Why Chairperson-cum-CEOs Have No Place in Today’s Capitalism

Bright meeting

When it comes to separating the roles of company CEO and board chair, many arguments—both for and against activist calls to do so—have been made. Arguments against the idea generally insist that separating the roles needlessly complicates the business of running a business by creating two armed camps with blurred responsibilities. Meanwhile, arguments in favour of separation tend to highlight numerous perceived benefits, ranging from improved executive oversight to diversity of thinking.

Financial savings have also been highlighted as a reason to split the functions. As noted in the Harvard Business Review article “The Cost of Combining the CEO and Chairman Roles,” a 2012 study conducted by GovernanceMetrics International—which looked at 180 North American corporations worth US$20 billion or more—found that shareholders of companies with a combined CEO/chair pay a lot more in compensation without receiving any clear improvement in performance. In fact, over a five-year period, the study found that shareholders at companies with split roles received an average return of 39.96 per cent, while the average five-year return for shareholders at firms with combined leadership was a less impressive 31.3 per cent.

As far as the authors of this article are concerned, of course, governance improvements alone justify separating the CEO and board chair functions.

As investment industry professionals at Legal & General Investment Management, one of Europe’s largest asset managers, we have long been concerned by a worrying pattern of companies only splitting these functions after a scandal. And we believe that waiting for something to go wrong is not in the best interest of any business or its long-term shareholders. That is why we put our money where our mouth is during the most recent proxy season, voting against the board appointments of Darren Woods, CEO/chairman of ExxonMobil, and Jeff Bezos, CEO/chairman of Amazon, among many others.

To frame our thinking on the matter, we thought it instructive to observe that the United States government was based upon a political doctrine that originated during the Age of Enlightenment. In The Spirit of the Laws, published in 1748, French lawyer and political philosopher Charles-Louis de Secondat, Baron de Montesquieu, argued that liberty can best be maintained by forming constitutional governments with independent branches empowered to keep each other from abusing authority.

This line of thinking heavily influenced the crafting of the United States Constitution. As succinctly noted by John Adams—American Founding Father and second U.S. president—in the Adams–Jefferson letters, “Power must never be trusted without a check.”

Too grandiose an example? Perhaps. But the analogy has merit, especially considering the need for built-in checks and balances that exists in the States today.

“Just as the independent branches of the U.S. government carry their own defined powers, uncoupling the powers of the CEO and board chair represents a positive move away from self-interest, conflicts of interest, and power imbalances, toward more strategic, relevant, and inclusive decisions and company cultures.”

Just as the independent branches of the U.S. government carry their own defined powers, uncoupling the powers of the CEO and board chair represents a positive move away from self-interest, conflicts of interest, and power imbalances, toward more strategic, relevant, and inclusive decisions and company cultures.

In the United Kingdom, the Corporate Governance code does not allow for the combination of CEO and board chair functions. And while there has been some progress on this issue in other jurisdictions, the progress made has not been good enough.

As things stand, the proportion of global companies maintaining a combined CEO and board chair role remains astonishingly high—53 per cent of CAC 40 companies in France, and 48 per cent of IBEX 35 and other top 100 companies in Spain. In North America, according to the Spencer Stuart Board Index, 86 per cent of the 100 largest publicly traded companies in Canada had separated the roles by 2019, but almost half of the S&P 500 companies across the border in the United States remain led by a combined CEO/chair (although the U.S. number is down from 77 per cent in 2001, according to a Stanford study).

We find these numbers unacceptable because—like a U.S. government without functioning checks and balances—we believe any company with combined CEO and board chair roles is fundamentally incapable of governance best practices.

Good governance has never been more important because it can make or break a business, and good governance starts at the top. As laid out above, having distinct CEO and board chair functions provides a balance of authority and responsibility that we believe is in both the company’s and investors’ best long-term interests. Also—similarly to Congress’s legislative independence from the powers of the U.S. president and Supreme Court—a board’s independence from the CEO is equally important to ensure robust oversight over company strategy and executives’ decisions.

Why is it more important than ever before for hold-out companies to act? Put simply, we do not see how it’s possible for self-interested behaviours to be sustainable over the long term, not to mention the COVID-19 crisis.

Capitalism has hitherto been defined by what works in the marketplace. Left unchecked, with companies not having to answer to codes of regulation and conduct, the system can easily break. This generates justifiable backlash, whether public or governmental, against the idea of profit at any cost. Hence the need for checks and balances to mitigate corporate solipsism, which is where the concept of environmental, social, and governance (ESG) measures comes in.

The rise of ESG—along with last year’s commitment by the 181 CEOs who make up America’s Business Roundtable to lead their companies for the benefit of all stakeholders—reflects a deep schism with old-school capitalism. As a result, real change on the corporate governance front was needed even before the COVID-19 pandemic made it a matter of survival.

The roles of CEO and board chair exist for different purposes. Separating them doesn’t just reduce costs along with the risks of bad behaviour and scandal—it can help companies achieve and maintain profitability, mitigate potential challenges, and focus on growth to create long-term value—even, and perhaps more so, in times of crisis.

In today’s challenging world, diverse ideas and viewpoints may contain the seeds of survival, which is why we need diverse boards that can better challenge and support companies in making necessary changes and sustainable decisions. We need corporate boards led by chairs who can focus on their significant governance responsibilities, not CEOs/board chairs who can make their own rules—grade their own papers, as it were

At no time in recent memory has it been more incumbent upon businesses to lead by good example. In fact, we think there may be a structural fault line where non-sustainable corporate behaviour could be a predictor of eventual failure. Nevertheless, negative corporate behaviours can become structural, generating strong inertia against change while protecting fiefdoms or special interests and maintaining a biased conception of right and wrong. As a result, many companies need a helping hand to enact good and sustainable behaviours, which is why we have long viewed stewardship as an essential feature for asset managers seeking to generate sustainable long-term outcomes for their clients.

Earlier this year, LGIM updated its global proxy voting policy to step up our efforts to influence leadership structures. We also announced we will vote against any company in Japan with no women represented at the board level. In 2019, we logged 379 engagements with companies on governance issues. Using our considerable proxy voting power, we also voted last year against 159 directors in the United Kingdom due to concerns over independence. In Europe, we withheld support from 365 resolutions to confirm directors, boards, or committees. In 2019, we supported 51 shareholder-driven resolutions in the United States that asked for a split of the CEO and board chair functions. We also cast 40 votes against directors where the board’s decision to combine the roles was done without the prior approval of shareholders.

Our approach in advocating for governance (the “G” in ESG) measures—including separating the joint CEO and board chair positions—is twofold: on the one hand, we are acting to guide companies toward more responsible and sustainable behaviours; and on the other, we are acting out of self-interest to protect our shareholders as asset managers because we believe working to create a more inclusive and sustainable capitalist system is in the best interest of all investors.

But if we hope to maintain a habitable planet, the path forward must be one in which companies can be trusted to self-regulate (especially in the world’s largest economy, where environmental regulations designed to prevent catastrophes like the Deepwater Horizon oil spill are actually being rolled back). To effectively self-regulate on environmental issues, a company must have a diverse board and a separation of powers in place to ensure sound decision making. The same goes for unsafe and unequal work practices.

One lesson of the 21st century and its disruptions so far is that most progressive change comes from the outside. There can, however, be a different model for change—one coming from consenting, diverse, and active leaders within a firm. This model starts with corporate boards effectively serving as a balancing force to a company’s executive “branch.”

Unless otherwise stated, references to “LGIM,” “we,” and “us” are meant to capture the global conglomerate that includes Legal & General Investment Management Ltd. (a U.K. FCA authorized adviser), Legal & General Investment Management International Limited (a U.S. SEC registered investment adviser and U.K. FCA authorized adviser), Legal & General Investment Management America, Inc. (a U.S. SEC registered investment adviser) and Legal & General Investment Management Asia Limited (a Hong Kong SFC registered adviser). 


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