The CEO cum Chairman – Best Practice?


As a young student of Chartered Accountancy in India I was once asked to present on Corporate Governance at the local chapter of the Institute. It was my first introduction to the subject/topic and I have been fascinated by it ever since. At the time, one of the key reports or publications on the topic was the Cadbury report of 1992- a report issued by a Committee chaired by Sir Adrian Cadbury, which was in response to major corporate scandals in the UK at the time.

One of the key recommendations of the report was a separation of the roles of the Chairman and CEO. Over the years, various Codes of Corporate Governance (including Bahrain’s) have advocated and recommended the need for splitting the roles of Chairman of the Board and Chief Executive Officer (CEO):

The UK Corporate Governance Code of 2010 (also known as the ‘Combined Code’) under Division of responsibilities Paragraph/section A2.1 includes as follows: ” The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board.”

The Corporate Governance Code of the Kingdom of Bahrain under Principle 1, paragraph/section 1.3 recommends as follows ” The chairman of the board should be an independent director and in any event should not be the same person as the CEO, so that there will be an appropriate balance of power and greater capacity of the board for independent decision making.

The HC module para/section 1.4.7 & 1.4.8 , Volume 2 (as applicable to Islamic Banks) of the Central Bank of Bahrain rulebook also contains the following and is quite specific on the issue of division between executive and non executive roles in a Bank: ” The Chairman and/or Deputy Chairman must not be the same person as the Chief Executive Officer.The Chairman must not be an Executive Director.” A similar provision is contained in the rulebook applicable to conventional banks.

While leading and conducting Corporate Governance reviews and consulting engagements at one of the leading practice leaders in Corporate Governance in Bahrain, I was sometimes asked the question ‘what is the international best practice on CEOs also being Board Chairman?’

A reading of the above Codes, rulebooks etc. leads one to a conclusion that experts and professionals around the globe advocate the need for separation of these two roles. Considering how long these ideas have been around, one would think that leading Banks and institutions, organisations and companies worldwide would have already implemented this key corporate governance recommendation.

However the reality is quite far from the truth…

Given below is list of some major Banks and Companies whose CEOs are also their Chairmen/women:

Goldman Sachs: Lloyd Blankfein

JP Morgan Chase: Jamie Dimon

Xerox: Ursula Burns

GE: Jeffrey R. Immelt

Gap Inc: Glenn Murphy

As can be seen above, a large number of large international Banks and MNCs still have the same persons leading both their companies and their Boards.

The main reasons advocated for separation of these roles are situations concerning Board review and approval of management compensation, Board review of CEO and Senior Management performance and, ensuring that a Company is being run in line with the mandate and best interests of the shareholders. In any Board deliberation on management compensation or performance of the senior management, a CEO cum Chairman would be in a ‘conflict’ situation. Being a Chairman, he/she could also influence the Board in which direction to vote. Whereas it is expected that an independent Director Chairman/woman would primarily have the interests of the shareholders at heart when it comes to deciding or discussing on the operations of a Company.

A look at major headlines across business news portals throws up many indications of stakeholders/shareholders asking for separation of this role. Recently Jamie Dimon faced requests for splitting of the roles at JP Morgan, though eventually shareholders approved him continuing with the dual role.

It was also heartening to note the way in which a similar issue at Goldman Sachs was resolved when a major advisor to Union Pension funds (with $250billion of assets-CTW Investment Group) pushed for splitting of the roles at the Investment Bank. The issue was resolved with one of the lead Directors being given new powers such as setting Board agendas and writing annual letters to the shareholders.

Also noteworthy are the cases of Chesapeake Energy and Avon shareholder activists succeeding in stripping their CEOs of the Chairman/woman role (or as in the case of Andrea Jung for Avon, vice versa)

I would also argue that good CEOs need to be in a position to influence their Boards if they are to take an entity from where it is, to achieve much loftier goals and strategies. Good CEOs should be Drivers.

A ‘Chairman CEO’ is just one of the eight or nine Directors (typical Board size) on a Board. Therefore it cannot be assumed in all situations he/she would be allowed to hijack a Board’s agenda and actions. Different Board sub-committees (with independent Directors) can also balance out the undue effect and influence of a ‘CEO Chairman’.

It can be seen from the above that ‘one size doesn’t fit all’.

So if you ask me ‘what is the best practice?’ I would say that I definitely endorse the view requiring separation of the roles. I would also say that Europe seems to be much ahead of the US in practicing this key corporate governance best practice. Finally I would say that ‘one size doesn’t fit all” provided appropriate mitigating controls as in the case of Goldman Sachs above, are established.


Investment Banks Strategy, the strategy of ‘do nothing’?


As a child one learns about animals that store up food before winter and then go into long deep sleep or periods of inactivity while living off their stored food reserves during the winter months.

As a Manager in the Risk Consulting division of one of ‘Big 4’ in Bahrain one comes across many types of Banks. There are the Banks that are busy all year round and there are those that choose to do absolutely nothing during recession years other than conserve capital. The region as a whole has been going through a deep recession and Banks in the region also took a big pounding due to their exposure to predominantly long and medium term real estate assets and projects. Many say that we are looking at the slow upswing of the curve in the long climb from recession. News reports tend to suggest that Investment Banks have started to do deals and have started looking at ventures and businesses for purchase in MENA, Europe etc.

However there is the breed of Banks that took a decision to not touch a single deal during the deep recession years. They tended to focus on ‘rolling’ of short term money market deals and nothing else. Due to depressed asset values, exits could not also be processed and hence ‘asset-management’ and ‘value- extraction’ were what Banks appeared to be focusing on, with an allergy towards further capital injections and loans to existing projects. While this was perfectly justifiable for Banks with little liquidity or mired in projects with significant unexpected stumbling blocks, a question needs to be asked as whether this ‘hibernation’ strategy was in the best interest for all stakeholders of the Banks who had reasonable available funds for investment.

Now that it appears that the economy is on the upswing, I start to wonder whether the concept of hibernation works for Banks. Was this strategy that was followed by some of these Banks the right one?

A review of financial figures and deal activity that are published in the paper does seem to suggest that some of them came away unscathed in the crisis as they maintained capital without any further exposures. They pared down staff to the most essential only. Placement, Investments, Operations, Corporate Communication and HR departments experienced the bulk of termination with numbers being pared down to the absolute minimum.

Stakeholders such as shareholders suffered the most. Shareholders had to stretch (and still are forced to) their patience razor thin. The question is, while the Bank survived and some employees retained their jobs, was this the best use of capital for all concerned? Have the economies in which these Banks are registered ultimately benefited?

Shareholder and customer activism in the region is almost non-existent (which is the subject of another blog post) as opposed to the situation in the United States, Europe and other regions such as India etc.  This allowed Banks to take the strategy of ‘hibernation’.  In regions such US, Japan, we see shareholder activists such as Daniel Loeb, Carl Icahn target Sony, Yahoo and others asking them to merge, split etc. as they are not performing.

On the other side it also appears that the relatively active Banks who continued looking at deals actively during recession years and did not shed their placement staff completely, were able to return much quicker to the markets and new customers at the first hint of return of investor confidence.

It seems they may have the last laugh as shareholders are compensated with dividends and employees with bonuses at the end of 2013.

One waits to watch whose strategy was better, those who hibernated or those were active…Two to three years from now the picture will be clear.