U.S. companies are increasingly separating the roles of the chairman and the chief executive officer. Boeing, Dell, the Walt Disney Company, MCI, Oracle, and Tenet Healthcare have all done so during the past year, and a new study (by Governance Metrics International) finds that roughly one-third of U.S. companies have adopted such a split-leadership structure, up from a historical level of about one-fifth.
Yet while more companies — in the U.S. and elsewhere — agree that separating the two roles makes sense, many are less sure about the best way to proceed. This uncertainty results in part from the polarized opinions of key stakeholders about whether to separate the roles in the first place and in part from the absence of widely disseminated best practices. For instance, company directors and investors in the U.S. seem to support splitting the roles — hardly surprising, given the mounting pressure on boards to become more independent of management — but CEOs are understandably less certain.
Experience from the United Kingdom, which has experimented with the split model for more than a decade, indicates that companies should move deliberately and judiciously. What may seem like a straightforward change of roles is actually a complicated process influenced by unpredictable factors — especially the personal interactions of the two people chosen for the posts. The switch requires careful planning and can take years to execute smoothly. Many companies thought they were doing well, only to stumble along the way.
Take the British retailer Kingfisher, whose chairman-CEO Geoffrey Mulcahy relinquished the chief executive role in 1993 to Alan Smith, recruited from the retailer Marks and Spencer. Investors, figuring that Mulcahy’s famed strategic thinking would dovetail nicely with the retailing skills Smith had honed during 27 years at M&S, applauded the move. However, Smith had difficulty adjusting to Kingfisher’s more entrepreneurial and decentralized culture. After two years, when it had become obvious that the men’s poor working relationship had contributed to a string of bad financial results, the board took action, showing Smith the door. Mulcahy was named CEO with a charge to fix Kingfisher’s many problems, while nonexecutive director Nigel Mobbs became acting chairman. “There was a duplication between Geoff Mulcahy and Alan Smith, and this I think led to confusion,” concluded Mobbs at the time.
Boards bear the ultimate responsibility for making the split work. Experience suggests that five things are required to manage it in a smooth and orderly way: identifying the right board members to lead the process, determining the best form and timing for the separation, defining suitable roles for the chairman and the CEO, appointing an appropriate person to each post, and fostering a productive relationship between the two. Some of this article’s recommendations, drawn primarily from experience in the United Kingdom, may seem intuitively obvious, but companies ignore them at their peril.
Leading the Process
Since boards bear responsibility for the outcome of the process, they ought to lead it and choose the candidates. (If the board has no governance or nominations committee, the process should be led by independent members under the stewardship of the lead independent director, if any.) But it’s not a good idea to include all board members. The board’s governance (or nominations) committee, which should consist of only independent directors, ought to take the lead, while board members who are executives of the company probably ought to recuse themselves, since otherwise they would be choosing their own bosses.