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COMMUNITY UPDATE

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In the wake of the numerous corporate and financial scandals that have befallen the business world in the past decade there have been frequent calls for stricter governance. In the UK, this governance has been built into corporate structure by enforcing a separation between the chief executive and chairman.  

Although this is not widely practised outside the UK, organisations the world over are looking at the benefits of dividing the roles. 

In fact, last week, in the name of governance, the California Public Employees Retirement Fund (CalPERS), voted to split the roles of chairman and chief executive officer at Goldman Sachs.

CalPERS, the largest US public pension fund, is using its size (1.81 million Goldman shares) to split the roles when the next CEO is named. “CalPERS believes if the chair is not the CEO, the board may be able to exercise stronger oversight of management,” the pension fund said on its website.

Bank of America, Citigroup and Morgan Stanley, Goldman’s main rivals, have divided the roles in the past three years. 
Why is it so important to have a separate chief executive and chairman?

Regulation - “In terms of governance, it helps immensely with checks and balances, and better control if the roles are split,” says Ian Harley, NED and Audit Committee Chairman at John Menzies plc, and NED, SID and Audit Committee Chairman at Remploy Ltd.

Skill sets - “They are two quite different jobs which require two different skills and experience sets. That’s why they require two different people,” he says. “There is more than enough for two people to do.”

Checks and balance - “Two sets of eyes across a strategic proposal are better than just one,” says Helen Alexander CBE, President, CBI. “It is therefore very useful to have someone who is paid to have a bit of distance, to have antennae attuned to external stakeholders as well as to internal ones, who can give courage, support and extra vim and vigour to the right decisions.” 

A strong relationship between chairman and CEO is vital to a smooth running organisation. Best described as a ‘critical friend’ the chairman is the sounding board and provides check and balance, a moral compass, to the CEO.

“For it to work, it helps to have two people who are (not entirely, but in many ways) complementary. The last thing you want is two people that are the same as that would certainly be a recipe for disaster. When you get complementary people, then you can work as a very efficient unit giving you better control over the business,” Ian says.  

Helen says: “Giving courage and support to the CEO is hugely important because very often he/she is trying to push in a direction and finding resistance. One of the most valuable things the chairman can do is ring up and say, ‘keep doing what you’re doing, you’re doing the right thing’. This kind of support is hugely valuable.”

Deborah Loudon, Head of Government Practice Group at Saxton Bampfylde says, “Many successful CEOs go on to be excellent chairs but this should not obscure the fact that the skills are different and a degree of humility and willingness to learn is needed for those switching from an executive to a non-executive role. A chair adds value by offering wise advice, extending networks, supporting and challenging when necessary. Above all a chair cannot interfere in the day-to-day and needs to judge carefully when, and how forcefully, to express concern. This can be frustrating for those used to directing operations but, done well, the wisdom of those who have been there themselves in a different context has the potential to bring enormous benefits.”

Although there are considerable benefits to having a separate CEO and chairman, there are times when it isn’t needed.
 
“Actually, I think there are circumstances where you have to allow yourself the freedom to have the joint role,” says Alison Carnwath, Chairman, Land Securities Group plc. “That might be the case with a company that is smaller, or one that is newly floated or does not have the right succession planning in place. The government gurus would tell you that all these scenarios have been dealt with, but that isn’t always the case. Therefore, I think you have to be flexible.”

The downside to having a separate chairman and CEO can be:

  • Performance – It is clear that a chairman can take out an underperforming CEO, but questions arise about who can sack an underperforming independent chairmen.
  • Parachuting – If a chairman is parachuted into the position, they likely have no prior relationship with the CEO and will have to build trust.
  • Pay – The high salaries of chairmen of FTSE 100 organisations can compromise their independence. 

Hazel Cameron, Chairman Network Director, Lloyds Development Capital concludes “The roles of chief executive and chairman in my view are, and require to be, separate. I have no doubt that all parties benefit significantly from the split of roles. A chairman, while ensuring effective operation of the Board and its committees, is key independent counsel. The chairman brings broad experience, agrees the value play, continually ensures the necessary resources are available, focuses, challenges, supports and communicates. The chief executive is responsible for leadership of the business and managing it within the authorities delegated by the Board. If the quality and relationships are right, it is an unbelievably powerful combination and does provide necessary balance.”

Please get in touch if you have any comments about the issues in today's update.
 
I hope to see you soon,
 
Matthew