Articles, Thought Pieces
Executive Chairman Research – Policy and Practice
This note provides a brief review of the policy and practices behind the appointment and requirements for UK PLC Board Chairmen. In the UK, the roles at the top of the board (i.e. CEO and Chairman) have traditionally been split to ensure that not one individual can rule the board in its decisions on company strategy and governance structures. This best practice requirement is one of the main cornerstones in UK Corporate Governance and has been enshrined in the UK Corporate Governance Code throughout its various iterations over the years. Accordingly, the current Corporate Governance Code 2016 (the ‘Code’) describes the requirements for an independent Chairman at the head of the Board, as well as the split between the roles of CEO (who will lead the management of the Company) and the Chairman (who leads the Board).
Corporate Governance Code
Under Section A of the Code, the Code reviews provisions and recommendations on the proper ‘Leadership’ of a UK listed company, as well as the role of the board. In respect of the role of the Chairman, the Code notes the following:
A.2: Division of Responsibilities
“Main Principle – There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision.
A.2.1 The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board.”
A.3: The Chairman
“Main Principle – The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.
The chairman is responsible for setting the board’s agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues. The chairman should also promote a culture of openness and debate by facilitating the effective contribution of non-executive directors in particular and ensuring constructive relations between executive and non-executive directors.
The chairman is responsible for ensuring that the directors receive accurate, timely and clear information. The chairman should ensure effective communication with shareholders.
A.3.1. The chairman should on appointment meet the independence criteria set out in B.1.11…. A chief executive should not go on to be chairman of the same company. If exceptionally a board decides that a chief executive should become chairman, the board should consult major shareholders in advance and should set out its reasons to shareholders at the time of the appointment and in the next annual report.”
UK Market Practice
As mentioned above, in the UK the adage of split roles at the top of the board is both long-established and a key cornerstone of UK governance structures. Accordingly, many investors will push back strongly on proposals to appoint a combined Chairman/CEO (or an Executive Chairman) for fear of unfettered power at the top. NB: An Executive Chairman without the presence of a separate CEO (not Managing Director or COO) will automatically be considered a combined Chairman/CEO. Likewise, investors would not generally expect the CEO of a company to go on to become Chairman (executive or non-executive), given his previously deep involvement in the running of the company, and the concern that it will be difficult for him/her to give up the reigns when stepping up to Chairman. It takes a strong CEO to be able to rule next to a former CEO-cum-Chairman, especially so if the former CEO has been in charge of the company for an extended period of time, or may even have founded it.
Where a board exceptionally decides to promote a former CEO to the role of Board Chairman, or to appoint a combined Chairman/CEO, this should only be done with prior engagement of major shareholders. Additionally, to alleviate concerns, the investors would generally expect the introduction of a strong Deputy Chairman role – often taken up by an experienced, City-accepted Senior Independent Director – to offset some of the power imbalance created through the proposal.
There are a few companies/industries for which the appointment of Executive Chairmen may traditionally have been more accepted. These would tend to be those companies, in which the business concept is more complicated, or strong technical understanding is required to lead the board in its deliberations of strategy and governance structures. As such, investors have previously accepted the role of Executive Chairman in the banking industry, given the complex products and stringent regulatory framework. For companies in industries with a simpler business model, such roles will likely be more difficult to justify. What makes these companies different from their peers who manage without an Executive Chairman? And what is the motive for the proposed Executive Chairman role; is it driven by business need or the desires of a strong-minded individual wishing to retain control of their domain.
Given the importance placed on an adequate balance of power at the top of UK company boards, Executive Chairmen are a rarity amongst UK-listed PLCs. According to recent analysis from the Boardex database there are still currently three instances of Executive Chairmen leading FTSE 100 companies: Micky Arison at Carnival plc, Kevin Loosemore at Micro Focus International plc and Tony Pidgley at Berkeley Group Holdings plc. A slightly higher representation of Executive Chairmen is seen amongst FTSE 250 companies, where Boardex record 19 instances (8%), at companies such as JD Sports Fashion plc and Melrose plc. For the FTSE SmallCap and Fledgling indices, Boardex record respectively 8 out of 280 companies (3%) and 15 out of 90 companies (17%).