KARACHI, May 10: Should the chairman and chief executive officer (CEO) of a company be two different persons or should a single person be assigned both portfolios, is one of the widely debated issues of the Corporate Governance.
A brief series on corporate governance, published under the SEC- UNDP Project on Corporate Governance, identifies the first as ‘dual leadership structure’ and the second as ‘a unitary leadership structure’.
Historically, in most orthodox or family-owned corporates, the ‘Seth’—who often is also the head of the family doubles up both as the chairman and the CEO. Other members of the family are listed down as directors.
Such arrangement though convenient, is fraught with risks, especially where, in listed companies, public money is at stake. The SEC-UNDP document notes that the CEO is a full-time employee of the company and has the overall responsibility for the management of the company’s affairs, its performance as well as implementation of the corporate strategy. While the CEO discharges those responsibilities subject to the power given by the board of directors, the chairman heads the board and is, therefore, responsible for ensuring that the statutory and fiduciary duties of director are properly carried out and the board, as a whole, functions effectively. The chairman is also expected to monitor the performance of directors as well as the CEO.
Other advantages of ‘dual leadership’ structure has been counted as a good corporate governance mechanism to dilute the unfettered power that come from combining the two offices of the chairman and the CEO. It is also argued that keeping the two positions distinct would better safeguard shareholders’ interest since the chairman would keep an independent “check” on the CEO and maintain an oversight function.
But there has been opposition to the separation of the role of chairman and the CEO and much of the criticism is emanating from the latter, who are in favour of unitary leadership structure on the premise that it promotes communication and information flow between management and the board, and, thus, results in better decision-making. CEOs also argue that they hold valuable information about the business and affairs of the company that could be better utilized in their capacity as the chairman. “Separating the two position may result in conflicts and finger pointing”, say the opponents and they add: “Moreover, choosing the ‘right’ person with in-depth knowledge of the company’s business and industry can be a difficult and costly task.
Promoters of the corporate governance, however, hold strong case in favour of dual leadership structure. They argue that where the role of chairman and CEO is combined into one, it could result in number of agency problems. Unitary leadership might hamper effective monitoring and disciplining of the management. “Thus, there is a possibility for senior managers to engage in opportunistic behaviour, which means that the interests of shareholders will not be properly safeguarded”, they say and add that executive compensation is another area where the CEO may be able to yield under influence.
When independent from management, the chairman can play a pivotal role in giving directors (particularly non-executive directors) a strong voice in setting agendas of board meetings, deciding on executive compensation and encouraging meaningful discussions in board meetings. The chairman is also likely to take measure to require circulation of relevant information precisely, accurately and timely to non-executive directors for participating in board meetings. “Thus, the board is likely to discharge its statutory and fiduciary responsibilities in a diligent and transformed manner while maintaining effective management oversight”, say those who favour a dual leadership structure.
The Code of Corporate Governance requires that chairman of listed companies should preferably be elected from among the non- executive directors. Further, the board should clearly define the respective roles and responsibilities of the chairman and CEO, whether or not those offices are held by separate individuals.