Why two into one doesn't always go

Electing a director to the dual role of company chief executive and chairman of the board is a route that may seem attractive but it can lead to potential difficulties. It might appear a pragmatic decision – the CEO may be best suited with specialist knowledge and experience – especially when there are no obvious candidates to take the chair. But it places considerable reliance on an individual to manage the twin functions appropriately so as not to erode the company’s prospects.

If management of both functions proceeds satisfactorily, the board will feel secure about the future. However, significant dangers lurk. A dual incumbent holds inordinate power over the company’s affairs, especially when there is a change in direction or fortunes. One of the roles of the chair is to lead the board in testing the thinking of management to ensure sound decision making. This is less likely to happen if the CEO and chair is the same person. The executive chair will almost always have significantly more knowledge of the company’s current situation than independent directors, and executive directors may feel that it is not their place to question him or her.

Also, in difficult operational situations a CEO can call upon his or her chair’s experience and guidance. An executive Chair does not have anyone in a similar position to call on and often will just go ahead and make a difficult decision when to have the problem discussed by the whole board could have been preferable.

All directors may rightly or wrongly feel that the executive chair has such a strong position over his or her boardroom colleagues, the result of knowledge or power imbalance, that it can stifle frank and free exchanges of views. When directors feel cowed by such perceived differences and become reluctant to share their convictions, seeds of problems are sown and the board’s ability to carry out its fiduciary duties may be called into question.
Equally a board with total confidence in the dual incumbent may not see trouble looming. When the company is a listed entity, investor perceptions of the impact of the executive chair role need to be managed carefully.

The corporate governance code for listed companies in Britain promotes the view that the CEO should not chair the board. The chair should run the board, which sets company strategy. The CEO should manage the company and focus on implementing that strategy.
One of Britain's largest listed companies, Marks & Spencer, ran foul of many shareholders recently in signalling its intention to appoint its CEO Sir Stuart Rose to the combined role of CEO and chair.
It decided this after a period of boardroom turbulence stretching as far back as 1999.
Sir Stuart had overseen a significant revival of fortunes but despite his success and consequent popularity with shareholders, leading fund managers, among them Schroders, Legal & General, and Fidelity took umbrage.
Legal and General declared: “We do not support a dilution of corporate governance standards, particularly in leading UK companies.” The Head of British equities at Schroders, Richard Buxton, reportedly said Marks & Spencer were “setting an appalling example”. He figured the move would result in an undue concentration of power with insufficient interrogation of the company’s strategy at a time of poor trading.

In Britain, as in New Zealand, many SMEs have combined the roles - often successfully. Some have been established by an entrepreneur wanting to keep the enterprise under his or her direct control at both operating and board level. Many such enterprises are family-owned and confidence in the individual is absolute.

Nevertheless there is evidence that SMEs are increasingly alert to the benefits that can accrue to both governance and operations by either separating the roles or ensuring there is strong independent representation on the board to bring a wider perspective. Independent directors, if chosen well, can be pivotal in ensuring good governance is followed even if the CEO's and chair's roles are combined.