October 22,1999 Term Paper Separating the Board Chairperson and Chief
Executive Officer: Pro and Con & Rebecca Hundley I Introduction Numerous reports
on corporate governance have emphasised the desirability of increasing the
number of outside directors on boards. An equally important and related issue is
a growing insistence that the role of chairman and chief executive should be
separate, though on this issue there is less unanimity in the U.S. than in other
countries. Choosing the right Chief Executive officer is the key task for the
board of directors. Pressure on chief executives to perform in ever decreasing
time frames makes it essential that the CEO and the Board work closely together.
An effective chief Executive will drive company strategy, lead the top team and
fulfill shareholder ambitions . A good CEO will transform Board dynamics by
keeping an open line of communication, placing a high value on Board input, and
promoting the belief that management and the Board is working toward common
goals. The average Board size is between eight and nine members. It used to be
that Boards were constructed of executives with one or two non-executives; but
trends are swiftly driving executives out of the boardroom as even the CEO’s
familiar role as chairman has been called into question.
There has been a notable shift from executive director to non-executive
director in the boardroom. The supposed advantages to these changes are to
provide greater board independence from management, greater objectivity, and a
representation of multiple perspectives. Bosch believes that the fundamental
principle underlying this composition is accountability; if you have strong
independent directors, a separation of the Chair/ Chief executive role will
safeguard accountability . An opinion widely held is that separating the role of
chairman from chief executive- would secure a board sufficient power to
challenge CEO dominance. Although in many cases that rationale holds true, there
are considerable benefits to CEO duality. Researchers have suggested that
chairman/chief executive duality is a double-edged sword . While some
stockholders are put off by the absence of board control and checks and
balances, others are reassured by the presence of unity of command and the
absence of potentially acrimonious conflict between strong-minded individuals.
Finkelsein and D’Aveni found that a major factor in divining the success of this
duality was the level of CEO informal power. ‘Either perceptual or objective
data can be used to measure informal CEO power. Although some researchers have
used perceptual measures of power, power is a sensitive subject for many
managers. In using perceptual measures, a researcher assumes that social actors
are knowledgeable about power within their organizations; informants are willing
to divulge what they know about power distributions; and such a questioning
process II Advantages of CEO Duality When it comes to insiders versus outsiders
on the board, a predominant role for insiders finds support more often, probably
because insiders are more familiar with the issues, the technology, and the
practice of the firm . Only they who are deeply involved and can make it work
add value. It is simply not viable for twice removed outsiders, no matter how
expert, to provide anything other than a cursory perspective and maybe act as an
eventual deterrent to abuses of executive power.
