4.1 The chairman
The leadership of the board is the sole responsibility of the chairman. Today’s effective chairman brings time, business experience, personality and maturity to the role.
The chairman sets the tone and regulates the conduct of the board. Consequently, the manner and quality of its deliberations to a large extent reflect the chairman’s way of doing things. It follows that the chairman plays a leading role in the composition of the board.
The role and influence of the chairman has grown significantly in recent years and, as a consequence, today’s chairmen have more diverse profiles and backgrounds than in the past.
The required style of board leadership has also changed. It used to be that chairmen either provided robust leadership from the front or existed merely as ceremonial figures. Now, chairmen are required to coordinate a board of strong outside directors and, when things go wrong, be ready to slip into executive mode. Greater versatility and a broader range are imperative.
So the chairman has a significant influence on the culture and tone of the board. By setting the agenda and ensuring that the board is addressing the right topics at the appropriate level, the chairman promotes active participation of all directors.
The chairman’s influence and judgement is vitally important because it dictates the nature and quality of debate. It is the chairman’s responsibility to create an atmosphere in which topics are open for discussion and board members can disagree with each other if necessary. They should be able to express their views openly and candidly without fear of being considered disloyal. Effective debate and full disclosure at meetings make it less likely that divisive discussions will take place outside the boardroom.
When members spend time with each other outside board meetings it helps build trust and understanding within the board.
Some investment by the chairman in the social side is therefore beneficial to board relationships.
The chairman should encourage strong relationships and respectful interaction between executives and non-executives. The key principle here is trust: management will share their concerns with the board if they perceive a cooperative and supportive atmosphere.
The chairman should determine how and when non-executives communicate with executives outside board meetings. Relationships between the board and management can be strengthened in a number of ways, for example by inviting executives to present to the board, having directors make site visits and by mentoring.
All of the above comments apply equally to one- and two-tier boards. But in the two-tier system, the CEO and chairman have the additional responsibility of ensuring that the supervisory and management boards communicate and interact productively. In some jurisdictions, directors’ communication with shareholders is strictly regulated. For example, in Germany, only the CEO can discuss operational matters with shareholders. The chairman is only entitled to speak to shareholders on issues relating to the board.
There are many effective ways to lead a board of directors — perhaps as many as there are personalities in the chair.
It may be the diplomat who facilitates or the intellectual who listens; the conservative who cautions or the radical who inspires.
Whatever style the chairman might adopt, the principle aim is always to draw the best from the board, to support and encourage the executives and to ensure that the board as a whole is significantly greater than the sum of its parts.
The evolving role of the chairman
As their responsibilities have grown, most chairmen in a unitary board system would see themselves as the chairman of the company, rather than of the board only.
But whatever the system, whilst the management of the board and the smooth running of its deliberations are obviously part of the chairman’s role, they no longer define it.
Increasingly, in both the unitary and two-tier board systems, enhanced public scrutiny of corporate life has promoted some chairmen to the role of one of the company’s public representatives. Depending on the personality and profile of the CEO, this role can be significant.
In some two-tier systems, the role of the chairman is more constrained as a result of custom, practice and even regulation; however, in the absence of a formal constraint, chairmen are increasingly being drawn into the public debate.
Thus, the chairman may become another resource for the company in all its public dealings. As a result of the chairman’s raised profile there is a need for more rounded and experienced candidates.
When selecting a chairman, his or her style of leadership should be clearly understood. Going against conventional wisdom can be an effective strategy and is sometimes necessary, but the better default position for a chairman is to have a more low-key style that brings out the best in other directors.
4.2 The chairman as CEO
Thirty years ago, the orthodoxy in unitary boards was for companies to be led by an executive chairman whose power was effectively unrestrained other than by the collective of the board. In response to a series of high-profile abuses of corporate power, a number of countries determined that a better governance model would be to separate the leadership of the company into two roles — those of the chief executive and non-executive chairman.
Today, there is a growing belief around the world that the roles of chairmen and CEO are better separated. An undue concentration of power in one pair of hands heightens risk.
Board members should always feel free to challenge the CEO about the decision-making process in a robust and constructive manner. When the CEO is also the chairman, directors may feel inhibited. Since the balance of information is heavily weighted in favour of the combined CEO/chairman, the directors may feel at a practical disadvantage. For these reasons, we believe that in the unitary context splitting the roles is generally in the company’s best interests.
Some circumstances may justify the roles being combined, in which case the board has an obligation to explain why doing so is in the interests of both the shareholders and the company. It should also be made clear to shareholders how long this situation might prevail and the circumstances in which it might end.
Naturally, the question of whether the roles of chairman and CEO should be combined in one person only arises in the context of the unitary board.
To combine or separate the roles of chairman and CEO?
The governance code recommends that the roles should be separated, which is almost always the case.
Two-tier system: the roles are always separated.
There is a choice of three formulas:
- Chairman and CEO are separated
- Two-tier system with supervisory board and management board
66% of companies choose option 1.
Two-tier system: the roles are always separated.
Separating the roles is common. However, there are many executive chairmen. Structure depends largely on the company ownership (family; government, etc.).
Two-tier system: the roles are normally separated. There are very few exceptions in family-controlled companies.
Two-tier system: the roles are always separated.
57% of chairmen are also CEO. But even where there is a formal separation, often the chairman is de facto CEO and the CEO is de facto COO. Out of the remaining 43% at least half are purely cosmetic. Many founders remain as chairman and therefore de facto CEO.
There has been a big change in the last 10 to 12 years towards splitting the roles. 95% have separated.
The roles are almost always split. The code stipulates that there should be a clear delineation, but there are one or two examples where there is an executive chairman, with or without a CEO as well.
4.3 The “deputy” chairman
The position of deputy chairman is a feature of board governance regardless of whether the roles of chairman and CEO are separated or combined. In some jurisdictions the equivalent position is known as the senior independent director or the lead director. The role is designed to provide the following:
- to offer a sounding board for the chairman
- to serve as an intermediary for other directors when necessary
- to provide a point of contact for shareholders as an alternative to the chairman
- to lead the chairman’s performance evaluation on behalf of the board
- to conduct the chairman succession process
- to chair meetings of the non-executive directors once a year, or more frequently when the chairman is also the CEO
- to manage the board in the chairman’s absence.
Under normal circumstances, the role of the deputy chairman or senior independent director is limited to occasional contact with shareholders, and to leading the annual evaluation of the chairman’s performance. The role comes into its own in times of crisis or when a change of chairman is being considered.
In companies where the chairman is also the CEO, the deputy chairman or senior independent director has the vital role of acting as a counterweight to the chairman’s concentrated power. This requires an individual with both presence and authority.
4.4 The relationship between the chairman and the CEO
The relationship between the chairman and the CEO is the most important one on the board. Together, they represent the public face of the company and, to a great extent, take joint responsibility for its success or failure.
Often, the most effective combination is based on complementary strengths, where one compensates for and reinforces the other. Chairmen and CEOs of a similar character can nevertheless make formidable pairings, providing they reach a clear understanding of each other’s roles. That said, their relationship is always coloured by one simple fact — it is the chairman’s ultimate duty to change the CEO if things do not work out.
A good chairman is an ever-present resource to the CEO and will have the courage to guide, challenge and support him or her. But it is important that the chairman does not become a shadow CEO. Nothing will guarantee a breakdown in relations like a chairman seeking to perform the CEO’s duties.
If there is a fractured relationship between the chairman and the CEO, or if they are not aligned on the company’s objectives, long-term commercial success will be impossible to achieve.
There is a preference amongst some boards to promote former CEOs to the role of chairman in the same company. This raises a number of interpersonal issues and requires specific explanation to the shareholders.
Given that the relationship between the chairman and the CEO is the most significant in the business, regardless of board structure, then having a chairman who sits in judgement on their own successor creates a difficult dynamic.
If the CEO is to become chairman, boards should at least consider a grace period — but, grace period or not, it remains a poor idea, rarely justified.