Chairing the Board With An Independent Viewpoint
(Originally appeared in the February 13th, 2019 'Across the Board' publication, a Board Director, Board Advisor, C-Level, and Business Newsletter reaching 25,500+ exceptional business leaders in over 65 countries with articles focused on leadership, strategy, and governance topics - sign up here)
A Non-Executive Director (NED or NXD), also commonly called an Outside Director, by design is not part of the company's executive management team. They are also not an employee of the company, nor are they affiliated with it in any other way. Non-Executive Directors serving on Boards are expected to view organization and business issues in a much broader perspective, unencumbered by potentially skewed viewpoints that someone with a material interest in the company or closer relationship to the day-to-day operations may harbor. In many cases, Non-Executive and Outside Directors are frequently classified under the same definition umbrella as Independent Directors, but some sources differentiate them from Independent Directors with the reasoning that Non-Executive Directors are allowed to hold stock in the company, while Independent Directors are not.
Within the Securities and Exchange Commission (SEC) approved listing standards, the NYSE and Nasdaq have very slight variations in determining whether a Director is truly independent, but in both cases a Director must not fall within one of the explicit standards of the exchange that would prohibit a Board from classifying a Director as independent. Both, however, are definitive in the requirement that "a majority of the Board of Directors of a listed company be 'independent.'"
The outside viewpoint a Non-Executive or Independent Director is expected to bring to the Board is a very important concept. The need for impartiality, along with diversity of perspective, directly leads to diversity of thought and effective decision-making. "As a practical matter, Boards need Directors who have independence as well as industry and experience diversity. Both are necessary for Directors to satisfy their fiduciary duties to shareholders by questioning and challenging management,” states Jerry Angowitz, Managing Director of Lloyd Search. ”Independence from the company and its management means having Directors who can be impartial in exercising their judgement and action – each a critical component of effective corporate governance.” Within their role of guiding the company with an independent viewpoint, assisting in selecting/guiding the CEO, improving governance, overseeing goal setting, performing strategic evaluations, developing trust, and assessing risk, Non-Executive Directors can greatly assist in raising the overall Board's effectiveness and efficiency.
...But what about when an Independent Director is also serving as the Board Chairman/Chairwoman? What are the pros and cons? What are the concerns for and against this model?
The Background Details
According to EY's 2018 Center for Board Matters study titled 'Today's Independent Board Leadership Landscape,' "Board leadership structures have evolved dramatically over the past 20 years. Today, 92% of S&P 1500 companies have independent Board leadership [Chair], up from just 10% in 2000. This change corresponds to a rise in Independent Directors, as well as the continuing separation of Chair and CEO roles."
Similarly, Shearman & Sterling's 16th annual '2018 Corporate Governance Survey' found that "27 of the top 100 companies currently have different individuals serving in the roles of Board Chair and CEO. Of those companies, 19 have Independent Board Chairs."
All of this data supports a changing direction started over a decade ago in the 2008 National Association of Corporate Directors (NACD) survey which found 73% of Directors serving on Boards with an Independent Chair believed that companies greatly benefit from this model.
The Non-Executive Chair Governance Model
Traditional approaches have historically leaned towards the CEO also serving as the Board Chair. In most cases it wasn't even a question to separate the roles. The justification for this model typically centered around the belief that the leader of the organization's operations brought a distinct advantage to Board discussions and decisions that relied on 'boots on the ground' experience. This remained the norm, with many instances of CEO candidates who were not simultaneously offered the Board Chair position frequently ending in candidates walking away from the opportunity - presumably due to the perception that they were viewed as either not capable of handling both positions simultaneously, or their belief that as a CEO they could not be as effective if they did not also serve as the Board Chair.
Today's thinking is quite different. A Board's independence has become a hot topic. Many governance experts agree that not only should the CEO and Chairperson roles be separate, but also the Chairperson should be an Independent Director to ensure a company's optimal performance. "The creation of an independent Chair position clarifies who runs the Board. It eliminates some of the potential ambiguity surrounding Board leadership," states Richard Doern, Chairman of several companies in Brazil. "The time has come for true independent Board leadership. Independent Chairpersons can make Boards more empowered." Both CEO/Chair separation, as well as an Independent Chair is a frequent request of Activist Investors, too, believing that the separation of roles creates a better governance structure and increased company performance. CEOs have warmed to this concept as business complexity has increased and they are able to directly focus all efforts on running the organization. This awakening and openness to CEO and Chairperson responsibility separation has been a relief to some of the CEOs that I work with. Many CEOs have also recognized the elimination of conflicts of interest, such as CEO performance evaluations and compensation decisions typically handled at the Board / Chair level.
As Boards continue to become more transparent, the effectiveness of their governance has been fair game for investors and proxy advisory services to clearly evaluate - and loudly comment on. Whether due to fear of negative publicity or drive to elevate governance, willingly or begrudgingly, many Boards seem to be on the right path.
Have you considered your Board's optimal governance model?
Reach out directly to Mark A. Pfister to help form and implement your Board's ideal governance model with his 'Board Build - Strategic Planning & Structuring Engagement' offering, or 'Building an Effective Board For Your Company' National Speaking Tour topic.