In the wake of corporate scandals, government bailouts, and heightened shareholder activism, the move to separate the roles of board chair and chief executive officer at U.S. public companies is gaining rapid ground. Advocates of role-splitting maintain that the arrangement is better business, enabling the CEO to run the company with minimum distraction while the chair leads the board, recruits new members, advises the CEO, and manages CEO succession. The move is heralded also as a way to promote more open communication, better manage risk, and ensure truly independent leadership.
There is, of course, a competing view that favors a single person serving as chair and CEO, but with a separate lead independent director. Respected business leaders, corporate attorney Marty Lipton, for example, express a more traditional view that the chair/CEO model is better for driving long-term shareholder value in many companies. Supported by historical data that purportedly shows little correlation between splitting the roles and shareholder value, proponents of the merged role have a point when they suggest that the chemistry needs to be right to split the roles—or else risk adversity between board and management.
With that said, government and shareowners are forcing the issue. Legislation introduced by Sen. Charles Schumer (D-NY) and Rep. Gary Peters (D-Mich.) would prohibit CEOs from serving as board chairs, while investors have been submitting resolutions with this proscription. The Securities and Exchange Commission (SEC) is moving to require that companies justify their board leadership structure, and the New York Stock Exchange and NASDAQ have also considered adopting listing rules that would require separate positions with the goal of making boards more independent. We have only to look at this year’s general meeting of Bank of America—where shareowners re-elected CEO Kenneth Lewis as a board member but stripped him of his chairmanship—to know that a sea change is fast approaching.
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Statistics Tell the Story As many as 39% of the Standard & Poor’s (S&P) 500 had someone other than the CEO chairing the board in 2008, compared to 16% a decade earlier. Further, about 96% had a lead or presiding director in 2008—up from 36% in 2003. (Source: Spencer Stuart) Nearly 73% of directors serving on boards with an independent chair believe that companies greatly benefit from this model, while about 7% maintain that companies do not benefit from it. (Source: Survey, 2008 Public US National Association of Corporate Directors) More than 82% of chief financial officers and senior controllers believe that the roles of CEO and chair should be held by different people. (Source: Grant Thornton, 2008 survey) Outside the US, 79% of the largest British companies, and all German and Dutch companies, divide the board and chair roles. (Source: Millstein Center for Corporate Governance and Performance at Yale University’s School of Management)
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The independent chair model has been adopted successfully in Europe, Canada, and Australia as a surefire approach to creating an independent, and empowered, board. Increasingly, US boards are concluding that separating the chair from the CEO is the right thing to do—to underscore commitment to best governance practices and to ensure a more accountable, more transparent organization.
A non-executive board chair offers several distinct benefits, including:
- Curtailing conflicts of interest
- Ensuring that the CEO is accountable for managing the company in alignment with shareholder interests
- Serving as an objective conduit for the board to express its views on management
- Enabling the board to better fulfill its regulatory requirements and manage risk
- Ensuring that the CEO is effectively guided and mentored in his or her performance
- Gaining clearer focus on corporate succession plans
Whether forced or voluntary, the use of an independent board chair is becoming a reality. If the reality is here, what are the implementation issues and implications? This article explores immediate questions and practical considerations in separating the roles and managing a smooth transition.
When should we make the split?
In my role as an advisor to boards, I have seen leadership structures transition in a variety of circumstances, some more successfully than others. One thing that is certain is this: when the CEO has been recruited for both roles (and, historically, new CEOs assumed that the chair title came with the territory), it is immensely difficult to separate these two functions midstream. Typically, CEOs are reluctant to relinquish power, and those who do give up the chair role may find it difficult to take direction from a new chair. Similarly, those who cede the CEO role may be prone to undermining the new CEO’s authority. Wearing just one hat when one is used to wearing two requires tremendous resolve.
Many companies that have voluntarily split the CEO and chair roles have done so as a result of poor financial performance and pressing shareholder demands. When the roles are separated due to adverse circumstances, as opposed to a commitment to good corporate governance, the decision to split roles may waver as the financial picture improves.
The most natural transition point is when the current CEO/chair is ready to retire or leave the company. A leading report from the Millstein Center for Corporate Governance and Performance at Yale University’s School of Management proposes that companies either appoint a separate chair after the current CEO/chair exits—or explain to their shareholders why they chose not to.
Make the division of roles integral to your company’s succession planning and ensure that the issue of board leadership is continuously discussed. Separation during succession provides the opportunity to carefully evaluate candidates and document the roles and duties of each position—at a time of your choosing when you can implement the process based on good governance rather than in reaction to a negative event.
In the interim, consider strengthening the role of your lead independent director, who can potentially be groomed as the next chair. Avoid the temptation to have a rotating lead or presiding director, since building relationships and proving leadership qualities over time is crucial to a future transition. Many functions of the chair can be handled by a strong lead independent director. The difference between the two positions may be a matter of time commitment. A non-executive chair may be more effective, however, in reducing what some have perceived as undue influence on the board by a “dual-hatted” chair/CEO.
What is the chair’s role versus the CEO’s?
Once you decide to split these roles, carefully delineate the role of the chair versus the role of the CEO. This “two-in-box” structure is akin to the CEO-COO structure and similarly adds complexity to the operating structure of the organization. As such, spending time upfront defining roles is critical. Defining the different but complementary duties of these two positions will likely reduce the potential for duplication and conflict between them and reduce the risk of one or both derailing in the role.
In general, the chair runs the board, determines its priorities and meeting agendas (albeit with input from the CEO and other board members), leads board meetings, facilitates communications among board members and the CEO outside of board meetings, builds investor relationships, presides at the annual meeting, and briefs the CEO on issues of concern to the board. The CEO manages the company and is accountable for corporate performance. In the split model the chair should not take on company management responsibilities or be involved in company operations, and the CEO should not try to run the board.
What kind of person will make a good chair?
Determine the required experience, skill set, and personal attributes for the chair position.
Look for a candidate who:
- Can lead with confidence
- Can conduct effective meetings and knows where to spend time versus being agenda driven
- Has emotional consistency and can deal with a crisis
- Can limit distraction and build consensus
- Has a Socratic style and can ask hard questions in a constructive way
- Can solicit viewpoints and listen with sensitivity
- Can be content in the chair role, without a “hidden agenda” of seeking executive leadership in the company
- Can demonstrate continued independence in his or her relationship to management
- Has strong interpersonal capability and can build “trust” easily with multiple constituencies
- Is a strong communicator and is willing to share information back and forth openly and transparently
- Has been a CEO (although not required, this is a real plus)
The most important attribute of the chair is the ability to build relationships—among board members, between the board and management, and with the CEO. Directors must be comfortable in approaching the chair about difficult issues. At the same time, the chair may at times need to challenge the CEO and must communicate candidly.
The ideal candidate will bring to the table significant leadership experience but at the same time, be content in now playing a less prominent, more supportive role. Effective chairs have cultivated a collaborative, non-dominating personal style that brings out the most in board members.
How do we delineate the role of chair versus CEO?
Job responsibilities, objectives, and appropriate activities for both positions should be drawn up in writing. Duties should be clearly spelled out to the board, company employees, and shareowners. The chair job description should also include the amount of involvement and time commitment the position will likely require. Allocating too much time may increase the potential that the chair will get immersed in daily management activities. Yet allocating too little time may limit the chair’s effectiveness, particularly if the company faces a major crisis or change.
It is essential to ensure that the chair and the CEO have the right chemistry, with complementary skills and leadership styles. Like Goldilocks’ porridge, their fit needs to be just right. This takes careful thought and planning, not simply filling an empty chair. If the “Venn diagrams” of the chair and CEO have no overlap, it will be harder for them to gain alignment, and if they overlap too much, they will gravitate to the same things—creating higher levels of friction. Job descriptions will not only provide a blueprint for finding the right person for each role; they will serve as guideposts for how the two roles will interact. They will also reduce the risk that either leader will overstep their bounds once appointed.
How long a term is appropriate for the chair?
Most directors today are elected annually. The chair position is typically a three- to five-year term, but the position is reconfirmed each year—typically through a performance review.
How much should we pay for the position?
The independent chair position is a demanding job, so commensurate pay is a reasonable expectation. The main factor to consider in setting chair compensation is the amount of time devoted to the role, and the amount of money that is fair and equitable for the time invested. The chair should be paid more than a lead director, but less than the CEO. A study from compensation research firm Equilar finds that the median incremental pay for non-executive chairs in 2008 was $150,000, compared to $20,000 for the lead director. For those who argue there is little difference between a lead director and a non-executive chair, the pay gap suggests otherwise.
The tipping point to consider is this: At what level of compensation is the chair no longer independent? Too much compensation can raise questions of involvement in company operations. A compensation consultant can provide benchmarks for setting the chair pay formula, determining the best mix of cash and equity, and ensuring competitiveness with comparable organizations.
Who takes the lead in the selection process?
Increasingly, the Governance and Nominating Committee has become the epicenter for making decisions n board composition. These members are tasked with making sure that the board is staffed with the right kinds of directors with the right kinds of competencies, including the chair. This committee should lead chair selection, at some distance from the current CEO/chair. In later stages of the process, the entire board should reach consensus to ensure those chosen for both positions have full board support.
Before posting the chair position to a wider audience, assess the leadership talent already at the table. Often, the most effective chairs come from the ranks of current non-executive directors. Those who are on the board know the business well and, ideally, have already earned the trust of their board colleagues.
How do we assess the chair’s job performance?
The board’s responsibility is not only to elect and support the chair, but to assess his or her effectiveness in role execution. Performance assessment is recognized as a best practice in governance, and the New York Stock Exchange is increasingly requiring it.
Establish benchmarks for chair performance and conduct annual reviews. Start with a chair self-assessment and include assessment tools, such as 360-degree reviews, that have been validated by research. Draw on outside expertise, particularly if you are experiencing problems in chair performance. Outside facilitation can be an effective tool for board and chair performance evaluations alike. Open and personal appraisals are crucially important. The chair of the Governance and Nominating Committee should be a senior independent director who can effectively lead the performance assessment process and maintain confidentiality
Taking the proactive approach
In today’s financially tumultuous times, the practices of boards of directors and management are being monitored with ever-increasing vigilance. The government and shareholders are demanding change, and the expectation for boards to improve themselves will continue to grow. Adopting independent chairs voluntarily, with careful planning and deliberate execution, is a proactive way to promote responsible governance and retain, or restore, market trust.
Tom Wajnert advises senior executives, boards and directors of businesses in transition. He has extensive experience leading large, publicly owned companies, including AT&T Capital Corporation, where he served as founder, chairman, and CEO. He has also served on the boards of several NYSE-listed firms and privately owned companies. For more information, see www.twaj.com.