24 2月 Should the roles of chairman and chief executive be split?
There is a schism between the UK and the US in their approach to the relationship between the chairman of the Board and chief executive. Specifically, whether the roles should be combined or whether the chairman should be an independent director.
This is not a new question and it has been an on-going debate for many years but certain recent events have brought the issue to the fore again. Most notably, in response to shareholder pressure, Research in Motion (“RIM”) has recently adopted an independent chairman and the US approach is slowly moving this way as well.
The UK Approach
Ever since the Cadbury Report in 1991, listed companies in the UK have adopted the approach of separating the role of chief executive and chairman as part of their corporate governance regime. It is also common in the UK for the chairman to be an independent director.
Provision A.2.1 of The UK Corporate Governance Code states that “The roles of chairman and chief executive should not be exercised by the same individual”. It goes on to say in provision A.3.1 that the chairman should be independent when appointed and not be an ex-chief executive or executive director.
As far as splitting the role of chief executive and chairman goes, this is widespread in the UK and just 11 companies in the FTSE 350 still combine the role. However, when it comes to the chairman being independent there is a split between support in principle and support in practice. Support for the idea that an independent chairman is a good idea is near universal when directors are asked about it, but of the 39 new chairmen appointed in 2010/11, seven were not considered independent at the time of their appointment.[ref]Corporate Governance Review 2011, Grant Thornton[/ref]
So even in the UK where the idea of an independent chairman is fairly embedded, the attractiveness of individual candidates still sometimes overrides the underlying corporate governance principles.
The US Approach
The US has traditionally combined the role of chairman and chief executive and there is still strong support for it across the pond. However, a trend towards separating these roles is beginning to come to the fore.
According to a report by Spencer Stuart, in 2010, 40% of the S&P 500 had split the role of chairman and chief executive, up from 23% at the beginning of the decade. Of the 40%, 19% were classified as independent chairman. In fact, an early draft of Dodd-Frank Act mandated the separation of the roles, although this was later dropped.
These figures though may be overstating the differences. The traditional US model does not ignore the oversight and accountability function that is fulfilled by the chairman in the UK. In the US the role of the lead independent director is much stronger that it is in the UK and it is this role that provides some of the checks and balances that may otherwise be missing.
There are some that suggest that the difference is more to do with semantics than substance; that the lead independent director in the US is equivalent to a chairman in the UK. This is probably going too far, but it is worth bearing in mind when comparing the two systems.
Research in Motion
Last month RIM, the makers of the Blackberry, issued a report of their independent governance review committee. The report recommended the splitting of the role of chairman and chief executive and mandating this in the governing documents of RIM.
The review came about after a shareholder group threatened a vote on RIM’s corporate governance structure at RIM’s AGM. In particular the concern was that the two founders (and largest shareholders) were also the co-chairman and chief executives.
The results of the review were largely expected but, interestingly, the review itself doesn’t give any real analysis of the advantages and disadvantages of splitting the role. This would have seemed to obvious point for the committee to consider. Instead the review weighed up the pressure from RIM’s Canadian shareholders (Canada has a similar approach on this issue to the UK) against the approach of the US where RIM’s largest market is and hence its competitors. The review decided that “strong opposition to non-independent chairs in Canada should outweigh the other considerations”.
This suggests that, though there was no explicit analysis, the governance committee assumed that splitting the role of chairman and chief executive may have RIM’s competitiveness in the US as its competitors would be able to retain a joint role. Quite a controversial view to present without any reasoning, especially as Apple, one of RIM’s largest competitors, recently appointed a stand-alone chairman.
It is a shame that the corporate governance review didn’t even attempt to weigh up the advantages and disadvantages of the two systems so instead, I will have a go.
Which system is better?
The first thing to say is that there is relatively little clear evidence about whether it’s better to have an independent chairman or a combined chief executive and chairman.[ref]For these purposes I will look at the extreme situations and ignore the third option of a separate non-independent chairman[/ref] The following is therefore based just on my own views and opinions so please do let me know if you disagree.
A single powerful chairman/chief executive has served many companies well. RIM itself had the approach because its two very successful founders had taken the company to great heights with the model. Steve Jobs would be another very obvious example (though he wasn’t the chairman, there was no chairman of Apple while he was in charge) whereby a strong but largely unaccountable leader made a huge success of a company.
However, away from the superstars, what little empirical evidence there is suggests that there is little difference in the valuation of companies whether they have a joint chair/CEO or whether they separate the roles. The original justification for separating the role was the increased oversight that an independent chair can bring to the board. The Cadbury report in the UK recommended splitting the role for this reason and in the US it is similarly a string of scandals at companies the combine the roles that has triggered recent changes; notably Enron, News Corporation, Total and Tyco. Yet the importance of this is probably overplayed, when the same oversight can probably be provided by a strong lead independent director.
In my view, the starting position for a company should be to have a strong independent chairman but this should only be the starting point. Sometimes, the skills and strengths of a particular candidate can and should overrule this position. This is why I think RIM has got it wrong in mandating an independent chairman in their governance documents. It prohibits the company from taking advantage of certain candidates and limits their flexibility going forward.
Good corporate governance is a philosophy and a way of working that companies need to adopt and not a series of tick boxes. This is a fundamental point, but one that is all too often forgotten in the heat of an argument. Those corporate governance activists that want to mandate companies to have independent chairman are forgetting this principle. Companies should be able to appoint the same person to both positions of have non-independent chairman as long as they can and do explain to their shareholders the reasons for this and how the necessary checks and balances will be maintained.