CORPORATE GOVERNANCE Roles Apart? – The case against separate chairs and CEOs

Conventional wisdom holds that combining the chief executive and board chair roles is against the best interests of the organisation and the principles of best practice governance. But the duality leadership structure – where the executive who leads the board, with the responsibility of monitoring performance, also leads the management team – frowned upon in corporates, is the model for the entrepreneurial organisation, the driving force behind most industry success.
Strategic management and governance processes were reviewed in 10 New Zealand companies in which the CEO was not member of the board and the chair was not an executive. Only 24 of the top 200 (by revenue) New Zealand companies qualified for inclusion in the research, with CEOs and chairs in exclusive groups. The balance of the companies either had managing directors, CEO/directors, executive chairs or no identifiable chairs.

Strategic planning
The strategic planning processes were led by the CEOs, initiated by management and created through boards and senior executives meeting at least once (usually at the start of the process) before the plan was submitted to the board for approval. Middle management, customers, key stakeholders including major shareholders had varying degrees of input to the plan.
The board and executive management met from half an hour to two and half days, with transparency and ‘no surprises’ between the two groups critical factor for all companies whether state-owned, listed or private. Management and board achieved agreement on plans because they were collaboratively developed. Majority shareholders (such as the government) conveyed their corporate intent before plan approval.
The experience of the CEO in the business sector and the confidence of the board in the CEO’s performance had considerable influence on the board’s reliance on the CEO to create the strategic plan. Boards were increasingly seeking ‘stretch targets’ and creating healthy tension with management in striving for better performance from the company. The planning period was usually three to five years but could include 10-15 year time horizon particularly where technology, capital equipment or long-term contracts dictated.

Board – executive relationship
Communications between the CEO and chair occurred regularly throughout the monthly cycle between board meetings. Ministers of the Crown needed to be advised of some pending event or news release on which they may be asked to comment, whilst public companies had obligations to release information to all shareholders under the continuous disclosure regime.
All chairs met with their CEOs before board meetings to discuss issues, outcomes, and visitors to the meeting, eg executives. They spoke as peers, each with particular responsibilities.
Most companies had 11 board meetings year plus one or two planning sessions. (This result compares unfavourably with Fortune 500 boards that met on average seven times year, and raises the question of whether these New Zealand companies are being over governed.)
Although not board member the CEO usually attended the board meeting as did the CFO/company secretary. More than one chair suggested that having another executive in the board meeting kept the CEO honest. The chair and CEO gave prior approval for any contact between executives and board members. It was generally held that main board members should not be on the board of wholly owned subsidiary for which the CEO was accountable.
Strategic issues were usually kept to the earlier part of the board meetings and involved the opportunity for the CEO to share future thinking and plans so that there was continuing story rather than facts in isolation. Audit and Remuneration Committees existed for all boards and the CFO and CEO usually attended all subcommittee meetings as executive advisers except when they would be conflicted, such as when the CEO’s remuneration was being discussed.

Conflicts of interest
Whilst the Companies Act 1993 only requires that directors “declare their conflicts” it does not require that they absent themselves from meeting, take no part in the voting, remain silent in the discussion or apply other behaviours that are or could be required in addressing conflicts of interest. Usually the chair excluded the director from discussion or voting on matters where potential or existing conflicts arose. Meetings started with declaration by directors of any potential or existing conflict with any item on the agenda. Many of the State-owned organisations had directors who because of their industry-relevant and specialist knowledge could be involved in conflicts of interest.
Conflicts were only deemed to occur where matters were dealt with at the board level and this interpretation by chairs could be subjective, or seen as inappropriate by third-party stakeholders.
A more common conflict occurred when lawyers on the boards were partners in firms which provided professional legal services to the company. Is such director offering legal opinions rather than applying legal mind to governance issue?
There is increasing focus on this issue. The authors believe that the potential conflict should not exist and there needs to be increasing separation between the professional services offered to company and the board membership of principals of the professional services firm. Another potential conflict could arise where chair (or other board member), at the request of management or the board, provides consultancy or additional advisory services for which there is payment over and above directors’ fees.
What is director’s ‘normal’ time and advisory commitment to company? It varies enormously from those who contribute to the governance and advice to the company in meaningful and committed way to those who simply attend few board meetings year.
All CEOs and chairs interviewed had clear understanding of the separation between governance and management. Companies were improving their governance protocols and increasingly reporting on their governance in their annual report. But while CEOs commended their chairs for their understanding and application of good governance practices, most chairs were either dismissive of, or did not necessarily understand, the governance processes, let alone their application.

Board – shareholder relationship
In SOEs and Crown entities the relationship between the shareholder representatives (the Ministers) and the chairs of state-owned companies is well known and largely prescribed. The shareholders’ agents also include The Treasury, officers of CCMAU and others and the chairs are very aware of the Crown’s risk-aversion as shareholder.
In many ways the CEOs of Crown entities treated the shareholder as they would in private company with one shareholder. This compares with the listed companies (in the research sample) without major shareholders, where the relationship was formal and usually structured around an annual meeting and any releases under the continuous disclosure requirements. However, it is important to understand the relationship between the board, the executive management and the analysts and key fund managers, as often they are given information the smaller shareholders are not privy to, and certainly not within the same timezones.
The more distributed the shareholding, the greater the autonomy the board assumed, both in strategic planning as well as the corporate direction and commercial initiatives.

Appointment of directors
The process of appointing directors, in both the public and private sectors, should be further examined. The input at the Appointments and Honours Committee level of Parliament should be challenged in terms of the outcomes. There is evidence from this research that the contribution of some directors appointed to state-owned company boards does not represent the best possible solution for the companies.
The ‘old boy’ network still exists as source of

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