Whether to separate the CEO and chairman positions is one of the most hotly debated issues in corporate governance.  During the 2013 proxy season, calls for an independent board chair were the second most frequent proposal submitted to companies.1  Even though JPMorgan Chase managed to win highly publicized battles in each of the last two years against activists seeking to separate the top posts currently held by Jamie Dimon, board leadership structure will likely continue to be a top priority for activists in 2014.

Proponents of separating the CEO and chair positions typically argue that splitting the roles strengthens the independence of the board, thereby improving the board’s oversight function.  Proponents also contend that separation can free the CEO to focus on running the company.  Opponents generally counter that a separate chair can undermine the CEO’s authority and result in inefficiency.

Despite pressures to separate the positions, a board should carefully determine the optimum leadership structure for its particular company in light of the company’s unique circumstances and CEO and board dynamics.  Because these circumstances and dynamics can change over time, most boards preserve flexibility with respect to the leadership roles: only four percent of S&P 500 companies have adopted a formal policy requiring separation of the CEO and chair roles.2  Some factors that boards may wish to consider when evaluating their leadership structure include:

  • Recent trends.  According to the 2013 Spencer Stuart Board Index, 45 percent of S&P 500 companies split the CEO and chairman roles, up from 23 percent a decade ago.3  At slightly more than half of these companies, an independent director fills the chairman’s post. Consequently, only 25 percent of all S&P 500 companies have a truly independent chair (up from 16 percent in 2008).4  In most instances where the chairman is separate but not independent, the former CEO serves as the chair during a transition period before the new CEO takes the reins.5
  • Rise of the lead director.  Ninety percent of S&P 500 companies have an independent lead or presiding director6 who, among other things, helps set board agendas, runs executive sessions of the independent directors and serves as a liaison between the independent directors and management.  NYSE-listed companies are required to have a non-management director preside over executive sessions of the non-management directors, but the same director is not required to preside at all such sessions.  Of the 446 boards that have a lead or presiding director, 61 percent have lead directors (up from 28 percent in 2004) and 39 percent have presiding directors (down from 72 percent in 2004).7

A lead independent director is often viewed as an acceptable alternative to an independent board chair.  Even though JPMorgan Chase successfully fended off a shareholder proposal seeking to split the CEO and chairman roles, it subsequently acquiesced to shareholder pressure by elevating its presiding director, Lee Raymond, to a newly created position of lead independent director.8  Similarly, in 2012, Goldman Sachs managed to negotiate the withdrawal of a shareholder proposal seeking to separate its chairman and CEO roles by creating a lead independent director position, and the firm averted a similar proposal in 2013 by strengthening the powers of the lead independent director.9

Historically, Glass Lewis and ISS have strongly supported shareholder proposals calling for an independent board chair.  Prior to the 2013 proxy season, ISS changed its position and now it may not support such a proposal if the company has a lead director with certain specified duties, the company is performing adequately, and the company satisfies certain other corporate governance requirements.10  Specifically, to gain ISS support, the lead director must be charged with the following duties:

–      preside at all board meetings at which the chairman is not present, including executive sessions of independent directors

–      serve as liaison between the chairman and the independent directors

–      approve board meeting agendas and schedules, as well as information sent to the board

–      have the authority to call meetings of the independent directors, and

–      if requested by major shareholders, be available for consultation and direct communication.

In response to the ISS policy change, many companies strengthened their independent chair position.  As a consequence, ISS supported fewer calls for an independent chair in 2013 (47%) than in 2012 (75%), which also contributed to lower voting support.11  Shareholder support for resolutions seeking separation of the top roles averaged 31 percent in 2013, compared to 34 percent in 2012.12

  • The Academic Literature.  Studies comparing the effect on company performance of the two leadership structures have been inconclusive.13  A new study released in 2013,14 however, lends support to opponents of the “one-size-fits-all” approach advocating an independent chair.  After studying the financial performance of 309 companies following the separation of their CEO and board chair, the authors concluded that a board should separate the two roles only when the company is performing poorly.  Even then, the separation should occur in such a manner that the CEO retains that role but an independent chair is appointed.  Based on the results of their study, the authors conclude that it would be a mistake for boards to succumb to pressure from activist investors or corporate governance watchdogs to separate the CEO and chair positions simply because it is considered a “best practice.”15

As the study indicates, whether and when to separate (or recombine) the CEO and chair positions is a complex issue.  In addition to financial performance, boards often need to weigh myriad other factors, including the dynamics of the CEO’s interaction with the board, the company’s history and culture, the length of the CEO’s tenure with the company, and any corporate governance or oversight issues that have raised concerns among directors or shareholders.

This post was excerpted from our Top 10 Topics for Directors in 2014 alert.


1   J. Copland & M. O’Keefe, Proxy Monitor Report: Corporate Governance and Shareholder Activism (Fall 2013), at p. 11.

2   2013 Spencer Stuart Board Index at p. 21.

3  Id. at p. 5.

4 Id. at p. 21.

5   Id. at p. 5.

6  Id. at p. 23.

7 Id.

8 D. Fitzpatrick & J. Lublin, “J.P. Morgan Juices Up Director’s Job,” The Wall Street Journal (September 9, 2013).

9  A. Brown, “Goldman Sachs reaches deal to avert vote on chairman/CEO role,” Inside Investor Relations (April 11, 2013).

10   Specifically, the company must satisfy the following requirements:

•   Two-thirds independent board;

•   Fully independent key committees;

•   Established governance guidelines;

•       A company in the Russell 3000 universe must not have exhibited sustained poor total shareholder return (TSR) performance, defined as one- and three-year TSR in the bottom half of the company’s four-digit GICS industry group (using Russell 3000 companies only), unless there has been a change in the Chairman/CEO position within that time.  For companies not in the Russell 3000 universe, the company must not have underperformed both its peers and index on the basis of both one-year and three-year total shareholder returns, unless there has been a change in the Chairman/CEO position within that time;

•   The company does not have any problematic governance or management issues, examples of which include, but are not limited to:

•   Egregious compensation practices;

•   Multiple related-party transactions or other issues putting director independence at risk;

•   Corporate or management scandals;

•   Excessive problematic corporate governance provisions; or

•   Flagrant actions by management or the board with potential or realized negative impacts on shareholders.

11  N. Noked, “Key Issues from the 2013 Proxy Season,” The Harvard Law School Forum on Corporate Governance and Financial Regulation (Aug. 30, 2013).

12Id.

13 See, e.g., studies cited in R. Leblanc & K. Pick, “Separation of Chair and CEO Roles,” The Conference Board Director Notes (August 2011) and in “Watching the 2013 Proxy Season — Union Funds Pushing Companies to Separate Chairman and CEO Roles,” Proxy Monitor 2013, n.14.

14 R. Krauss & M. Semadeni, “CEO-Board Chair Separation—If It Ain’t Broke, Don’t Fix It,” The Conference Board Director Notes (June 2013).

15 Id. at p. 3.