Should the CEO Serve on the Board?

For a governance observer from the US or UK, this seems like a strange question to ask. In such jurisdictions, there are very few CEOs who aren’t on the board of directors - except perhaps in the charity or NGO sectors.

Indeed, a CEO who was told that they wouldn’t be appointed to the board would probably take umbrage at the suggestion. They might even refuse to take the job in the first place.

There are other markets where the opposite is true: it would be either impossible or frowned upon for CEOs to combine executive and board roles.

For example, the two-tier board system in Germany and some other European nations legally prohibits the CEO or managing director from serving on the supervisory board, which is composed of non-executives and employee representatives.

In the Nordic region, many governance experts believe putting the CEO on the board – even when legally permissible—is not good governance, as it blurs the lines between oversight and management and can create conflicts of interest.

What are Saudi companies to make of these differing practices and views? They are in an interesting position compared to companies in many other countries. The question of CEO board membership is more open and flexible, both from a legal and best practice perspective.

According to the latest data provided by the Saudi Exchange, only 42% of Saudi-listed companies include the CEO as a board member. However, these include some of the Kingdom’s largest and most prominent business entities, such as Aramco, SABIC, and Kingdom Holdings.

Appointing the CEO to the board is clearly not an automatic appointment in Saudi Arabia. And many companies still choose to make a clear separation between those appointed to the board of directors and those forming the executive management team (including the CEO).

You would imagine that such an important issue would be the subject of extensive research and investigation. The CEO is a key determinant of business performance. And so is the relationship between the CEO and the board. The positioning of the CEO in the governance architecture could have material consequences for both of those things.

However, this is not the case. Reflecting the Anglo-American orientation of much existing scholarship, the issue is rarely addressed in the corporate governance literature.

In contrast, the somewhat different – and very US-specific - question of whether the CEO should also serve as the Chair (e.g., in a combined role or as executive chairman) is hugely studied. However, this is of little relevance to Saudi boards as combining the chair/CEO is explicitly prohibited by the Saudi corporate governance regulations.

In contrast, the question of whether the CEO should even be a board member is a live issue that every Saudi board must evaluate. To unpack this issue, the Center for Governance recently published a White Paper exploring the pros and cons of CEOs serving on boards.

A major benefit identified by the study is the ability for CEOs to share in the legal duties and liabilities defined in company law that apply to other board members. Given the central role of the CEO in determining the performance and conduct of an enterprise, is it really appropriate that they should escape these legal responsibilities?

It is true that the CEO can be held accountable by the board in other ways, e.g. in terms of their remuneration or continued employment prospects. But in the eyes of some observers, it seems strange that directors’ legal duties should only be applied to non-executive board members, whose influence over the company is relatively indirect.

Secondly, if a board requires the CEO to execute their strategy, there is a strong argument for including the CEO in the formal decision-making process which leads to the approval of that strategy. This would obviously arise as a consequence of the CEO being a board member.

A third argument in favor of CEO board membership relates to a common source of governance dysfunction: a poor working relationship between the CEO and the Board (including the chairman). This can arise if the CEO feels distanced from the board and lacks a sense of shared ownership with board members for the achievement of strategic objectives.

Including the CEO as a board member may help alleviate this risk. There is less chance of an ‘us and them’ mentality developing. The two sides may be able to work more effectively as a team.

However, there are also certain disadvantages to the CEO serving on the board.

With the CEO as a member, the board becomes a less ‘independent’ forum, as the lines between monitoring and managing the enterprise start to be blurred.

Most importantly, the CEO is subject to a major conflict of interest. As a board member, they are required to monitor their own management performance (“self-monitoring”), which is akin to ‘marking your own homework’.

There may also be issues that the board may hesitate to discuss openly if the CEO is automatically present. These might include brainstorming around future mergers, restructuring or changes of ownership, which could be unsettling for management. They would also include a discussion of the CEO’s personal performance and remuneration.

It may also be argued that placing the CEO on the board gives them too much personal power. While some countries, such as the US, tend to expect powerful CEOs, other jurisdictions have different expectations regarding leadership and governance.

In recent years, there have been plenty of salutary reminders of how CEO dominance or hubris – insufficiently checked by the board – can lead to corporate scandal or disaster.

Examples include Carillion and the Post Office in the UK, Wirecard in Germany, and WeWork and Theranos in the US. The risk of excessive CEO dominance is not a theoretical concern. It has happened in the past, and will likely happen again in the future.

Each Saudi board must weigh the pros and cons of CEO board membership, but the risks of making such an appointment can be managed if they are recognized early, allowing for proper checks and balances.

Recommended actions include appointing an independent chair, ensuring a significant number of independent directors without pre-existing relationships to the CEO, and establishing procedures to control the CEO's influence on board decisions.

It is advisable for the CEO to be excluded from board committee membership, allowing independent directors to scrutinize the CEO's activities effectively.

Boards should hold executive sessions limited to non-executive directors to review the CEO's performance, compensation, and other conflict-prone matters, excluding the CEO from the meeting.

Boards should also conduct regular evaluations of how the CEO manages their dual roles as CEO and board member – as part of the periodic board review process.

If the CEO is on the board, it is essential that they appreciate the key differences between their management role and their board role, and reflect this in their boardroom behavior.

Providing the CEO with targeted training and professional development specifically on their governance role may further support their effective participation on the board.

There is no universal model of good governance, and the issue of CEO board membership provides an example of why one size does not fit all. Locally determined norms, regulations, and business practices will all play a role in determining outcomes – both in Saudi Arabia and in other markets.

For detailed insights and actionable recommendations, the full report from the Center for Governance is available here.

Dr. Roger Barker 

Chief Research and Thought Leadership Officer, Center for Governance

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the opinion or position of the Center for Governance.