Should the chairman and CEO be separate?

Leading practices across the globe seem inclined towards the appointment of a non-executive, preferably independent chairman for company boards separate from a CEO. Many companies in the UK and South Africa prescribe the separation of the two roles, codifying it as best practice.

There are no chairmen who are also chief executives in the top 150 FTSE companies. American corporates are increasingly following suit with 47 per cent of S&P 500 boards (234 companies) splitting the role, an increase from 45 per cent in 2013 and 37 per cent in 2009 (source: Spencer Stuart 2014 US Board Index).

India advocates segregation of the two roles in the voluntary guidelines issued by the Ministry of Corporate Affairs for public companies and large private firms. The Reserve Bank of India (RBI) also recently proposed to segregate the roles for public sector banks.

However, combining the roles can have its advantages.

An independent chairman may lack the requisite company and industry knowledge, and therefore may not be able to draw respect from other stakeholders. This may become a stumbling block in his ability to provide effective feedback and oversight. Employees may look at it as representing unity of leadership and greater alignment.

At times, lack of qualified professionals with the right skills, knowledge and acumen could also be a reason for integration. However, due to lack of clearly defined roles a chairman may happen to take over the CEO’s position, or vice versa. In some cases, the answer could lie in appointing a non-executive lead director who can also step into the chairman’s shoes indirectly and maintain independence at the same time. If the role is defined appropriately, he could also represent the board, specifically in situations when the board and the management are at a crossroads.

Proponents of splitting the function maintain that an independent chairman can prove to be a linchpin in effective functioning and monitoring of the CEO’s actions and performance. Any shortfalls in the CEO’s performance can be brought to the board’s attention, provided the chairman is vigilant.

An integrated role may provoke a CEO to abuse his position. Also, a CEO might be inundated with performance pressures and short- to medium-term business goals whereas a chairman would be more in tune with long-term and strategic goals. There is also evidence that suggests separating the roles could save costs and improve business performance.

Separation of roles seems pertinent for the developed world, a scenario marked by large conglomerates and evolved ownership and management practices. India Inc is largely dominated by family-owned and managed listed companies. Many of the businesses in India are promoter driven.

Companies with greater promoter shareholding should look at appointing an independent coach or advisor to provide expert perspectives or act as a sounding board for the promoter.

On the other hand, public companies with a need for greater transparency should definitely look to segregate the two roles. In the case of companies managed by professional CEOs, it could be imperative to have an independent chairman who provides adequate oversight in line with the company’s long-term objectives.

The decision should be made based on a voluntary, contextual, case by case approach.

The debate should shift to real issues: what characteristics a chairman needs to possess and how the corporate intends to positively enable its leadership in its relationships and interactions. What arrangement drives business excellence, performance and shareholder confidence, is the key issue.

The separation of the two roles can create harmony and balance, in turn leading to enhanced decision-making, accountability and independence in many organisations. Nevertheless, effective governance is a function of ethics and culture embedded in the organisational fabric.

Irrespective of this debate, it is of absolute importance to have a strong, qualified and independent board actively engaged with the company’s affairs and protects shareholder interests.

The writer is the head of Governance Risk and Compliance Services, KPMG, India. The views are personal

COMMENT NOW