Splitting Up the Roles of CEO and Chairman: Reform or Red Herring? (page 3 of 3)

"That's a company that's not ever been in trouble," says Useem. "Like any good non-executive chairman of the board, Omidyar is there for thinking strategically and for advising Meg Whitman, who runs that shop extremely well. Under some conditions, having a separate chairman may reflect the peculiar history of a company and the willingness of a founder to stay involved."

Another occasion when it may make sense to split the two roles is when a new chief executive has been named. In such cases, it is not uncommon for the outgoing chairman/CEO to stay on for a time in the sole role of chairperson until the new person gets his sea legs. "That just makes the transition easier, to make sure the person coming into the job is up to speed on things," explains Mittelstaedt.

Mittelstaedt adds that there are times when splitting the roles may not actually diminish the role an executive plays. "Whenever you have a company where the founder is still in the company, like Siebel, he may have given up the CEO title, but don't kid yourself, he's still running the place," says Mittelstaedt. "That's a split in name only because his personality is such that he is unlikely to stay out of it. It's similar to Microsoft. Gates and Ballmer split roles, but they had been a team for a long time and they're still a team. The split changed responsibilities, but Gates still plays a day-to-day role, especially in product development."

A Sounding Board for the CEO
Despite the lack of hard evidence that separating the roles boosts returns to shareholders, it is worthwhile for companies to consider doing just that, according to John Percival, adjunct professor of finance. "If I'm a shareholder, I don't think I want the CEO of my company to be chairman," he says. "I think boards should represent the interests of the shareholders of the company ... The chairman of the board should ask some important questions about why the company is doing what it's doing and should act as a sounding board for the CEO."

But Percival wonders whether there are enough experienced people available to perform the role he envisions for a chairperson. "It takes a really special person who has experience in running a business, hopefully a similar business, where he can provide the right kind of counseling and has the credibility to be accepted by the rest of the board as a leader. I just wonder where you find those people. Being a skeptic is an important role for a chairman -- not cynical but skeptical, a person who doesn't just fall in line with the CEO's vision. Leaders don't like to have their vision questioned. The perfect way to achieve that is to be both chairman and CEO." Percival says that if the right individual cannot be found to serve as a strong, independent chairperson, a company "might be better off having the CEO be chairman of the board."

In years to come, the issue of dividing the CEO and chairperson's roles may take on less importance as boards of directors adopt other ways of strengthening their independence to give them the ability to go head to head with hard-driving CEOs, according to accounting professor John Core.

"Regulations are moving toward having [increased] oversight by independent boards of directors so that the spirit of splitting the CEO and chairperson roles can be achieved in other ways," says Core. "If keeping the chairperson and CEO jobs separate allows directors to be independent, then that's certainly helpful. But other developments are making this less important. For example, the New York Stock Exchange and NASDAQ have started to require that outside directors meet separately. These regular meetings of outside, non-management directors have the effect of splitting the board chairperson and CEO positions because they let non-management directors set their own agenda and have independent oversight of the company. It's not so clear to me that it was important to have a separate CEO and board chairperson to begin with. As these rules get stronger, it may be [even less important]."

Larcker and Useem predict that only a small number of large companies will divide the CEO and chairperson posts in the future. "I think the tradition is so strong that those are mutually held positions for big companies," Larcker says. "A separation of roles would almost have to be mandated [by regulators] before you'd see a big shift." Adds Useem: "I'd be surprised to see [many more S&P 500 companies] having those roles separated out. In the culture of U.S. corporations, people would question the implicit lack of confidence in a CEO who was not given both titles."