Should Your Organization Divide its CEO and Chairman Roles?
A chief executive officer (CEO) who is also the chairman of their board becomes an increasing rarity. Around 59% of S&P 500 companies had separate CEO and chairperson positions in 2021, a 55% increase since 2020 and a 37% increase since 2011.
One recent example of this transition that sent shockwaves worldwide was Tesla’s CEO, Elon Musk, being ousted as chairman to settle a lawsuit. Another example is Boeing’s CEO’s departure as chairperson. But why does CEO duality become increasingly rare, and should you separate these positions?
This time, we shed light on the risks of CEO duality and the benefits of splitting the two positions for the board of directors. Keep reading to discover the difference between ceo and chairman of the board.
CEO vs. Chairman: The definition
Harvard Business Review says there is a continuous chairman vs. CEO debate. Several leading public companies, like Boeing and Facebook, combine CEO and chairperson roles.
According to Indeed, many small businesses and nonprofit organizations also have CEO-chairman duality. Many chairpersons have similar responsibilities with CEO roles due to a small company’s size.
However, Investopedia insists on separating the CEO and the chairperson because these are very different positions.
CEO stands for chairman of executive officer. It is “the senior manager or leader of a business or other organization, such as a nonprofit or nongovernmental organization (NGO),” according to Britannica. It is the highest-ranking executive.
In contrast, a chairperson (chairwoman, chairman, or chair) is the “senior officer of a committee, board, or organization responsible for presiding over its annual general meeting.”
Let us unveil more details about the differences between these two roles.
What is the difference between Chairman and CEO?
You can compare the key differences of the CEO and chairperson roles in the table below.
Summary: The board chair is a high-level position compared to the CEO. The chairperson manages the board of directors that oversees the organization’s strategic performance.
In contrast, the CEO is the top decision maker of the company. The CEO holds accountable for the organization’s operational performance and fulfills growth strategies. Many retired CEOs become board chairs, while senior executives become CEOs.
On average, the CEO works 11.3 times more hours per week than a board chair. As for salary allocation, the average chairman receives $685 per hour, while the average CEO earns $252 per hour.
The cooperative role of chairman and CEO
Many successful companies, including advisory & consulting firms like Deloitte, have separate CEO and board chair positions. These are two complementary roles, and the board chair becomes the extension of the CEO’s business strategy, providing guidance and supervision.
According to Spencer Stuart, the CEO and board chair should have balanced cooperation, not too close or too combative. It helps them manage the conflict of interest and preserve the freedom of action.
Chairman and CEO same person: Consequences
Unfavorable consequences of CEO duality have made CEO-chairman splitting a governance trend. Let us describe several examples that answer why CEO duality is not a sustainable approach.
Conflict of interest
Researchers have concluded that the executive chairman vs. CEO battle lies between organizational unity and independent business assessment. However, the potential conflict of interest outweighs the good intentions of combining these roles.
Sometimes it leads to devastating consequences, including financial loss and, most importantly, the loss of lives. This once happened to Boeing.
In October 2018 and March 2019, two crashes of Boeing’s best-selling airplanes took the lives of 346 passengers.
Investigators and reporters attributed the tragedy to competitive pressure, the lack of oversight, and the flawed flight control systems of Boeing’s 737 MAX aircraft.
The New York Times also found that Boeing successfully lobbied for the law that undermined airplane design oversight before the accidents. The Los Angeles Times attributed these accidents to the board’s “dereliction of duty.” The aftermath was the following:
- Boeing fired Dennis Muilenburg, its CEO, chairman, and board president.
- Boeing lost $12 billion in 2020 when the pandemic worsened its reputation.
- Boeing paid victims’ families $500 million in compensation and over $2.5 billion in charges to the airlines that used its aircraft during the accidents.
Boeing could have avoided passenger deaths if its senior managers had had adequate supervision from an independent board chair.
The power of chief executive officer
According to IE University, combining CEO and board chair roles leads to the concentration of substantial power in one individual.
Consequently, the lack of management supervision may lead to controversial decisions and harm both business operations and shareholder profits.
One such example is Elon Musk’s Tesla stock manipulation back in 2018. At that time, Elon was the CEO, co-founder, and chairman of Tesla and had unlimited power over the company.
On August 7, 2018, Elon tweeted that he secured the deal to take Tesla private for $420 per share (18 times higher than the company’s stock price of August 1, 2018).
Elon pursued shareholder interests and claimed he received their confirmation. However, the deal was never meant to be realized, and there was no sufficient financing. This led to several consequences:
- The stock price surged 10% after the tweet and dropped 20% once Musk suddenly canceled the planned privatization deal.
- Elon Musk faced an investor lawsuit as traders lost millions of dollars.
- Elon Musk paid $40 million in penalties and resigned from the chairman position at Tesla.
Tesla and its investors could have avoided these issues if Elon had not been the only person making significant decisions.
Chairman of the board vs. CEO: Benefits of splitting the roles
The primary benefits of separating the board chair and CEO positions are reduced risk of conflict of interest and excessive concentration of power. Eliminating these risks allows companies to avoid many reputational, financial, and regulatory issues.
Hiring an independent board chair provides several more benefits to the board of directors:
- Balanced oversight. The independent company’s chairman acts in good faith and prevents management errors and flawed decisions of the senior management team.
- Enhanced board independence. The board chair keeps the board of directors from the CEO’s potential abuse. This additional barrier for conflict of interest keeps the board independent and prevents corruption.
- Clear division of responsibilities. A non-executive chairman dedicates 100% of their effort to the board of directors and strategic oversight. In contrast, the dual CEO’s overwhelming workload limits their board governance capabilities.
- Improved compliance. Several laws require boards to have only external board members (including board chairs). Splitting the CEO-chair roles helps nonprofits and businesses improve ESG compliance.
|Check more ESG compliance requirements regarding the governance structure of the board.|
A series of checks and balances
First and foremost, one should look at this from a human perspective. Indeed, CEOs should be hired based on their upstanding moral fiber and keen business sense. And one could assume they’re only going to be making decisions and public statements that serve the best interests of an organization.
But, as someone like Elon Musk proves, human error, ego, hubris, and other matters come into play. And companies with same CEO and chairman positions often give single individuals too much power.
Being granted the position of chairman – on top of CEO – is enough authority and governance for anybody to lose perspective. Or, there are more extreme situations like with the former Boeing’s dual CEO-chairman, Dennis Muilenburg.
Also, if the CEO is the chairman, it’s a conflict of interest when it comes to the hiring and firing of that position.
If a CEO-chairman is fending for their job, they have more power to obfuscate and influence the proceedings. Contrarily, an independent chairman provides a fresher, more balanced point of view.
Therefore, “board chairman vs. CEO” shouldn’t be a debate. They should be different roles. By removing that level of governance from a CEO, the chairman acts as a mitigating force to these kinds of activities.
Independent of the chief executive officer, the chairman protects the organization from ill-disciplined behavior (Musk) or unprofessional, dangerous actions (Muilenburg).
What are the pitfalls of separating the Chairman and CEO roles?
While separated CEO and board chair roles eliminate crucial risks, it may create the following pitfalls:
- Potential chairman versus CEO rivalry. Potential conflicts disconnect the board from the company and challenge governance flows. It may also happen when the board chair is a former CEO.
- Increased leadership costs. Splitting CEO and board chair positions leads to ~$200,000 in additional yearly spending. However, this is not the case with nonprofits, where board directors are usually unpaid.
- Board succession challenges. Seeking two leadership candidates instead of one may challenge board turnover timelines. However, many boards successfully tackle these challenges with wise succession planning practices.
|Check the six best practices for nonprofit boards, including board structure and succession planning.|
- The chairman and chief executive officer are different roles within the company or organization.
- Chairman’s responsibilities revolve around the board of directors and strategic oversight of the company, while the CEO supervises day-to-day company operations.
- Most companies divide roles of CEO and chairman more than before the series of scandals involving CEO-chair duality.
- Combining CEO and chairperson roles leads to a conflict of interest, excessive concentration of power, and various business risks.
- Splitting the chairperson and the CEO roles helps prevent financial, reputational, operational, and legal risks.
Is the chairman more powerful than the CEO?
The chairman stands above the CEO in the corporate governance structure. Chairmans are responsible for electing CEOs and board members.
Can the CEO be the chairman of the board?
The CEO can serve as a board chair. But the dual roles of CEO involve several governance risks, including conflict of interest and excessive concentration of power. These risks involve financial, operational, and reputational issues for the company.
Why should CEO and chairman be separated?
The division between the chairman and the CEO position is the best governance practice. It provides sufficient oversight of the company management, improves board independence, and contributes to unbiased strategic decisions.