Ups and Downs of Separate CEO and Board Chair Roles
Shareholders are putting increasing pressure on companies to separate the functions of CEOs and board chairs. But according to a recent study from The Conference Board, CEO-Board Chair Separation: If It Ain't Broke, Don't Fix It, companies might not want to yield.
TCB researchers Ryan Krause and Matthew Semadeni say they found that although poorly performing companies improved after separating the roles of CEO and head of the board of directors, healthier companies that implemented the change saw performance dip. The report said enacting the separation at healthy companies is akin to taking medicine when you arent sick.
Boards should really assess their companys own performance before deciding whether or not to separate those roles, said Melissa Aguilar, the executive editor of TCBs bimonthly Director Notes publication, which presented the report.
The study, which looked at 309 separation events between the years 2003 and 2005, also found that CEO-board chair separation might not constitute a significant corporate governance change, because the roles are often recombined within a year.
The study broke up CEO-chair separation into three categories: apprentice separation, departure separation, and demotion separation. Apprentice separation (the former CEO/chair remains board director, but helps train a new CEO) and departure separation (the CEO/chair retires or resigns and is replaced by two new individuals) constituted roughly 90 percent of the separation events in the sample. Of 201 apprentice separations, 28 percent of were reversed in the subsequent year; the same was true for 17 percent of the 77 departure separations. The companies that implemented apprentice and departure separation and did not recombine the CEO and board chair roles saw virtually no effect above and beyond that of just changing the CEO, according to the study.
The third kind of separation, demotion (the CEO retains that role, with a new person becoming board director), is the one most sought after by discontented shareholders. Krause and Semadeni also found it to be the most impactful: Among the 31 demotion separations, only 10 percent were reversed. Of those that remained separated after a year, companies that implemented a demotion separation saw the largest effect on annual stock return, with an average reversal of those companies annual stock return of 140 percent.
Such a reversal is a boon for companies with meager performances, but a disaster for companies doing well.
If you do this when things are fine, youre essentially forcing a change when you dont want one, Krause, the lead author of the study, said.
The report suggested readers keep an eye on digital security vendor Symantec to see how high-performing companies that implement demotion separation fare. Following a 30 percent shareholder return for 2012, the company appointed an independent board chairman in January. According to Krause and Semadenis predictions, Symantec will report negative returns next year.
Overall, corporations are already taking separation slowly. Of 610 Russell 3000 companies that held their annual shareholder meetings between January and April 2013, only 21 companies had separation even come up for vote, according to Director Notes' May fact sheet. A majority -- 70.3 percent across the 21 companies -- voted against separate CEO and board chair positions.
However, separation is not uncommon, according to another Conference Board report, Director Compensation and Board Practices: 2013 Edition, especially among smaller companies. About 61 percent of companies with less than $100 million in revenue surveyed for the report have separate board chairs and CEOs.
Before making the same move as those companies, the authors of the CEO-Board Chair Separation report urged companies to ask themselves: Is performance suffering under the CEOs command? Is it poor enough to justify a change in board leadership structure? If so, how should that separation be undertaken?
The evidence shows that failing to consider those questions, as well as the companys performance and separation type prior to implementing a separation, can have dire consequences, the authors concluded.