The Costs of a Combined Chair/CEO — The Harvard Law School Forum on Corporate Governance

The article points out the only real benefit to combining these chairman of the board and CEO roles into a one person role is to the person and not to the business and its shareholders.  Small business takeaways and need-to-know.

Excerpt:  The rationale behind combining the roles of CEO and chair is usually independent of shareholder interests. For example, CEO’s recruited by a corporation sometimes make it a condition of signing their employment agreement that they also be board chair in addition to chief executive and in some cases president as well. In other instances, the founder of the company is trusted with carrying out both roles. In either case, the lack of an independent board chair represents an absence of key oversight for shareholders.

In addition to the conflict of interest, however, this report concludes that it is far more expensive to combine the roles of CEO and chairman. It also appears to be indicative of the potential for other governance and management failures. Companies that combine the roles of CEO and chair score far worse in our ESG model, which evaluates companies using GMI Ratings’ comprehensive list of ESG KeyMetrics, as well as scoring far worse on our AGR Ratings, which test for fraud and financial restatements, among other quantitative accounting items. Furthermore, shareholder returns over an extended period seem to be favorable for those companies which separate the CEO and chairman roles. Indeed, there appears to be very little benefit to long-term shareholders in having a combined CEO and chair. The only benefit seems to be an economic one to those CEOs who have convinced the board to allow them also to serve as chair.

Read full article via The Costs of a Combined Chair/CEO — The Harvard Law School Forum on Corporate Governance and Financial Regulation.

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