The CEO cum Chairman – Best Practice?

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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.

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2 thoughts on “The CEO cum Chairman – Best Practice?

  1. Pingback: The CEO cum Chairman – best practice? | Joseph Thomas

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