Splitting the Chairman and CEO Roles

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Managing Performance

While I've had the privilege of working with some truly outstanding nonexecutive chairs, I have found that one of the biggest headaches in Canadian corporate governance is this: It's very hard to get rid of a bad nonexecutive chair. Who takes him or her out? It can't be the CEO. While there have been instances of a palace coup launched by other directors in circumstances where the nonexecutive chair was a true disaster (such departures are almost always couched in the context of "other commitments") they are few and far between.

Underperforming or problematic nonexecutive chairs are most typically allowed to continue underperforming until they reach mandatory retirement age simply because no one else on the board is in a position to put the bell on the cat.

Problems of managing the performance of nonexecutive chairs seem equally prevalent in Britain. In 1998, the Hampel Report alluded to this situation by recommending that British boards name a senior independent director who could ride herd on the nonexecutive chair. Hampel's recommendation would hardly have been necessary unless there were performance issues in that country, too.

Whether a nonexecutive chair or a lead director is your model of choice, to help better manage performance be sure to incorporate questions on board leadership into your annual board assessment and ensure that another committee chair (of the audit or compensation committee, perhaps) is given responsibility for collecting and delivering this feedback so that you don't create a situation where the board leader is conducting his or her own performance evaluation.

Parachuting

Performance issues among nonexecutive chairs in Canada and Britain are sometimes compounded by another practice common in both countries, namely recruiting a chairman who has not previously served as a member of the board. Lead directors, on the other hand, are typically chosen by their peers from among the current board members; the advantage being that it's known how this individual interfaces with fellow directors and the CEO. The position of lead director tends to be a rotational one. While U.S. practice on terms for lead directors is still evolving, a term of three to five years seems prevalent, and most continue to serve on the board after stepping down. Those recruited to be chairman typically serve in this role until they reach mandatory retirement age—often after a tenure of 10 years or more—and then leave the board.

Pay

Nonexecutive Chairs John Pepper and Stephen Ashley each receive $500,000 a year in chairman's fees (compared with annual board retainers for other directors of $65,000 at Disney and $100,000 at Fannie Mae). Lead directors Ralph Larsen and James McNerney are paid no more than any board members. The only material difference between the job of a nonexecutive chair and lead director is presiding at board meetings. Is this worth a half-million dollars a year to shareholders? Might this level of compensation not actually counter the very rationale behind splitting the roles in the first place, that of providing independent leadership to the board? How truly independent is a nonexecutive chairman who is pulling down $500,000 a year?

There are many highly effective nonexecutive chairs providing outstanding leadership to boards in Britain, Canada, and the U.S. There are lead directors doing so as well. It comes down to the effectiveness of the individual. Separating chairman and CEO roles not only provides no guarantee of better leadership, it can result in some downsides that U.S. boards and institutional investors should consider carefully before making this decision.

Beverly Behan is the managing director of the Board Effectiveness Practice of the Hay Group and co-author of Building Better Boards: A Blueprint for Effective Governance. She writes "The Boardroom" for BusinessWeek.com/Managing/.