- An important responsibility of a board of directors is to maintain the most effective leadership structure for the corporation. Key decisions include whether the roles of Chairman and CEO should be combined in one person or split, and if split whether the Chairman should be an independent director.
- Having one person serve as both Chairman and CEO has been the norm in large U.S. companies; about 58% of large-cap companies have roles combined.
- The trend is toward splitting the roles. Between 2001 and 2012, the proportion of S&P 500 companies with split roles more than doubled to 44%.
- It has become commonplace for boards to have designated Lead Directors with specific responsibilities, both when the roles are combined and when the Chairman is not independent.
- Having the roles combined is a North American, and to a lesser extent a European, phenomenon. Around most of the world, 90% of companies keep the roles split, sometimes by law.
- Proponents of combining the Chairman and CEO roles say that it enables unity of direction and speed of action, especially in times of business crisis or transformation.
- Proponents of splitting the roles point to the potential abuse of consolidated power, the opportunity to improve governance, and the assertion that the two distinct roles are just too big a job for one person in a large and complex corporation.
- The research on the effects of leadership structure on business performance is, taken together, inconclusive. The prevailing advice on splitting or combining roles is to do what’s best for the company given its combination of business challenges and candidate leaders.
- The Vell study of the F100 found that these large U.S. companies still tend to have roles combined (61 companies) rather than split (39).
- But the trend is toward splitting: 25 companies that had combined roles in 2000 are now split, versus only four that were split then and are now combined.
- We analyzed the F100 companies in six categories:
- Always Combined (16 companies) have had the roles combined since the beginning of 2000, and sometimes much longer. These companies include five of the ten largest, with some of the longest-serving CEOs (including Warren Buffett at Berkshire Hathaway), and have the lowest rate of CEO turnover.
- Combined with Transitions companies (34) split roles when transitioning to a new CEO (and eventual chairman) but stay combined over the long run. This is a popular approach, though many companies used it selectively. Transition periods vary from a few months to over two years.
- Single Combine (4) went from split to combined structures. In all cases, the board had an experienced CEO to assume the Chairman role.
- Always Split (10) have kept the roles separate since the beginning of 2000. They have had on average more CEO changes than Always Combined companies do, and they are more willing to bring in outsiders as CEO, given that the Chairman usually remains in place.
- Single Split (21) went from combined to split structures. Half of these changes coincided with CEO or Chairman transitions, some involving the founder. Some were purposeful efforts to increase board independence and improve governance. A half dozen happened amid business turmoil.
- Complex Changes (15) went back-and-forth between structures. Eight are currently split, seven combined. Eleven of the 15 have returned to the structure they had at the start of 2000; the other four were combined then and split now. Ten of these companies experienced repeated leadership changes (including ousters), declining business performance (including during the financial crisis), and/or investigations of management improprieties.
Figure 1: Chairman-CEO Structures and Changes
- These 100 companies averaged 1.7 CEO changes between the beginning of 2000 and the end of 2013. Companies with strong commitment to combining roles (Always Combined plus Combined with Transitions) averaged only 1.4 CEO transitions. The Always Split companies averaged 1.8. And the companies with Complex Changes averaged 2.7.
- Across all CEO changes, these companies promoted an insider to be CEO 80% of the time. Among the Always Combined plus Combined with Transitions companies, it was 94%. Among the Always Split companies, it was 78%. And among the companies with Complex Changes, it was only 65%.
- Most of the governance guidelines of these companies include provision for designating an independent Lead Director whenever the Chairman and CEO roles are combined or the Chairman is not independent. Others provide instead for a Presiding Director, which typically rotates among the committee chairs, to lead meetings of independent members of the board.
- Sixty-seven of the companies have individuals designated as independent Lead Director. That includes 52 where the Chairman and CEO roles are combined, 14 where the roles are split and the Chairman is an insider, and one (Hess) with both an independent Chairman and a named Lead Director. Twenty-two other companies have split roles and independent Chairmen, hence no official need for an independent Lead Director.
- Nine companies with roles combined, or with roles split and an insider Chairman, have no designated Lead Director. Four of them have provisions for a rotating Presiding Director, two are mutual insurance companies with different board structure standards, and three have no policy on the matter.
Figure 2: Lead and Presiding Director Distribution
Note: Combined total is 59 instead of 61 because this is a December 31, 2013 snapshot, and two of the 2012 F100 had been acquired by that date.
- Thirty-four of the companies had leadership transitions involving the departure of long-time (10 to 38 years) CEOs, several of them founders. These companies were not more likely to change leadership structure than the F100 overall. However, when they have changed structure – upon departure of the long-time CEO or later in our analysis period – it has been predominantly to split the roles. Twelve companies split roles; two split then recombined.
- As of the end of our analysis period (December 31, 2013), six of the 61 companies with combined roles had women as Chairman-and-CEO: IBM, Archer Daniels Midland, Pepsico, Kraft Foods (now Mondelez International), DuPont, and General Dynamics.1 Across the 39 companies with roles split, women serve as CEO at Hewlett-Packard and Lockheed Martin, and as Chairman at Sysco.
- The overall picture is of well-managed leadership transitions regardless of Chairman-CEO structure. However, we count 16 companies (in the Complex Changes and Single Split groups) that had unplanned and sometimes chaotic management-plus-structure changes, including two dozen occasions where an executive was ousted or forced to give up one of the roles. Other companies (beyond those 16) have had sudden executive departures or dismissals, business performance downturns, or scandals of various types – but without their boards’ finding it necessary to change leadership structure.
- Any change to leadership structure carries risks as well as potential advantages. Some companies could avoid reactionary structure changes through more robust succession planning, including better contingencies for sudden or unscheduled CEO or Chairman departures. Boards should be clear and transparent about preferred structure (if any), the rationale behind the current structure, the roles of independent Lead Directors, and the handling of CEO and Chairman transitions.