It’s common knowledge that separating the roles of CEO and Board Chairman (see Chairmen’s Forum) is considered by most the epitome of best practice ....
Wrong. As I detail in my recent article Dodd-Frank: Quack Federal Corporate Governance Round II:
A study by Olubunmi Faleye ... finds support for the hypothesis that firms actively weigh the costs and benefits of alternative leadership structures in their unique circumstances and concludes that requiring a one size fits all model separating the CEO and Chairman positions may be counterproductive.[1] Another study by James Brickley, Jeffrey Coles, and Gregg A. Jarrell found “preliminary support for the hypothesis that the costs of separation are larger than the benefits for most firms.”[2] As John Coates summarizes the field, the evidence is mixed, at best:
At least 34 separate studies of the differences in the performance of companies with split vs. unified chair/CEO positions have been conducted over the last 20 years, including two “meta-studies.” … The only clear lesson from these studies is that there has been no long-term trend or convergence on a split chair/CEO structure, and that variation in board leadership structure has persisted for decades, even in the UK, where a split chair/CEO structure is the norm.[3]
Although Coates concludes that splitting the CEO and Chairman positions by legislation “may well be a good idea for larger companies,” he further concludes that mandating such a split “is not clearly a good idea for all public companies.”[4]
In my view, proponents of a mandatory non-executive Chairman of the Board have overstated the benefits of splitting the positions, while understating or even ignoring the costs of doing so. Michael Jensen identified the potential benefits in his 1993 Presidential Address to the American Finance Association, arguing that: “The function of the chairman is to run the board meetings and oversee the process of hiring, firing, evaluation, and compensating the CEO. … Therefore, for the board to be effective, it is important to separate the CEO and Chairman positions.”[5] In fact, however, overseeing the “hiring, firing, evaluation, and compensating the CEO,” is the job of the board of directors as a whole, not just the Chairman of the Board.
To be sure, in many corporations, the Chairman of the Board is given unique powers to call special meetings, set the board agenda, and the like.[6] In such companies, a dual CEO-Chairman does wield powers that may impede board oversight of his or her performance. Yet, in such companies, the problem is not that one person holds both posts; the problem is that the independent members of the board of directors have delegated too much power to the Chairman. The solution is to adopt bylaws that allow the independent board members to call special meetings, require them to meet periodically outside the presence of managers, and the like.
Turning from the benefit side to the cost side of the equation, even if splitting the posts makes it easier for the board to monitor the CEO, the board now has the new problem of monitoring a powerful non-executive Chairman. The board now must expend effort to ensure that such a Chairman doesn’t use the position to extract rents from the company and, moreover, that the Chairman expends the effort necessary to carry out the post’s duties effectively. The board also must ensure that a dysfunctional rivalry does not arise between the Chairman and the CEO, both of whom presumably will be ambitious and highly capable individuals. In other words, if the problem is “who watches the watchers?,” splitting the two posts simply creates a second watcher who also must be watched.
In addition, a non-executive Chairman inevitably will be less well informed than a CEO. Such a Chairman therefore will be less able to lead the board in performing its advisory and networking roles. Likewise, such a Chairman will be less effective in leading the board’s in monitoring top managers below the CEO, because the Chairman will not know those managers as intimately as the CEO.
[1] Faleye, Olubunmi, Does One Hat fit All? The Case of Corporate Leadership Structure (January 2003), http://ssrn.com/abstract=394980.
[2] James A. Brickley et al., Corporate Leadership Structure: On the Separation of the Positions of CEO and Chairman of the Board, Simon School of Business Working Paper FR 95-02 (Aug. 29, 2000), http://ssrn.com/abstract=6124.
[3] John Coates, Protecting Shareholders and Enhancing Public Confidence through Corporate Governance (July 30, 2009), http://blogs.law.harvard.edu/corpgov/2009/07/30/ protecting-shareholders-and-enhancing-public-confidence-through-corporate-governance/.
[4] Id.
[5] Michael C. Jensen, Presidential Address: The Modern Industrial Revolution, Exit and the Failure of Internal Control Systems, 48 J. of Fin. 831, 866 (1993).
[6] James Verdonik and Kirby Happer, Role of the Chairman of the Board 2 (explaining that “one of the duties of the Chairman is to call meetings of the Board of Directors and the shareholders. … Chairmen often set the agenda for Board meetings”), www.directorsforum.com /role-of-the-chairman-verdonik-happer.pdf.
