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The Securities Edge Securities Blog for Middle-Market Companies

Separating the positions of CEO and Chairman: The debate rages on

Posted in Corporate Governance

Independent ChairmanAre the CEO and the Chairman of the Board the same executive at your company?  While there can be very good reasons to have these positions held by the same person, the separation of these posts continues to be a hotly debated topic.  Since the early 1980s, much attention has been paid to corporate boards of directors and how their structures improve (or undermine) organizational performance. In the wake of the recent financial crisis, public corporations have come under scrutiny from activist shareholders, institutional investors, advisory firms and regulators alike.  So naturally, this is the source of the debate over the separation of the CEO and Chairman positions. 

According to the ISS Governance Exchange, in 2012, investors filed 49 independent chair proposals, with more than three-quarters coming to a vote, including three that received majority support.  As of February 1, 2013, this year’s volume of filings now exceeds last year’s total with 53 firms targeted by shareholders seeking a split of the top posts, with additional filings likely at companies meeting later in the year.  Notably, the record for such proposals was set in 2010, with a total of 66. 

Proponents of CEO and Chair independence base their view on the inherent system of checks and balances that the Board, and particularly the Board’s Chairman, is supposed to impose on management.  Essentially, a firm’s Board and Chairman of the Board serves to hire, fire, evaluate and compensate management (including the CEO) based on performance.  Clearly then, these proponents argue, a single CEO and Chairman cannot perform these tasks apart from his or her personal interests, making it more difficult for the Board to perform its critical functions, if and when the CEO is its Chairman.  Accordingly, separation of the Chairman and CEO roles, can lead to better management and oversight because an independent Chairman is able to ensure that the board is fully engaged with strategy and to evaluate how well that strategy is being implemented by management. Importantly, appointment of an independent Chairman can also signal to all stakeholders that the CEO is accountable to a unified Board with a visible leader. 

But while largely helpful from a corporate governance standpoint, one must note that the separation of CEO and Chair positions can impose several costs on a firm.  First, while appointing an outside Chairman can reduce the agency costs of controlling a CEO’s behavior, such an appointment introduces the agency costs of controlling the behavior of the non-CEO Chairman.  Essentially, the power associated with the Chairman position is extensive, and while CEOs generally have great reputational and financial capital risk in the future performance of the company, which incentivizes the single CEO and Chairman to act in the best interests of the firm overall, such may not be the case with an outside Chairman.  Second, in light of the CEO’s usually unparalleled specialized knowledge regarding the strategic challenges and opportunities facing the firm, separating the CEO and Chairman titles necessitates the (sometimes) costly and generally incomplete transfer of critical information between the CEO and the Chairman.  Third, splitting the titles can possibly dilute CEO and Chairman power enough to affect their individual ability to provide effective leadership, to create the potential for rivalry between the separate title holders, and to lead to confusion over who is really in charge, both within and outside of the firm.  Finally, and perhaps most important, separation of the positions might make it more difficult to pinpoint the source of bad corporate performance. 

In light of the foregoing, there are both pros and cons in requiring the separation of the CEO and Chairman positions.  Generally, despite the apparent benefits of CEO and Chairman independence, separation of the CEO and Chairman positions may not be a one size fits all solution. When making the decision in this arena, therefore, each firm must evaluate its particular strategic environment, and take into account all costs and benefits associated with separating the positions as they relate to the firm’s particular circumstances.