On February 2, 2021, Jeff Bezos announced that he would “transition to Govt Chair of the Amazon Board and Andy Jassy will develop into CEO.” Whereas this alteration marked a significant company governance shift for Amazon, government board chairs have develop into more and more frequent. In response to Spencer Stuart, 15% of board chairs within the S&P 500 have been designated as “government chair” in 2021. Firms like Autodesk, Ford, Google, Iron Mountain, Occidental Petroleum, and Oracle have opted for an government board chair in recent times.
But, to our shock, few individuals perceive what an government board chair does, who tends to carry the place, and whether or not they profit their firm. To discover these questions, we recognized 289 corporations from the S&P 1500 index that had an government board chair in some unspecified time in the future between 2003 and 2017. Utilizing information via 2020 from the BoardEx, Execucomp, Compustat, and SDC’s mergers and acquisitions databases, we in contrast these corporations’ yearly efficiency with an government chair to their efficiency with one other kind of board chair (i.e., non-executive chair or CEO-chair). To higher perceive this new place, we additionally examined the press releases of over 500 government chair appointments by these corporations. We discovered that the chief board chair has develop into an essential board management innovation that has efficiency penalties for the group.
A Hybrid Place
Board chairs sometimes have three most important tasks: oversight, strategic recommendation, and board management. The diploma of focus a chair commits to every will depend upon the chair construction. A non-executive board chair, who’s separate from the CEO place, performs a restricted strategic position and is as a substitute centered extra on oversight and board management actions, equivalent to director recruitment and board effectiveness. Conversely, a mixed CEO-chair focuses on technique improvement and implementation, thus taking part in little to no position in oversight, and a constrained position in board management duties. On this case, the oversight tasks fall to the impartial administrators on the board, now sometimes led by a lead independent director.
So, what position does an government chair play in every of those tasks and what does it imply for the board and agency? To reply these questions, we examined the press releases of over 500 government chair appointments. We discovered that the chief board chair is usually a former chief of the agency. In 35% of instances the chief chair was the agency’s founder (e.g., Jeff Bezos at Amazon), in 11% they have been a member of the founding household (e.g., Invoice Ford at Ford Motor Firm), and in 40% they have been the agency’s retired CEO (however not a founder or member of the founding household, e.g., Eric Schmidt at Google). Accordingly, government board chairs maintain appreciable data about their corporations.
We additionally discovered that about 70% of press releases explicitly highlighted a deal with technique. Company governance finest practices sometimes prescribe a division between administration and oversight. For that motive, corporations have been shifting away from a mixed CEO-chair construction and towards an independent chair structure. The manager board chair place gives a middle-ground possibility, searching for to learn from a chair’s strategic acumen and managerial expertise whereas nonetheless remaining impartial from administration to offer efficient oversight. And it’s certainly efficient: We discovered that when an organization has an government board chair, it has on common a 33% larger profitability than when it has one other kind of board chair.
Nevertheless, having substantial oversight, strategic, and board management tasks on the identical time would possibly contain tradeoffs and blur the strains between the chief chair and CEO’s tasks. We discovered that the extent to which an organization advantages from an government board chair is determined by its particular state of affairs. Our analysis means that shareholders and boards ought to ask three questions earlier than appointing an government board chair.
1. How highly effective is the CEO?
As a result of the chief chair is extra concerned in strategic decision-making, they can present nearer oversight of administration. This generally is a profit if the board must extra intently monitor the CEO. Research has demonstrated that, as CEOs develop into extra highly effective inside their corporations, their potential to make extra unilateral choices will increase. Whereas this has some stewardship advantages, it additionally requires larger monitoring to make sure these choices are in one of the best curiosity of the corporate.
Our outcomes display that as a CEO turns into more and more highly effective (indicated by possession, tenure size, and compensation), the nearer oversight offered by an government chair turns into more and more helpful. Therefore, if your organization has a strong CEO, appointing an government chair could provide the additional oversight wanted to make sure that the CEO finest serves the corporate.
2. How advanced is the group?
When corporations are extra advanced, they’re tougher to handle. Firms which might be bigger, extra diversified, or that have interaction in additional acquisitions, for example, require clear strains of communication and delineation. In such an organization, an government board chair may appear a superb factor.
Nevertheless, an government chair who performs a extra concerned position in technique improvement and decision-making may pose a “too many cooks within the kitchen” hazard to advanced organizations, as a result of it challenges the unity of command wanted by CEOs. It might additionally lead to tensions between the CEO and the chief chair, particularly when the 2 disagree. Certainly, we discovered that the efficiency profit that an government chair gives an organization diminishes in additional advanced organizations. Therefore, when contemplating whether or not an government chair is true on your firm, contemplate its complexity and whether or not it should disrupt your CEO’s potential to be efficient.
3. How demanding is board management?
The management calls for of a board chair are always rising. Board chairs are sometimes answerable for director recruitment and improvement, board tradition, variety, fairness, and inclusion (DE&I) initiatives, and general board effectiveness. The perfect boards have chairs who handle these tasks successfully.
As a result of government board chairs maintain tasks for oversight, technique, and board management, they’ll develop into overwhelmed. And since their focus is particularly on technique, there’s the hazard that they neglect their board management duties. We discovered that, when a board’s management duties have been larger (indicated by the dimensions of the board, proportion of recent administrators, and proportion of busy administrators – those that serve on three or extra different boards of listed corporations), the efficiency profit of getting an government board chair diminishes. In case your board requires appreciable management duties from the chair, an government board chair is probably not the most suitable choice. In such a case, a non-executive board chair could also be preferable.
Completely different Functions
Firms use the chief chair place in several methods. Some founders and relations, like Jeff Bezos, Larry Ellison, or Invoice Ford, relinquish the CEO place however tackle the chief chair position to stay intently concerned of their corporations’ methods. Others use the chief chair place for a restricted interval throughout a CEO succession. Doing so promotes a easy transition and the continued help of the outgoing CEO on tough issues, equivalent to throughout a significant acquisition or transformation, and for onboarding the incoming CEO. We discovered that that is notably helpful. Firms that transitioned their CEOs to the chief chair place considerably outperformed people who didn’t. So, if your organization has a profitable and influential chief who will quickly step down, there is perhaps an extra profit of making an government board chair place.
