Anthony Walker, ESG Manager at M&G Investments

 

 

In South Africa these days we are becoming accustomed to seeing instances of a former CEO of a company moving to assume the Chairman’s position. However, this does not mean it is generally considered to meet high standards of  governance – in fact, good governance requires that a Chairman be truly independent of the company and its Board.

 

 

On face value, the CEO’s move to Chair could appear to offer a number of benefits. Institutional memory is quite key to many institutions whose success depends on strategy in numerous diverse and complex businesses, particularly where the new CEO might not be ‘home grown’. It could also bring cultural continuity. Additionally, the new CEO could be mentored by the Chairman and guided by his stronger experience and extensive corporate knowledge.

 

 

The disadvantages of a former CEO becoming Chairman are perhaps less obvious, but significant, and are grounded in both theoretical considerations (with practical implications) and pragmatic reasoning.

 

 

If we look at the basics of corporate governance, the Board of Directors represents the shareholders and has oversight over executive decision-making. A former CEO working as Chairman at their old entity may find it difficult to transition in mindset from a top role involved in detailed execution to an independent oversight function representing shareholders: risk management takes on quite a different dimension from strategic implementation. In fact, the roles are fundamentally different, and often the role of the Chair as mentor to the new CEO is over-emphasised, to the detriment of accountability.

 

 

There are a number of other considerations, with two being the most common.

 

 

-The drivers that set a company on its early growth path, under the former CEO’s leadership, may not be its continuing drivers.

 

 

We often see the CEO transfer to Chair in entities that have reached between 20 and 40 years old, having successfully grown under charismatic leadership. In their earlier stages, many companies are entrepreneurial and often high risk-takers. As the company matures, however, to be sustainable it must necessarily take on a more restrained culture. As such, a former CEO who achieved success under a high-risk entrepreneurial approach may prevent this cultural shift, and be closed to new strategies.

 

 

-Echo chambers are hard to fight.

 

 

Secondly, a CEO that has been grandfathered into the Chairman’s role may be too similar to the previous Chair. In this case, it is likely to be more difficult for the Board to exercise oversight and institute necessary change, since neither the Chair nor the CEO would easily welcome other methods of operation. Bringing in an outside Chair may bring fresh thinking, with the Board then challenging the new risks and strategy on their merits.

 

 

In our voting as shareholders, we have heard many justifications from the companies, some more reasonable than others. At M&G we take a pragmatic approach in our decision-making, depending on the circumstances. For example, one prominent media company unfortunately experienced a death on its Board of Directors following its very rapid unbundling. The former CEO stepped in as Chairman following this event. Given the unique nature of the Board and the circumstances of the company and industry, following discussions with other shareholders and the Board, we agreed that it was a pragmatic interim measure.

 

 

Meanwhile, quite often companies propose appointing the former CEO as an interim Chair during the time it takes to find a permanent replacement. Subsequently, that “interim” appointment is extended numerous times until the incumbent would have been in the position for many years – we have seen 12 and 15 years, for example.  The company’s justification is almost always that there is a new(ish) board on average, so the former CEO’s experience is too valuable to lose. In our view, however, this simply illustrates failed succession planning, and we would not be in favour of allowing these situations to continue.

 

 

Finally, we have more extreme cases where the search for the appropriate Chair has gone on for years. Shareholders are basically held hostage to the company’s claims that a highly specific Chair is required. If we examine the reason behind the years-long search more closely, it can be that the company is looking for another Chairman who is very similar to their current one, but because this Chair is also still playing a quasi-CEO role, a replacement will naturally be very hard to find. If this is the expectation by the company, then there are likely to be questions around the culture of that company.

 

 

In conclusion, in our view, a former CEO’s presence on a Board can be invaluable for their experience. However, this does not mean that they must assume the role of Chairman, or even Non-Executive Director (NED), both of which are meant to offer independent counsel. To do so contravenes the basic rules of good governance. Rather, we would always prefer that they become a NED not classified as independent, or much better yet, a consultant to the Board or the new CEO. For us, the move from CEO to Chair is a path that should be very seldom travelled, and not for any duration.

 

 

ENDS