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Wall Street Journal - A Boardroom With a View :

November 21st 2013

A Boardroom With a View

Outside Directorships Can Offer CFOs Fresh Perspective, Add to Financial Toolbox

By Maxwell Murphy And Emily Chasan

Chief financial officers are far less likely than chief executives to hold board seats at other companies, but those who do serve as outside directors say the experience makes them better at their jobs. New research suggests it might even help their company's stock.

James Drury, founder of executive-and-director recruiting firm James Drury Partners Ltd., said his firm recently studied 660 of the largest U.S. companies and found that fewer than 6% of all their directors were active or retired CFOs. Just 19% of those same companies had an active or retired CFO as the chairman of its audit committee, arguably the board role that would make best use of a CFO's financial skills and expertise.

At Safeguard Scientifics Inc., a Pennsylvania-based company that invests in technology and life-sciences businesses, CEO Stephen Zarrilli says he is encouraging newly appointed CFO Jeffrey McGroarty to look for outside board seats.

"When you sit on another company's board you gain perspective—not only about the company and its industry—but, more importantly, about other operating methodologies, governance, and viewpoints that can be very beneficial when you bring them back to your company," Mr. Zarrilli said.

A study by compensation-research firm Equilar Inc. found that companies with CFOs sitting on outside corporate boards generally outperformed those that didn't, based on total shareholder returns over the past three years. The median return for companies in the Standard & Poor's 500-stock index whose CFOs were on external boards was 19.9%, compared with 15.2% for the rest.

Still, Equilar found that just 102 S&P 500 CFOs were outside directors, compared with the 234 of those companies whose CEOs held outside directorships.

"[External] board experience for top-tier executives…is of great value to that company," Mr. Drury said. However, he said he's not convinced having a CFO join an outside board magically boosts shareholder returns, at least "not overnight."

To be sure, Equilar said of its findings that "the correlation of financial performance and board service doesn't indicate causation." CFOs of bigger, more recognized companies with higher shareholder returns could simply be more attractive candidates for external boards.

Although some smaller companies, or those facing intense challenges, might not let executives take outside directorships, Mr. Drury said he isn't aware of any large company that would bar its CFO from accepting a seat on another board, so long as it made sense. But he said some companies prefer their CEO to be on an outside board before other executives join one.

CFOs, who rarely serve on their own boards, are relatively uncommon on an outside board, both because of board-appointment practices and a relative shortage of offers that are good fits for a CFO, Mr. Drury said.

Safeguard's Mr. Zarrilli is a longtime board member at diet-product company Nutrisystem Inc., where he heads the audit committee. He was promoted to CEO of Safeguard last year after serving as CFO since 2008. He says the outside seats he has held on four public and several private boards have been critical to his day job.

Mr. Zarrilli said Nutrisystem added him to its board in 2003 to help beef up its financial expertise as the Sarbanes-Oxley corporate-governance law was implemented. Those reforms led to a rush to add CFOs to corporate boards, which abated after many companies added just one.

His Nutrisystem experiences proved valuable to Safeguard when the latter faced a financial restructuring after the 2008 financial crisis, he said. "I used a lot of the thought processes I learned at Nutrisystem to help [Safeguard's then-CEO] reshape the balance sheet," he added, such as looking at new ways to borrow money and manage long-term debt obligations.

Bob Shearer, CFO of apparel maker VF Corp. , said his company's board started encouraging him to find an outside board seat when he was first named CFO of the company in 1998. Many VF directors have multiple board seats. "Our board recognizes that having a little broader perspective is very useful," Mr. Shearer said.

Since February 2008, Mr. Shearer has been a director at Church & Dwight Co. , which makes personal-care and household goods, such as Arm & Hammer baking soda. While the companies deal with very different types of consumers, Mr. Shearer says the outside board role "gives you perspective in dealing with your business and also working with your own board."

If his CFO seeks an outside board opportunity, Mr. Zarrilli said he would want more details about the directors the CFO would be serving with and how the CFO would make time for the post. But, with those questions adequately answered, "it can only be a net-net positive," Mr. Zarrilli said.

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