Chairman vs. CEO: Empowering Leaders Wisely

A recent New York Times headline caught my eye: “Fewer chiefs also serving as chairmen.” The article goes on to say that Disney made the break, as did Fannie Mae, Hewlett-Packard and Dell, and now the number of S&P companies with a separate chair and CEO has moved up from 21 percent five years ago to 29 percent today.

Certainly this is not a new issue, but it is one that has generated an increasing amount of discussion and debate. Whether one person should wear both hats has long been of great interest to many, including me, and I’d like to put in my two cents as to whether this is positive or not for American business.

As the Times article notes, reasons for separating the roles vary, in some cases with pressure coming from stockholders, in others to give a chief executive a “promotion,” and still others to let a new CEO grow into the job under the watchful eye of the chair.

Pressure also comes from institutional investors who want more of a check and balance against the CEO. The view is that separation will help avoid more fraudulent financial reporting and related debacles, outlandish compensation packages, and the ability of a CEO to push through a strategy or transformational transaction with possibly disastrous results. Companies looking to improve their corporate governance rating score or lower their D&O insurance premiums also tout the benefits of the two hats not being on the same head. I’m pleased to see, however, that some institutional investors and other influencers don’t see it this way.

For what it’s worth, I believe that for most American companies, one individual being both chairman and chief executive makes the most sense. Why? For a number of reasons. One is that companies and shareholders usually are better served having a single point of authority for the organization—both internally and externally; that is, one individual who can drive development of the right strategy, convince the board and senior managers of its merits, and be positioned to ensure its effective implementation. And externally, one voice to speak a unified message for the enterprise. While I don’t subscribe to the notion of “if it ain’t broke, don’t fix it,” I do believe that one reason American business has been so successful over time is the existence of one individual at the helm with broad authority to make things happen.

Checks and Balances

Yes, potential negatives come along with a common chairman-CEO. Too much power in one set of hands carries its dangers, with possible results as described above. Certainly, an “imperial” chairman-CEO with a flawed idea, unchecked by an independent board, is a recipe for disaster.

But let’s look at checks and balances over a chairman-CEO—many of which have been instituted as requirements or best practices in recent years:

Boards are comprised largely of independent directors;

Nominating, audit and compensation committees are entirely independent, with better defined responsibilities and ability to engage experts for advice;

Independent directors hold private meetings, led by a lead or presiding director;

Senior managers certify the financial reports;

Codes of conduct and whistleblower channels are in place;

Management and the auditor report on the effectiveness of company’s internal controls over financial reporting;

The Public Company Accounting Oversight Board oversees the work of the auditing profession;

An increasing number of disclosures are made in reports to shareholders, including new rules for compensation.

Perhaps among the more significant developments is the increasing number of lead directors. These individuals are intended to be, and often are, a counterbalance to a powerful chairman-CEO, with authority to set board agendas and information requirements and have a role in determining how board meetings are run. Importantly, this individual is a critical focal point enabling independent directors to determine what action needs to be taken that may be counter to the wishes of the chairman-CEO.

So some, including myself, would say that generally enough checks and balances exist on an individual who wears both hats.

Risk Aversion

Holding the separation issue aside for a moment, what I and others active with boards of directors have seen in recent years is a move towards risk aversion. There’s little doubt that in the wake of Enron, WorldCom, Adelphia and other debacles—along with a broad range of new laws, regulations and rules affecting boards of directors and their committees—many directors have focused like a laser on compliance. Accompanying that was perhaps an unconscious and unintended but real consequence: taking a more risk-averse perspective. Seeing what happened to directors of failed companies, board members certainly didn’t want to suffer a similar fate. Not all boards overreacted—and the focus on compliance is becoming more balanced—but we’ve seen an element of risk aversion on a broad basis. And this aversion to risk seems to have extended into strategy and how much risk a company should take.

For what it’s worth, I believe that for most American companies, one individual being both chairman and chief executive makes the most sense.

Is this good or bad? Certainly, if I were faced with the circumstances and pressures directors of American companies have had to deal with in the last few years, I probably would have welcomed a “safer” route at least for a while, until things settled down. I’ll admit, I would be concerned about my personal reputation and legal liability. But I wouldn’t be alone.

In any event, the answer to the question of good or bad may be a matter of perspective—depending on whether one has a “micro” or “macro” viewpoint.

From a micro view—the view of one company—taking less risk may well make sense. It might be wise not only from the perspective of the directors whose reputation and personal assets may be on the line, but also from the standpoint of the company’s long term viability. That is, taking less risk might result not in the highest possible return on investment, but a sufficient return to enable the company to stay in business and do reasonably well over time.

But from a macro view—that of the domestic economy as a whole—the answer might be different. Would we want each company to play it safe, or rather to make the big bets that have a better chance of providing the larger returns, and with them greater benefits to society? With investments in many companies, investors might be supportive, and end up better off, with individual companies taking greater risks—perhaps not to bet the ranch every day, but to take greater risks with the likelihood of greater results.

I’m not an economist, and others are more qualified to speak to this issue. (Well, I do have a degree in economics, but it doesn’t really count, as every graduate from my school received the same economics degree regardless of major!) And perhaps empirical evidence on the subject is out there, regarding both the micro versus macro view, as well as how companies have fared over time with a common chairman-CEO versus those with separate roles. I raise these issues in part to be provocative and stimulate further discussion. I have my opinion, but facts would be better.

The Answer

With this said, is it better for a company to have a chairman-CEO rather than separate roles? My answer is generally “yes,” but it depends.

I believe there are circumstances where separation makes sense. With appointment of a new CEO, especially one promoted internally without prior experience as CEO or as director of a comparable company, the board might well decide to have a separate chairman. The CEO may have enough to learn in that job without the added responsibility of the chairmanship, and the board would have an opportunity to see how the new CEO performs. Then, over time and if warranted, the board might decide to put both hats on the same head.

Another circumstance is where the chairman-CEO wishes to take a step back from the day-to-day grind, and asks to be responsible only for the chairman responsibilities. Another is a turn-around situation, where often there is good reason to separate the roles. And no doubt other circumstances exist as well.

But we keep coming back to the typical situation: Do we want the CEO to be viewed as having only half the job? Many would say, rightly so, that these are two different and distinct jobs. But whether we like it or not, in American business there is one image of the chairman-CEO, and another of a person who has the CEO title alone. Right or wrong, the authority and, yes, the power to get things done—as viewed from within the organization and outside—is different.

Despite pressures from a number of sources, so far lawmakers, regulators and rule-makers have not sought to require separation of the chairman and CEO in corporate America. Presumably, those bodies will continue to let the marketplace decide what is best. My hope is that this decision will be made by boards of directors on a case-by-case basis, recognizing what is best for the company and shareholders they serve, in the context of the society in which we operate.