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Board Ruminations: Volume 1, Issue 2

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Introduction

Earlier this summer, a group of 22 public company board members gathered for the first in a series of roundtable discussions on corporate governance sponsored jointly by Boyden and the Three Rivers Chapter of the National Association of Corporate Directors.

The group included current and former CEOs, Chairmen and independent directors. The subject of this particular session was Board Leadership: Shaping the Culture, which we hoped was a non-threatening title for a hot topic that elicits strong responses from both sides of the aisle since any discussion invariably leads to the question of whether it is better to separate the roles of Chairman and CEO…or not?

Opinions varied from strong support to absolute rejection. It was not always predictable, based on the participants’ backgrounds, who would wind up on which side of the issue. But for every person concerned about diluting the CEO’s authority, there was another who wondered what there is for CEOs to be so afraid of. Were any conclusions reached? Read on…

Board Leadership: Creating An Environment That Enhances Director Contribution

Everyone agreed that the shareholder activism of recent years hasn’t really changed the roles and responsibilities of directors, whose job description has always been built around serving the shareholder. They also agreed, however, that it has triggered boards to execute those responsibilities more actively and, in some cases, more forcefully. In general, this has been a positive development. While greater engagement on the part of the board won’t and can’t prevent management and directors from sometimes making the wrong calls, governance is the best thing we have for protecting the enterprise.

This collective faith in our system of governance is a faith in the system of checks and balances. The key is making sure we have the right checks and balances. Can the leadership structure at the top make a difference in how the board performs?

There is a growing sentiment among independent directors for separating the roles of Chairman and CEO. While conventional thinking defends the idea that there is no single model for every corporation, a recent survey by the NACD found that 63 percent of responding directors preferred having a non-executive Chair. The directors attending our session did not accept that the two roles should be separate. But they did concur that the two roles are


Defining the Roles

Most directors at the roundtable and many others we know agree that the CEO is responsible for: 1) creating a strategy that aligns with the organization’s mission and increases its value and 2) running the business day to day. He or she is – and should be – the real hero (not the board); creating a vision, leading the charge, making the tough operational decisions, motivating employees.

If you believe that the board’s job is to help the CEO – and the company – succeed (thereby creating shareholder value), then you have to believe that part of the job is to make sure that what the company is doing makes sense. Oversight that ensures compliance with the law, regulatory requirements and sound business practices is a big piece of this. But the board must go beyond oversight to be truly effective. Directors have a wealth of knowledge and feedback to share – about strategy, about people and about the world outside the company. The power of the board lies in having directors with intelligent viewpoints, a strategic mix of skills and experience and a culture that supports them in their work.

When the same person serves as both Chairman and CEO, that system of checks and balances is harder to maintain. Can we really ask someone as CEO to lead the company and, at the same time, lead the group whose job it is to assess the CEO? Looked at from a slightly different angle, if the board is moving more towards being an independent body, doesn’t it deserve to have its own leadership? There are occasions when management and the board are at odds. Is it fair to the shareholders in such instances for both groups to be led by the same person?

On the surface, it looks like splitting the roles should be easy. The CEO can focus on leading the company. The Chairman can focus on leading the board. But in truth, these roles are interconnected, so boards must be careful in choosing the right people to fill them and in defining what responsibilities each of them have. Not every director has the leadership skills to be a good Chairman.

That being said, I agree with the many directors who believe that having a non executive Chairman is a powerful way of ensuring that the checks and balances are in place and that the company gets the best out of the board. In this scenario, the Chairman would be expected to lead the board’s evaluation of the CEO’s performance (arguably one of the two or three most critical board functions), collaborate with the CEO on board meeting agenda and information requirements, lead executive sessions, obviously, but also help steer board meeting discussions by knowing when to dial down some directors and dial up others, keeping the group focused while soliciting differing viewpoints. It can be more difficult for the CEO to orchestrate discussions like these since they typically are a critique of management’s plans and positions. There are numerous other responsibilities a Chairman can take on and these depend upon the specific needs and personalities of the players.

A Rose by Any Other Name?

Many companies have chosen to combine the role of Chairman and CEO and name a lead director. This often works well, but only when the lead director has real stature. We believe that what’s most important to achieving a high-functioning board is a shared vision between the board and management about what the board is there to do. This vision needs to be supported by strong leadership from the management team (in the person of the CEO) and strong leadership from the board (in the person of an independent board leader).

We can think of very few situations where separating the Chair from the CEO, as a default structure, wouldn’t work better for shareholders. Of course, this means that the Nominating & Governance Committee must be evaluating prospective new directors through the added lens of potential board leadership skills to ensure that the board has one or two talented directors who can step into the role. Not having a skilled Chair is a sure-fire way to throw off that system of checks and balances.

It’s true that a strong lead director can play a nearly equal role to that of non executive Chair. But giving the independent board leader the title of Chairman sends a message to all stakeholders that the position carries substantial weight.

Subscribing to the belief that reasonable people can disagree, we welcome your perspective.

Contact Boyden’s North American Board Practice:

On the web: www.boyden.com/practice_areas/board_services

Via email:

Thomas Flannery
+1 412.756.1000
tflannery@boyden.com

Trina Gordon
+1 312.565.1300
tgordon@boyden.com

James Hertlein
+1 713.655.0123
jhertlein@boyden.com

John Holland
+1 415.874.3700
jholland@boyden.com

Richard McCallister
+1 312.565.1300
rmccallister@boyden.com

Tim McNamara
+1 410.625.3800
tmcnamara@boyden.com

Ken Rich
+1 212.949.9400 ext 232
krich@boyden.com

Brent Shervey
+1 403.237.6603
bshervey@boyden.com

Sarah Stewart
+1 412.756.1000
sstewart@boyden.com