CEO — Chair Separation, season 15

The separation of the two most powerful positions within a company — the CEO and the chair of the board of directors — is a classic of corporate governance. 15 years after the Enron-era series of scandals, which exposed the dangers of imperial CEOs, there is still no international consensus on the topic — sadly enough. The OECD has the ambition of setting the tone globally when it comes to corporate governance. Its position on the topic is far too timid however to hope for any change in the near future.

Bring together a group of corporate governance experts in a room and it is likely that, to some point in the conversation, the separation of the positions of CEO and of chair of the board of directors will prop up. CEO-Chair separation is perhaps the most central issue of modern corporate governance. At least, it is so, for jurisdictions with “unitary board” systems, including all Anglo-American countries, a good part of continental Europe, of Asia, Latin America, Africa.

Separating the two positions makes sense. No need to be an expert to understand why. The two functions are simply incompatible with each other. The Enron-era series of scandals in the early 2000s exposed the dangers of “imperial CEOs” cumulating their powerful position within executive management with a de facto control over the board of directors, the body which primary function is to oversee… the CEO.

One would expect a large consensus on the topic by now. Wrong. 15 years after the Enron series, a NYT article shows how much the issue of separation remains divisive in the US, particularly between workers’ pension funds and mutual funds (A Lack of Consensus on Corporate Governance, Steven Davidoff Solomon, Sep 29, 2015). According to the article, only 14 companies in the Standard & Poor’s 500-stock index require that the two posts be split, and only 38 percent have a separate chairman. The lack of consensus is not limited to the US arena. Of the 32 OECD jurisdictions with one-tier / unitary board systems, separation is recommended in only 8 jurisdictions and is mandatory in 4 only.

Those who justify unification typically argue that separation does not prevent failure. And indeed, at the board of Enron in 2001, there was separation of the functions. But then, nobody ever argued that separation would, alone, be a silver bullet. It is part of a package of governance rules, also covering diversity and independence of the board, transparent and comprehensive reporting, etc. That package is in fact what the OECD has been trying to work on with its Principles of corporate governance, a non-binding set of recommendations and “good practices” first drafted in 1999 in the wake of the Asian financial crisis.

The other classic argument against separation is that there is no evidence that it helps boost “corporate performance” and shareholder value. Corporate governance however, is not about corporate performance. At best it is only vaguely connected to “performance” (not to speak of shareholder value). And when it is, it is on the very long term only. No, corporate governance is about trust and accountability — and that requires separation of the functions. It is about having a boardroom with a diverse, competent and skilled group of people that can constructively challenge the CEO and executive management. That’s at least the views of the labour movement. For the AFL-CIO “the board chair’s duty to oversee management is compromised when the positions of board chair and CEO are combined”, for the British TUC “the role of the chair should be distinct from that of the chief executive”.

So what does the OECD have to say about CEO-chair separation in its flagship Principles of Corporate governance? Not much unfortunately.

When the post-Enron revision of the Principles began in May 2003, the OECD Secretariat staff proposed to consider separation as a universal best-practice “including in countries where it is not a mandatory requirement”. “Separation”, we were told, “would help ensure an appropriate balance of power, and an increased accountability and capacity of the board for independent decision making.” (“Assessment of the OECD Principles of Corporate Governance”, 23 May 2003 DAFFE/CA/CG(2003)6, #81). During the negotiations however, the proposal was fiercely opposed by business groups and by a key member state. At the time, even a World Bank representative argued against separation on the ground that it could become “a way to dilute the liability of directors”… In the end, it is a watered down version of the OECD staff proposal that was agreed to, and one that was only to be inserted in the “annotations” of the Principles (i.e. the text accompanying the core Principles that so few people read, to put it politely). Separation “should be regarded as good practice” in the draft proposal of revision, then, in the very final version adopted in April 2004 “may be regarded” as good practice…

Five years later, in the aftermath of the 2008 financial crisis, the OECD staff brought back the issue on the table, deploring the “bargaining power” of CEOs, the absence of counter-powers within the boardrooms and, again, argued in favour of separation of CEO and chair functions (Corporate Governance and the Financial Crisis — Key Findings and Main Messages, 2009), but with not much impact — no revision of the Principles in sight. Another six years gone and the Principles were, at last, reviewed in 2015. The revised version of September last offers only marginal improvements. Still located in annotations, separation no longer “may be” but rather “is generally” regarded as a good practice. Woaw.

1999, 2004, 2015: considering the pace of OECD reviews, we should reasonably expect an updated version of the Principle around… 2025, this time with a text showing CEO-Chair separation as being “seriously considered” as good practice?

Links:

OECD webpage on the Principles http://www.oecd.org/corporate/principles-corporate-governance.htm

13/10/2014| TUAC Submission on the Review of the Principles of Corporate Governance