Board chairman and CEO - a case of separation

Written by Franco Azzopardi, 6 May 2013

The Listing Rules for Malta companies strongly make the case that the role of the Chairman and that of CEO should be vested unto two distinct individuals. The reasoning backing this division is based on avoiding 'unfettered powers of decision' (Article 2 refers). The rules state that the position of Chairman and that of the Chief Executive Officer should be occupied by different individuals. There can be exceptions only if the Company provides an explanation to the market and to its shareholders through a Company Announcement for the decision to combine the two roles. Where the roles are combined, our listing rules provide that the board should appoint one of the independent directors to be a Senior Independent Director to act as a reference point for requests by the executive directors. It is probably safe to state that locally we only had one instance of a combined Chairman and CEO among the listed entities since the setting up of the stock exchange. This however does not hold true across the private companies where the role of Executive Chairman is more the rule that the exception.

The culture in corporate America has traditionally been somewhat different though, with the vast majority of the American corporations having one key person, that of Chairman and CEO. The governance system there also provides for the position of the Lead Director who is the equivalent of the local senior independent director.

There seems to be a common consensus among analysts, governance experts and legislators that firms should actually separate the roles, contending that boards cannot perform their crucial oversight functions without an independent Chairman. Post the enactment of the SOX 2002, the S&P 500 companies have seen a shift towards splitting the role of Chairman and that of CEO, rising from 25% to 43%, studies show. Ryan Krause and Matthew Semadeni, in their paper Apprentice, Departure and Demotion: An examination of the three types of CEO-Board Chair separation, June 23, 2012, question whether separation actually adds any value to the shareholders, as one would seem to expect. The paper concludes that the benefits are not so cut and dried. Using 309 firms of the S&P1500 and Fortune 1000 firms, they found that separation positively impacts future firm performance when current performance is currently poor. Inversely, it affects negatively the future performance of the company when the current performance is high. Of the three types of separation, they find in their study that demotion separations have the most dramatic effect. 

By demotion is meant that the Chairman and CEO retains the position of CEO and steps down from Chairman to be succeeded by an independent person. The apprentice method refers to the Chairman retaining the position of Chairman and making way for a CEO. The departure method is when the person occupying the post of Chairman and CEO resigns altogether from both positions.

The authors find that although the demotion strategy brings some upside, it is all about timing, and if the status quo is working, companies should think twice before demoting their CEO. They found from their empirical research that firms that had a total shareholder return of 30% suffered an average hit of 42% the next year they demoted their CEO. However in cases of poor performance, the demotion strategy seems to be the most corrective option because it imposes independent oversight on the CEO. So it is very much the case of the old adage, "if it ain't broke, don't fix it!" the authors conclude in the press release.

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