Separation Anxiety

Knowing the value of two heads, why would anybody opt for one? That question is posed by proponents of separating the CEO and chairperson positions at public corporations. In 2001, 45% of companies did so, according to Institutional Investor Services. By 2003, that number was 50.4%, and it is growing, with recent converts including Disney, Oracle, MCI, Dell, and Seagate. The issue is high on the agendas of many institutional investors as well. The argument for separation is compelling. The board, after all, is supposed to oversee management for shareholders’ benefit. Does it make sense for the head of that monitoring body to also be the chief subject of its scrutiny? But a hydra-headed management structure creates two substantial risks. First, establishing dual centers of authority may compromise the CEO’s ability to run the organization, tempting disgruntled or ambitious subordinates to do an end run around the chief executive and consult the chair on controversial managerial decisions. The organization’s unified message splinters. Discipline suffers. The second potential casualty is the board’s effectiveness. Legally, every director has the same obligation to actively monitor management. But directors—like most human beings—are happy to off-load responsibility onto someone they trust. Other board members may assume the nonexecutive chair is paying the necessary attention to management and so pursue their own responsibilities less diligently. How can companies bridge the gap between theory and practice? Putting the perfect individual in the chair’s position obviously helps. The job requires a person whose ego is secure and whose leadership inspires. A person who understands that he or she is there to run the board, not to comanage the organization. A person who can excite enthusiasm and creativity in colleagues. Such people, unfortunately, are in short supply. So unless we can clone directors like Ralph Whitworth (Waste Management, Apria Healthcare); Jack Krol (MeadWestvaco, Tyco); or Ken West (TIAA-CREF, Motorola), we’re still in theory territory. A more practical solution is to stop wringing hands over who fills the chairperson slot and focus instead on the rest of the board and its committee structure. To maximize effectiveness monitoring, a substantial majority of directors should be independent and hold meaningful long-term equity positions. Independent directors should make up and chair all the major oversight committees. Committee heads should set oversight agendas for their areas, and they should rotate every few years. Under this model, every independent director assumes equal responsibility for the board’s performance. Of course, the bulk of the board’s monitoring activities takes place within committees. Unfortunately, little work—empirical or analytical—has been done to understand how these bodies function and how they might do a better job. If shareholders focused more on the composition, structure, and activities of these committees, they would be a stronger force for oversight. Obviously, this is not the perfect solution. But separation is riskier and less likely to work. The question is not whether to concentrate authority in one person or divide it between two. The question is how to make sure those clustered around the authority are doing their jobs.

Separation Anxiety

Summary.

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