By Shagun Parekh
The top two leadership roles in the corporate world are the Chairperson of the Board of Directors (“Chairperson”) and the Chief Executive Officer (“CEO”). These instrumental and coveted designations impact the company in innumerable ways, but the nature of that impact depends largely on the corporate structure of the company.
Over the years, America’s corporate leadership has gone either one of two ways, (1) the duality approach or (2) the separation approach. The term “duality” refers to a corporate structure where one individual holds the position of both the CEO and the Chairperson. On the other hand, the separation approach splits the two roles to avoid a conflict of interest and impaired judgement.
Advocates of the combined CEO-Chairman position say that this approach can confer numerous benefits to the corporation. These benefits include a clear line of command, stability, enhanced efficiency, and in-depth involvement in day-to-day functions.
On the contrary, the advocates of the role split believe that no person can be objective towards their own designation. In other words, CEOs cannot be their own bosses.
Although duality has been the dominant form of corporate structure in the country, the proportion of companies adopting it has reduced in recent years. As unpredictable financial turmoil increases in investor markets, separation is gaining steady support.
We face a backdrop of a challenging economy with increased regulations and rising investor discontent. The obvious question is that no matter how innovative or successful, can one person effectively handle both management and governance?
Splitting the two roles helps to eliminate conflicts of interest, and foster unbiased decisions about compensation, performance, and promotions. It also helps the two most capable people at the corporation focus on an area of expertise.
Recent backlashes against duality include Facebook investors’ desire to oust Mark Zuckerberg from the dual role, and Elon Musk leaving his coveted Chair position to ensure Tesla’s survival.
It would be nice to think that a company’s problems could be cured just by separating the CEO and Chair roles. Although recent trends suggest it is beneficial to split leadership, there is no blanket approach for companies. Some industry giants like Disney, Oracle, Dell, and more recently, Tesla and Microsoft have shown that separation can be a major lifeline for a company. But if it is not done for the right reasons, separation can intensify failure.
When there is a need for change, usually a company or its panicky investors will know if a structural change could be an end to the organization’s woes. It is up to the Board then, to make the impartial albeit difficult and risky split decision.
Unsure how to choose a corporate structure, or how to transition to a split? Contact your trusted Chugh, LLP attorney for guidance.
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