In our current business climate, and in the wake of the recent corporate scandals and heightened shareholder activism, the debate to separate the roles of the chairperson and the CEO rages on, and by some accounts continues to gain ground.
Proponents of the split argue it will permit the CEO to run the organization more effectively and allow the board chairperson to focus on leading the board, providing direction to the organization, and succession of the CEO and board.
The other side of the debate argues that there is little empirical data showing that splitting the roles increases shareholder value in the organization.
Although they lack the authority to control the governance of organizations, certain regulators have weighed in on the issue. The Securities and Exchange Commission (SEC) now has rules in place which require its reporting companies to disclose if and why the company has chosen to combine or separate the principal executive officer and board chair position. The SEC does not attempt or suggest which method is its preferred choice, yet if your corporation does not separate the position it will need to explain why.
Similarly, while not specifically asking if there is a split in the CEO/chairperson role, the IRS requires tax-exempt entities to explain how it makes decisions, and inquires about the independence of the board and those involved in its compensation process.
As this debate rages on, it is critical to remember the importance that culture plays in defining the governance practice of your organization. Governance is the aggregate of an organization’s culture, methods, processes, systems and controls for: (1) providing direction to the business, operations and other affairs of the organization and (2) executing or carrying out that direction.
Because governance of an organization is the aggregate of many things, what may be appropriate (in terms of governance) for one organization may not be appropriate for another. So, depending on whether your organization is a Fortune 500 corporation, smaller reporting corporation, privately-held or tax-exempt organization, the determination of whether or not to split the roles may or may not be in the best interest of your organization’s stakeholders.
A number of the fears argued by those against combining the positions—which include one person holding both the position of CEO and board chair as having too much power; the combine position cannot be properly monitored by the board; it can lead to CEO entrenchment; and excess CEO compensation—can be averted by revisions to the governing policies and procedures. An example would be revising the governing documents to allow other directors the ability to call a special meeting, eliminating the CEO from the nominating committee, and removing the CEO from considerations regarding compensation (which hopefully all boards already do).
The primary role and function of the board is to provide direction and oversight to the corporation and also mentorship of the CEO. Included in these functions are the hiring/compensating of the CEO, monitoring of the risks to the organization, and planning for succession of the CEO and board, which is why the proponents of the split believe the roles must be separate.
However, none of these tasks falls solely on the shoulders of the chairperson. They are the responsibility of the board as a whole (or possibly a committee of the board that is properly delegated the requisite authority to act on behalf of the board). A board acts only on behalf of the majority of those directors present at a meeting in which a quorum is present. The chair’s vote does not carry any more power than the other directors as no one director has more authority than the next to act.
While the chair in most organizations does have some responsibilities separate from the other directors like setting the agenda and calling special meetings of the board, will a more powerful board chair deter other board members from inquiring into matters that are of concern to other directors?
If true, is this an issue best addressed by not splitting the role? Or is it better addressed by board composition, whereby the board should be recomposed of individuals more fully engaged or interested in complying with their fiduciary duties to become reasonably informed of all material information, including risks to the organization, before making a decision, and failing to act in or not opposed to the best interests of the organization? Even though the split may be a best practice for some organizations, there are limits to how much can be expected from one governance change of an organization’s policies and procedures. Splitting the role of chairman and CEO will not guarantee the application and benefits of independent oversight.
While continuing to combine the two roles in a single person may be viewed as a risk factor by some stakeholders (particularly in the current climate), the separation of the two functions alone is no guarantee of the absence of risk or better oversight by itself to the organization.
Still, the pressure to change will continue to be debated for all organizations, and those that do not change may be increasingly called upon to explain why.
If your organization is considering the split, remember that any consideration of a best practice needs to be considered in light of all governance practices, policies and procedures. It is always best to start the process by auditing all of the organization’s governance practices, and understanding the culture of the organization.
While separating the two positions may be considered a best practice by some, it may not be the best practice. The main question that all organizations should consider is not whether it is a best practice, but whether or not it will be their organization’s next practice.