It’s Time to Stop Splitting Hairs Over Splitting the CEO and Chairman Roles

Should we care who is the chair?

CEM_SONNENFELD_GSIn Logan City, Utah in 2011, a fast-thinking, brave construction worker inspired 10 fellow bystanders to help him rescue a motorcyclist pinned under a burning car after a fiery collision by lifting the 4,000-pound sedan. You don’t require a title to be a good leader. Nonetheless, boards ranging from large publicly listed corporations to small family enterprises endlessly debate whether the CEO can also serve as chairman.

Recent Events
This fall, the strong-performing CEO of Bank of America, Brian Moynihan, survived a contentious proxy battle over whether he could retain the dual tiles of chairman and CEO awarded by his board last year. Fashion legend Ralph Lauren made headlines by relinquishing his title as CEO, staying on as chairman and chief creative officer. Mylan Labs shareholders ratified a tax inversion proposal to become a Dutch company with a controlling foundation—which ensures it will continue to be led by an entrenched chairman with a figurehead CEO who functions in the shadows. Boeing’s highly regarded Jim McNerney recently stepped down as CEO but retained his chairmanship title. United Airlines just replaced Jeff Smisek with a president and CEO and a non-executive chairman of the board, amidst a federal investigation over possible criminal misconduct.

“The financial performance of once-high performing firms was actually diminished through the introduction of separate roles.”

Which of these models is the correct one? Surprisingly, stock exchange, SEC and IRS rules do not require the chairmanship title. Nonetheless, the doctrine of many governance activists is that both titles must be used, but always held by separate people.

No Panacea
Such arrangements may, on occasion make sense, such as at Ford Motor Company, where the Ford family controls 40 percent of the voting stock, or at firms going through disruptive change, such as United Airlines, or even smooth gradual successions, such as at Boeing. However, there is no reason to accept the conventional wisdom that the split roles are a panacea or predictors of better governance practice or superior financial results.

Most of the corporate scandals in the U.S. (WorldCom, Enron, Global Crossing) and all of those at scandalized UK firms (HSBC, Barclays, BP) took place in companies that had separate roles. A systematic study of 309 firms between 2002 and 2006 by Matthew Samadeni and Ryan Krause of Indiana University found that the financial performance of once-high-performing firms was actually diminished through the introduction of separate roles. They concluded, “If it ain’t broke, don’t fix it.”

Fewer than 25 percent of major U.S. firms actually separate the chairman and CEO roles, contrary to the religious fervor by many governance activists to do so. In fact, many firms cited by shareholder activists as poster children for the wisdom of the separation of roles experimented and discarded it. Such firms as IBM, Procter & Gamble, Boeing, Dell, GM and Walt Disney reverted back to combined roles after just one term of split roles. Last year, 18 of Fortune’s top 25 “Most Admired Firms” (Amazon, Starbucks, Facebook, PepsiCo) had combined chairman/
CEO leadership roles.

Boards need strong, independent-minded directors like United’s Henry Meyer, Bill Nuti and Walter Isaacson, with a lead director—or a chair who can set the agenda and provide backbone to remove the CEO—whatever the titles.

This article can be found in the November/December 2015 issue of Chief Executive magazine, on page. 26. To subscribe to Chief Executive magazine, click here


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