Over recent years we have seen major fallout from some huge companies. Great commercial institutions have hit the buffers and others have had to take painful medicine just to stay afloat. Many of these organisations have played a large part in their own downfall. Shareholders are beginning to look into the boardroom for answers to why things went so wrong and – tellingly – why warning signs were not acted upon.
The combined role of chairman and chief executive is the explosive issue at the moment. This dual role presents a massive risk to any reasonably sized organisation, and must be avoided or corrected immediately; the two roles are an essential part of delivering shareholder value and ensuring the necessary corporate governance.
It is down to the non-executive directors to resolve this high-risk anomaly. In the recent past we have seen problems at Marks & Spencer, Alliance & Leicester, British Land; all suffering share price erosion with a single person straddling the two jobs. This is not coincidence.
The CEO’s job is a tough one. How could we forget Greg Hutchings’ reign at Tomkins; for years he did both jobs. Corporate governance at Tomkins was never “Item One” on the board’s agenda. Some directors enjoyed outrageous perks, such as company flats and domestic expenses charged to the company. No questions asked!
Smaller and start up companies initially tend to have the same individual as both chairman and CEO. This normally works while the businesses are small. One of the major attributes of smaller businesses is that they can move very quickly as a result of very short decision-making processes. The CEO knows all the major players, processes, people and customers in the business and therefore can make well-informed decisions very quickly. As businesses grow, their complexity makes this more autocratic style inappropriate.
At the wheel
This is when the role of the CEO becomes increasingly the day-to-day running of the business with a team of senior executives or directors, responsible for marketing, finance, operations and so on. The CEO’s job is a tough one, and usually critical in terms of the successful delivery of the business. The CEO tends to be the highest paid staff member, reflecting his or her importance to the business.
The CEO must make the tough and often unpleasant decisions that will make the business successful. Failure to do so may have significant consequences. For example, at Tomkins, Hutchings resisted the break-up of the group, despite tangible evidence that this was obvious and necessary. At Marks & Spencer, the then chairman, Sir Richard Greenbury, never listened to any criticism from his directors or the City. He even tried to decide who his replacement would be.
Enter the chairman
The chairman runs the board. The CEO runs the business. The CEO reports directly to the chairman, but is responsible for ongoing decision making in the business, in effect delivering the strategy agreed by the board.
An autocratic boss, especially one who has been around for some time, is more likely to ignore danger signals. However, this is less likely to happen when there are frequent discussions and debate between chairman and CEO.
The chairman is responsible for hiring and firing the CEO, usually with board approval. He or she has to monitor the performance of the CEO while providing necessary support and guidance.
It has become increasing necessary and desirable to have a chairman from outside the organisation with a service contract. Three years is the favoured length of time. It is vital that the chairman has an independent, objective and less detailed view of the business than the directors.
The dangerous trait of the CEO rising to the position of chairman must be avoided at all costs. Someone who has done the job before you in a particular fashion, and succeeded is absolutely the wrong person to chair the board. They tend to want to get involved at the wrong level, and clash with, if not undermine, the CEO.
Most of all though, the role of the chairman is to ensure that the business is being run in an appropriate manner, and fulfilling all its obligations, both legally and to the shareholders. It is incumbent on the chairman to ask the uncomfortable questions. The chairman will need to ensure the board is acting and behaving as a team and working in a cohesive manner.
He or she will maintain effective relationships and communicate with all the major shareholders, leaving the CEO free to run the business.
The chairman tends to handle the financial media in the main, especially with any issues that could significantly affect trading or the share price.The CEO tends to be more associated with the business media about business issues.
Old boys’ club
There are a number of portfolio chairman who will serve a number of companies as chairman. This old boys’ club is alive and kicking. But it is no longer appropriate to just turn up for the board meeting and assemble the annual report. It has become an increasingly time consuming role. It requires dedication and a passion for the business.
There are still many high profile organisations with one person wearing both hats. Even some new age captains of industry are playing in two positions on the boardroom field. Charles Dunstone’s massively successful operation Carphone Warehouse has disappointed the city with its recent figures.
Although obvious for Dunstone to be chairman and chief executive at the onset of the business, as creator of the company, surely it must now be time to think again and install someone less stubborn and more responsive to bad news and advice.
Why would you want to have two mission critical roles, requiring significantly differing capabilities, in one person? Goalkeepers rarely make good centre forwards and you certainly would not be able to play both positions simultaneously.
The most awkward but telling moment I have experienced in a boardroom as a serving director was after a particularly poor set of quarterly figures (the third set of disappointing results). The CEO was explaining why things were so bad, in a rather matter of fact way, when the chairman interjected, ever so politely, “how much worse do sales have to get before you consider resigning?”. I nearly choked. The CEO was gone in three weeks.
Rene Carayol is the author of Corporate Voodoo