Should CEOs Sit on Other Boards?

The Federal Trade Commission's inquiry into board ties between Apple and Google raises an interesting question: Should CEOs be allowed to sit on other boards? The problem is that conflicts of interest are surprisingly common, even when the companies aren't competitors or even in related industries.

Check out this story; it'll make your skin crawl. It centers on Sanford Weill, then Chairman and co-CEO of Citigroup, and Michael Armstrong, then chairman and CEO of AT&T. Keep in mind that, in addition to chairing their own, Weill and Armstrong sat on each other's boards.

In 1999, Weill was engaged in a long-standing boardroom feud with Citigroup co-CEO John Reed and needed board support to overthrow his nemesis. In order to get Armstrong in his camp, Weill asked Jack Grubman - telecom analyst at Citigroup's Salomon Smith Barney unit - to take a "fresh look" at his "neutral" rating on AT&T's stock.

At the time, Grubman was trying desperately to get his kids into New York's exclusive 92nd Street Y preschool. So Grubman asked Weill if he could pull some strings at the school. In the end, Citigroup donated $1 million to the school, Grubman's kids got in, and Grubman upgraded his rating on AT&T from "neutral" to a "buy."

Grubman admitted to all of this in an email that was leaked to the Wall Street Journal. Both he and Weill later denied that there was any connection between these events. Nevertheless, the story was key to a landmark $1.4 billion settlement between federal and N.Y. state prosecutors and Wall Street's top investment firms over conflicts of interest between research and investment banking.

Fast forward to today's controversy. The FTC is concerned about Google CEO Eric Schmidt sitting on Apple's board, citing a rarely enforced antitrust rule that prohibits directors from sitting on rival boards if it would reduce competition. While the two firms don't actually compete, they have common interests in the wireless market and a shared competitor in Microsoft.

Google says Schmidt recuses himself when Apple's board discusses the wireless market, but is that enough? I don't think so. There's simply too much potential for conflict of interest when a CEO sits on another company's board, regardless of their competitive relationship. Citigroup and AT&T weren't even in the same industry.

This should be an SEC rule; it's such a no-brainer it makes me wonder why we have an SEC at all.