Splitting the CEO and Chairman Roles: It’s Complicated …

Photograph by Steve Hix/Somos Images/Corbis

It seems that every year calls ring out louder and louder for boards to separate the roles of CEO and chairman. Large companies from Wells Fargo (WFC) to News Corp. (NWSA) have faced shareholder proposals demanding that they replace their CEO with an independent director in the role of chairman.

Advocates of splitting the positions argue that an independent leader will aid the board in more effectively monitoring the CEO’s actions and performance. Critics of the combined CEO/chairman role include institutional investors, policymakers, and a preponderance of corporate governance experts and advisory firms. Many executives disagree, however, arguing that such a structure creates unnecessary confusion and hurts unity of leadership.

Who’s right? The answer is tied to company performance.

We recently conducted a study to better understand the effects of separating the CEO and board chair positions on company performance. We looked at 309 companies that underwent a separation from 2002 to 2006 and found the results differ depending on how the firm is performing at the time, as splitting the positions imposes a check on the CEO where none existed before. This is helpful if the firm is having performance problems; it’s not so helpful if everything is running smoothly. Our study showed that CEO-chairman separation tends to reverse a company’s performance: Low-performing firms benefit from a separation event, while high-performing firms suffer.

It doesn’t just matter how the firm is performing, though. It also matters how the firm chooses to separate its top jobs. For the company to see this reversal of fortune, it has to go through what we call a “demotion” separation, whereby the CEO remains the same, but a new, independent chairman is appointed to oversee him or her. This occurred at Chesapeake Energy earlier this year. The other options, where the chair remains the same but a new CEO is appointed (a recent example is the retirement of clothing company Oxford Industries’ longtime CEO), or the CEO/chairman leaves and is replaced by two new people (such as occurred after Mark Hurd was forced out at Hewlett-Packard), do not impose the kind of strict governance shift that advocates of the CEO-board chair split have in mind.

So to those companies and shareholder groups contemplating proposals for a CEO-chairman split, we offer a few words of caution: Examine your firm’s performance, and if it ain’t broke, don’t fix it.

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