3.5 Splitting the Roles of Chairman and CEO

There is much debate as to whether companies are better served be splitting the roles of CEO and Chairman. In large companies, good governance requires the roles be split, and virtually all companies do.

In tech start-ups, often the founder assumes the CEO role. He may also hold most of the equity, and therefore appoints himself Chairman as well. If the Chairman/CEO is an experienced entrepreneur and business manager with significant experience in Boards and fiduciary duty, then he may have the experience necessary to separate the roles of management and oversight. He can guide the Board in its duty, (one of which is to evaluate the CEO), and manage the company, (one duty of which is to report all material events to the Board).

Typically, however, start-up company CEOs do not have this wealth of experience, nor the disciplined mind necessary to manage both Board and management processes which can sometimes be in conflict. Too often, having both roles vest in the same individual concentrates too much knowledge and power. In such companies, other directors are dependent upon the agenda set by the Chairman/CEO for the Board. They can become marginalized, since they won’t know what questions to ask that are not on the agenda. Directors, no matter how diligent, cannot spend as much time keeping current as the Chairman/CEO. Consequently, there is a great tendency to defer to the judgment of the Chairman/CEO who is better informed.

All of this is very unhealthy for the Board, directors, and the company. Best practices require the Board to provide independent assessment and oversight of management. It is the Chairman’s role to guide the Board in its preparation and deliberation. There is no independence if the CEO is guiding the process. Importantly, it is more difficult for the other Board members to exercise oversight over the most powerful Director. Where contentious issues arise, the Board is hobbled in its ability to perform. In the worst case, it would be difficult for a Board to remove a poorly performing CEO if the CEO were also the Chairman.

Therefore, it is invariably the case that the company is better served if the Chairman and CEO are different people. The CEO can focus on managing the company and providing information to the Board. The Chairman in his role as mentor and overseer, can advise the CEO on alternative courses of action, question missing data, probe his analysis and decisions, advise on unintended consequences, etc. A second informed, experienced opinion will usually result in a better outcome. This is why as an important item of governance and best practice, the roles should be split. Please see related document Relationship between Chairman and CEO.