Aswath Damodaran 13
The CEO often hand-picks directors..
! The 1992 survey by Korn/Ferry revealed that 74 % of companies relied on
recommendations from the CEO to come up with new directors; Only 16 %
used an outside search firm. While that number has changed in recent years,
CEOs still determine who sits on their boards.
! Directors often hold only token stakes in their companies. The Korn/Ferry
survey found that 5 % of all directors in 1992 owned less than five shares in
their firms. Most directors in companies today still receive more
compensation as directors than they gain from their stockholdings.
! Many directors are themselves CEOs of other firms.
This adds to why directors spend so little time on oversight. CEOs, left to
themselves, will seldom pick adversarial directors. Directors also make far more
money from directorships than they do from owning stock in the firm. Not
surprisingly, they do not take the side of stockholders.
A Wall Street Journal article, a few years ago, looked at the phenomenon of
CEOs sitting on each other’s boards. It is very difficult to see how they can be
objective in those cases.
