How to Separate the Roles of Chairman and CEO

Many companies that thought they knew how to split them stumbled along the way. Five steps can make the process smoother and more successful.

A substantial amount of time could be needed to effect the separation. In some cases, a company crisis may prompt directors to initiate it and to hire new leadership quickly. For the most part, however, boards have the luxury of time to seek out the right people for the two posts. The U.K. defense contractor BAE Systems, for instance, took more than a year to find a replacement for the outgoing chairman, Dick Evans, because of the industry’s highly specialized nature. In the United States, given the lack of precedents and the potential reluctance of candidates to accept the split, even more effort may be required to get the right nonexecutive chairman.

The best way to proceed is to make the division of the two roles an integral part of a company’s succession planning. As a McKinsey poll shows, U.S. chairmen-CEOs will probably resist ceding power. (See “What Directors and Investors Want from Governance Reform,” The McKinsey Quarterly, 2004 Number 2, pp. 30–9.) To avoid disruption that could harm their motivation and performance, particularly at top companies, boards may wish to wait until they leave before instituting a divided model. In the interim, the governance committee could appoint a lead independent director, who might be groomed as the next chairman.

Companies can also choose to stagger the separation of roles. At one European bank, for instance, the board developed a 15-month plan for the switch: First, a special committee would spend about six months to come up with the desired CEO profile and to undertake a broad search. Once the CEO had been appointed, he or she was to work with the former chairman-CEO, who would serve as chairman during a 9-month transition. When this period came to an end, the chairman would relinquish his job to a nonexecutive director. At the U.S. company Waste Management, the chairman-CEO, A. Maurice Myers, relinquished the CEO role to David P. Steiner, who was the company’s chief financial officer, in March 2004. When Myers retires as chairman, nonexecutive director John C. Pope is slated to succeed him.

Defining the Roles

One important and often overlooked task for the governance committee is to define the very different but complementary jobs of the chairman and the CEO, thereby reducing the possibility that overlapping roles will generate conflict between them. The natural starting point is for the committee, in conjunction with the entire board, to define the roles of the board and of management. Boards, at a minimum, must fulfill their oversight responsibilities under the law. But many want to go further by acting as adviser and coach to the CEO, by contributing in a meaningful way to the development of the strategy and talent of the company, and by helping to manage its performance. Every board must determine the specific role it wants to play and then agree with management on their respective functions. Clarity on this front will ensure that only candidates who complement the board receive consideration for the posts of chairman and of CEO.

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