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Separation of the roles of chair and CEO - Coggle Diagram
Separation of the roles of chair and CEO
Employees will look tot eh CEO as their leader
Board members will look to the chair as their leader
A person holding both positions could become an overly dominant influence on decision making in the company
In order to prevent this happening, Code Principle G states there should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company's business
When an individual holds both positions they are likely to be able to exercise a dominant influence on the board, unless there are strong individuals such as a deputy chair or SID to act as counterweight
CEOs tend to be strong personalities with high levels of confidence in their own abilitities, although these characteristics may be desirable, there is a risk that they may be overly domineering if their powers are left unchecked
A CEO who also acts as the chair is effectively allowed to mark their own homework, set their own targets, influence board appointments thus reinforcing their own position
Overtime they may become less and less likely to listen to advice from board colleauges and the board may eventually cease to function as an effective body
Without effective checks on their powers an individual could ultimately try to run the company for their own personal benefit rather than in the interests of its shareholders
Code 14 Provision requires the responsibilities of the chair and CEO to be clear, set out in writing, agreed by the board and made publicly available
FRC guidance states that when decisding the differing responsibilities of the chair and CEO, particular attention should be paid to areas of potneitla overlap
Areas of overlap are most likely to arise if the chair has executive management responsibilities, the role envisaged for the chair is essentially non executive in nature. It is concerned with the leadership of the board rather than the management of the company's business
A chair with executive responsibilities is more likely to get embroiled in a clash with the CEO.
A dominant CEO might seek to infringe on the chair's role as the leader of the board by manipulating the agenda for board meetings
CEO should not become chair of the same company
Code Provision 9 states that a CEO should not become chair of the same company
Used to be relatively common practice where a successful CEO who had been in post for a long time was promoted o the role of chair
Sometimes done as a way of retaining their expertise on the board, however it was often seen as an unmerited reward for their long and distinguished service and as an inducement to persuade them to retire as CEO
Investors usually oppose such promotions because
the outgoing CEO will not have been independent on appointment as the chair
the outgoing CEO will often retain some of their executive responsibilitites, effectively becoming an executive chair
the division of responsibilities between the chair and the CEO may become more blurred
the incoming CEOs freedom of action may be restrained by having their predecessor constantly looking over their shoulder
the outgoing CEO may view any changes proposed by the incoming CEO as implied criticism of what happened before under his or her watch
In ordinary circumstances, companies are only required to explain their non-compliance with provisions of the Code at the end of the financial year in the report and accounts
In the case of the recommendartions regarding the separation of the two roles, Code Provision 9 requires the board to consult major shareholders ahead of the appointment, set out its reasons to all shareholders at the time of the appointment and also publish these on the company website