Combining the Roles of Chairman and CEO Costs Shareholders
The two most authoritative positions in a boardroom are the CEO and the chairman. However, when these roles are combined, all the authority is vested in one individual; there are no checks and balances, and no balance of power. The chairman is charged with monitoring the CEO, presenting an obvious conflict of interest. Indeed, if the CEO is responsible for running the company, and the board is tasked with overseeing the CEO’s decisions in the interests of shareholders, how can the board properly monitor the CEO’s conduct if the CEO is also serving as board chair?
While the theory behind separating the two roles has been the subject of much shareholder and governance activist protest and commentary, an analysis done by GMI Ratings, a corporate governance research firm, suggests that other, more practical considerations would support the separation of the two roles.
This report focused on 180 North American megacaps, companies with a market capitalization of $20 billion or more. The report found that in addition to the inherent conflict of interest already discussed, CEOs who also command the title of chairman are more expensive than their counterparts serving solely as CEO. In fact, the value of executive compensation for a CEO who is also chairman is often higher than the combined cost of compensating a CEO and a chairman separately.
Furthermore, in addition to presenting a greater risk in ESG (environmental, social and governance) and accounting, companies with a combined CEO and chairman appear to present a greater financial risk for investors and provide lower stock returns over the longer term than companies that have separated the roles. The report concludes that having a separate chairman and CEO costs less, is less risky, and is a better investment for shareholders.
Some of the main findings of the report are as follows:
The median total compensation for a CEO who also serves as chairman is more than $16 million.
The median for a CEO who does not serve as chairman is $9.8 million.
Five-year shareholders returns are nearly 28% higher at companies with a separate CEO and chairman.