Corporate Governance - The Dual Role of Board Chairperson and CEO

Introduction

The CEO performs a senior executive function over management, while the company chair is the head of the board of directors. The board monitors corporate governance or how the CEO runs the company relative to its mandate and shareholder wishes. In a perfect situation, the board and the CEO cooperate to promote the best interests of the company. CEO duality, where the CEO is also the chairperson of the board, is viewed by many governance experts and shareholder advocates as poor corporate governance.
 
What Is a Chairperson of the Board?

The Chairperson of the Board of Directors (also known as the 'Chairperson of the Board' or the 'Executive Chairperson') is the head of an organization's board of directors. Their primary responsibility is to their stakeholders, working to ensure that the company meets stakeholder expectations. In doing so, they also manage the board directors and their activities, providing transparency and accountability. 

The board chairperson has substantial power. The person appointed to this position often uses secure board management software to set the board’s agenda and facilitates board meetings. The executive chairperson usually has a close working relationship with the CEO, but the chair doesn’t actively manage the daily operations. However, they do guide company objectives through steering committees.

The Chairperson focuses on:

• Executing good board governance and best practices
• Overseeing all board meetings, including meeting agendas
• Ensuring compliance with industry regulations
• Making sound financial decisions for the organization
• Facilitating discussion between the board and executive teams 

What Is a Chief Executive Officer (CEO)?

The CEO is the organization’s chief executive, overseeing day-to-day activities and making important decisions by collaborating with senior leadership. 

The CEO’s position entails focusing on the strategic plan, which includes strategizing about the competition and which markets to enter. The CEO reports directly to the board of directors, the party ultimately responsible for matters like Environmental, Social, and Governance (ESG), Corporate Social Responsibility (CSR), and even corporate email security.

Some CEOs also serve as presidents of their organizations, while larger organizations often have different people serving as CEOs and presidents. In these cases, the CEO usually focuses on internal operations.

CEOs are also responsible for the following: 

• Communicating between the board of directors and senior leadership
• Ensuring daily activities align with the organization’s strategic plan 
• Reporting to the board on behalf of the entire organization
• Serving as the public face of the organization
• Managing executive-level recruiting and hiring decisions

What’s the Difference in Duties Between the CEO & The Chairperson of the Board?

The differences in the duties and responsibilities between the CEO and the board chair are clear. In simple terms, the CEO is the top senior executive over management, while the board chairperson is the head of the board of directors.

• Top Decision-maker:

The CEO is the top decision-maker for the company and the person who oversees the daily operations and logistics. All of the senior management executives report to the CEO. The CEO is the chief operating officer and usually delegates many responsibilities to other senior, mid-level, and lower-level managers, depending on the company’s size. 

• Long-term Planner/ Reviews:

By contrast, the executive chairperson of a company is the head of its board of directors. The shareholders elect the board of directors and protect the investors’ best interests. Part of that responsibility includes ensuring that the company is stable and profitable. Boards usually meet quarterly to set long-term plans, discuss committee reports, including those from the executive committee, review and monitor the financial reports, oversee the senior-level executives, and vote on significant decisions.

• Recruitment/Evaluation:

Board directors are also responsible for recruiting, appointing, and evaluating the CEO’s performance and replacing those who don’t meet performance expectations.

• Striking the Right Balance of Power between the CEO and the Executive Chairperson:

Companies have the liberty to find a balance of responsibility and authority between the CEO and the board chairperson. For this reason, the balance of power between the CEO and the executive chairperson varies substantially, even within similar industries.

• Discussions/Co-lead:

Since the board chairperson is superior to the CEO, the CEO has to get the board chairperson to approve any significant moves. While the board chairperson has the ultimate power over the CEO, the two typically discuss all issues and effectively co-lead the organization. Some companies find their operations fare better when the CEO has considerable flexibility in running the operation.

• Confidentiality:

The best way for the CEO and the board chairperson to stay connected is with board management software, where they can be assured their discussions are confidential.

• CEO Influences Board Composition:

The CEO is sometimes allowed to choose the senior executives. It’s common for a company’s bylaws to guarantee retiring executives a board seat. In this way, the CEO effectively influences board composition. Some companies continue to adhere to tradition and assign the CEO as the board chairperson.

Why a Company’s Chairperson and CEO Should Not Be the Same Person?

As noted earlier, some companies are choosing to allow the CEO to also serve as board chairperson. This is more common in large companies. For high-growth companies, financial experts agree that the executive chairperson and the CEO shouldn’t be the same person.

• Strategic Planning/Oversight Responsibilities:

The board’s primary responsibilities are strategic planning, oversight, and abiding by the principles of good corporate governance. In recent years, companies in Europe and the United States have seen the benefit when boards spend more time providing value to the CEO and the senior executives-which isn’t as effective when the chairperson and CEO are the same person. Boards of directors typically have varied industry experience and a good understanding of overall economic trends, which make them valuable resources for the senior leadership and the CEO.

• Managing Board of Directors/Managing the Organization:

For companies to be successful, they need a CEO who is dedicated to the responsibilities on a full-time basis. Managing a board of directors is also a full-time job. Both positions are of such importance that when one person serves in both roles, it’s difficult, if not impossible, to serve both positions well.

• Independence:

There’s no clear answer about whether one person should fill both positions, and no regulations require one structure over the others. The debate has been ongoing for the last few decades with no clear answer. As it has become more common for boards to choose independent board directors to serve as board chairpersons, the general thought has been that they are best suited to serve as board chairpersons.

• Two distinct Separates Roles:

The main benefit of separating the two roles is that it distinctly separates the board and management roles. The separation also allows each person to devote the proper time to their position. Since the board of directors evaluates the CEO and senior executives and sets their pay, separating the CEO and the Chairperson of the Board roles eliminates potential conflicts of interest.

4 Reasons to Separate CEO and Chairperson Positions

Separating the CEO from the executive chairperson allows each person to give their full time and attention to their role rather than to split their priorities. But that’s not the only benefit. 

Here are four more reasons to separate the CEO and chairperson:

• There’s a single spokesperson: Having an independent board director as the chair gives one person the ability and authority to speak on behalf of the board. 
• It allows for diverse perspectives: An independent director can also better represent individual director perspectives to the CEO. An independent Board Chair is also more likely to elicit opinions and attitudes that will challenge the CEO and enable them to think differently about specific issues.
• It bridges the gap between the board and other stakeholders: The Chairperson of the Board acts as the primary liaison between the board and management. The person who fills this role is valuable during crises in dealing with external groups such as investors and the media.
• There’s a better balance of power: An independent board chair provides the necessary balance with the CEO position, ensuring that one person’s perspective doesn’t carry more weight than the other board directors. 

How Can the CEO and Executive Chairperson Work Together to Meet Stakeholder Demands?

Separating the CEO and the chairperson can ensure a healthy balance of power. But perhaps the most significant benefit of clarifying the roles of CEO vs. chairperson is how they can support each other. To thrive, organizations need to keep up with stakeholder capitalism, which requires a level of focus that one person can’t tackle on their own.

By dividing responsibilities, the CEO and chairperson can work together to build a more robust modern governance infrastructure, one that meets and even exceeds stakeholder expectations.

Conclusions

In the most common argument based on agency theory, separating the chair and CEO roles increases the board’s independence from management and thus leads to better monitoring and oversight. Because the CEO manages the company and the chair leads the board in overseeing (hiring, compensating, and replacing as necessary) the CEO on behalf of shareholders, holders of this view see a conflict of interest if one person occupies both the CEO and chair roles.