Both the roles of corporate leaders and the suppositions about them differ markedly by region. Since regulatory constraints on corporate directors and leaders are, increasingly, global in their influence, it’s important that regulators, legislators, and shareholders consider these regional and cultural differences. For example, as Exhibit 4 shows, there are considerable regional differences in the division of the chairman and CEO titles among outgoing chief executives, which reflect the regional variations in corporate governance structures, particularly the differences in the roles played by boards and management. In Japan, 96 percent of departing CEOs were not chairmen; in North America, only 26 percent of departing CEOs did not hold their firm’s chairmanship.
The biggest surprise is the large number of North Americans who initially held only the title of CEO and added the title of chairman three years or more later. North America remains the only region where a single individual routinely takes both titles. But instead of immediately conferring the chairmanship on an incoming CEO, our research indicates that many obtain the position only after a probationary period.
Despite the pressures of the governance movement, separation of the roles does not appear to be increasing, either globally or in any of the major regions. Indeed, in Europe, the proportion of departing CEOs who were not chairmen was lower in 2003 than in 1995. This is counterintuitive. In the U.K., for example, there was a striking change in the composition of corporate leadership after the appearance of the Cadbury Commission report on governance reform in 1992. The commission’s recommendation that public companies separate the roles of chairman and chief executive, along with subsequent reforms, led most U.K. companies to divide the positions. We had expected the split roles to be reflected increasingly in European turnover figures — that is, year on year, we anticipated seeing more departing nonchairman CEOs. Instead, the proportion of nonchairman European CEOs remains below its 1995 peak.
The appearance of “safety” among nonchairman CEOs disappears, though, when we look not at total turnover but at forced turnover. Consistent with the claims of governance activists, boards of directors are far more likely to force the resignation of a CEO when the roles of CEO and chairman are split. Exhibit 5 shows that in both Europe and North America, the proportion of CEOs forced to resign is higher among those who don’t also hold the chairmanship — in Europe, more than twice as high.
But contrary to the presumptions of governance activists, dividing the roles of CEO and chairman does not result in higher returns to investors. In both Europe and North America, returns to investors are lower when the roles are split. (See Exhibit 6.) The main reason for the difference in total shareholder returns is the extremely poor performance of nonchairman CEOs in the second half of their tenures.
These findings have striking implications for both chief executives and directors. Clearly, a CEO who is not chairman is the board’s hired hand; a chief who is also chairman has far more influence over the other directors. Although that certainly means a chairman–CEO has an advantage in maintaining himself or herself in office, it also means there is something in that increased authority that contributes to superior corporate performance, particularly during the second half of the leader’s tenure.
A number of explanations are possible for this pattern. It may very well be that the chairman–CEOs are better able to withstand pressures for short-term changes that don’t pay off, and have the combination of experience and power that allows them to stay the course when shareholders are agitating for change. Perhaps boards are more careful in the selection of a CEO when they know the additional chairmanship will make his or her removal difficult. Maybe a board, once it’s made the commitment to a chairman and CEO, focuses less on evaluation and more on making the individual successful. Perhaps the greater job security of the combined roles emboldens the CEO to undertake the risky transformation of a com-pany’s culture, which often is critical to a firm’s lasting success. Then again, it may simply be that more qualified leaders have the leverage that weaker leaders lack to bargain with boards for the chairmanship.