Corporate Governance: Separating the CEO and the Chairman Roles

The D & O Diary does a great tackles the issue of separating the CEO and Chairman positions. Corporate Governance: Separating the CEO and the Chairman Roles : The D & O Diary:

"A growing chorus of voices is calling for public companies to make the separation of the Chairman and CEO functions the default governance structure. This movement, which may have the support of the new SEC Chair, appears likely to lead to some type of 'adapt or explain' approach. Increasing evidence that the companies where the CEOs also act as board Chair are likelier to have 'certain troubling governance characteristics' will likely encourage shareholder interest in the initiative as well."

"The Millstein Center’s March 30, 2009 press release (here) reports that while in the U.k. only 5% of the FTSE 350 companies combine the chairman and CEO roles, over 60% of the S&P 500 companies have boards that are chaired by their CEOs"

"....as noted by the Chairmen’s Forum report, that "the overwhelming majority of financial institutions had combined roles before the current crisis erupted" – including, among others, Bear Stearns, Lehman Brothers, Citigroup, Washington Mutual and Wachovia.

On the other hand, there may be limits to how much can be expected or discerned from this single governance trait. As the Chairmen’s Forum’s report also notes, "splitting the role of chairman and CEO does not guarantee the application of independent oversight,"

The piece does cite research from the Corporate Library that argues that separation of the two positions is good for a number of reasons (but noticeably absent is stock performance).

From the Corporate Library press release:

"March 25, 2009 – A new study from The Corporate Library, an independent corporate governance and executive compensation research firm, found that companies whose chief executive officers (CEOs) also serve as Chair of the Board are more likely to have certain troubling governance characteristics than companies where the roles are separated. The study is the result of an analysis of the board leadership structure at more than 3,000 North American companies.

The governance features in question, all of which have been associated with board entrenchment
or lessened oversight of management, include:
• relatively long CEO tenures;
• fewer board meetings per year;
• classified board structures; and
• the presence of executive committees, which are typically given the power to act on
behalf of the entire board, potentially allowing for a concentration of power among a few
board members."

While there are obvious conflicts with having the same person perform each role, there may be good reasons for having a single CEO/Chair. But before the baby is thrown out with the bath water, it is important to see both sides.

The separation of CEO and Board Chair has been an issue for over a decade (see this 1996 paper by Dahya, Loni, and Power finding that separation results in positive stock price reaction).

Both sides agree that incentive conflicts can exist when the same person is the both the CEO and Chairman of the board, but there what the sides disagree with are whether these conflicts are enough to outweigh potential benefits of the roles each being played by same person.

For instance from the FinanceProfessor summary of a 2004 paper paper by Brickley, Coles, and Jarrell,

"Notably the paper posits the view that the CEO has valuable inside information and he may be better able to use that in both roles. Further that firms use the multiple title to phase in and phase out new CEOs. Conclude that there are good points of having a single person in charge of both positions."

and from a Knowledge@Wharton 2004 article entitled "Splitting up the Roles of CEO and Chairman: Reform or Red Herring?

"...Michael Useem, director of Wharton’s Center for Leadership and Change Management, says a few statistical studies have compared companies where two persons hold the CEO and chair positions with companies where one person holds both posts. This research, which also took into account other factors that can affect financial performance, shows that whether a company does or does not separate the CEO and chairperson titles “has no bearing on corporate financial performance,” he notes."

And while clearly these papers are 5 years old now and the trend is noticeably towards separation, the evidence is still not so overwhelming in either direction as to be certain. Would I encourage separation? Yes. But making it mandatory (or even making firms explain why they are not separating the two) seems to be a case of regulation going too far.