As a result of recent corporate scandals, reformers and investors have increasingly called for U.S. companies to separate the chairman and CEO jobs — a model of corporate governance that is prevalent in the United Kingdom (as well as in most European countries, not to mention Australia, Canada and New Zealand). At first glance, splitting the two positions makes sense. After all, the same person acting as chairman and CEO looks suspiciously like the proverbial fox guarding the chicken coop. But most large U.S. public corporations continue to combine the two top jobs, generally splitting them only as a temporary measure (for example, to facilitate a CEO’s upcoming retirement).1 All of which raises the following question: Does separating the chairman and CEO jobs necessarily result in more effective leadership and better governance?
To answer that, we examined both British and U.S. boards, interviewing more than 50 directors in major public companies in the two countries.2 We found that the U.K. model is not the panacea that its advocates suggest. This is not to say that the emerging consensus that U.S. boards need independent leadership3 is wrong. In fact, it’s dead-on right. But achieving such leadership by splitting the two positions has its own characteristic problems, and this arrangement is not necessarily a clear improvement over the U.S. model.4
The British Model
Of the 100 largest British companies, all but a handful separate the CEO and chair positions.5 Of those that do, about three-quarters have chairs who are nonexecutive or part-time. Most nonexecutive chairs are former CEOs, usually from a different company. They may devote as many as 100 days per year to a company. In addition to leading the board, they generally chair the nominations committee and may also serve on (but typically do not chair) the compensation and/or audit committees. These nonexecutive chairmen also help determine the board’s agenda and the information the directors need. The CEOs’ interactions with boards between formal meetings are largely through their chairmen, who see themselves both as bridges to the nonexecutive directors6 and as principal representatives of the shareholders, to whom they are ultimately accountable.
The simple conventional wisdom in the United Kingdom is that the chairman runs the board while the CEO runs the company. The reality, though, is more complicated.
1. According to a March 2004 study, 75% of the CEOs of S&P 500 companies are also the board’s chairman, down slightly from 79% as of February 2003. Of the S&P 500 companies that did not combine the two jobs in March 2004, at 65 of those organizations the chairman was the company’s former CEO. See “Governance Research From the Corporate Library — Split CEO/Chairman Roles — March, 2004,” www.thecorporatelibrary.com/Governance-Research/spotlight-topics/spotlight/boardsanddirectors/SplitChairs2004.html.
2. These directors included 18 chairmen (holding a total of 24 chair positions among them) and five CEOs of the 100 largest British companies, as well as 17 former or current Fortune 500 CEO/chairmen.
3. See M. Lipton and J. Lorsch, “A Modest Proposal for Improved Corporate Governance,” The Business Lawyer 48, no. 1 (1992): 59–77.
4. This article draws extensively from A. Zelleke, “Freedom and Constraint: The Design of Governance and Leadership Structures in British and American Firms” (Ph.D. diss., Harvard University, 2003).
5. D. Higgs, “Review of the Role and Effectiveness of Non-Executive Directors” (London: Department of Trade and Industry, 2003).
6. The British prefer the termnonexecutive director to refer to board members who are not part of management (calledoutside directors in the United States). British nonexecutive directors make up less than 60% of the board of the typical Financial Times Stock Exchange (FTSE) 100 company (that is, the top 100 British companies ranked by market capitalization); the other directors are high-ranking executives of the company. In contrast, fully 80% of Fortune 100 board members are outside directors.
7. Higgs, “Review of the Role and Effectiveness of Non-Executive Directors.”
8. Sarbanes-Oxley Act of 2002, Public Law 107-204, 107th Congress, enacted July 30, 2002, http://news.findlaw.com/hdocs/docs/gwbush/sarbanesoxley072302.pdf.
9. See New York Stock Exchange, “Final NYSE Corporate Governance Rules,” approved by the Securities and Exchange Commission on Nov. 4, 2003, available at http://www.nyse.com/pdfs/finalcorpgovrules.pdf; and NASDAQ, “NASDAQ Corporate Governance Summary of Rules Changes,” approved by the SEC on Nov. 4, 2003, www.nasdaq.com/about/CorpGovSummary.pdf.