A New Era in Corporate Governance

Directors and investors are demanding reform. Companies had better prepare for it.

Both directors and investors believe strongly that this separation must occur if boards are to provide the kind of independent oversight of management that investors demand. Investors are acutely aware that CEOs have tended to dominate boards over the past decade—sometimes with disastrous results—and wonder how a board with the CEO as chairman can oversee management. They also point out that the split structure works quite well in parts of Europe, in Canada and Australia, and in a small number of US companies.

CEOs, though, are resisting the change. Many argue that the combined model has served the US economy well and that splitting the roles might set up two power centers, which would impair decision making. CEOs also point out that finding the right chairman is difficult and that there are real negative consequences for choosing the wrong person. Clearly, they will strongly oppose giving up the power and influence they have worked so hard to accumulate.

Yet given the growing demand for change, CEOs, directors, and investors must form a plan that works for everyone. Since the topic of separating these roles can be highly charged and very personal, the board should discuss it solely as a business problem. Collectively, the board and the CEO need to come up with an approach that satisfies investors while retaining and motivating the CEO. At a minimum, a lead (or presiding) director should be appointed as an interim step. To bring more credibility to a role that many shareholders view as merely symbolic, however, the lead director must have clearly defined responsibilities and meaningful authority.

At the same time, the board should at least consider the idea of installing a nonexecutive chairman over time. The current CEO might support such a plan upon his or her retirement, which for many companies would be two or three years away. (The average CEO’s tenure is now five to six years.) Any prospective new CEO would be recruited on the clear understanding that the plan will be implemented. Shareholders are likely to consider these arrangements preferable to losing or diminishing the motivation of a high-performing CEO. In fact, discussions with CEOs indicate that many of them think that the roles of chairman and CEO will eventually be divided; they just hope this doesn’t happen on their watch.

Investors shouldn’t underestimate the challenge of finding the right non-executive chairman, who must have not only the experience, personality, and leadership skills to mesh with the current board and management but also sufficient independence to show that the board is no longer a rubber stamp for the CEO. If boards wait until regulators or investors force them to start searching for candidates, they may well find that other boards have already snatched up the best ones; in any event, the transition will be delayed.

Soon enough, moreover, investors may well have the tools—proxy-voting provisions and the like—to drive change. It would be better for boards to engage the issue now, and seriously.


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