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Berkonomics

Are your chairman and CEO the same person?

Here’s one that targets most any company that has taken investments at any stage, as well as more mature companies.

Why would you split the positions?

More and more today, shareholder organizations recommend that the positions of chairman and president (or CEO) be split, so there are checks and balances at the board level in the leadership.  This recommendation is true for all companies with outside investors who are active and have or seek board representation.

The risk of hand-picked boards by the CEO

If we examine the blowups that have been so public these past years in public company leaders exceeding their reasonable authority or exercising dictatorial authority to the ultimate detriment of the shareholders, in most cases the CEO and chairman was the same person.  When you combine that fact with the relative inaction by the board, it becomes clear that some boards are hand-picked by the CEO who is also the chairman, and those boards are the ones most likely not to challenge marginal or bad decisions.

Why this balance is important

[Email readers, continue here…]   With a balanced chairmanship and CEO separation, the chairman sets the meeting agenda, manages the meeting, allows for asking the tough questions by board members, encourages all to speak and hopefully gain consensus, and moves the meeting along to cover critical issues.  The CEO is given much of the meeting by the chairman, but it should be clear who is in charge of board meetings.

The types of chairmanships

There are two types of chairmanships: executive (paid and full time) and non-executive, the latter typical of most corporations whether private or public.  Non-executive chairmen (chairwomen) should actively dialog with the CEO before the meeting to discuss the agenda and expand time for discussion of critical issues.  Without this, it is typical that board meetings seem to follow an agenda that does not change much from meeting to meeting, and strategic issues are often ignored at the board level when a high profile, large ego combined chair-CEO is in charge.

Is there a formal method required for splitting the positions?

There is no shareholder vote required to split the positions.  Officers are elected by the board, not the shareholders.  So, it is the responsibility of a great board to explore then act upon this recommendation from the various shareholder advocacy groups and split the positions.

  • An active and responsible Board represents the owners of the company for which the CEO is hired to manage, subject to Board direction and approval.
    Unless the Board is in control of the company and CEO the investors will be captives of a personality and character who may or may not perform as the investors wish.
    I also believe that investors would benefit from more active involvement of members of the Board of Directors if they were not absolutely protected by Directors and Officers insurance for decisions made. Directors should be well compensated for their efforts and acceptance of personal liability.

  • Ray Chan

    Dave
    It is a great post, I concur completely.

  • Michael O'Daniel

    I believe decision-making is the function of the CEO, in consultation with and/or with the approval of the Board. There can be a written understanding of which decisions require board approval — key hires/fires, expenditures above a certain $$ level — and which do not. Making decisions by committee is a recipe for disaster. I’ve seen situations where the loudest voice in the room (whose % of ownership could be far less than other board members) prevails, to the ultimate detriment of the company.

    As to the CEO being a board member, of course that person should be. If the board is considering replacing the CEO, then the CEO must be recused from discussions re: continued employment. Obviously he or she should be given an opportunity to make his or her case, but the final decision would be the board’s.

    Certainly open to other points of view on this matter…

    And BTW the Chairman / CEO question is just as critical in the nonprofit world as in the private sector. A Chairman / CEO with his or her handpicked board can also be a recipe for disaster.

  • Ronald Soloman

    No, the chairman heads the board of directors. The board of directors chooses the CEO.

    • Ron,

      Thanks for this. True of many companies and all companies after the founder-CEO has left for any reason. My bias toward the early stage came out in this post, where the founder is CEO. Your comment restores balance to this conversation.

      Dave

  • Arthur Lipper

    The more basic question is “Should the CEO be a member of the company’s Board of Directors?”

    One of the primary functions of a Board of Directors is to determine the efficacy of the CEO and to
    take remedial steps if the board believes warranted.

    The presence of one being judged is an impediment to the effective judging of the individual.

    The role of the CEO is to implement the decisions of the Board of Directors as to the company’s mission, policies
    and practices.The CEO is hired manage the business, not to decide the objectives or policies of the business.

    The Board should call upon the CEO and others for information and advice, but not decision making.

    Decision making is the function of the elected representatives of the owners of the business.

    This is why in in closely held, privately-owned companies, it is more appropriate for there to be a Board of Advisors
    assisting the CEO rather than a Board of Directors monitoring and supervising the CEO.

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