Wednesday, April 05, 2006

To Separate or Not to Separate?


We all know the story of how Enron had a separate chairman (Ken Lay) and CEO (Jeff Skilling). The un-perfect company actually followed good corporate governance procedures by disallowing executive power to remain with one person. We all know the unhappy ending to this story.

Over the past several years as more scandals unfolded, there has been increasing discussion in the media about separating the two positions in an effort to curb CEO power. Alas recent research noted in Harvard Business Review (April 2006) found that there is no statistically significant difference between companies that have two people or one person at the top. The authors used stock price and accounting income as their metrics (Yale professor Roberta Romano, Yale Journal of Regulation). Similarly, Institutional Shareholder Services (ISS) has been unable to find a correlation with market performance for separating the two roles.

On the other hand, when we asked this question in 2003 in our reputation research, we found a pattern leaning towards separating the chairman and CEO roles. Nearly two-thirds of U.S. business influentials reported a preference for splitting the two roles (63%) vs. less than one-fifth (17%) who thought they should be combined. A fairly large group -- 20% -- remained undecided. I have always wondered if respondents were offering what was an expected response in light of the abuses of CEO power at the time.

I think it is good that evidence is still unclear that splitting the roles makes a difference. Decisions such as this depend on the company’s culture and individual personalities. Citigroup’s chairman Sandy Weill is soon to depart (April 18) and there is no doubt that while he delivered on what he said he would do(no interference), Weill and current CEO Chuck Prince are probably looking forward to an amicable divorce and less close quarters.

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