Should the roles of Chairman and CEO be split?

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There is an on-going debate about whether one person should be allowed to combine the roles of chairman and chief executive. We look at both sides of the argument, studies, statistics and examples of companies with both a separate and combined chairman and CEO and analyse the issue from the perspective of our Golden Rules of Corporate Governance.


Back in 1992 in the UK the Cadbury Committee, tasked with making recommendations to improve corporate governance, produced a seminal report. In this report, in the section making recommendations about Best Practice regarding the Board, it made a clear statement of its considered views about the chairman on p 21 of the Report, which is worth repeating verbatim:

Given the importance and particular nature of the chairman’s role, it should in principle be separate from that of the chief executive. If the two roles are combined in one person, it represents a considerable concentration of power. We recommend, therefore, that there should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. Where the chairman is also the chief executive, it is essential that there should be a strong and independent element on the board.

How important is it?

In 2005, the Harvard Business Review quoted an Ethos Group proposal to the Nestlé shareholders as saying

“A chairman of a board of directors who simultaneously holds executive functions cannot independently exercise the task of ultimate supervision of the persons entrusted with management”.

The same article said that

“…reports sponsored between 1992 and 2004 by national governments, major stock exchanges, or both in at least 16 countries outside of the United States have recommended splitting the functions. Indeed, in the United Kingdom, the value of such an arrangement is an article of faith….”.

Recently the chief executive of Norway’s sovereign wealth fund (SWF) was reported in the Financial Times as saying that time was running out for the largest banks in the US to end what he described as the contentious practice of combining the roles of chief executive and chairman. He felt that, though it might take a generation for habits to change completely, the current stance was unsustainable.

His own position was challenged later in the same newspaper by a former SEC Commissioner, who was concerned by the expressed threat implied by the SWF’s intention to use its considerable voting weight to impose its view and even to divest companies that didn’t comply with its view. His counter argument was that with separation of the roles, an aggressive CEO simply had to persuade one person of his views, the chairman, who in turn would deliver the relatively un-informed (and possibly lazy) board. On the other hand, a CEO who was also chairman would have to persuade the entire board in order to get his way. One might say, fair enough, but when the opposite view is promoted by a global investor with assets approaching $1 trillion, it must certainly rank as an important issue for countries still undecided.

What does the UK Corporate Governance Code say?

The UK Corporate Governance Code 2014, in its Main Principles, says:

There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.

So the message is very clear and follows directly from the original pronouncements of Sir Adrian Cadbury’s Committee.

An extension of this principle is that a CEO should not step up to chairman on relinquishing the CEO role, the argument being that he/she would then be able to exercise undue influence over their successor.

How many UK companies comply?

In its 2015 review, Developments in Corporate Governance and Stewardship 2014, the UK’s Financial Reporting Council (FRC) produced survey results from accountants Grant Thornton and proxy voting agency Manifest. The figures quoted showed that 96% of FTSE 350 companies had a separate chairman and CEO in 2014, up from 94% in 2013, and 99% of smaller companies, up from 97% in 2013.

A breach of this rule which was well-discussed at the time was the elevation of Sir Stuart Rose from chief executive of retailer Marks & Spencer to the combined role of chairman and chief executive, in 2008. His track record at that time, coupled with the promise that the posts would again be split on his retirement, won the day. But when a new CEO was appointed in 2010, prior to Sir Stuart’s retirement, the combined role was again split.

By and large, companies have avoided elevating chief executives to the chairman role, though it has been justified in cases where the business is said to be so complex that only a person with the CEO’s experience of that industry can do a successful job as chairman. Examples quoted here are the failures of UK banks RBS, HBOS and Northern Rock in the 2008 financial crisis, none of whom had chairmen with banking experience, compared, for instance, with global bank HSBC, which survived quite comfortably, with a chairman who was a lifetime banker and who had indeed previously been chief executive.

What about the USA?

Though an early version of the Dodd-Frank Act apparently intended to make the separation of chair and CEO roles mandatory, this never made it to the final version. So, by comparison with the UK, there is no specific regulatory pressure to make this split. Indeed, one of the justifications is that the role of Lead Independent Director is much more powerful than its equivalent in the UK and can almost be equated to the role of independent chairman in holding the CEO to account.

However, the trend appears to be inexorably in the direction which the UK took after Cadbury. A report by Russell Reynolds Associates in 2014 suggested that the US was approaching a tipping point where more S & P 500 companies would have a separate chairman than not.

There is still an on-going debate about the degree to which this separation leads to proven benefits, as evidenced by the concerns of the former SEC Commissioner quoted above. And Sheila Bair, former head of the Federal Deposit Insurance Corporation (FDIC) was quoted as saying “too much is made of separating these roles………it’s really more about the people and whether they are competent and setting the right tone and culture”. In some cases you could have a “dominant CEO and a weak chair,” which could actually make the situation worse, “as it obfuscates CEO accountability.”

However, a counter view was expressed by Glass Lewis, a leading proxy adviser, in recommending to their clients that they vote against Brian Moynihan retaining the role of chair of Bank of America in addition to his role as CEO. Their note to clients said “Glass Lewis believes that the appointment of a chairman of the board who is independent of management is nearly always preferable to having a single individual lead both the board and the executive team.”

The bank’s response was to say that the board believed it ought to retain the flexibility to do what it thought best.

An earlier Harvard Business Review article quoted research apparently intended to alert companies not to promote a former CEO to chairman on the grounds that studies in the US and abroad suggested that this could be detrimental to shareholder value.

And research by GMI Ratings, a provider of environmental, social and corporate governance ratings and research, indicated that in 180 major US corporations, where a single person held the combined role of chair and CEO, the median pay was over $16 million, compared with $11 million for the CEO in companies which split the role.

The same research also pointed to greater risk and lower returns in companies which combined the role.

How many US companies comply?

Corporate America has not been nearly as enthusiastic as the UK in splitting the roles of chairman and CEO.  Indeed, in banking, as the head of the Norwegian SWF quoted above has remarked, there are some high profile stand-outs.

The banking sector is indeed a well-known hold-out against splitting the roles. Bank of America is mentioned above, but Jamie Dimon at J P Morgan has fought several successful battles to retain his combined role, and John G Stumpf at Wells Fargo and Lloyd Blankfein at Goldman Sachs have also combined these roles for several years. It has to be said that they have been successful managers; if they start to lose their reputations, they will probably lose their combined roles too.

Interestingly, when challenged about Jamie Dimon’s combined role in the context of his illness due to cancer, the board used the same argument as Bank of America: the bank wasn’t against splitting those roles, just that it believed such a decision should be made by its board of directors and not shareholders.

However, J P Morgan had to make a deal to settle one threatened proxy fight to split Jamie Dimon’s role and it did this by agreeing to give its lead independent director, former Exxon CEO Lee Raymond, the power to set the agenda of board meetings.

Notwithstanding the resistance of banks, and generally slow progress, the trend appears clear. By 2012, according to research conducted by Russell Reynolds Associates, 44% of S&P 500 companies had separate executives holding the chairman and CEO roles. This compared with 2005 when 29 percent of companies had split the roles. There was a similar trend in the NASDAQ 100 where 62 % of companies had split the roles in 2011 compared to 45 percent in 2005.

Moreover, an analysis by the Wall Street Journal in 2015 indicated that the chairman and CEO roles are split at just over half of S&P 500 companies.

Golden RulesHow does it fit into our 5 golden rules and what stance would we take?

The issue of splitting or combining the roles of chairman and CEO would fall under our fourth rule of good corporate governance, namely: an organisation structured and resourced to achieve the agreed goal of the key stakeholders.

Hence we would be looking at the issue of the effectiveness of the board in carrying out its role and thus the critical role of the chairman in assuring a properly functioning board. In this regard, it’s worth re-iterating what the role of the board is and in that context, what the role of the chairman is in relation to the CEO.

In simple terms, the board’s role is to:

  • decide policy: this includes setting the cultural and moral tone of the Company, defining the Company’s business and long-term objectives and identifying strategic opportunities
  • appoint the right person as chief executive to deliver the policy: it also includes having the right person as chairman of the board, and it also means taking steps to plan for succession
  • monitor progress towards delivering the agreed policy: this means taking care that the Company has effective management processes for making sure that its resources are applied to the profitable exploitation of business opportunities, making sure the organisation is structured appropriately and  has access to the right quality of people, technology and adequate financial resources, evaluating the internal controls to ensure the protection of the stakeholders and evaluating the financial statements issued by the Company
  • change either the policy if it needs changing or the chief executive if he or she isn’t doing a good job: this entails evaluating and monitoring the chairman and the chief executive and being prepared, if necessary, to replace them.

It is important to distinguish direction from management. The directors, and no-one else, have the ultimate responsibility for the Company to its stakeholders and their role is to ensure that management does its job properly and that they don’t get involved in doing the management job themselves.

Considering the above, it seems very clear that the chairman cannot be a party to appointing, monitoring or sacking himself/herself as CEO, whatever the apparent justification in terms of experience of the business. So we would therefore come down firmly on the side of Sir Adrian Cadbury in recommending splitting the roles of chairman and chief executive.

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