Date:09/11/2010 URL: http://www.thehindubusinessline.com/2010/11/09/stories
/2010110950570800.htm
Back Chairman and Managi...
its composition. His posture is expected to be “reflective”, maintaining a focus on the long term,
rather than on day-to-d...
and decisions of the Chairman or the CEO.
Located between these two types is the “minimal review” Board, which reviews iss...
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Chairman and MD / CEO - combined or separate roles?

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An incisive look at the pros and cons of combining or separating the roles of the Chairman and the MD / CEO

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Chairman and MD / CEO - combined or separate roles?

  1. 1. Date:09/11/2010 URL: http://www.thehindubusinessline.com/2010/11/09/stories /2010110950570800.htm Back Chairman and Managing Director — Should roles be combined or not? ACHAL RAGHAVAN Should the roles of the Chairman and the Managing Director/CEO of a company be kept separate, and handled by two different individuals? According to a recent news item, a committee set up by the Securities and Exchange Board of India (SEBI) is considering a proposal to separate the roles of the Chairman and the Managing Director (MD) in listed companies, so as to “prevent concentration of management powers in the hands of one individual”. This move has drawn a response from Dr U. D. Choubey, Director-General, Standing Conference of Public Enterprises (SCOPE), who has reportedly said that companies — at least those in the public sector — are better off with a unified Chairman and Managing Director (CMD) role. In his view, much more analysis is required before a decision can be taken in this matter. This article takes a detailed look at both the alternatives from the point of view of effective management and governance, and presents a model for understanding the corporate implications. Role definition The Chairman is expected to provide leadership to the Board of Directors, and is responsible for http://www.businessline.in/cgi-bin/print.pl?file=2010110950570800.ht... 1 of 3 11/13/2010 9:34 PM
  2. 2. its composition. His posture is expected to be “reflective”, maintaining a focus on the long term, rather than on day-to-day activities. He is expected to make sure that the Board sets and implements the company's direction and strategy effectively. The MD runs the company's business on a day-to-day basis. He is responsible for ensuring that the company's strategic plans and operating budgets are aligned with the corporate objectives set by the Board. He provides leadership to the company, and is accountable to the Board. The basic argument against combining the roles of the Chairman and the MD/CEO is that it would lead to a conflict of interest. It would be difficult for the Board of Directors to supervise the management of the company effectively, if the Chairman (who heads the Board) is also “management”. Additionally, day-to-day pressures of running the company may make the incumbent focus more on the MD's role, at the cost of his (or her) responsibilities as the Chairman. The combined role also denies the company the benefit of having two senior people at the helm who can bring their combined wisdom to bear on any issue at hand. Concentration of all powers in the hands of one person is also a risk. The argument in favour of combining the roles of the Chairman and the CEO rests essentially on “simplicity” — that it is a lot more efficient to have just one person at the top to take decisions and move forward. This option eliminates the potential harmful effects of having two people at the top who do not necessarily see eye-to-eye, leading to politics and ego clashes. Last, it might not be practical (or affordable) for smaller companies to have two senior leaders on its rolls. Global trends There is no definitive research evidence to show which approach works better. The US is trending towards separating the two roles, driven primarily by recent governance scandals involving high-powered CEOs who were also Chairmen of their companies. UK favours separating the roles. Many European countries (like Germany and The Netherlands) have made it mandatory by law. In many cases, where the roles remain combined, companies are choosing to appoint — in addition to various committees — a “lead director” who would coordinate the annual evaluation of the CEO, and act as a special advisor to the Chairman/CEO. This approach seeks to address the need for the Board to have an effective supervisory role in companies that have a CMD in charge. However, this is, at best, a half-measure — since the Chairman still runs the Board. This brings us to the key role to be played by the Board of Directors. It is the vital “third dimension” to this issue, which most pundits seem to ignore when taking positions on whether the offices of Chairman and CEO should be combined or kept separate. By definition, the role of the Board is to “direct the affairs of the corporation, but not to manage them”. The Board is expected to play the lead role in establishing the mission, objectives, strategy and policies for the company. It is responsible for hiring (and firing) the MD/CEO. It reviews and approves the use of resources, and is the guardian of shareholder interests. While this is what is ideally expected of the Board, the reality is different in different companies. T. L. Wheelen and J. D. Hunger have come up with the concept of the “Board of Directors Continuum”. As per this concept, at one end of the spectrum is the “phantom” Board, which does not get involved at all in the affairs of the company. At the other end is the “catalyst” Board, which plays a very active role. Such a Board is not afraid to question and evaluate the recommendations http://www.businessline.in/cgi-bin/print.pl?file=2010110950570800.ht... 2 of 3 11/13/2010 9:34 PM
  3. 3. and decisions of the Chairman or the CEO. Located between these two types is the “minimal review” Board, which reviews issues that senior management chooses to bring to its attention. Optimal combination Making use of this classification, it is clear that a “phantom” or “rubber stamp” Board, combined with a Chairman who is also the MD, is a risky proposition, especially from the point of view of governance. In such a case, the fate of the company is heavily dependent on the mettle of a single individual — the CMD. Where the CMD is a highly capable person, the leadership is quick and effective; where that is not the case, the results are highly detrimental. At the other end, a very active “catalyst” Board, working in tandem with a far-sighted Chairman and a (separate) capable MD / CEO, is likely to provide the most balanced governance and direction to the company. Other combinations will lie in between these two extreme positions, in terms of balance and effectiveness. (The author is a Bangalore-based strategy and business excellence consultant. blfeedback@thehindu.co.in) © Copyright 2000 - 2009 The Hindu Business Line http://www.businessline.in/cgi-bin/print.pl?file=2010110950570800.ht... 3 of 3 11/13/2010 9:34 PM

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