Pineau-Valencienne: In France, most of the time the chairman and CEO are the same. But a new law has been passed encouraging the separation. I like the idea of separation. It could make the CEO spend more time working with the board members.
Neff: There’s a lot of institutional noise now about splitting the roles. But you can’t legislate it. Boards will do it if they think it’s appropriate. And it won’t happen quickly in the U.S.
Khurana: Change is possible, however. The U.K. and U.S. looked very similar in 1990; about 90 percent of the FTSE 100 and the Fortune 500 had a combined CEO/chairman. Today, about 85 percent of the FTSE 100 separate those positions. The U.S. is still largely what it was.
I think that raises a question. If a board finds itself in a situation where it’s going outside for the CEO, and the first thing it has to give up is good governance practices by allowing him to become the chairman and name the board, that tells you something about that board. That’s not a good place to be. It often translates into a kind of carte blanche in strategy that can’t be questioned.
Roman: Maybe it should be changed, maybe it shouldn’t. But let’s deal with the art of the practical. The art of the practical is that most people who are sought as CEOs want and expect to be chairman, too. Given that reality, a lot of companies would be better at least if they named a lead director who took responsibility for coalescing the board’s sentiment. I just think that’s a very simple solution.
Neff: There’s definitely a trend going in that direction.
Pasternack: It could be a very good solution. The lead director doesn’t necessarily convene the board. But in many companies, the lead director helps set the board’s agenda and leads the process of the board’s evaluation of the CEO and the performance of the board itself. It’s a powerful role, and it allows the CEO to have the title of chairman and CEO.
Neff: The lead director also leads the executive sessions, which should be standard practice.
The Measure of Success
S+B: Tom, you mentioned the increased stringency of CEO evaluations. Is it possible for leaders to take a long-term perspective when share price considerations are so important?
Neff: Well, that’s just one metric that’s used in assessing CEOs. I don’t think it’s as important as it was. There are other measures relating to return on capital and to cash flow that are part of the formula for evaluating CEOs. I think it’s rare that the only metric is total return to shareholders.
Pasternack: I think the run time, though, is a lot shorter. It used to be that a CEO had a lot more time to work his or her way out of a problem — missing a forecast, a short-term earnings drop. Now, the time is much shorter. It’s okay to do it once, maybe twice, but do it more than that and you’re in trouble. As Jeff Pfeffer of Stanford put it, business has become a spectator sport. It really depends on how the media and investment analysts play it.
Neff: Companies have played to these external pressures. I think this quarterly guidance is nonsense.
Roman: You know, there are no SEC regulations that say you have to provide guidance.
Pasternack: Yes, and a lot of companies are making very public statements and saying that they aren’t going to do it anymore.
Neff: They’re going to annual guidance.