By Elizabeth G. Olson
September 16, 2011

Do executive careers die? Or do they just get recycled?

One thing seems certain: When executives or board members head for the exit — for whatever reason — they often don’t get tagged as tainted. In fact, they regularly pop up again on the corporate landscape in similar jobs with little apparent damage to their careers.

A string of recent executive departures — Yahoo (YHOO) CEO Carol Bartz to Bank of America’s (BAC) division presidents Sallie Krawcheck and Joe Price, to name a few – raises the question of whether this cycle will continue.

Rinsing and recycling familiar business leaders is far from new. Whether you call it the executive class or the corporate elite, a narrow band of execs have been hop-scotching to and from well-paid perches for decades.

Boards replete with buddies rubberstamp executive decisions — but no one pays attention until something goes wrong, and outsiders delve into board connections. What gives?

Familiar feels comfortable

“There is a comfort level issue here,” explains Sydney Finkelstein, professor at Dartmouth’s Tuck School of Business. “You could find five experts for a board opening, and one’s from the country club, and that’s that.”

Finkelstein says that executives and board members have to spend a fair amount of time together, and it’s easier with a known quantity. The risk, however, says Finkelstein, author of Why Smart Executives Fail, is that “directors might be more concerned about friendships and connections.”

In the game of corporate musical chairs, room is often made for even those from disgraced companies, according to a new Stanford study, called “Scarlet Letter: Are the CEOs and Directors of Failed Companies ‘Tainted’?”

Former directors of the insurance giant American International Group (AIG), like Ellen Futter, president of the American Museum of Natural History, and Marshall A. Cohen, former Molson Co. (TAP) CEO, for example, escaped unblemished and have migrated to the boards of other major public companies, including JP Morgan Chase (JPM) and TD Ameritrade (AMTD).

Directors of defunct companies like Bear Stearns, Lehman Brothers, Wachovia Bank and Washington Mutual have resurfaced on the boards of corporate behemoths like Verizon (vz), Dow Chemical (DOW), Hewlett Packard (hpq) and Nike (nke).

But the Stanford study shows that the professional fates of such luminaries can pivot on whether a company’s failure or failings were due to management or governance problems.

“Executives are hired with the express purpose of taking strategic risk to increase shareholder value, some of which might not work out as hoped,” says David Larcker, a professor of corporate governance at Stanford Graduate School of Business and director of its Corporate Governance Research Program. “Corporate monitors, by contrast,” says Larcker, “are hired with the express purpose of detecting malfeasance.”

Yet a recent Stanford survey found that two-thirds of executives and directors questioned believe that directors who served on the board of a failed company can succeed as board members elsewhere.

CEOs get less of a break

Only one-third agreed that a former chief executive of a failed company could be a good director at another company. And CEOs were held to a higher standard of accountability in the 2011 Corporate Board of Directors Survey conducted by executive recruiter Heidrick and Struggles and the Rock Center for Corporate Governance at Stanford.

Even so, Carol Bartz, who was unceremoniously ousted from struggling Yahoo recently and resigned from the tech company’s board, remains on Cisco’s (csco) board of directors. And she may yet land another plum position given the small pool of experienced CEOs.

“As firm loyalty toward employees and employee loyalty towards firms declines, executives change jobs more frequently,” says Lynn Stout, a professor of corporate and securities law at the UCLA School of Law. “This makes it harder for boards to find strong ‘home grown’ CEO candidates from within the firm and whom they know well, and forces them to look for outside candidates.”

Also, boards looking at outside candidates, she says, “will naturally be biased toward hiring someone who has already been a CEO elsewhere, rather than taking a chance on an outside candidate who has not held that position.”

All in the corporate board family

Why do directors so often escape without a scarlet letter? One reason is that the executive social network “still reigns” in selecting directors, says Noel Tichy, professor at University of Michigan’s Ross School of Business, because “the same names are passed around when there are openings.

“In some cases, the executive thinks ‘Who wants to train a neophyte when I’ve got a buddy who already understands what the job is?'”

The fact that many executives serve on multiple boards only reinforces the narrowness of the business leader pool. For example, News Corp.’s (nwsa) latest director nominee, James Breyer, is a partner at venture capital firm Accel Partners and a director at Dell (dell), Wal-Mart (wmt), and Facebook as well as others like Etsy, Inc.

“These are people who are already overloaded so what is the point of board membership, which involves a lot of work and attending meetings?” asks Tichy, who has written several books on leadership, including Judgment: How Winning Leaders Make Great Calls. Also, he says, “it can create conflicts of interest, and the CEOs are already being paid for their day jobs.”

Directors from failed companies are red-flagged in company research reports, says Paul Hodgson, communications director and research associate at corporate governance research firm GMI. But CEOs still pass along these names as potential directors on their company boards, he says.

“It’s a very small pool. It has to be kind of an incestuous feeling,” he notes. GMI is developing a database to help company clients expand the kinds of directors they recruit to their boards. The database, which will be unveiled in upcoming weeks, “will crack that circle a little wider,” he says.

However, Hodgson notes, “the job of being a director is more onerous now, and the skills needed are much more exclusive. It’s unlikely you would add anyone to the list who does not already have experience.”

The ‘it could be me’ dilemma

The empathy factor, says Finkelstein, also explains why board members of collapsed companies often sail into similar professional posts. “Board members typically put themselves in the shoes of the other person…. And they could see something like that happening to themselves.”

The result, according to Larcker, is that directors of Enron and other extinct corporations not only remain on the boards of public companies but also have joined new boards, according to its examination of company filings with the SEC. The Stanford study shows that five of the 12 Bear Stearns directors serving when the investment bank imploded are directors of public companies today. That includes Frederic Salerno, who serves on five boards, including CBS (CBS) and Viacom (via).

Two directors of Lehman Brothers now hold board seats at prominent companies like MGM Resorts International (mgm), Sony (sne) and Telemundo. Ten directors of Wachovia, which was forced to sell itself by the government to avoid failure, went on to serve on the boards of major corporations like Wells Fargo (wfc), Altria (mo), Lowe’s (low), Kraft (kft) and Dow Chemical.

“There’s an amorphous, elite group that’s in the pool,” says Larcker, who directed the Stanford study. “When something goes bad, are those people still acceptable? Do leopards change their spots?”


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