You've probably noticed that most large, publicly-held companies are led by someone with the (long and impressive) title of "Chair of the Board of Directors and Chief Executive Officer."
And you've probably wondered if doing things this way produces the best corporate governance possible.
After all, aren't we talking about the leadership roles of two very different, and possibly conflicting, functions in a corporation?
Doesn't the Board of Directors and its Chair represent the corporation's owners (shareholders)?
And isn't the Board responsible for hiring the corporation's management which would be led by the Chief Executive Officer (CEO)?
Do you see the potential conflict? What happens when the shareholders are unhappy with the firm's management? Would someone filling both roles have a conflict of interest if the shareholders demand the CEO be fired?
It looks likes this heretofore common practice is changing, albeit slowly.
In 2002, only about 22% of all Standard & Poors-500 companies separated the Chair's job from the CEO. Currently, the percentage has increased to about 36% according to Corporate Library, a research group in Portland, Maine.
Some of the impetus for this shift comes from Britain where a 1992 corporate governance reform effort essentially requires a Board's Chair be an "outside" director. Doing it otherwise, which basically has been the American approach, means "The job of CEO has no boss," according to Harry Pearce, retired vice-chair of General Motors.
The key to making it work is applying the lessons we've learned.
A company's elected Board of Directors is responsible for deciding its strategic direction and hiring and supervising the CEO. Those duties constitute the governance function for which the Board is responsible and no one else.
Management is charged with implementing the strategic direction set by the Board. The CEO's job is to "make the trains run on time" and he or she should expect (and demand) the Board stay out of day-to-day operations.
Conflicts happen when roles and duties aren't clearly defined and understood. Blurring the governance and management roles by combining their leadership into a single position doesn't seem likely to produce good corporate governance.
Separating power and setting up checks and balances works well in government settings. Critics point out that it's not an efficient way to run things. Decisions take longer and the process isn't as tidy as it could be. But if that's the price for getting better decisions and, ultimately, better governance, it might be a bargain. What do you think?
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