Shareholders: When The CEO Is Also The Chairman…Run

The Sarbanes-Oxley Act of 2002 missed something. The Public Company Accounting Reform and Investor Protection Act of 2002 did not include, as it relates to “Investor Protection,” the elimination of the CEO’s ability to become both the CEO and Chairman of the Board of Directors. Want to protect shareholders from White Collar Crime? Separate the two roles. Why separate the two roles? One accounting principle has a lot to say about it, separation of duties. To better understand why these roles should be separated, an understanding of corporate governance is appropriate.


Executive Board vs. Supervisory Board
All publicly held companies in the U.S. have two distinct boards: The Executive Board and The Supervisory Board.

The Executive Board is comprised of Officers such as the Chief Executive Officer (CEO), the Chief Financial Officer (CFO), the Chief Information Officer (CIO), and the Chief Operations Officer (COO), to name a few, to handle the day-to-day operations of a company.

The Supervisory Board is comprised of the Board of Directors, which is a body of elected or appointed persons who oversee the activities of a company. When the CEO is also the Chairman of the Board, the individual is now given the two most powerful and influential roles of a company. This creates little to no accountability that is internal to the company, only external i.e. Government Regulations. Although the individual is accountable to the shareholders, what can the shareholders do after the fact? By then, the CEO/Chairman has already moved on to the next company.


CEO Compensation Is Decided By The Board
Just think, if you are the CEO of a company, who determines your compensation? Well, if you guessed the Board of Directors, you are correct. See the problem yet? When the CEO is also the Chairman of the Board, the CEO has great power and influence when it comes to determining their salary, stock options, and overall compensation. If the Chairman is deciding the total compensation of the CEO, the hands of the shareholders’ are tied.


A Closer Look At A CEOs Total Compensation
Former CEO of AIG William McGuire is an example of a CEO that was not the Chairman of the Board. In 2005, McGuire received for one year, $128,400,000 in total compensation.
That’s:
$10,400,000 per month (12 months per year), or
$2,418,605 per week (4.3 weeks per month) or
$60,465 an hour (40 hour work week)
The number that astounds most is that the CEO made over 60k an hour. At over 60k an hour, that’s more than the average American’s annual household income. Can you imagine what this CEO’s total compensation might have been had he been both the CEO and Chairman of the Board? If the roles are split and the Board of Directors believes the total compensation is excessive, at that point they have the authority to change the CEO’s compensation instead of having their hands tied by the Chairman if the individual is also the CEO. Boards do vote on issues but one thing is undeniable, the Chairman has a substantial amount of influence.


Companies Where CEO Is Also Chairman
What do the following companies have in common? AIG, GM, and Chrysler…they’re all in financial trouble. What else do they have in common? They have CEOs who are also the Chairman of the Board. The list goes on as far as companies that do not split the roles of the CEO and the Chairman of the Board.


Stats: Europe
Let’s take a closer look at Europe. In Britain, 95% of companies have the roles split. A survey completed by Christian & Timbers showed that 97% of European executives believed that the CEO should not be the Chairman of the Board. To note, shareholder returns were reduced by 5% in companies that split the roles. In America, only about 20% of companies have the roles split and some 85% of executives believed the roles should be split. Although the Company’s returns may be lower, the one thing shareholders should be thinking is:

At least the Company is not going bankrupt as a result of Corporate Governance Breakdown.


Solution: to create more accountability and establish an atmosphere of Corporate Governance, separate the role of the CEO and the Chairman of the Board.


About the Author:
Paul Gillett is an auditing consultant and author. If you would like more information on auditing solutions, go to: http://auditsolutions.blogspot.com or email: phgillett@hotmail.com. You may reprint this article electronically or as a hard copy as long as the author's resource box remains intact, with the active links included.