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What’s with all these “Executive Chairmen?"

Dec 2

Written by:
12/2/2011 3:24 PM  RssIcon

By Dr. Dan Sweeney
Director, Institute for Enterprise Ethics

William Clay FordRecent years have witnessed the proliferation of a new position simultaneously in the board room and in the executive suite – the “Executive Chairman” – a chairman of the board who is not an independent director but is an employee of the company. Among those corporations with such a position are Ford, William Clay Ford; Google, Eric Schmidt; LinkedIn, Reid Hoffman; and Viacom, Sumner Redstone. The latest corporation to join the crowd of those with an “Executive Chairman” is HP, Raymond Lane – no surprise here as they have never been viewed as a paragon of corporate governance.

So, what exactly is an “executive chairman” and why are some corporations appointing them? The position appears to be an attempt to get around the perception that having a single executive with both the CEO title as well as the chairman of the board title reflects poorly on the governance of the corporation. 

The main rationale behind the separation of these two roles is to make the chairman independent of management, not on the executive payroll and thus much more enabled to oversee management and represent the interests of the shareholders.  Appointing an “executive chairman” is contrary to this purpose. Just as in the case of a combined CEO/Chairman position, it creates a situation where the chairman of the board that is supposed to oversee the management team is actually a part of that management team – he is overseeing himself and his management colleagues!

In addition, the appointment of an “executive chairman” creates a position described by some as a “second CEO”. Clearly, the relationship between the actual CEO and the “executive chairman” must be, at best a bit amorphous, and at worst, duplicative, conflicted and confusing.  One of the complaints from traditionalist governance observers about the recently recommended position of “Lead Independent Director” was that it could cause confusion between the role of that position and the role of the Chairman, a very dangerous situation especially in times of crisis. An “executive chairman” position multiplies that confusion many times over, but now at the CEO level, where crises erupt very frequently requiring firm, fast clear action by a (hopefully) single chief executive officer.   

Other motivations for appointing an “executive chairman” might be to give a founder the title of chairman while relieving her of the responsibilities of the CEO role but allowing her to substantially influence the operations of the company and receive CEO type compensation. This appears to be the rationale for the rash of newly IPO’d companies where the founder is no longer the CEO, but still wants to run the company. 

Another reason for an “executive chairman” might be that the company has appointed a new CEO who does not command the board’s full confidence and therefore needs a “second CEO” just in case. So, the board makes three bad decisions all at once: appoint a less than capable CEO and then a second CEO diluting the power of the first, and appoints a non-independent chairman of the board.  Could this be the case at HP?

Finally, the purpose of the “executive chairman” might be to protect the interest of the founding family that controls only a small minority of the corporation’s shares but has not been able to produce an heir who is actually capable of running the company. Such a motivation is often accompanied by a two class share distribution where the family controls all or at least most of the voting shares. This might be the case with Ford and Viacom.  

Whatever the motivation, the new popularity of the “executive chairman” position in public companies appears to fly in the face of a lot of excellent progress in the field of board governance over the past decade. It is not a good trend.

5 comment(s) so far...

Re: What’s with all these “Executive Chairmen?"

You have perfectly nailed the situation at HP. Your discussion of the Ford and Viacom examples also rings true. I haven't seen any figures on the popularity of the "executive chairman" position, so the discussion of leading examples is the way to go, and you are right in suggesting that it should be nipped in the bud before it spreads. To have a three-headed monster of CEO, executive chairman, and lead independent director could especially create major confusion and conflicts, as you suggest. I don't know how common that situation is, but it seems potentially dangerous, especially when the three different positions are occupied by executives with massive egos, which could very well be the case when the executive chairman is the founder.

By John Holcomb on   12/13/2011 2:13 PM

Re: What’s with all these “Executive Chairmen?"

This morning's WSJ announced that the Avon Products Board " ending Andrea Jung's long run as its chief executive". That is their prerogative, of course, but in so doing they appear to committing four simultaneous blunders.
First, Ms. Jung held the CEO position for some 12 years with a pretty stable board during that period. I would think that a decade or more would be ample time to plan for and provide for a smooth predictable succession plan. Instead, the board finds itself in the position of having to mount a crisis search for a new CEO from outside the business. This process will not only be very expensive and take a long time, but will also demand a long break-in period for the new CEO and have an unknown probability of success. They choose this option rather than doing their duty in the previous years and having an internal candidate or two ready to fill Ms. Jung’s shoes right away.
Second, they decided to keep Ms. Jung in place as a lame-duck CEO, thus creating a period of unknown duration during which the organization will be hesitant and uncertain, further exacerbating the problems they have been experiencing for the past several years in the marketplace.
Third, while they took the right decision to separate the roles of the CEO and Chairperson, they also decided to appoint Ms. Jung to the position of “executive chairman”. So, Ms. Jung as the “executive chairman” of the board will have the fiduciary responsibility to oversee the performance and compensation of a management team of which she will continue to be a very senior and presumably a very well paid member. This will place her in a very conflicted pair of roles.
Finally, Ms. Jung will continue to be in the “executive chairman” role after the new CEO is hired, thus placing that new leader as well as Ms. Jung in a very difficult relationship and placing the corporation and its strategy in a very precarious balance.
All of this could have been avoided if the board had fulfilled its responsibilities over the past decade by planning and implementing an effective CEO succession process.

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