Splitting the Chairman and CEO Roles

It's a popular practice outside of the U.S., but there are some serious potential downsides that deserve consideration

by Beverly Behan

Watch the Video…

U.S. boards typically combine the roles of chairman and chief executive officer, a majority practice among the Standard & Poor's 1500 composite index even today. Among the companies that do so, it is also common to appoint an outside independent director to serve as lead director. In Britain, where boards historically have had fewer independent directors than their American counterparts, a different practice arose: that of appointing an outside, independent director as nonexecutive chair. The question of whether U.S. companies should adopt the British model of separating chairman and CEO roles surfaces every time a corporate crisis erupts in America, most recently in the controversy over Countrywide Financial (CFC), where institutional investors called for splitting the combined roles held by Angelo Mozilo.

Institutional Shareholder Services' latest survey, released in September, 2007, noted that 36% of U.S. institutional investors favored the separation, although 50% found appointment of a lead director entirely satisfactory when the chairman and CEO roles are combined. Does separating the roles really provide better governance, or is it simply window-dressing for shareholders with little impact on board effectiveness? Before deciding what's best for your board, here are some practical implications to consider:

In 2004, the National Association of Corporate Directors (NACD) convened a blue ribbon commission comprised of 50 experienced board members, CEOs, and institutional investors to study the issue. Among the commission's findings:

• One-third had a strong preference for separating the chairman and CEO roles, expressing concerns about the leader of the board (as chairman) also being the employee of the board (as CEO), and advocated the model of a nonexecutive chair as a best practice;

• One-third had strong reservations about separating the roles and advocated maintaining the current practice of combining them but appointing an outside, independent director as lead director;

• One-third felt it made little difference if independent board leadership was provided by a lead director or a nonexecutive chair. In this group's view, it was the effectiveness of the individual who provided leadership that mattered, and whether that person carried the title of nonexecutive chair or lead director didn't matter in the least.

The NACD endorsed the last view above as "best practice."

Recent surveys show that more than 70% of the Fortune 1000 now have lead directors. While some U.S. boards have appointed nonexecutive chairs, this practice has been adopted almost routinely at companies that have been through crises such as Tyco (TYC), Marsh & McLennan (MMC), AIG (AIG), Fannie Mae (FNM), and Walt Disney (DIS), which tout the separation of the roles as proof of a renewed commitment to good corporate governance. But is it? Or is the U.S. model—that is, appointing a lead director and leaving the chairman/CEO roles combined—actually a more effective system of board leadership?

I began my career working with boards in Canada 12 years ago, a country where chairman and CEO roles are nearly always separated. Over the past dozen years, I've worked with nearly 80 boards in both the U.S. and Canada, gaining perspective on the practical implications of each model, in particular some of the downsides inherent in splitting the chairman and CEO roles.