Splitting out the Chief Executive Officer (CEO) and board chair roles may help companies prepare for future challenges.
Having the right structure at the top of a company is crucial for its success. When a single person is tasked with exercising management duties as CEO and challenging management simultaneously as board chair, we believe a conflict is inherent.
Recent news stories have thrown this into sharp relief. The arrest of Nissan’s chairman, Carlos Ghosn, who was also chair and CEO at Renault, has set alarm bells ringing over the future of the French car company and the Renault-Nissan-Mitsubishi alliance. Stakeholders have woken up —with a jolt — to how the board-level structure led to Ghosn playing a domineering role in the company and the alliance.
Another headline detailed Elon Musk’s commitment to resign as chairman of Tesla. He will be staying on as CEO, however, despite becoming embroiled in a scandal over taking the electric car company private. Musk promised to resign his chairman role within 45 days, and has agreed with the Securities and Exchange Commission not to seek re-election to the position for three years.
Separating two of the most high-profile positions in the organisation provides a balance of authority and responsibility that is in the company’s and investors’ best interests
This approach is one of the most publicised remedies the Tesla board has taken to repair the company’s reputation. However, the move has come after a barrage of negative news stories – and we think it’s important for boards to be proactive, rather than to wait until the company is facing turbulent times to act.
We ask for clear roles to be assigned to both the independent chair and the CEO. The CEO focuses on running the company’s business and executing the long-term strategy. The independent chair, along with the rest of the board, is responsible for overseeing the actions of management. Their role also involves board composition and succession planning, performance evaluation of the board and managing the dialogue with investors.
Companies increasingly recognise the benefits of separating the two functions
Concentrating power in the hands of a single individual can be seen as an advantage for a company. It is thought by many to facilitate quick decision-making. However, LGIM’s view is that, on balance, the perceived advantages do not outweigh the risks of such a structure, especially for large complex companies. These include developing a board with an overbearing leader, absence of challenge and poor diversity of thought. Separating two of the most high-profile positions in the organisation provides a balance of authority and responsibility that is both in the company’s and investors’ best interests. It helps to generate engaged, challenging – and sometimes even uncomfortable – dialogue. These kinds of board dynamics give us comfort that decisions are truly being scrutinised at the top.
We have been engaging across the globe and voicing our concerns directly to companies for many years. And it seems that they increasingly recognise the benefits of separating the two functions. In 2008 just 39% of US boards were splitting the two roles compared to 51% in 2017*.
Currently, we are reinforcing our engagement on the topic through an additional campaign in Europe. We are engaging with 14 of the largest French companies and three of the largest Spanish companies representing a total market cap of €549 billion to encourage their boards to split the two roles when putting in place a new succession plan. Depending on how companies respond to our engagement, we will consider voting against the combined chair and CEO of companies who do not agree to splitting the two senior roles when the next succession plan is put in place.
In an evolving business environment, we believe that the roles of CEO and chair will increasingly differ. Two senior leaders with complementary but different skill-sets will increasingly be required to help meet the challenges of the future, and ultimately contribute to make our companies better.
*Source: Spencer Stuart Board Index 2018 – United States
This post is based on Marion’s comment piece which featured on Board Agenda, a governance magazine.
We and other major shareholders want oil major BP to explain how its strategy is consistent with the Paris Agreement on climate change. This is the first time LGIM has put forward such a shareholder proposal.