CEOs and board membership – who chooses, and does it matter?

Accounting and finance students Michelle Li and Helen Roberts have undertaken an award-winning study to see if having a company’s chief executive on the board makes a difference to the bottom line.

We offered a short synopsis on this, and other interesting research coming out of New Zealand, in another article, however here we go through the research in more detail. The research looked at the determinants and performance implications of CEO board membership in New Zealand companies, since New Zealand companies are in the reasonably unique position of many CEOs not being part of the board, allowing the research to have separate groups. 

The board is a well-researched topic within corporate finance with various guidelines being developed over the years to encourage best practice. The board is responsible for implementing and enforcing corporate governance standards.

The outcome of much of this discussion about the board of directors and how the directors impact the functioning of the company has meant issues like independence, gender, chairperson, and remuneration of directors has been under examination, and subsequently, changes have been made, particularly post-GFC and increasingly as the workplace puts more emphasis on gender equality. 

What hasn’t been examined thoroughly is the impact of the presence of the CEO on the board of directors. It is in fact uncommon for CEOs not to be part of the board of directors, as set out by the code of practice, corporate governance and best practice recommendations in many countries, including Australia, the United States, and Canada.

New Zealand, however, doesn’t follow this rule. A third of all company directors do not sit on their company board, this provides room to actually as: (i) what determines CEO board membership, and (ii) what are the consequences of variation in CEO board membership on company performance?

The final sample for the study was 956 firm-year observations over a 12-year period from 1997 to 2008 across 152 separate companies.

Interestingly in 1997, 20 per cent of companies did not sit their CEO on the board, compared to 2008 where 42 per cent of CEOs were off the board. This is a marked increase in the choice to keep the CEO out of directorships. 


The researchers argue that CEO board membership is the result of shareholder and CEO interests – the company and the CEO must have aligned interests for it to work well.

What this looks like in real terms is thus: CEOs are more likely to be part of the board only when the benefits outweigh the costs (that is, benefit the most or suffer the least) – costs are reduced by having the CEO on the board, and the CEO benefits in many ways, including enhanced reputation, more power, and the increased ability to behave badly, which acts as a deterrent from the board's side.

Strong governance environments mean there is less need (from the company’s perspective) to separate the CEO from the board, and increases the probability of CEO board membership.  Meanwhile using the CEO’s interests, weak governance environments provide greater incentive to sit on the board. This offers a conflict in consequence of the diverging interests of the board and the CEO – a perfect test for seeing if the CEO makes this choice to sit on the board, or if the board chooses. 

Who decides if the CEO sits on the board?

There are various reasons why or why not to have the CEO sit on the board, all valid and very dependent on the company’s operating environment.

The research was conducted using two environmental factors that determine CEO board membership: the information environment and the governance environment. Using these two elements, the researchers developed their hypotheses based on shareholder interests arguments and CEO interests arguments within both of these environments.


The researchers were testing whether a more opaque information environment and a weaker governance environment meant the CEO sitting on the board became more likely.

Suggestions were made that firm size and the number of locations are positively correlated with a higher probability of CEO board membership, with a more opaque information environment leading to more CEOs on boards.

CEO board membership is negatively related to the company’s age – information is easier to come by when a company is younger, which changes as it ages, and the interests of the CEO and the board align more closely. In early days, the CEO is interested in running a good company; the shareholders want profits. 

CEO board membership is less likely with more independent directors, more board ownership (shareholdings), and more capable directors on the board. Strong corporate governance (good directors) discourages CEO board membership, and weak corporate governance encourages CEO entrenchment on the board, and results in a higher CEO board membership probability.

Firm size, the number of locations, and the percentage of independent directors have economic significance – a 1 per cent increase in real sales increases the probability of CEO board membership by 6.2 per cent; an added location increases the probability by 8.6 per cent; a 1 per cent increase in independent directors on the board causes a 0.5 per cent decrease in the probability of CEO board membership.

Together, one extra independent director on the typical NZ board of six board members, 3.6 being independent, with other variables at the sample average, drops the probability of CEO board membership by 10.8 per cent.

This model successfully predicts almost 94 per cent of companies with CEOs on the board, 7 per cent of all companies with CEOs off the board, with an overall success rate of 87.14.

Does CEO board membership affect company performance and shareholder wealth?

Companies with CEOs on the board performed better, but the results were not significant. 

After changes made in 2003 (the Best Practice Code) to director independence requirements in New Zealand, there may now be no difference in CEO board involvement and company performance.

There were some interesting changes to results after the researchers looked into this regulatory change, however, with the relationship between CEO board membership and market performance changing dramatically after 2003.

Before 2003, CEO board membership enhanced market returns, but this relationship was reversed after 2003 – after the change, market participants may have believed that CEO board participation was unfavourable, whereas previously it had been favourable. 

Download the full report: CEO Board Membership: Evidence from NZ Data
Author Michelle Li, Department of Accounting and Finance, University of Auckland
Author Helen Roberts, Department of Accountancy and Finance, University of Otago
2015 New Zealand Financial Colloquium (NZFC)