CEO also determines the agenda of the board meeting and the information that will be provided to directors. 

The presence of the CFO or any other executive officer on the board provides an additional source of information for independent directors.  In other words, there is a benefit that can flow from the presence of executive officers inside the boardroom.  Moreover, the benefit is likely to be greater where the CEO serves as chair.