Friday, July 11, 2008

Chairman/CEO - or independent?

Many startups have the founder as both CEO and Chair. The company starts small, there are a few angels who come to board meetings but don't want to run the company, and then when venture capital comes in the VCs sit on the board and wield power but they rarely want to put the time in to be Chair.

So how, and when does the transition to a separate CEO and Chair happen? It turns out it doesn't the majority of the time, even though this separation is well recognized as being good governance. The WSJ journal reports that "Today, despite growing shareholder opposition, the CEO and the chairman remain the same person in 65% of the S&P 500 companies." in an excellent article about the Imperial CEO.

The problem is that in well run public companies the chair sets the agenda for the board meeting and drives the recruitment of new board members. Without an independent board there is a risk that insufficient checks and balances are in place for the CEO - as discussed here about the banking crisis. With CEO as chair s/he sets the agenda when planning the board meeting thereby exercising control of what's discussed.

So as a company grows up how can you manage this problem?

- First, nip it in the bud - assign an outside chair on the first infusion of venture capital. Smart VCs would make this a term of investment for companies they believe have the potential to go public.
- If that doesn't work then make the break on the IPO. These days bankers and lawyers wield so much power on that transition that they could easily team with the independent board members to insist. It does affect ISS governance ratings after all.
- And then finally, if you just can't separate the chair/CEO for personality reasons then be sure to name an independent director who is a strong personality - with a mind of his/her own - and willing to go nose to nose with the chair-CEO to get the right issues discussed and the right directors onto the board.

Nothing is worse for a company than a passive board. Speaking from my own experience - tough board meetings where I am challenged are the ones where I learn the most and make breakthroughs in my own assumptions.

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