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THE ROLE OF THE "NON-EXECUTIVE CHAIRMAN"?

By Serge Ejzenberg
Posted May 21, 2005


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Quite common in Europe, but rare in the USA a permanent board chair separate from the CEO is drawing renewed attention as we want to analyze corporate governance.

Can the concept of a non-executive chairman finally take root in America?....


Several financial and accounting scandals have raised several questions about the effectiveness of Boards of Directors in the exercise of their fiduciary duties.

The role of a Non-Executive Chairman can create a new power base in the company, which can lead to turf battles. So without a careful intention and good intentions this can creates bad results….

The basic question is: “Did the directors properly oversee management and ensure management’s action were in the best interest of the shareholders?”

Diverging questions may arise from there: Are the Directors really independent? – How are they selected? – Who is controlling their pay? – And finally “How can they be effective is the CEO controls their agenda?”

Good corporate governances requires that the Board of Directors (Directors) are a check and balance on the CEO.

These days questions and debates arise to seek if the CEO and the board should be separated?

The “Old Continent” (Europe) allied with Canada have developed and implemented “Non-Executive Chairman”.

This brings some appeal to when questions like: “How can a CEO manage the business and be his own overseer?” – “How can a CEO fulfill these two duties?”

In management theory, the CEO should spend his/her time managing the business and the Chairman should spend his/her time managing the board and its corporate functions.

Nevertheless both the CEO and the Chairman are part of a leadership team serving the best interests of the shareholders in maximizing value.

http://www.altpeter.de/fun/wortlos/ceo.gif

We will also add that this “Corporate Team” should be the guardians of the “Global Corporate Governance” of the company and ensure its correct implementation with the acceptance of all the members of the company.


Of course the role of a Non-Executive Chairman can create a new power base in the company, which can lead to turf battles. So without a careful intention and good intentions this can creates bad results...


Obviously there is no definitive answer to this question.

If precluding a CEO from serving as a “Board Chairman” will result in more effective governance; the answer will depend on the facts and circumstances of each case.

The emotional and personality of the CEO twisted with those of the Non-Executive Chairman can generate either an explosive cocktail or bring the corporation to a next level.

All the functions of the company will be affected by this new organization (from staffing, till research and development...).


What circumstances create a case for a Non-Executive Chairman?


Certain facts and circumstances linked to the company and its global environment are more compelling cases for Non-Executive Chairman.

Are the Directors really independent? – How are they selected? – Who is controlling their pay? - How can they be effective is the CEO controls their agenda?

We can cite as examples:

  1. A new seasoned CEO from a major corporation is brought on board. It will be a challenge for him/her to learn and manage the business. On top of its current activities managing the Board will be added to an agenda already more than busy...
  2. On the other side a “young” CEO promoted within the company; he/she will spend more of its time on daily activities rather than establishing a “working link” with the Board. Adding a Non-Executive Chairman will enable him/her to focus on the primary duty of operations.
  3. In case of turnaround situation (e.g.: M&A, “key man” changes,...); some conflicts of interest can appear between the CEO and the Chairman functions. Usually the short term financial interest of the CEO take over the global interest of the shareholders community.
  4. On more strategic view, when a CEO has implemented “good governance” practices may be completed by a strong thinking Non-Executive Chairman.
  5. In Family Business environment, the CEO/Chairman which has build the company to “nearby” corporation, would need in order to mitigate the “family corporation” a Non-Executive Chairman that will be beneficial for both the Family and the Company.

The creation of a Non-Executive Chairman will signify a new power base which could potentially lead to an internal battlefield...

To mitigate this risk, detailed operating procedures must be developed first.

The high level question “What the Non-Executive Chairman will do and how it will done?” are the essence of the matter

Opponents of the Non-Executive ideas will evoke too much governance regulation, too much of oversight, etc...

The question to separate the CEO and Chairman positions to lead to better performance/governance or not depends on the qualification, emotional maturity and, of course, the value of the two key participants.


What issue or problem would a non-executive chairman solve in the Company?


The key success measures for an Non-Executive should be evaluated in the context of other changes occurring in the work ethic of the Board.

Boards are becoming more independent, working harder and longer and exercising more detailed oversight.

Well....this can lead to the raise the question if the CEO can still serve as the Chairman?

Let’s review some basic questions:

  1. Why the company needs a Non-Executive Chairman? What is wrong with the current corporate governance practices?
  2. What are the qualification for a Non-Executive Chairman
  3. Should we implement a “firewall” to avoid bitter competition between the CEO and the Non-Executive Chairman.
  4. How to avoid “intelligence” between the rest of the company and/or the CEO and/or the Non-Executive Chairman.
  5. Which mechanisms to implement, in order to ensure that the Non-Executive Chairman empower its oversight role in the corporation?
  6. What issue or problem needs to be solved and will a Non-Executive Chairman solve it?
  7. Is the problems can be solve by a better power equilibrium between the CEO and the Non-Executive Chairman?
    1. Is a CEO controlling issue?
    2. Has the CEO been resistant to the approved corporate governance practices implemented?
    3. Has the CEO a full and appropriate understanding and access to people and to the right level of information?

If the concerns are about the perception issues and conflicts of the Chairman overseeing himself/herself as CEO, therefore the position should be split.

Other alternatives include the expansion of the Board oversight policies and procedures, changing the makeup of certain board committees (new nominating procedures for Directors, appoint a lead Director,...)

In other words the vital issue for the company can be the board itself. Therefore creating a Non-Executive Chairman will certainly not solve that issue.


Non-Executive Chairman: A serious Job with at least 1 000 hours invested yearly....and being paid accordingly...
What should be the qualification? And the price?....


The key success measures for an Non-Executive should be evaluated in the context of other changes occurring in the work ethic of the Board

The Non-Executive Chairman should be a person with the highest integrity, accomplishment and emotional maturity.

This person should have fully satisfied with its ego/ambitions needs and ....is looking for significance not success.

But should have a strong leadership capabilities to control and spur the board’s oversight and advisory roles, and on top be bale to gain the respect of senior management and the employees.

Its not a requirement that this person should be selected from outside the Boar/Company...it can be a current board member.

Not only this person should have superb personal qualities, but he/she should have the knowledge of the company’s industry and of course, the company itself; otherwise he/she must strive to learn the business, the people, and all the issues from bottom up.

The amount of time may vary from each situation, but in the case of a large and complex diversified company, approximately 1 000 hours a year would be seen as reasonable.

Obviously to attract the right person, a significant compensation may be required....


“Firewalls are needed to prevent power plays...


The two main functions of the Non-Executive Chairman relating to the CEO: overseer and advisor. The effectiveness of this relationship is the ability of both to build a trusting relationship while implement the controls and balance systems.

The company will have two leaders, two strong individuals.

Be careful not to mix the roles:

  1. The CEO has ultimate responsibility for managing the business.
  2. The Board has the ultimate responsibility for managing the managers...

A wrong selection of the Non-Executive Chairman will expose the company to personalities conflicts and political battles between the CEO and the Non-Executive Chairman.

A too strong split between the CEO and the Non-Executive Chairman can establish a strong lost of performance within the Company as a whole.

By contract and policies, a Non-Executive Chairman should be preclude from serving as CEO of the company or as CEO of a competitor...

To avoid “political camp” neither the CEO nor the Non-Executive Chairman should serve on the:

  1. Nominating committee of the Board
  2. Compensation committee of the Board

Some rulings have to be accepted and only be modified or removed by a vote of the independent directors.

The Board should promulgate the Non-Executive Chairman’s duties and responsibilities. The CEO and all the senior officers should contractually acknowledge those duties and agree to use their best effort to ensure effective governance.

Finally, the performance of the Non-Executive Chairman should be evaluated annually by the other independent directors to insure that the purposes of separation are met and achieved their goals.


What are the rules of engagement? – How will a Non-Executive Chairman and its board execute their oversight duties?


A the origin there is a key factor whereby the company creates a new power base with the Non-Executive Chairman, this new “power base” is added to the corporate mix.

Written policies and procedures should be set relating to:

  1. Which kind of information and how the Non-Executive Chairman can access to?
  2. What kind of staff, travel budget and advisors would the Non-Executive Chairman need?

The goal should be unlimited access to information and people in line with the board’s fiduciary duties. The positive benefits should spread amongst the company, avoiding any possible conflict or challenge to the CEO.

Joint communiqués disseminated throughout the company by both the CEO and the Non-Executive Chairman.

“The Devil is in the details”

A strong education and training of the officers should be set to clarify both roles of CEO and Chairman, explaining that the CEO reports to the Chairman who oversees the Management for the owners of the company: the shareholders.

The issue of whether the creation of a Non-Executive Chairman would lead to better governance really depends upon the two persons involved and how the details of implementation are worked out.

The combination of a “Wrong Non-Executive Chairman” and/or a wrong process will deserve the governance and the put the company et risks...

“The Devil is in the details”

Can you have good performances and governance without a Non-Executive Chairman?: YES

Can you have bad governance and poor company performances with a Non-Executive Chairman?: YES



Serge Ejzenberg
Président de l’Association Alexis de Tocqueville

 
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THE ROLE OF THE "NON-EXECUTIVE CHAIRMAN"?
In management theory, the CEO should spend her time managing the business and the Chairman should spend her time managing the board and its corporate functions



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