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Thursday, July 14, 2011

The Sophomoric Placebo of Separating CEO and Chair

Shareholders face the difficult challenge of trying to protect and grow their investments under circumstances where they are not qualified to run -- or be on the boards of -- those companies in which they have invested and where, at least heretofore, they have not had sufficient information, tools, power or the business experience and skills to meaningfully influence, analyze, compare or make decisions about the directors who are representing them or the managers who are running the portfolio companies. Among the many opportunities available to shareholders to empower or influence Boards, the campaign of separating the CEO from the Chairmanship of the Board appears at first blush to be eminently logical (in a high school civics sort way) and easy to grasp and debate, but it is magnificently ineffectual (a mere placebo) with potentially harmful side effects (a nocebo).

The common arguments FOR requiring that the CEO and Chair be separate persons are that (a) the CEO ought not be the chairman of the corporate body which is overseeing him or her, (b) a separate Chairman can raise important questions that would not otherwise be raised at the meeting, (c) separation of roles of authority at the top of the corporation is essential to protect against problems resulting from the abuse of power, (d) being Chairman is a full-time job that would detract from the CEO's performance as CEO, (e) it is a proxy of good governance, (f) it gives shareholders an ability to speak to Chairs as the independent leaders of board to get a better idea of what's going on at the board level, (g) titles are important, (h) the separation sends a message that the CEO is accountable to the Board, (i) the Chairmanship title is an incident of structural power that should not be conferred gratuitously, (j) the majority of directors polled want separation of the roles and (i) institutionalizing the accountability of the CEO by excluding her from the Chairman title and role creates a constructive energy in the board room.

The common arguments AGAINST mandatory separation include: (a) no study regarding whether or not separating the Chair and CEO improves company or board performance (including the most recent Korn Ferry report) demonstrates any correlation between the two, (b) a recent ViewPoints Report of Members of the Lead Director Network (consisting of lead, presiding and non-executive chair directors) indicated that directors believe that the various titles given board leaders to be distinctions without any practical difference and agree that, notwithstanding the view of persons outside the company, these titles do not meaningfully affect the board leader's relationship with the CEO or the board leader's responsibilities on the board of directors, (c) it creates confusion that two heads are running the shop, (d) it undermines the authority of the CEO in other contexts, (e) it sends a negative message that the board does not have confidence in the CEO, (f) the Chairman and the CEO may constantly be contradicting each other, especially where the Chairman has a staff, (g) being the leader of the board requires special skills, such as ensuring full participation, moving the discussion along at the right pace, knowing where each director stands, nurturing a diverse group of people with different styles of participation and from different business cultures, actively managing the board processes, pulling directors together to ensure board effectiveness and assuring that the boardroom environment remains open and multi-sided -- and if the CEO has these skills she should not be precluded from the Chair, (h) separation has adversely distorted behavior at some companies where CEOs have changed titles to become executive chairs (and thus out of reach of shareholder compensation votes while in form appearing to separate the CEO and Chair roles) and promoting COOs into the nominal CEO position, (i) the board is in the best position to choose its leader and should not be constrained from electing the CEO as chair, and (j) under circumstances where shareholders are resource- and information-constrained, there are more effective places upon which they can turn their attention to restrain excess power and promote board effectiveness.

The most common arguments for and against the CEO-Chair separation have failed to consider two factors in Board effectiveness: board composition and resulting board dynamics. While board effectiveness (including its oversight of management and related prevention of the abuse of power) is a function of many factors, the single most important is its composition. Boards work not only through the use of written materials, governance guidelines, committees, structures, processes and agendas but more significantly through the measure each director takes of each other director and members of management. As in every other group, there is a pecking order; some directors are more equal than others. Decisions are made, questions are asked, and the board work is done through the interaction of the differing personal power, heft, experience, skills, attitudes, behaviors, communication and charisma of each director, including the CEO. Inside the boardroom, these dynamics are unspoken but well understood. In substance, the board easily identifies its leader, regardless of where the form or structure places the chairman title. The board will follow the lead of the de facto leader, regardless of which director has the de jure title. The Board Pecking Order cannot be changed by a shareholder or legislative mandate requiring separation of the positions.

There are many board leadership structures -- from Wal-Mart (where the CEO is not even on the board), to Occidental Petroleum and Google (where the former Chairman and CEO is now the Executive Chairman) to Research in Motion (where two founders are Co-Chairs and Co-CEOs) to Apple (where there is no Chair but there are two non-executive co-lead directors), to Yahoo! (where the board leadership consists of a Chief Yahoo! and a non-executive Chair) to Ford (where Bill Ford is listed as Executive Chairman and Chairman of the Board) and to the UK model (with an Executive Chair, a lead director and a CEO). In the end, board effectiveness is determined less by formal structure and more by CEO-Board composition and dynamics, including (i) whether directors trust management and (ii) whether or not the directors -- individually and collectively as a group -- have sufficient credibility, respect and personal power relative to the CEO and each other (regardless of who has what title), to enable them to operate effectively and with the optimum balance of CEO-Board dependence and independence.

In conclusion, it must be acknowledged that there are widely recognized and highly regarded corporate governance experts who advocate belling the CEO cat, but both of the arguments for and against are compelling and persuasive. The answer to the battle of the intellects is contextual -- the winning arguments are determined by the facts and circumstances of each particular board. Given the limited insight and resources available to them, stockholders concerned about potential abuse of power by company leaders should not waste resources on the CEO-Chairman debate but rather focus on areas with greater impact on board effectiveness (to be discussed in an upcoming blog). Leave the board leadership decision -- in substance and in form -- to each board.

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