The CEO staying on the board after retirement presents a catch-22 dilemma for both the company and its shareholders. Here are some recommendations.

One issue that goes to the very heart of corporate governance is the role of current and former CEOs on the boards of directors. Should chief executive officers remain on the board after retirement? The Institutional Shareholder Services (ISS) data base reveals that the boards of more than 20% of the S&P 500 companies include the former CEO of the corporation.

How to vote on a retired CEO's nomination is a difficult voting decision for shareholders. Many will ask whether it matters at all. Neither ISS, nor any study of which we are aware, claims that companies with their former CEOs on the board systematically under perform other companies. Why then should we even look at the issue?

The simple answer is that many of our clients now evaluate individual director nominees and asked us to focus on retired CEOs in particular. Through our research, it became apparent that the question is just as important to incumbent CEOs and directors. Given the interest on both sides, it is worth exploring the issue to find some common ground.

A look at just a few major U.S. corporations reveals a range of policies and practices regarding board seats for ex-CEOs.

At many corporations, the outgoing CEO is forced to retire from the board simply because he has reached retirement age. At Ford Motor Co., the choice is a personal one. Philip Caldwell stayed on as a director for five years until he reached retirement age in 1990, after Donald Petersen replaced him as CEO in 1985. But when Harold Poling replaced Petersen in 1990, Petersen resigned his board seat as well as left the executive suite. General Electric Co.'s policy -- not written, but observed -- requires all inside directors to retire from the board once they leave their executive posts. Thus, in 1981, CEO Reginald Jones gave up his directorship when Jack Welch became the new CEO.

But for most boards, the question is left to the old CEO. If he wants to remain on the board, few directors would argue. Even if the new CEO objects, he probably would not want to object -- he risks losing support from the directors recruited by the old CEO, who, when the change of command occurs, probably comprise most of the board.

ISS's general policy recommendation is that shareholders should consider with extra care their votes on director nominees who are the former CEOs of the corporation.

Why, as a general matter, is it difficult to support the election of retired CEOs to their boards? One reason we object to retired CEOs remaining on the board is that they could dominate the board agenda and decisions. Many, if not all, inside directors may owe their jobs to the retiring CEO and would be reluctant to contradict his views out of a sense of loyalty and߼or fear: CEOs often continue to exercise enormous power even after their retirement. The same combination of fear and loyalty can apply to the non-executive directors recruited by the retiring CEO.