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Getting more value out of the chairman/CEO relationship

Public companies when looking at the need to separate the roles of chairman and CEO, have to understand the dynamics that are found with the individuals concerned, plus the board. Whatever the solution, ultimately it is the investor and public’s perception that needs to be managed.

Public companies are coming under increasing pressure to separate the roles of chairman and CEO. This split is recommended, inter alia, by the Higgs Report in the UK, and is becoming an established trend in both the US and France. In Germany, the separation is already mandated by law.

The split is intended to be beneficial for companies, allowing an increase of balance, complementarity, clarity and predictability. Organisations, as a result, should strive for a proper equilibrium, transforming the chairman/CEO relationship into something that functions akin to the US constitutional principles of fostering ‘checks and balances’, ‘advice and consent’ and a ‘separation of powers’.

The separation should improve the company’s prospects and performance. An effective chairman/ceo relationship gives investors greater confidence, attracts and retains good executives, and creates value for the business. If this relationship is mismanaged, however, value may be quickly lost.

In practice, getting this important relationship right can be surprisingly dependent on the individuals and personalities involved. Certain attributes emerge as the key issues in ensuring a good chairman/CEO relationship and effectively resolving any personality conflicts.

Ingredients for a Good Relationship

An effective chairman/CEO relationship requires honesty, mutual trust and confidence, plus a clarity of roles. Honesty means fostering open communication between the two individuals that addresses both praise and criticism. The CEO should communicate with the chairman frequently and openly, letting the board know that it is getting early warning of emerging issues and problems, so that it is always ‘ahead of the curve’ and can address problems in a considered, pro-active way.

In turn, the chairman must be able to detect and convey to the CEO how other important constituencies may view the CEO’s actions and views, regardless of whether it is critical or negative. An effective chairman will play devil’ s advocate and should help draw out constructive criticism and suggestions from the board early enough to allow for vigorous dialogue.

Trust and confidence are about believing in the other’s abilities. Clarity of roles is about who does what. In part, an effective relationship results from a clear differentiation between operational and supervisory responsibilities. The CEO is responsible for running the company, but that person must execute the strategy of the board. In contrast, the chairman’s job is to supervise the board that delivers the strategy and the role should not be too involved in operational matters.

One high-profile partnership that worked well was at British Airways, under Lord King and Colin Marshall (now a Lord). King, the chairman, had a clear view of the strategic repositioning needed to create ‘the world’s favourite airline’, which he combined with a strategy of providing to the CEO ‘guidance without interference’ at the operational level.

Clarity of roles is also about external communication. For example, the chairman might be strong and effective at running the board, but might not be comfortable in front of TV cameras in the event of a crisis. Chairmen often make good news announcements, but leave the delivery of bad news to executives, often the financial director.

The actual division of roles should relate to individual personality. If it suits the chairman to talk to the major investors, while the chief executive goes on TV, why shouldn’ t this arrangement be implemented? Success derives from using individuals’ different qualities and offsetting personal weaknesses. The important point is not always who does what, but rather that internal discussions and debate are necessary to produce a successful, forward thinking strategy.

Marks & Spencer is a recent example of a company that suffered when the clarity of the company’ s external message was undermined by its board. A non-exec forced out chairman, Paul Myners, against the apparent wishes of chief executive, Stuart Rose, (never mind the view of the chairman). At the same time, an unhappy compromise meant that incoming chairman, Terry Burns, would not take the chair until mid񮖦.

To investors, this reshuffling created a loss of clarity and cohesion. Investors might have been asking whether they should just ignore Myners and he may not have been included in some important meetings and decisions. The lesson is that if the decision to replace a chairman has been made, it should be implemented without delay, so that the company can move forward without creating the impression of internal division.

What sort of personality conflicts can arise, and how should they be addressed?

A classic problem in the chairman/ceo relationship can arise when one of the individuals does not publicly address a problem, and importantly, does not communicate any concerns early enough. This could be an operational problem that might balloon into a reputational risk. When the problem finally does emerge as a distinct threat, trust between the two inevitably breaks down.

The ‘hider’ is embarrassed and looks bad. This sort of situation can arise, when the CEO has a cautious personality or is over-territorial. Equally, the CEO might be over-optimistic that a problem will just disappear. The net effect, however, is that a potentially alarming issue the chairman should have been warning people about, is treated as an operational issue, thus compromising the chair.

Part of the solution involves structurally improving management information, which makes it harder to keep issues quiet. The chairman needs to know what is going on in the business, something that sounds obvious, but is not always the case.

The relationship-based solution is about constantly working on personal communications. There needs to be enough trust that the CEO feels confident enough to go to the chairman early on, and say that the company may have a problem.

Early warnings help cement the relationship and give time to agree on an action plan. The CEO could aim to resolve the issue (particularly if it is purely operational) and then report back with (hopefully) a positive resolution. Part of the board could take on the issue, or an external consultant could be employed.

A conflict could arise from the ‘power of personality’, where one individual exhibits a very strong personality and does not accept dissent. Some strong personalities are effective, in part, because they are also good listeners; they know where they are going and are open to persuasion. Virgin’ s Richard Branson, who has become a one-man brand, can be seen in this category. He is clearly smart enough to pick good people to run his diverse businesses and let them get on with it.

Then there are the bullies, like Robert Maxwell, the larger-than-life former media mogul, who exhibited a less laissez-faire approach. While a chairman who plays devil’ s advocate should be able to foresee and head off conflict, such intervention could anger an intolerant or egotistical chief executive.

Same but different

A matrix of possible interactions between chairmen and chief executives with different personalities is worth considering. A strong-minded chairman and a weaker chief executive, can produce a company that is effectively run by an executive chairman, with the chief executive simply following orders as chief operating officer (COO).

UK supermarket group, Morrisons, shows the tensions that can result from a dominant chairman. As executive chairman, Ken Morrison, seems to believe there is nothing anyone can teach him about retail; he checks the fruit, the lighting, and is in the shops seven days a week. Importantly, he has also questioned the value of having non-executives at all.

This suggests an inclination to surround himself with weaker executives, which means the business becomes acutely dependent on one man getting it right.

Investors had growing doubts about the group’s takeover of Safeway, and to combat this, senior non-exec David Jones, led the search for more non-execs to help the supermarket group out of its hole. He had to act in spite of public griping from Ken Morrison, a public tension that hurt investor confidence and squandered the opportunity to send a positive message to the investor community by bringing in new directors.

At the same time, boardroom tension inevitably means that Morrison himself will have been distracted from thinking about the operational side of the business. Imagine how investment decisions may be delayed. Such boardroom dysfunctionality will permeate through the workforce and even through to customers.

By contrast, a scenario involving a weak chairman and a strong chief executive, means board members have to hope the CEO is doing the right thing, because the chairman has less effective tools of observation and regulation. In such situations, the rest of the board may also be weak, but if it is strong, it needs to replace the chairman.

A weak chairman may fail to identify dissenting views among directors or ensure that valid objections are addressed. Dissent may then break out openly, or through the media as a result.

A weak chairman, combined with a weak chief executive, is a recipe for disaster. The business may appear to have no leadership in such a case, and the management may be too complacent operationally, neglecting to confront problems in the hope they will simply go away on their own.

Finally, of course, both the chairman and the chief executive can have equally strong personalities. In fact, two strong personalities is often the best combination, provided the relationship involves communication and trust. Relationship difficulties caused by two big egos can be managed by breaking down problems into smaller elements and addressing them at that lower level.

However, if the pair don’t or won’t talk to each other, the board may have an obligation to make a change. Where one person holds the job of chairman and chief executive, the risk of over dominance at the expense of a balance of power is particularly acute.

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