Separating the Roles of CEO and Chairman

As a follow-up to our study conducted earlier this year, additional research indicates that of the S&P 500 Company’s proxy reports and filings, forty (40) companies have split the positions of CEO and Chairman of the Board during the years of 2003 and 2004. Of these companies, twenty-five (25) or 63% have elected a new CEO and maintained the current Chairman. Eight (8) or 20% have split the roles of CEO and Chairman and have replaced both the CEO and the Chairman. Interestingly, in seven (7) companies representing 18%, the position of CEO/Chairman was split with the individual maintaining only the CEO position and bringing in a new Chairman.

We have also identified twelve (12) companies that reversed the trend and actually merged the roles of CEO and Chairman of the Board. Of these companies, eleven (11) added the title of Chairman to an existing CEO.

Compensation After the Roles “ Split ”

Upon the completion of the roles splitting, the majority of the new Chairman “only” positions are still employees and continue to be paid as employees. Therefore, they do not receive any additional compensation for serving on the Board of the Directors.

The table below indicates how the Chairman of the Board continues to be compensated after the split:

Category	Compensation
Former Chairman/CEO is now Only a Chairman	The majority of these companies indicate that the new Chairman has received an average of a 34.0% decrease in base salary after relinquishing the CEO role. Only in a few cases, did the new Chairman receive an average increase of 9.1 % in base salary after dropping the CEO role. There were no companies, in which the new Chairman received the same base salary after dropping the CEO role.
Former Chairman/CEO is now Only a CEO	The majority of these companies indicate that the CEO has received an average of a 136.3% increase in base salary after relinquishing the Chairman role. • There were no companies, in which the CEO received a decrease in base salary after dropping the Chairman role. • Only in one case, did the CEO receive the same base salary after dropping the Chairman role.
Chairman/CEO position split and now there is a New CEO and a New Chairman	The position of Chairman as an employee is mixed. If Chairman is paid as an employee, then he/she does not receive any additional compensation for serving on the Board. If Chairman is considered a non-executive, then he/she continues to receive compensation for serving on the Board.

Compensation After the Roles “ Merged ”

The table below indicates how the CEO/Chairman of the Board continues to be compensated after the merging of the two positions:

Category	Compensation
Former Chairman retired/died; with one individual acting as both roles of CEO and Chairman	In all but one case, there was an average 10.2% increase in base salary to account for the added role of Chairman.

Discussion

The positions of Chairman and CEO are two distinct roles with different duties and responsibilities. The Chairman acts as the leader to the board, and has responsibility for selecting and replacing the CEO, providing executive pay guidelines, supporting and advising the top management, monitoring and evaluating the managerial and company performance, and representing shareholder interests. On the other hand, the CEO has the responsibility for managing the day-to-day operations of the company, acting as the company’s spokesperson, and designing and implementing business strategies to achieve a company’s success.

Can one individual act as both the CEO and Chairman of the Board? Many people question whether the board can sufficiently oversee and evaluate the performance of senior officers, including the CEO and the remainder of the company. In order to effectively reduce the power of the CEO to achieve corporate governance standards, separating the Chairman from the CEO position is an absolute necessity.

Despite the recent trend to split these roles, the practice of having one person serve as the CEO and Chairman continues to be prevalent. While an increasing number of companies are realizing that separating the roles will achieve a wider array of acceptance, support for this practice is still lacking in many corporations. It is still a common belief that separation can create two power centers, thereby compromising the CEO’s ability to lead the company.

Conclusion- Implications

There have been several attempts to correlate the separation of the roles with market performance; however, thus far they have proven to be inconclusive. A recent study by ISS shows that the stock price is not affected by a company’s announcement that it will separate the positions of CEO and Chairman. According to the authors, the market appears to not be effected to changes in an organization’s duality status, there is little evidence of operating performance changes in the duality status, and there is only weak evidence that duality status affects long-term performance, after controlling for other factors that might impact that performance.

It should be noted that in other studies as indicated in the ISS article, companies with a dual leadership outperform companies with a unitary leadership. To illustrate, banks and large industrial companies with non-executive chairmen show higher price-to-book multiples, returns on assets, and cost efficiency ratios than peers where the Chairman also serves as the CEO.

Compensation Resources, Inc. (CRI) provides compensation and human resource consulting to start-up, emerging, and middle market companies. CRI specializes in Executive Compensation, Board Advisory Services, Salary Administration, Performance Management, Salary Administration, Sales Compensation, and Expert Witness services. For more information on auditing your Executive Compensation Programs, please contact us at (201) 934-0505 or visit our website at www.compensationresources.com .

Independent Chairman (Separate Chairman/CEO); Institutional Shareholder Services, May 5, 2004.

Ibid Footnote 1.