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In: Finance

explain why separation of roles of chairman and CEO is considered best practice in most jurisdictions

explain why separation of roles of chairman and CEO is considered best practice in most jurisdictions

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Expert Solution

Separation of role of chairman and CEO, is necessary due to :

The board of directors have the task of managing all the business operations and protecting the interests of the shareholders. The chairman heads the board of directors . Separation of the chairman and the CEO, who is the top manager of the company ensures smooth functioning of the organisation.

  • The board of directors decides the compensation of the CEO. A CEO also the chairman could lead to a conflict in matters of executive compensation,recruitment of new staff. The board oversees the performance of the CEO and hires and fires them after their performance evaluation. Making the CEO and chairman one person makes it difficult to perform such functions. It could lead to conflict of interest , as the CEO may vote for his own compensation.
  • Splitting the role of chairman and the CEO is important as combining both the roles lead to lack of oversight and reduces the independence that the board enjoys. Appointment of a separate CEO helps to signal the board that a unified leader is answerable to the board, while the board can concentrate completely on execution of business strategies
  • Both the roles are very intensive roles and so a separation of both these roles is a must. A CEO also the chairman can lead to a abuse of the position. A company which is run by an independent board makes sure that the business is run as per the mandates and nay deviation is immediately rectified.
  • The separation helps the CEO to concentrate completely and focus on the operations of the business.

jeff jeffy answered 9 months ago
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