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Who’s The Chairman?

I think I have the answer to the current quiz question being tossed out in corporate governance circles. “Who should be Chairman of the Board?”Should it be the CEO, as most American companies have it, and as most CEOs want it? Should it be an independent, outside director as the British do it, and if …

I think I have the answer to the current quiz question being tossed out in corporate governance circles. “Who should be Chairman of the Board?”

Should it be the CEO, as most American companies have it, and as most CEOs want it? Should it be an independent, outside director as the British do it, and if so, should the chairman be elected by the stockholders? Should it be someone designated, or approved, by a government agency, such as the SEC? What about the retiring CEO? Or the largest shareholder? Should it be different for public companies versus private companies, for banks, for public utilities, for companies in financial trouble?

These are not frivolous questions. They are being asked aggressively by institutional shareholders, shouted shrilly by stockholder organizations and proffered seriously by all kinds of pundits who feel that an independent chairman may help to curb excessive executive compensation, abuse of perquisites, board domination and egotistical or aberrant CEO behavior that damages the corporation.

So who should it be? I have finally remembered what I was taught to say at Harvard Business School when confronted with a thorny problem. The simple answer is: “It depends.”

All things being equal, which they never are, I think the CEO should usually be the chairman as well. There are just not enough valid reasons why he should not be. The CEO has to be so deeply involved in setting the agenda, arranging the presentations and offering recommendations that he ends up acting as the functional chairman anyway. Even a good independent chairman adds little; a weak or inept one can stifle board effectiveness.

Yet, there are some times when it makes sense for the CEO not to be chairman. For example:

  • When the CEO baton is passed with only a short time remaining before the former CEO retires. I did this myself for nine months and it made for a harmonious transition to my successor.
  • When the new CEO has had limited experience, but is still the logical choice for a variety of special reasons. A senior director may be able to act as chairman/mentor while the new CEO is continuing to mature. I have seen this work well several times.
  • In a family-held or closely held company, the dominant family member or largest shareholder may want to hold the chairman’s post for monitoring reasons. It doesn’t follow that he is a good chairman-he may even be a bad one-but I believe he has the ownership right to be chairman if he wants to.
  • In a new venture or buy-out, when the principal backer wants to be closely involved, but not as CEO.

For the most part, these are transitional situations. After a while, the CEO moves up, or the chairman moves on, or the CEO moves out.

Conversely, there are times when it is unrealistic not to make a new CEO chairman. A newly recruited CEO often will not take the job unless he is also made chairman. A longtime president and COO may leave the company if he is not made both chairman and CEO. Worst of all is the chairman and CEO who reaches mandatory retirement age as CEO but hangs onto the chairmanship.

I can’t see anything wrong with having the board elect its own chairman each year, simultaneously deciding whether he should be an outside director, or the CEO or whomever. If large individual or institutional shareholders want to influence this selection, let them suggest nominees to the nominating committee. These days, any company that fails to listen to its major stockholders is asking for proxy fight trouble.

I can see everything wrong with having a government agency approve a

chairman’s appointment. Deciding what a chairman’s credentials should or should not be invokes a nightmare. Business and boards don’t need this kind of help.

As a matter of fact, the general state of corporate governance is working pretty well and getting better. We focus so much of our attention on the Wall Street highbinders, the savings bank sharks and the couple of dozen CEOs who came up with absurd compensation deals, that we forget about the good things that are happening.           I

Great progress has been made in converting boards to a preponderance of outsiders (next month’s “Speaking Out” column will focus on the situation at General Motors), in improving the quality and toughness of audit, compensation and nominating committees, and in handling the complicated and critical issues that companies face today.

Are there some instances in which an independent chairman would improve corporation governance? Yes. Where and when are these instances? It depends. Let the companies and their boards decide for themselves.

As for me, I don’t want to be an independent chairman of a board. I want to be an independent director, so I can feel free to support and criticize the CEO whenever I wish and without having to worry about a functionless supernumerary getting in the way.


Formerly the CEO of F.&M. Schaefer (1972-1977), Robert W. Lear teaches at Columbia Business School, where he is Executive-in-Residence. He is an independent general partner of Equitable Capital Partners and holds directorships with Cambrex Corporation Inc.; Crane Company; Scudder International and Scudder Institutional Funds; Korea Fund; Medusa Corporation; WICAT Systems Inc.; and Welsh, Carson, Anderson, Stow Venture Capital Co. His latest book is How to Turn Your MBA Into a CEO.

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