Chairman and CEO roles: unify or separate?
The issue of a combined chairman/CEO role remains a controversial corporate governance matter. While there have been shifts towards separation, the unified role remains favourable and common in large listed US companies.
Calls to separate the roles of chairman/CEO in public corporations increased in the wake of the global financial crisis. Activist shareholders, institutional investors and other stakeholders impacted by the crises and high-profile examples of misconduct by directors and C-suite members responded by undertaking increased scrutiny of corporate board structures and argue for separation of the roles.
In theory, the benefits of an independent chairman of the board and CEO appear obvious. The board of directors is charged with oversight of the corporation’s affairs and the hiring, performance evaluation, compensation determination and if necessary, firing of the CEO. The appointment of an independent chairman creates a clear distinction between the authority and roles of the board and management. It also eliminates conflicts in the areas of performance evaluation, compensation and succession planning. The appointment of an independent chairman allows the CEO to focus on the everyday demands of managing the company and work with the chairman to ensure governance oversight.
Separation of the roles in and of itself does not guarantee exceptional corporate results. The success or failure of the approach is contingent upon the attitudes and personalities of the CEO and independent chair and their ability to focus on strategies and structures that maximise opportunities for corporate success, and the engagement of the full board.
As noted above, companies in the USA are more likely to have a dual chairman/CEO than an independent chairman. Proponents of the approach indicate that combining the chair and CEO role establishes a clear line of authority in the company to a single leader who has in-depth knowledge of the organisation.
What about concerns associated with the chairman/CEO withholding information from the board? Or he/she allows management pressures to take precedence over governance matters? And, how is the chairman/CEO’s performance evaluated, compensation determined, etc, if the CEO is his own boss?
In all of the above scenarios, the full board of directors is responsible for ensuring prudent governance oversight of the organisation. A board comprising independent non-executive directors who are expected to provide objective criticism and ensure focus on board matters rather than executive direction. In addition, the appointment of an independent non-executive director to be the senior independent director to provide a sounding board for the chairman/CEO where management has conflicts, and the leadership and focal point for other non-executive directors.
What does legislation say?
The UK Corporate Governance Code, produced by the UK Financial Reporting Council, applies to companies with a premium listing, whether incorporated in the UK or elsewhere. The code presents a “set of principles that emphasise the value of good corporate governance to long-term sustainable success”. However, in its introduction, the document states: “The code does not set out a rigid set of rules; instead it offers flexibility through the application of principles and through ‘comply and explain’ provisions and supporting guidance.” Here lies a clear indication that the answer to the question of unification or separation of roles may be, “It depends”.
The Code’s Section 2 Division of Responsibilities, Provision 9, states: “The chair should be independent on appointment when assessed against the circumstances set out in Provision 10. The roles of chair and chief executive should not be exercised by the same individual. A chief executive should not become chair of the same company. If, exceptionally, this is proposed by the board, major shareholder should be consulted ahead of appointment. The board should set out its reasons to all shareholders at the time of the appointment and also publish these on the company website.”
In the US, while Dodd-Frank stipulates that public companies must have some form of independent leadership, boards are free to select the leadership structure, however, that decision must be disclosed and justified.
To unify or separate, which structure is best? It depends!
The needs of individual corporations will vary. It may not be practical in a small private company to separate the two roles therefore one person may act as the chair and president. In another scenario, shareholders, wary of combining power in one individual, may feel it necessary to separate the roles. In yet another scenario, shareholders, happy with the returns generated under a combined or separate chairman/CEO structure, may elect to maintain the status quo.
Whether a company chooses to unify or separate the chairman and CEO roles, it remains essential to have an independent, engaged and inquisitive board that actively involves itself in the business in order to safeguard stakeholder interests.
Therefore, each board must evaluate its company’s strategic environment and take into account costs and benefits of each approach as they relate to the firm’s circumstances.
While “it depends” may not be a satisfying answer, the increasing relevance of this issue should encourage boards and management to at least examine the roles in their organisations and determine the best way forward for company and its stakeholders.
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