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Two Hats: The CEO/chairman role is an accepted practice, but why?

Many CEOs of the largest corporations also serve as the chairman of the board. Does this mean that the dual role concept is the best and most efficient organizational design? Can one further conclude that these and other organizations, which have accepted the combined role of the CEO/chairman, determined that board independence is unnecessary, overestimated and pointless? No, these are not necessarily correct assumptions.

The acceptance of the combined role may mean it is considered to be the best design for these few individuals affected, but does not necessarily mean this is the best organizational design for the firm, its investors and stakeholders in general.

Research seems to indicate the combined role has not been copied in most other countries. In fact, an executive CEO and a non-executive chairman is a more common organizational structure outside the United States.

It seems most institutions resist combining the two positions and only appear willing to separate the roles when they are under stress to make a change and when the firm is underperforming.

Defining roles

The CEO is the senior executive officer and principal decision maker in the company. This individual is responsible for establishing the strategic direction of the organization and identifying the tactical steps to be implemented in achieving the mission and objectives of the firm. The CEO and other members of the executive team are accountable for executing the strategic plan and achieving the desired financial objectives.

All organizations should be lead by an active and energetic board, which collectively is responsible for the overall financial success of the firm. The directors have a fiduciary responsibility to the shareholders and are obligated to support the interest of the investors and increase shareholder value. The board of directors is normally led by a chairman, who is responsible for the overall governance of the board. The board including the chairman holds the highest level of decision-making control within the organization—and yes, above that of the CEO.

In many institutions, the CEO also serves as chairman of the board. Separating the two roles continues to be a matter of continued discussion with stern advocates on both sides of the debate.

According to the Spencer Stuart Board Index 2015 (Governance Survey), the concept of splitting the two roles seems to be gaining acceptance.

  • 34 percent of survey respondents said their board has recently separated the roles of chairman and CEO.
  • 19 percent of respondents expect their boards to consider splitting the roles within the next five years.
  • Of those that have recently separated or expect to consider separating the chair and CEO roles, the most common reasons are a CEO transition and the belief that separating the roles represents the best governance model, each cited by 43 percent of respondents.

For and against

The proponents of the combined authority concept argue that:

  • A more defined line of authority within the firm that clearly identifies a central position of power results in a more streamlined organizational design.
  • The CEO has a greater understanding of the basic issues, strategies and tactics of the company.
  • One person can more readily identify potential opportunities and problems.

These arguments certainly have value and give a degree of validity to the combining of the two positions.

The opponents of the combined authority concept have equally strong and perhaps more convincing arguments:

  • An independent board chairman will inspire enhanced accountability to shareholders.
  • Separating the roles results in a defined authority and stronger governance.
  • An independent chairman is more likely to identify performance issues and initiate corrective measures.
  • There is a conflict of interest if the CEO also serves as chairman since the board is responsible for hiring/terminating the CEO.

Regulatory guidance

To date, government regulators have not offered a great deal of guidance on the subject and their silence seems to create a certain amount of emotional confusion for the CEOs and directors. It would be beneficial if regulators would take a position and set forth recommendations and further guidance on this matter. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires “an issuer to disclose in the annual proxy sent to investors the reasons why the issuer has chosen (1) the same person to serve as chairman of the board of directors and chief executive officer; or (2) different individuals to serve as chairman of the board of directors and chief executive officer.” This does little to clarify the issue of enhanced corporate governance.

A poor performing business with a combined CEO/chairman role may experience a heightened concern from the government regulators which could, in the long run, result in more restrictive regulations.

Is there an optimal structure for corporate governance? Probably not—no single structure seems to work for every organization. However, the increasing consequence of this matter should inspire each firm to examine the issues and determine the best organization design for all stakeholders.

Every company is unique. Regardless of the firm’s decision to merge or separate the CEO/chairman position, it is essential to have an active, independent and curious board that stays involved in order to enhance shareholder value.

Business practices continue to change? All things change, either voluntarily or involuntarily, out of necessity! It is naïve to think we currently have the best and most efficient organizational design. These issues are much bigger than any one individual. Perhaps the real question is how do we continue to make an improvement without trashing what we have achieved?

Garry BarnesGarry Barnes is a director of PW Partners Consultancy, former bank president/CEO and a board member for Holladay Bank & Trust. Barnes served on the SBA National Advisory Council and was a consultant to the Central Bank of Russia (in-country)

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