Investment Initiatives » Separating the Chairmanship from the CEO

06.01.08

Separating the Chairmanship from the CEO

Posted in Blog at 4:11 pm

Overlooked in the controversy regarding the Rockefellers’ dispute with Exxon Mobil over the future direction of that corporation is the fact that one of their motions had nothing to do with alternative energy sources: a proposal to split the roles of chairman and CEO. The proposal to divide Rex Tillerson’s job received an impressive 39.5% (virtually the same as last year, despite an heroic effort by management to fight the proposal) but given that the company has opposed this proposal seven years in a row, it is unlikely that the board would accept anything other than an outright win for proponents of the measure, and perhaps not even that.

The Rockefellers were probably concerned that Tillerson is opposed to their alternative energy investment program, and the separation of roles resolution may have been specifically targeted at reducing his power. Those investors who saw it as an ad hominem attack were probably inclined to oppose this resolution as well, because Tillerson has been an outstandingly successful head of Exxon. But the argument that a CEO ought not be his own boss stands on its own merit, without regard for the achievements of any single executive. Separating the chairman of the board from the chief executive is not about annual earnings enhancement; it is a risk-limiting measure.

Even in the limited area of the public corporation, the lesson of history is that uncontrolled power is potentially corrupting. The counter argument is that this is the only way to avoid crippling indecision at the summit of an organization. This is always the argument for autocracy. “Someone must ultimately be the one responsible,” autocrats claim, “and the just authority [the board, the shareholders, God(!)] will remove him if he fails in that responsibility.” The reality is that such individuals frequently evade the blame for their own mistakes, often re-structure a board when it looks likely to withhold support, and can often engineer change of the already supportive shareholder voting rules to protect the entrenched chairman/CEO even further, most especially when the mistakes made have been of heroic proportions.

The idea of dictatorship as the only form of rule which can guarantee efficacy is perpetually seductive to some minds. Perversely, this model has been shown again and again to be most susceptible to corruption from within. Outside minority shareholders, and analysts who have no long-term stake in the company, as well as journalists, all prefer to have one person in charge, a face and voice they can assume always speaks for the company and constitutes its will. The actual necessity for collaborative execution of decisions belies this, but it is always more convenient for outsiders to assume the company is like an advancing army, give all credit to the general, and to screen out any messiness which might accompany critical decisions.

True, most CEOs are not monsters in the making: fortunately! But very few individuals armed with the power can always resist the temptation to impose upon their board a decision about which a majority are uneasy. Some of these decisions turn out to have long-term unanticipated consequences for the company and its culture. It is precisely at the moment when the power of the Chairman/CEO is being abused that the potential corrective of an independent chairman and a truly independent board are necessary, not months or years later, after a major mistake has been made and acknowledged.

I used to work closely with two colleagues who were themselves former chairmen and CEOs of major corporations. Both had been and continued to be active on many signature boards, as well as counseling managements on issues of corporate governance. When this ‘foreign’ proposal to impose a division between the two roles of chairman and chief executive was first mooted in the United States, both of them were opposed to it. But as they reflected upon their own experience, and observed the behavior of their fellow CEOs with the perspective that came from having been there themselves, they began to feel more and more strongly that no one should have the power which comes from combining the two roles. They came to realize, as one of them put it, that a CEO can abuse his authority without even knowing it, and discourage even the least expression of contrary views without consciously attempting to stifle dissent or censor anyone. The added efficacy wasn’t worth the added risk, or even the likelihood of merely minor abuses of one’s authority.

The experience of Britain and other countries which normally divide the chairmanship from the job of chief executive has been extremely positive. A non-executive chairman seldom, if ever, tries to run a company; except in the case where he is himself the former CEO, he would in any case be unlikely to command the support to do so. Open disputes between chairmen and CEOs almost always occur only when the CEO has screwed up, and the company is in trouble. In this limited number of cases, this is exactly what the independent chairman is supposed to do. Companies with this dual structure have not been shown to be any less competitive than their autocratically-run brethren. And there is, under this dual structure, almost no chance of the dangerous hiatus which occurs when the chairman/CEO must be removed, and there is no successor groomed and waiting in the wings.

It is often argued that dividing the roles of an existing chairman/CEO would be such a slap in the face that a good executive would be likely to quit, rather than see his job publicly reduced. However, it seems that most boards are equally fearful whenever a new CEO is to be named, to give him less power than his predecessor. The reality is that boards themselves almost never voluntarily divide the two jobs, and probably never will. Yet most CEOs would still be happy merely to lead their companies if the possibility of concurrently being chairman were not available. The vanity of the current crop of CEOs will have to be sacrificed by an aggressive campaign coming from the shareholders themselves, if this essential risk-reducing reform is ever to succeed.

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