Should boards split Chair and CEO roles?
The different approach in UK and USA
Citigroup in America has announced that a British woman Jane Fraser, who was already the bank’s successful CEO would, in addition, be appointed as Chair of the board.
This resulted in raised eyebrows and “clutching of pearls” by some institutional investors and corporate governance hawks in the UK who believe it is crucially important to separate the two roles. In the USA this was not a controversial appointment. Big banks like Bank of America, JP Morgan and Goldman Sachs combine the tasks as does Microsoft. Others like Apple, Disney and Walmart split the roles. About 50% of all American listed companies have a combined Chair/ CEO. In the UK the combination is almost never accepted.
The conventional argument is that the CEO runs the company and the Chair runs the board. It is obviously quite possible for a single individual to undertake both roles. The benefits of combination is it reduces the risk of conflict between two people trying to take the business in different directions. And having a single person, who clearly has full authority, can be useful when dealing with issues like mergers and acquisitions. The argument against is that there is the risk of someone dominating the board, behaving in a dictatorial fashion and not being subject to independent oversight.
The degree to which the separation of roles is successful depends on how the individual in the Chair position chooses to interpret their relationship with the company and with the CEO. At one extreme some non-executive directors who become Chair take the view that they should remain remote and aloof and be very much part-time. They endorse the belief that it somehow compromises their independence if they become too involved in day-to-day activities. Others take the opposite approach and have an office next to the CEO and come in almost daily. This can lead to tension with the CEO and other executives and confusion about who is really the “boss”.
My own experience is that if a board Chair is effective and engaged they are not really “independent” in the sense expected by the UK Governance Code. A good Chair ought to feel a strong emotional attachment to the company and ideally is paid enough that they devote quite a lot of their time to the job even if they do not have an office in the building. In this circumstance they cannot really claim the full independence of a non-executive director. This type of Chair has a foot in both camps. This does not prevent a Chair removing a CEO if this is clearly the will of the board and shareholders. But it does mean a Chair is more likely to side with a CEO than with external critics.
The independence of the board itself ( whether the Chair/ CEO roles are combined or separate) can be ensured by having truly independent non-executives and a SID (Senior Independent Director) who focuses on governance issues. A Chair who interprets their own role as being principally about oversight, rather than board management and strategic development, is much more likely to end up in conflict with their CEO.
The reality is the two roles (Chair and CEO) are different whether they are done by two individuals or by the same person. Running the company is an executive job largely achieved by setting goals and through monitoring the activities of others. Running the board is a combination of meeting management and politics to balance the potentially conflicting interests of all the various stakeholders including shareholders, regulators employees and customers.
There is an interesting third option whereby the board Chair is described as an “executive” position but there is a very clear division of responsibilities with the CEO. In large complex companies, particularly those with a heavy burden of regulation like banks, there is often a need for the Chair to be almost full-time. At this level it is misleading to suggest they are also wholly independent. If there is a lot of time needed for things like investor relations, government and regulatory contacts or dealing with the politics of joint ventures having an Executive Chair can be very helpful. In this set up the CEO needs to continue to be primus inter pares on the executive team. And all of the C-Suite should report the CEO not to the Executive Chair.
In the UK the pressure to separate the roles of Chair and CEO built up over a number of decades following various corporate scandals where it was felt that boards of directors did not exercise sufficient oversight over powerful chief executives and wayward executive teams. The problems of BCCI, Maxwell Communications, Northern Rock and Polly Peck generated lengthy prescriptive reports.
America has had similar corporate shocks most notably Enron and there are growing calls for a UK type separation. But American stock exchange rules do demand a majority of independent directors on boards and committees and “independent” is far more strictly defined than in the UK. Also, in a litigious society, corporate bad behavior and lax oversight is much more likely to end up with court action and damages.
Proxy advisory firms like ISS and Glass Lewis, who advise investors how to vote at AGMs, generally promote separating the two roles. But this approach is linked to the ESG and DEI movements which are not in favor with the administration of President Trump. Elon Musk has described proxy advisors as a “major problem” and “corporate terrorists”.
Having two distinct individuals in the two positions certainly produces better optics and gives the appearance of effective oversight. But, in practice, Boards can function perfectly well if the Chair and CEO roles are combined as long as there are other robust checks and balances in place. The decision by Citi is likely to encourage other boards to follow suit. And may even cause some in the UK to think again.
