When it comes to corporate governance, one issue that continues to get a lot of attention is whether companies should have have the same person as both CEO and chair.

The issue was highlighted following corporate scandals at companies like Enron and WorldCom, which led to reforms and a push for greater board independence under the Sarbanes-Oxley Act of 2002.

“It’s a long running debate,” Stephen Giove, co-founder of Shearman & Sterling’s Corporate Governance Advisory Group, tells InsideCounsel. “It shows every sign of continuing to go on.”

One option that was first seen in the 1980s is having a lead independent director take over some of the functions that would otherwise be assigned to a chair or CEO.

Overall, some common governance scenarios include:

  • Separate the role of CEO and chair. Giove likes this option the best from a governance perspective.

  • Have the same person be CEO and chair, with a lead independent director. Giove says that is the “second best” alternative.

  • Other possibilities are having a combined role for CEO and chair without a lead independent director. Giove does not recommend this option.

Regulating roles

A recent study by the Council of Institutional Investors (CII) of the companies on the Russell 3000 shows that 35 percent of these businesses have a separate CEO and chair. Some 44 percent have a non-independent chair with a lead independent director, while 21 percent have a non-independent chair without the lead director. The CII recommends that boards should be chaired by an independent director. The CEO and chair roles should be combined only in “very limited circumstances,” the study further advises.

If the board opts for the combined role, it should include an explanation in proxy materials why the same person being both CEO and chair is in “the best interests of shareowners, and it should name a lead independent director who approves the flow of information to the board, meeting agendas and meeting schedules,” the CII says.

In larger companies, there are far more situations where the same person has the CEO and chair roles. Public companies will find that the Securities and Exchange Commission (SEC) wants the company to explain in proxy statements why the board leadership structure is appropriate.

Commenting on these trends, Matthew Semadeni, a professor at Arizona State University, tells InsideCounsel that the use of the lead independent director has become “very popular” and represents the “middle of the road.” Yet, recently, there have been some questions . “Perhaps we’ve gone too far the other way,” Semadeni says.

Robert Pozen—who is a senior lecturer at MIT Sloan School of Management, a fellow at the Brookings Institution, and formerly vice chairman of Fidelity Investments and associate general counsel at the SEC—agrees that there are questions with regard to these roles.

Pozen explains that CEOs find themselves with many demands on their time, so someone may need to share in the responsibilities to lessen the burden.

“Everybody wants every minute of your time,” Pozen says about the CEO’s typical schedule. “You just don’t have enough time in the day… You just can’t do everything.” Semadeni adds that the CEO’s roles can be complex so sharing of these duties may be appropriate.

One of the new issues that arises regarding CEO and chair roles is that of investor engagement. Some big investors, such as funds invested in the company, may want to discuss issues directly with the CEO.

“Someone has to engage with investors,” Pozen says. “I think investor engagement is a big deal.”

Also, certain stakeholders and others may want to see someone with a “big title,” Pozen says. For instance, in the case of global companies, foreign business leaders or government officials may want to “meet and greet” a top executive from the company, he adds.

Each company is different and industries differ, so corporate governance needs to be tailored for each specific business.

Regulating risk

There is also the risk that if there is not a combined CEO/chair, the message coming from the top could be “inconsistent,” Pozen said.

Or, if a company gives some of the duties to a lead independent director, there are times that may not work. The CEO or possibly the chair would be able to speak for the company on a TV business news network like CNBC, but it is questionable if a lead independent director would be the right fit.

Pozen points out the example, too, that an independent director cannot testify on a bill before Congress or a state legislature. The CEO can take on that task, or perhaps an independent chair.

Giove says the combined CEO and chair roles may be a good fit if a company needs “unified leadership” and the combination allows the board and the company to “go in the same direction.”

“It could be a really good thing in an industry that’s fast moving,” Giove explains. In fact, the combined role could allow a company to attract a “rock star” type CEO who will have a higher impact on the business. That person can set direction of the company and run the board in a “more meaningful way,” Giove says. That gives the person authority in oversight and in strategic operations of the company.

Also, having the same person holding the CEO and chair roles means there is no one else to blame if something goes wrong. “There’s clear accountability,” Giove says.

But the combined role may also lead to a potential for fewer checks and balances, according to Giove.

“Many investors favor separation [of the roles],” Giove adds. “With an independent chairman [the] person and the board can stress test the management team and guide the management team.”

Other opinions

Beyond investors, others favoring separating the two roles are proxy advisory firms and governance staff at large institutional investors.

“Studies show there is no uniform rule here,” Pozen says. He advises to “get away from the status and start to think about the function… Take a hard look at the function that needs to be played.”

“The conventional thinking is that no one size fits all,” Giove adds. “Do what’s best for your company.”

Pozen tells companies to answer the question: Is this the best use of the CEO’s time?

In addition, there are sometimes concerns with those chairs who may have been former CEOs at the company. In the long run, this system of management could create problems related to micromanagement. “Some people have a hard time giving up the reigns of their company,” Pozen says.

Also, companies that hire a new CEO may wait until the CEO “earns” the title of chair in two or three years, before adding that title to their responsibilities, Giove says. Some may never earn that role, he adds.

While these issues are played out, another current trend relates to the right of shareholders to nominate their own director candidates. If these candidates get elected, they may encourage changes in corporate governance such as having an independent chair.

Whatever is decided, general counsel may find themselves in a “conflict” when it comes to the debate of having the same person in the CEO and chair roles, Giove says.

Giove says the general counsel should play a “meaningful role” in the debate. Perhaps the general counsel can be a “broker” or “liaison” between different sides, Giove says. Still, if the CEO also wants to be chair, Giove recognizes the general counsel “may want to make the CEO happy.” It is likely the general counsel reports to the CEO. Yet the general counsel has responsibility to be counsel for the corporation and works for the board and shareholders.

It is also notable that more CEOs, and even some chairs, have backgrounds as lawyers and bring those skills to the leadership of a company.

The debate also comes as corporations are less frequently seeing powerful CEOs. There are not as many CEOs out there like GE’s former omnipotent Jack Welch.

After the Enron-type scandals, companies “can’t allow individuals to be that powerful,” Semadeni says.