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Split CEO/Chair Roles: The Gateway to Good Governance?

CCBE data shows that split Chair and CEO roles are more highly correlated with good governance than any other metric tracked in the Board Shareholder Confidence Index. As split roles become commonplace in Canadian corporations, will U.S. firms follow suit?

By Kerry Clare

While split Chair/CEO positions are not yet the rule in Canada, they’ve become common enough to be accepted as a governance standard. In the United States, however, where progress has been slower, corporate leaders are now seeking to raise their own standards by pushing split CEO/Chair positions as “the default model of board leadership in corporate North America.” The idea is to have American companies follow their Canadian neighbours’ example.

As indicated by recent Clarkson Centre research, there is considerable reason for highlighting the split Chair/CEO model in particular as a governance initiative. While it makes sense that companies with sound governance structures would demonstrate good governance overall, as shown by scoring mechanisms such as the Clarkson Centre’s “Board Shareholder Confidence Index”, the correlation between high scores and CEO/Chair splits in CCBE’s latest study is remarkably high.

The Clarkson Centre’s 2008 “Board Shareholder Confidence Index” (based on 2007 fiscal data) showed TSX Composite-Listed companies with separate CEO/Chair roles achieving an average overall governance best-practices score of 80%, in contrast to 58% overall for companies whose CEO/Chair roles were combined. This was the most direct correlation evident between overall governance scores and specific best practices, suggesting that the CEO/Chair split model could well be functioning as a corporate board’s gateway to good and even better governance.

The potential governance impact of separated CEO/Chair roles has been promoted recently by the Millstein Centre for Corporate Governance and Performance at the Yale School of Management in a report entitled “Chairing the Board”. Citing pressure from the Canadian Coalition for Good Governance for “a dramatic increase in independent chairmanship” among Canadian corporations during 2006-2007, they’re seeking similar results from their own Chairmen’s Forum initiative. The Chairmen’s Forum is a group of more than fifty North American corporate leaders now “calling on all North American public companies to voluntarily adopt independent chairmanship as the default model upon succession to a combined CEO and chairman.”

According to the Milstein Center’s report, “Global experience has shown that the [CEO/Chair split] model is a tested instrument of governance. Having an independent chairman is a means to ensure that the CEO is accountable for managing the company in close alignment with the interests of shareowners, while recognizing that managing the board is a separate and time intensive responsibility.”

The report notes, however, that the split CEO/Chair structure in itself does not automatically indicate a well-functioning board. “The consideration of splitting the roles must be accompanied by delineated responsibilities that are clear to the board, the non-executive independent chair, the CEO and the shareowners in order for the independent chairman to fulfill the important leadership role. Furthermore, attracting and retaining qualified independent directors is a key ingredient.”

The Milstein Center’s report also stresses that a move toward split CEO/Chair roles should not be reactionary, in response to crisis (as has been the case for many American companies during the current financial situation). Rather, the ideal opportunity for instating the split structure would be during times of succession, when such a change could occur more naturally and with added consideration.

The Clarkson Centre’s data supports the Milstein Center’s assessment of separated CEO/Chair roles, and the wider governance impact of this model. We are pleased that our research continues to be on the cutting edge of corporate governance trends, encouraging best practices for corporations across North America.

CEO - Chair Split Chart