Although Con-gress passedwhat is arguably

the most comprehen-sive public companylegislation since the1930s, the Sarbanes-Oxley Act neverthe-less left undone one ofthe most contentiousgovernance issues of our day:the deconstruction of the “Impe-rial CEO.”

The Imperial CEO is a sin-gle individual who holds boththe role of public companychairman of the board as wellas its CEO. The chairman of theboard is responsible for runningthe board of directors that, inaddition to general corporateoversight, has a fiduciaryresponsibility for selecting newdirectors, setting executive com-pensation, evaluating executiveperformance and, through theaudit committee, evaluating thecompany’s financial reportingand disclosures on behalf ofshareholders. This role conflictswith that of CEO because theCEO often is, or should be, thesubject of board discussions andwill be directly affected bydecisions on matters such aswho joins the board, manage-

ment team performance, andcompensation.

CEO RUN AMOK?

An Imperial CEO who hasunfettered control of the boardcan discourage discourse andimplement a range of policiesthat serves only management asopposed to the shared needs ofmanagement and shareholders.Not all Imperial CEOs will takefull advantage of their positionto advance their own personalagenda. I suspect that mostCEOs want what is best for theircompany. But the temptation isgreat and this clear conflict ofinterest can have disastrousresults if not eventually checked.

This unfinished businesswas not due to a lack of visibili-ty or knowledge of this structur-al weakness. Academics, corpo-rate governance experts, and

shareholder activistshave ensured that bothCongress and Corpo-rate America are wellaware of the conflictand its detrimentalimpact on our compa-nies. Rather, it appearsthat Imperial CEOs areso pervasive in our

public companies that manybelieve it would be too disrup-tive to summarily demand sepa-ration. Yet shareholder activistsare not waiting for corporateboards or Congress to beginreform. They are taking the fightto the boardrooms of some ofour largest corporations. Smartexecutives who are both CEOand chairman of the board willtake the initiative to make cer-tain that change will occur ontheir terms. Others will spendsignificant time and energyfighting activists and holding onto power rather than leadingtheir companies.

Today, nearly 80 percent ofU.S. public companies run underthe Imperial CEO model. Whilethe Imperial CEO is not auniquely American problem,only France combines the rolesof chairman and CEO more fre-quently than the United States

The Sarbanes-Oxley Act is arguably the mostcomprehensive public company legislation sincethe 1930s. But it left undone one of the most con-troversial issues of our day: abolishing the Imper-ial CEO, who is both CEO and board chairman.

© 2004 Wiley Periodicals, Inc.

Scott Green

Unfinished Business: Abolish theImperial CEO!

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19© 2004 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com). DOI 10.1002/jcaf.20051

and other major Westerneconomies. The United King-dom, along with the UnitedStates, is often cited as havingsome of the strongest corporategovernance practices in theworld. Over 95 percent of theFTSE 350 companies split theduties of chairman and CEO.Germany and the Netherlandsmaintain a split board structure.In those countries, a nonexecu-tive supervisory board exertsgeneral oversight and gover-nance rights, and a managementboard consisting of companyexecutives provides opera-tional supervision.1 Thisstructure, by definition,precludes the creation ofthe Imperial CEO.

But does splitting therole of chairman and CEOreally make a differencein corporate performance?A recently published work byYale economist Paul W.MacAvoy and internationallyrecognized corporate gover-nance expert Ira M. Millsteinmakes a compelling argumentthat good corporate governanceleads to better returns for share-holders. Their study found acausal link between corporategovernance practices and Eco-nomic Value Added™2 at thelargest public companies. Theauthors’ most important recom-mendation is to separate theroles of chairman and CEO andto designate an independentdirector as chairman.3

Other countries are doing it,and it seems to be a profitablepractice. So why haven’t theboards of our public companiesembraced this governance initia-tive? The most obvious reason isthat Imperial CEOs are loath togive up the power they haveachieved, and boards are unwill-ing to upset a CEO they view asimportant to the company. Most

CEOs have worked hard for theircompanies, and the august titleof chairman is the highest recog-nition of that contribution. Addi-tionally, some also argue thatseparating these roles will notensure good operating perfor-mance. Furthermore, somebelieve that even if you find aqualified chairman, any benefitsto a company are short-lived, as adirector’s independence of minddegrades the longer he is in therole. This is because he begins toidentify himself with some of thedecisions previously made.4

ACTIVISTS RAISE A CLAMOR

Regardless of the counterar-guments, shareholder activistsare not waiting for debate to set-tle the question. As Michael Eis-ner found out at the last WaltDisney Company board meeting,institutional shareholders arebanding together to forcechange. The California PublicEmployees’ Retirement System(CalPERS), the nation’s largestand, arguably, most influentialpublic pension fund, refused tosupport Eisner’s reelection;many other public pension fundsfollowed suit.5 A remarkable 43percent voted no confidence inEisner, and it would have likelybeen higher had concessions notbeen made by the board. Undershareholder pressure, he wasforced to resign his role as chair-man in order to continue as thecompany’s CEO.

But Disney is not the onlycompany facing challenges fromshareholder activists. TIAA-

CREF, another pension fundbehemoth, has targeted 50 com-panies they have identified ashaving independence issues. Thisis both good and bad news if youare an Imperial CEO. The badnews is that, whether you like itor not, this issue will require sig-nificant time and effort toresolve … if not now, then soon.

The good news is that theactivists may be picking toomany battles and waging waragainst the wrong targets. Forinstance, CalPERS recentlyopposed the election of Warren

Buffett to the board ofCoca-Cola. Most view thisaction as absurd. Buffetthas created substantialwealth for his shareholders,not just for a five- or ten-year period, but overdecades. Any rationalshareholder would want his

presence on and counsel to theboard of their company.

For those companies withstrong share-price appreciation,this lack of focus will help keepactivists at bay, but any turn infortune will leave a CEO vulner-able. Poor operational results,even over a short period, regard-less of the reason will refocusinstitutional shareholder initia-tives into a more effectivethreat. There is also the risk ofthe next financial scandal(which will happen—only thetiming and character of thescandal is in question) energiz-ing a regulatory response.Requiring a split of the chair-man and CEO functions seems apopulist response and naturalnext step in regulatory tighten-ing and oversight. A smart man-agement team will take steps toaddress this issue now on theirown terms, rather than wait forthe inevitable market downturnor financial scandal. They willnot wait for their largest share-

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The good news is that the activistsmay be picking too many battlesand waging war against the wrongtargets.

holders to raise the issue.Rather, they will work with theirboard to adopt a road map orplan that takes concrete steps toaid board independence and cre-ate a succession plan that willeventually lead to the creation ofan independent chairman.

The first action is to appointan independent lead director todevelop and run executive ses-sion meetings where manage-ment is not present. The CEOmay still be chairman of theboard, but the lead director willguide discussion of managementperformance, compensation, andother sensitive issues with theother independent directors. Thisintermediate step demonstratesthe board’s commitment to inde-pendence while buying some

time to prepare a succession planin a deliberate fashion. Further-more, by working with the boardnow, the management team willhelp determine who can bestassume these duties and how therole should be structured. Manycompanies appear to be adoptingthis approach. The AmericanSociety of Corporate Secretariesreports that the number of com-panies with an independentchairman, independent leaddirector, or presiding outsidedirector increased from 26 per-cent before passage of the Sar-banes-Oxley Act to 62 percent ayear later.6 However, this is onlyan intermediate step.

The second necessary actionto take is the preparation of asuccession plan for both the CEO

and chairman positions to beimplemented upon the retirementor unavailability of the currentCEO. The most difficult aspectof a succession plan is notpreparing the plan itself, butidentifying successor candidates.The successor to the CEO shouldideally be developed from themanagement ranks. The impor-tance of this concept was recent-ly underscored by the untimelydeath of McDonald’s Corpora-tion’s CEO. Due to the foresightof the CEO, a succession planwas in place at the company thatresulted in the transfer of powerin a manner that assured the leastpossible impact on the company’sstrategy and operations. Thechoice for the chairman role,however, should not originate

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Symptoms of a Board Impaired by an Imperial CEO

Does an Imperial CEO impair the effectiveness of your board? Here are some signs that, alone or in combinationwith other symptoms, might indicate that the inherent conflict between that of CEO and chairman of the board isaffecting your board.

• There is no independent lead director or presiding outside director.• There is a lack of open dialogue at board meetings.• The board does not retain their own outside experts to counsel them on important issues such as compensation,

risk management, governance, and so on.• Meeting materials are not sent sufficiently ahead of time to properly assimilate.• Nonexecutive directors are overly reliant on management for setting meeting agendas.• The size of the board is overly large, retarding effective communication among directors and independent

consensus building.• Nonexecutive director contact with line managers is not encouraged.• Director terms are staggered, preventing the removal of a full board by a single election.• There are excessive antitakeover provisions in place that disadvantage active shareholders and unfairly protect

management.• There is little consideration of shareholder proxy requests.• A significant number of company executives are directors that could be expected to follow the lead of the CEO.• The board is dependent on management to identify and nominate new directors.• There is little correlation between corporate performance and incentive compensation.

Exhibit 1

from within the company. Rather,it should be an independentdirector that the board begins toprepare immediately for theduties of the job.

Finally, the board shoulddesignate the conditions underwhich the succession plan willbe implemented. Retirement,incapacitation, untimely death,or a successful vote of no confi-dence from shareholders wouldall seem to qualify.

But perhaps you don’t thinkthis applies to your public com-pany. Take a look at the checklistin Exhibit 1, “Symptoms of aBoard Impaired by an ImperialCEO.” Your own Imperial CEOmay be causing more problemsthan you think.

STAYING AHEAD OF CHANGE

Most Imperial CEOs aregood people and great managers.They got to where they are bycreating value for shareholders.Accepting the chairman rolealongside their everyday CEOduties was likely conferred asrecognition for a job well done.But smart executives will see thatthe governance model in the Unit-ed States is changing and willtake steps to be out in front of it.It is always better to be a changeagent than the subject of change.By addressing these valid con-cerns now, CEOs can manage thiscoming revolution while meetingthe interests of both shareholdersand the management team.

NOTES

1. Coombes, P., & Wong, S. C.-Y. (2004).Chairman and CEO—One job or two?The McKinsey Quarterly, Number 2,pp. 43–44.

2. Economic Value Added™ and EVA™are registered trademarks of SternStewart & Co.

3. MacAvoy, P. W., & Millstein, I. M.(2003). The recurrent crisis in corpo-rate governance. London: PalgraveMacMillan.

4. Id. 5. Arango, T. (2004, February 26).

CalPERS piles on: Biggest pensionfund urges Disney to boot Eisner. NewYork Post, p. 33.

6. House Committee on Financial Ser-vices. (2003). Rebuilding investor con-fidence, protecting U.S. capital markets.The Sarbanes-Oxley Act: The first year.Retrieved June 11, 2004, from http://financialservices.house.gov/media/pdf/Sarbanes-Oxley%20Report.pdf

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Scott Green, CPA, is the director of Audit and Compliance for Weil, Gotshal and Manges, one of the largestlaw firms in the world and a leader in the practice of corporate governance. He is also the author of Man-ager’s Guide to the Sarbanes-Oxley Act: Improving Internal Controls to Prevent Fraud, published by JohnWiley & Sons, Inc. A graduate of the University of Idaho and the Harvard Business School, he is a recog-nized expert on management controls, with more than 15 years of experience in the field. He has alsotaught finance and banking at Hofstra University.