Question

Briefly explain the theory behind the idea that the Chief Executive officer of the company should not chair the board.

Answer 1

Answer:

A Recent Trend toward Separating the Roles of Board Chair and CEO

In the most common argument based on agency theory, the separation of the chair and CEO roles increases the board’s independence from management and thus leads to better monitoring and oversight. Because the CEO manages the company and the chair leads the board in overseeing (hiring, compensating, and replacing as necessary) the CEO on behalf of shareholders, holders of this view see a conflict of interest if one person occupies both the CEO and chair roles.

In contrast, stewardship or administrative theory suggests that the benefits of separating the chair and CEO roles are not so clear-cut. Stewardship theory is based on the principle of “unity of command” and argues that having clear and unambiguous authority concentrated in one person is essential to effective management. Unity of command creates clear lines of authority to which management (and the board) can respond more effectively. In an environment where strong, directive, stable, and unconfused leadership is seen as critical to organizational success, this kind of legitimacy is an important signal to stakeholders about who is accountable.

Separate Chair Behavior

Some governance researchers also warn that formal structural separation of the board’s leadership roles is not sufficient for board performance and may even undermine it. In some cases, chairs were closely consulted on strategy and even took on some executive functions, while others assumed an almost exclusively monitoring role. In other words, there was not a clear and defined job description for the separate chair position. Although there are distinct benefits to the chair’s separated role, including greater attention to the board’s functioning and even a lightened load for the CEO, lines of responsibility are often blurred between the two roles.

The actual behavior of the chair becomes extremely important, particularly in an environment such as the United Kingdom, where that position carries a great deal of status and typically is filled by very experienced former CEOs of other companies (not companies where they serve as chair). According to Zelleke’s interviewees, for example, learning to bite one’s tongue, or resisting the urge to “to use one’s power at the board and … run a sort of campaign against the chief executive … to try and make him more like you,” are important behaviors. [9] The formal definition of the role of chair and how it interfaces with the CEO’s responsibilities (i.e., having separate, explicit position descriptions) is also important.

A brief study on why the Chief Executive officer of the company should not chair the board :

There were examples of separate chairs viewed by colleagues as being ineffective—termed “caretaker-chairs” by the researcher. As for “conductor-chairs” (chairs viewed as effective by peers), their success appeared to be unrelated to whether the chair was separate or combined with the CEO role.

Interviewees had a wide range of opinions on “caretaker” (ineffective) and “conductor” (effective) chairs and the decision to separate roles:

“Look at the successes for nonexecutive chairmen…. We should pick someone who has the requisite skills already versus training on the job.… Not just the time and availability, but the skill set that the job requires. We should recruit chairmen of boards with this in mind.” (Director)

“There should be a [expletive deleted] course for chairmen to take on how to run a [expletive deleted] board meeting.” (Director)

“A chair should move things forward by consensus. Once you know the facts and directors’ points of view, you go one-on-one first. It’s time-consuming.” (Chair and CEO)

“The right chairman creates the right atmosphere. With the wrong chairman, it’s completely different.” (Director)

“Chair versus CEO? You can have the opposites with both outstanding results. There are many different models of how to get things done successfully without following a script. It depends on the personalities, history, and mix, and you can’t qualify this, so you need to leave something of discretion to the guys involved.” (Chair)

“You need to tailor the situation [chair and CEO] to the people and personalities involved … the circumstances of the company and personalities of the company. In some situations, you might want both roles in one person or it doesn’t matter.” (CEO)