Separation of Chairman and CEO for better governance

It is considered good practice to separate the roles of the Chairman of the Board and that of the CEO. If the same person holds both positions the Board’s function of oversight over their own Chairman who acts as CEO becomes somewhat futile. In cricket, it would be like being the head of the selection committee and being captain of the cricket team, at the same time.

The Chairman is head of the Board and the CEO heads the management. If the same individual occupies both the positions, there is too much concentration of power, and as generally known; power corrupts! In Enron, Kenneth Lay was both the Chairman and CEO. For a brief while the two positions were separated when Jeff Skilling functioned as CEO, and when he resigned in August 2001, Ken Lay again took on both roles and the world knows what happened to Enron. Though it was not the only reason for the collapse, we wouldn’t know what would have happened if they had a separate chairman and a CEO.

However, in the US, there were some high profile cases where share holders voted to keep the roles with the same person. At JPMorgan Chase, shareholders rejected a proposal to separate the roles with a 69% “against” vote. May be because JPMorgan had delivered great returns, in part due to Jamie Dimon’s leadership. In 2013, Disney shareholders rejected a proposal to separate the roles with a 65% “against” vote. In its recommendation to vote against the proposal, the board argued that its lead independent director (LID) ensured adequate oversight over the CEO and management team.

Review of studies conducted over the past two decades by the Center for Leadership Development and Research at Stanford Graduate School of Business, found that separating the roles of chairman and CEO has had little or no effect on either a company’s stock price or its future operating performance. What was not studied is if it led to better governance?

As with many questions on governance there is no easy rule dictating an answer. However, the increasing relevance of this issue should encourage companies to at least examine the roles in their organizations and determine the best way forward. Personally, it’s very difficult to comprehend a unified head performing two different activities in the same environment. I support the separation of the chairman and CEO roles because it increases the board’s independence from management and thus leads to better oversight.

Negative effects of a unified role can be negated if there was an independent, engaged and inquisitive board that actively involves itself in the business and safeguards shareholder interests. Many are not lucky to have this dream! Further, the benefit of a particular governance structure depends on the culture of the company and the character of the person acting as chairman and chief executive. Humorously one may say, “If you have the right chairman the Board is complete and if you have the wrong one, it’s finished!“.

About surenraj

“Views expressed are my own”
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