The Great Divide: to separate the chairman and CEO roles, or not? To make such a separation mandatory, or not? A panel of experts tackles the thorny theoretical issues and practical concerns involved in splitting the two top leadership positions of the corporation.

• Author: Kristie, James
• Position: BOARD LEADERSHIP - Discussion

I DON'T KNOW HOW to be a chairman and not a CEO." That is what the AP reported Ed Whitacre Jr. telling top General Motors executives upon being named chairman of the automaker last year. Well, in January of this year he resolved that dilemma by adding the CEO title. But he may be on the wrong side of history on that maneuver. There trendline of one person holding down both the chairman and CEO titles may be moving against senior executives who, in a Whitacre-type boardroom, "don't know how" to lead without serving as the head of the company and head of the board of directors.

That is one of the consensus sentiments voiced by a group of business leaders and governance thought leaders brought together to hash out the pros and cons of separating the top roles. The panel (see bio notes on page 27) convened in November 2009 at the Weinberg Center for Corporate Governance at the University of Delaware. The 90-minute session in front of an audience of 100 business school students, faculty, and guests was ably moderated by the center's director, Charles Elson. The spirited debate resulted in some clear conclusions by the panel: there will be diminishing opportunities for the two top positions at American corporations to be held by the same person; the positions should not be split while someone holds both titles but should be factored into the succession planning process; separation of the roles will likely become the default board governance policy in the future; and that the federal government and courts should stay away from mandating a separation of the roles.

This is the fourth in a series of Weinberg Governance Center roundtables on pressing board leadership issues that DIRECTORS & BOARDS has published. Previous panels addressed "Whose Company Is It Anyway?" in 2000, a roundtable that launched the center 10 years ago; "Handling Dissent in the Boardroom" in 2004; and "Director Term Limits Under Review" in 2008. Excerpts from the debate on chairman-CEO role separation follow.

Charles Elson: The issue of whether the CEO position should be separate from the chairman position is being passionately debated in boardrooms, in the broad business community, and within the institutional investor community. Historically, the chairman was the senior member of the board--a board that hired and fired management. With the separation of company ownership and control in the 1920s and 1930s, management took over board composition and control unified, in the sense that the CEO assumed the role of board chairman, and the board became less of a monitoring body and more of an advisory group to management.

Several years ago, a movement picked up steam to separate the roles, so as to revert to the historical approach in which the chairman of the board was independent of management. When you think about it, why should the chairman of the organization that is overseeing management be the person being overseen--i.e., the CEO? That doesn't make much sense.

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Legislation that would separate the roles has been introduced in Congress by Sen. Schumer. This is an issue that the courts ultimately may deal with as well. During these times many questions are being asked about separating the roles and how it would impact the organization of the company and the way that the company operates. Ira, you have been an early proponent of separating the roles. Lead us off as each of you states your initial positions on the matter.

Ira Millstein: The trend toward splitting the roles is inexorable. At least a quarter of major U.S. companies have adopted separation. Even more important is that directors want it. In the latest report from the National Association of Corporate Directors more than 70% of directors voted for separation.

As Charles noted, the whole structure of the board has changed. Years ago, management handpicked board members; they essentially acted as an advisory board, not a monitoring board. The independent director movement really started in the 1970s with enactment of the Foreign Corrupt Practices Act and the requirement by the SEC that public companies establish audit committees composed of independent directors. With the rise in hostile takeover activity in the 1980s, Delaware courts demanded board independence, and then the GM Board Guidelines in the early 1990s brought the independence issue into the mainstream for all companies. The accounting scandals that led to enactment of Sarbanes-Oxley eventually prompted the SEC to require not only audit committees to be composed entirely of independent directors but also compensation and nominating committees. So, over time, independent directors increasingly comprised the majority of the board. I consider the independent chairman to be the final piece in the creation of an independent board that truly monitors management.

I've lived in boardrooms over the past 25 years. I have been called into many miserable situations involving a troubled board. I know that one thing is certain: He who sits at the head of the table runs the board meeting. If the CEO sitting at the head of the table also happens to be the chairman who is running the board meeting, that meeting will be very different than a board meeting being run by an independent chair, because an independent chairman can raise important questions, notwithstanding management's take on those issues.

I'm not urging a mandate. I'm not saying that every company must separate the positions. And I don't think the chairman role should be stripped from a CEO who now holds the combined position. Rather, that separation should occur upon succession.

In summary, I don't see how separation could fail to happen. Directors want it. Activists want it. Companies in many countries in the civilized world already have split the roles. It's going to happen, and it's the right thing to do. The CEO should not be chairing the independent board which is supposed to be monitoring his or her activities. Period. Splitting the roles is the preferred model, and I think that most U.S. companies will voluntarily adopt it in the not-too-distant future.

James Robinson: I have been an independent director. I have been a non-independent director. I've been a chairman and CEO. I've been a nonexecutive chairman. There are times when the best course of action is to split the roles. There are times when it's best to combine them. My conclusion is a simple one: Do no harm. Beware the simplicity of saying that two heads are better than one. What about the 12 heads of the full board? You have to be careful that you don't create a passive attitude among directors who think they can just sit back and watch while the chairman and the CEO run the show. You want all board members to be actively engaged. Once you start separating the duties and acknowledge that two heads are running the shop, you risk disenfranchising the other board members and not getting the active contribution you want from each and every director.

An unintended consequence of the debate on separation is word choice. We say that we need a separate chairman to "monitor" the CEO, as in "Watch them--they are going to do something that could put them in jail." This gets into the delicate issue of defining risk. In my view, avoiding risk is more than simply avoiding financial exposure. The biggest risk a board should be concerned about is management getting so traumatized that it doesn't take legitimate business risks.

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I would certainly disagree with any efforts to make the role separation mandatory. This should not be a politically populist initiative. The systemic risk in this country, I fear, is no longer the financial system--it's the U.S. Congress.

Bob Monks: I'll come at this issue with a story about the tragedy of Tyco and Dennis Kozlowski. Kozlowski would not be in jail today and the shareholders of Tyco would have been spared expensive notoriety if Tyco had been required to have a chairman of the board be someone other than the CEO.

I served on Tyco's board for nine years under Kozlowski. During my tenure, I wrote numerous letters to him saying that the combined chairman-CEO role wasn't working, that the board was dysfunctional and that there was disorder within the compensation committee, and that we needed an independent chairman. Ultimately, I was asked to leave the board. In hindsight, I don't blame my colleagues for wanting to see me go. I do blame them, however, for allowing, even enabling, the company culture that resulted in Dennis' conviction and the company's near demise.

It requires great talent to be a CEO of a company. It is a lonely job that is best done by individuals with a good sense of their worth, but this personality trait usually comes with a need for power and control. The individuals comprising Tyco's board while I was there were probably typical of most boards. The members had no particular sense of governance, no sense of the dangers of absolute authority, and they took great pleasure in the company's seemingly limitless expansion potential and rising stock price. They were not bad people. Kozlowski isn't a bad person. He could...