Corporate Leadership: Two-Headed Monster, or One-Man Show?

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Boards of directors around the U.S. should be prepared to weigh in on a heated debate over whether or not their companies should continue in the American tradition of consolidating the CEO and chairman duties into one person, or shift to the more European-style separation of powers.

There are pros and cons for both cases, of course. Separating the duties allows the chairman to serve as a watchdog of the CEO and puts the company in a position to avoid the pitfalls that accompany an imperial CEO. Then again, combining the roles can increase efficiency and avoid front-office personality clashes that can cripple companies.

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Corporate governance and executive-search experts say the trend in the U.S. is leaning more towards separating the CEO and chairman duties and some are even calling for a further step: term limits on CEOs.

“Regardless of what hat you’re wearing, or if you’re wearing both hats, you have a fiduciary obligation to the shareholders,” said Charles Whitehead, a law professor at Cornell University. “It’s a question of two heads being better than one, and that you aren’t putting so much power in one” person.

Separating the CEO and chairman duties has been in the headlines lately as some have called on Goldman Sachs (NYSE:GS) to strip CEO Lloyd Blankfein of his chairman title as the bank attempts to repair its tarnished public image. Bank of America (NYSE:BAC) shareholders stripped then-CEO Ken Lewis of his dual titles in 2009 amid criticism over the bank’s questionable acquisition of Merrill Lynch.

At the same time, American International Group (NYSE:AIG) chairman Harvey Golub resigned last month over a front-page spat with CEO Robert Benmosche, who complained their relationship was “ineffective and unsustainable.”

There have also been recent examples of companies that may have benefited from having already split their CEO and chairman duties, such as embattled oil giant BP (NYSE:BP), which last month announced the resignation of CEO Tony Hayward, who had been criticized for a series of public-relations and strategic blunders.

“If Tony had been the chairman of BP, could he have looked at himself in the mirror in the morning when he was shaving and said, ‘Tony, you need to be fired’?” said Tom Flannery, managing director at global executive search firm Boyden.

Avoiding the Imperial CEO

The case for separating the top front-office posts is that it increases accountability and minimizes conflicts of interest.

“The board’s role is to represent the shareholders and the chairman of the board should be focused on that assignment,” said Flannery. “The CEO’s role is to manage the ongoing affairs of the company. On a day-to-day basis, those roles are different and can occasionally be in conflict.”

A strong chairman can serve as a badly-needed check on the CEO’s authority, which some board members may be reluctant to challenge. Separating the two roles can also prevent potential fraud or corruption.

“We’re trying to get rid of the imperial CEO -- the idea you have one person both running the board and the company and insulating themselves to outside review,” said Whitehead. “You kind of want to split the baby a bit. You want to leave open the possibility for conflict and differences of opinions.”

It’s also clear that some executives may not have enough experience guiding a major corporation to be able to handle both roles. For example, BofA’s Brian Moynihan was only given the keys to the CEO position when he took over for Lewis earlier this year.

“It’s quite a bit to ask somebody to learn corporate governance and learn how to be chairman and learn the CEO job,” said John Wood, vice chairman and managing partner at the chief executive officer and board practice group of Heidrick & Struggles.

Of course, not everyone is sold on the idea of splitting the positions, especially because there is little evidence of large-scale studies that show dramatic differences in performance between the two scenarios.

“Overall, the academic literature doesn’t find a lot of value gained from the separation,” said Ralph Walkling, executive director of Drexel University’s Center for Corporate Governance.

It can also be dicey to strip a CEO of his chairman title mid-tenure as it should be viewed as a demotion and a signal to the markets of a change in direction. In those situations, Whitehead recommended appointing a chairman who would undoubtedly be viewed as deserving of the position, such as someone like Paul Volcker, the former Federal Reserve chairman.

“Each situation is different. Sometimes it makes considerable sense to separate the two. Sometimes it makes considerable sense to combine the two,” said Wood.

There are countless examples of current executives who have successfully held both the CEO and chairman titles, including JPMorgan Chase’s (NYSE:JPM) Jamie Dimon, Google’s (NASDAQ:GOOG) Eric Schmidt and Cisco Systems’ (NASDAQ:CSCO) John Chambers.

Will the U.S. Shift to the European Model?

For now, U.S. companies are still far more likely than foreign companies to have a single person holding the CEO and chairman titles.

According to a 2007 Georgetown/Ohio State paper on corporate governance, just 42% of U.S. companies separate the roles, compared with 100% of companies studied in Austria, Denmark, Finland, Germany, New Zealand, Norway and Sweden. Aside from Japan, the U.S. had the lowest percentage of chairman/CEO separation out of the 23 nations studied.

Some believe the debate in the U.S. will lead to an eventual mandate from the Securities and Exchange Commission or another regulator calling for separation of powers. Wood says that would be a bad move.

“Deciding the jobs should be separated or joined is the business of the board and should not be determined by some regulatory body,” said Wood.

Still, Corporate America may be moving in the separation of powers direction on its own, especially in cases where companies transition to new leadership.

“We’re moving more towards the European model,” said Flannery. “It’s something better done when bringing in a new CEO. I think you’re going to see a trend moving in that direction.”

In fact, some are calling for companies to go a step further by adopting term limits on CEOs.

“Why not just hit it head on? Forget chairman vs. CEO, let’s go ahead and impose term limits,” said Whitehead, who is working on a paper on the topic.

Whitehead said term limits would get at the root evil of the imperial CEO better than separating powers between a chairman and CEO. He argued for a seven-year term limit but also to allow CEOs who are seen as successful to stay on for two-year terms if voted in by a majority of shareholders.

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