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Feature

Donald P. Delves
Founder and Principal
The Delves Group

Why You Want Retired CEOs on Your Board
Their experience, wisdom, status, wealth, age, and independence are a powerful combination.

When former Secretary of the Treasury Paul O’Neill was asked if he feared any recriminations for being an outspoken critic of the Bush Administration, he reportedly replied: “I’m old and I’m rich… What can they do to me?”

Like it or not, this blend of experience, wisdom, and feisty independence born of age, wealth, and status makes for a good corporate director. In today’s boardrooms, where high quality governance is at a premium, companies need more O’Neill-minded directors who have the courage to speak up and the intelligence and experience to say the things that are highly relevant.

Based on what I’ve seen in more than 20 years of advising boards as an executive compensation consultant, there are a number of attributes that make a board member -- and particularly a compensation committee member -- effective. I have also observed that retired CEOs best and most consistently exemplify these qualities.

1. They Know the CEO Job
Retired CEOs know what it’s like to occupy the top spot in the executive suite. They know first-hand what the CEO’s job is, and they have the skills, maturity, and finesse to perform it well. Now, as board members, they understand that their job is to make the CEO successful. Most are very well qualified to do this, since they’ve spent most of their careers evaluating, hiring, coaching, and mentoring executive talent.

Retired CEOs tend to have personal empathy for the current CEO and other executives. They know what it takes to succeed, what it feels like to fail, and what level of risk and assertiveness is appropriate. They can discern the difference between a minor and forgivable mistake and a colossal error requiring a change in management. They also know what level of performance merits a lucrative reward and what is just business as usual.

2. They’ve Been Paid the Money
Retired CEOs have the personal context for being paid a multimillion-dollar compensation package. They know the difference between being paid, say, $2 million versus $4 million a year. Most other people have no personal reference point for those kinds of numbers, other than knowing that mathematically one is twice the other.

These former top executives, however, know from their own experience how much compensation is too much and how much is not enough. Therefore, their recommendations to the compensation committee and the full board usually do (and should) carry a lot of weight.

3. They Have Very Little to Lose
Although they may not be universally beyond reproach, retired CEOs generally have what it takes to stand up to a threat. Therefore, they tend to be more willing to take stands on important issues, such as strategic decisions or evaluation of the CEO’s performance.

As former top executives, these board members don’t have future promotions or pay increases hanging in the balance. They have typically amassed enough wealth that board compensation is not an important source of current income. Losing a board seat for a good reason won’t cause significant financial pain.

For these and other reasons, most former CEO board members I know are not afraid of a fight when necessary. That said, they tend to know how to use diplomacy and save the “heavy artillery” until absolutely necessary.

Every former CEO has his or her own style, to be sure, but all have substantial experience getting things done and making things happen in large organizations. This combination of independence, drive, and skill on the board is critical, because without it, a board can find itself merely reacting to management, without its own agenda and initiatives. A board that lacks strong leadership can lose track of its purpose as well as the principles and standards of corporate conduct it is there to uphold.

4. They Have Age on Their Side
There’s much to be said about a person who has reached the pinnacle of his or her career, successfully led a company, designed and implemented long-term plans and strategic visions, and recently retired. At age 60, 65, or even older, these executives typically have wisdom, experience, and perspective on their side, plus the desire to remain productive for another 10 or more years.

Many retired CEOs understand the concept of leaving a “legacy.” The current generation of retired CEOs, in particular, is very often defined by the desire to give back out of their success. After setting down the reins of control of a company, many are eager to take up the mantle of being a corporate steward.

Unfortunately, many boards require directors to retire at 70 or 72, which, I believe, is far too young for many of them. At 70 or 72, directors can draw upon a lifetime of not only business but also personal experience. Plus, after joining a board at, say, age 65, they may need two or three years to learn the ins and outs of the company, forge the alliances, navigate the factions, and work toward meaningful change and consensus on important issues. I have seen many directors who are forced to retire from boards just at the point when they have become most effective.

And Then There Is CEO-Speak
Current and former CEOs speak the same language. Whether they have “been there” or are currently “doing that,” they are in the same league. They know the game, the rules, and the types of players on the field.

Academics, community leaders, customers, and suppliers who become directors can bring a wealth of knowledge, expertise, and perspective, but having never occupied the C-suite can be a disadvantage. The nuances of who knows whom, who works with whom, who is a customer of whom, who owes whom a favor, are best learned by being an insider in the upper echelon of business. Most CEOs-turned-directors can guess the dynamics of a board just by looking at the players.

With a combination of clout and stature, they are able to maneuver, mostly behind the scenes. Their power and influence are best used to effect positive change on issues such as corporate governance and compensation reform.

This is when it truly pays to have independent-minded retired CEOs on the board. They understand the issues, they aren’t afraid of the confrontation, and -- with the wealth, stature, and experience that comes from having held the top job -- they aren’t afraid of using their twin strengths of finesse and muscle.

Donald P. Delves is founder and principal of The Delves Group, a consultancy in corporate governance and executive compensation (http://www.delvesgroup.com). A certified public accountant, he is the author of Stock Options and the New Rules of Corporate Accountability: Measuring, Managing and Rewarding Executive Performance, published in 2003 by McGraw-Hill, and has testified before the U.S. Senate on stock option accounting. He can be contacted at ddelves@delvesgroup.com.

A longer version of this article appeared in the First Quarter 2006 edition of Directors & Boards.