Breaking Up Chairman and CEO Roles

CEOs do not like it. More and more often, it seems, the roles of chairman and CEO become separate from one another. And the arrangement usually is forced on the chief executive. A major problem at a big corporation is often the catalyst of these actions. That certainly happened at many of the nation’s banks after the financial crisis. Troubled Chesapeake Energy (NYSE: CHK) ripped the chairman’s role from CEO Aubrey McClendon when it became clear that he took advantage of his position to financially enrich himself.

It turns out that there may be reasons other than good corporate governance practices to separate the two jobs. A new study by GMI Ratings, a corporate governance research firm, claims that the decision to separate the roles also saves a public company, and thus, its shareholders, money.

In a new piece of research GMI found:

[T]he cost of employing a combined CEO/chair is 151 percent of what it costs to employ a separate CEO and chairman.

Specifically, the data show:

• Executives with a combined CEO and chair role earn a median total summary compensation of just over $16 million.
• CEOs who do not serve as chair earn $9.8 million in median total summary compensation.
• A separate CEO and chairman earn a combined $11 million.

The information makes sense. The CEO who also holds the chairman’s job has, by the nature of the arrangement, more power than if he were CEO alone. He probably can convince a board that the dual-capacity job has more value, because it is two jobs. And he does not have as much counterbalance on his board as if there were a nonexecutive chairman who could challenge his self-interest — usually quietly and out of the public eye.

Another reason that the separation of the two parts has financial advantages is that nonexecutive chairmen do not work full-time in their roles at most companies. They have almost nothing to do with the time-consuming activities of day-to-say operations. They are paid for what they are — people with a part-time job.

The breaking apart of the CEO and chairman jobs often occurs because the chief executive makes a major strategic mistake. Now there appears to be a second reason. The arrangement is cheaper.

Douglas A. McIntyre