In defense of the CEO chair against
the split of power in public corporations
«I my opinion adopting a reform across all firms
that systematically reduces the power and influence
of the CEO is rather likely to be a remedy that is too
William T. Allen "manifesto"
explained in an interview at Gurusonline.tv after his
Opinion article in the Forethought section of Harvard
Business Review, September 2003 edition (volume 81,
number 9, pp.24-25)
Nascimento Rodrigues interviews William T. Allen,
Director of Centre for Law & Business in New York,
Nusbaum Professor of Law & Business and member of
the Legal Affairs Committee of NYSE, September 2003
William T. Allen just published at Harvard Business
Review a short article of opinion in defense of the
CEO role and power, criticizing as a "bad idea"
the gradually accepted view that corporate governance
best practices require the split of the roles of board
chairman and CEO. The January 2003 report of the Conference
Board's Commission on Public Trust and Private Enterprise
recommended this dual power structure. Allen co-authored
the article at HBR with William R. Berkley, chairman,
founder and CEO of W.R. Berkley Corp, in Greenwich,
Connecticut, USA. His main argument is simple: the dual
power will increase organizational tension and intrigue.
In times of even moderate stress, such a system would
tend to default into duelling centres of authority.
And it will subvert the corporation's commitment to
the unitary board.
William T. Allen is the Director of the New York University
Centre for Law & Business, a joint venture of the
Leonard N. Stern School of Business and the NYU School
of Law. Allen is also the Jack Nusbaum Professor of
Law & Business. From 1985 through June 1997, Allen
served as Chancellor of the Court of Chancery of the
State of Delaware. The Court of Chancery has been called
the leading trial court in the U.S. for questions of
business and corporation law. More than 75% of the judicial
work of the court falls into these categories, with
cases involving the rights and duties of corporate directors
forming the largest part of this work. As Chief Justice
of the court, Allen authored more than 500 judicial
opinions treating a broad range of civil law issues;
most notable, interpretations of the fiduciary duties
of corporate directors both in the context of corporate
takeovers (e.g., the 1989 Time Warner merger case) and
of regular operation of the corporations business (e.g.,
the 1997 Caremark case). From 1997 through 2000, Allen
served as Chair of the Independence Standards Board
(ISB), a self-regulatory body established through negotiations
between the Securities and Exchange Commission and the
American Institute of Certified Public Accountants.
Allen is also a member of the Legal Affairs Committee
of the New York Stock Exchange (2001 to date), on the
Board of Trustees of the University of Delaware (1997
to date), and an elected member of the American Law
Institute and the American Academy of Arts and Sciences.
Links of reference:
Centre for Law and Business - www.stern.nyu.edu/clb/
William T. Allen - www.stern.nyu.edu/clb/allen.html
Conference Board - www.conference-board.org/knowledge/governCommission.cfm
E-mail of professor Allen: firstname.lastname@example.org
The present trend about the split between chairman
and CEO takeoff because of greedy and fraudulent activities
of CEOs in public companies in the last bubble period.
How can we prevent and control this flaw, without taking
the steps the chairman role's theory advocates?
First we have to remember that while we certainly wish
to prevent bad acts by greedy people, we do not wish
to do more harm than good in preventing such acts. I
my opinion adopting a reform across all firms that systematically
reduces the power and influence of the CEO is rather
likely to be a remedy that is too costly. Other reforms
are better suited. The Enron problem was first a problem
of compliant auditors. How can a board of directors
(with or without an outside chair), uncover the truth
in complex financial statements if the professional
auditors are willing to play along with managements
risky strategy? So the primary response must be auditor
regulation with more teeth. We are moving in that direction
in the U.S. and this is the most important area of reform.
Beyond that the heightened standards of independence
for corporate directors and the requirement that all
members of the Governance Committee be outside directors
goes a long way to creating the ground out of which
better monitoring can grow.
One of the arguments with true "demagogic"
appeal is the idea that the chairman can act as an "ombudsman"
of the conglomerate of minority shareholders. What's
Where there is a distinct minority of shareholder (that
is where the corporation is controlled by a majority
shareholder) or even when there is a majority of shareholders
whose votes cannot control the election of the board
(as happens when there is super-voting shares), U.S.
corporate law, by which I mean Delaware corporation
law, places a special duty of fairness upon the controlling
shareholders. All directors would understand in these
circumstances that an important element of their duty
is to assure that minority shareholders are treated
fairly. If they do not understand this obligation and
outside chair is unlikely to remedy the situation. There
should of course be some leadership structure to the
outside directors but in my view it should be the chair
of the board's governance committee, not the chairman
of the board.
«The split proposed threatens
to open the possibility to greater intrigue and alliance
making within the senior management group and it reduces
the role and responsibility of outside director who
now will be able to feel that a potential problem is
someone else's concern.»
What are the risks of this split of power between
so-called independent chairman of the board and the
top management? Is this new matrix beneficial for the
long run or is a troublemaker solution?
The risks of splitting the positions were alluded to
in our Harvard Business Review commentary. By separating
the leadership role, it puts power in the hands of someone
who will be less informed about the business and its
markets than the CEO. It threatens to open the possibility
to greater intrigue and alliance making within the senior
management group and it reduces the role and responsibility
of outside director who now will be able to feel that
a potential problem is someone else's concern.
The idea that companies (and particularly public
ones) is like governance structures - with balancing
powers, from Montesquieu vision about the Modern State
structure - is correct?
Despite the great size that modern corporations sometimes
reach -- sometimes as big in revenues as a small country
-- it is mistake, in my opinion, to confuse the governance
of the state with the governance of these economic enterprises.
Their purpose is narrow in comparison to that of the
state and focused on a narrow part of human life. The
tests for the correct performance of their functions
are very different and the relative power to affect
the welfare of the average person is incomparably different.
Typically, unlike the state they exist in a competitive
system in which citizens can chose not to deal with
them at all. Indeed while the power of the corporation
to affect the welfare of its workers may be significant,
in modern competitive economies the power of the corporation,
which superficially seems great, is really rather constrained
and limited. Governance concepts for this institution
need always to keep in mind its limited and special
purpose: the facilitation of the efficient voluntary
production of goods and services. Because of the huge
breadth of the state's power and responsibility, moral
rules and political values require that those subject
to its power be given a voice in its governance.
«It is far more likely that
this split will be useful for private or family controlled
companies. But in this setting too the need for directors
to have in mind their duty to public share.»
Split of power between chairman and CEO is a good
prescription for family owned companies?
Splitting these roles may be a good idea in a number
of circumstances. For example when there is a transition
in leadership, the period of testing may be appropriate.
Furthermore since a cost of this system is that a less
informed person will be given power, it should be understood
that where there is one or more directors whose knowledge
and incentives are as great or greater than the CEO,
then these costs will be reduced. Thus, in my opinion,
it is far more likely that this split will be useful
for private or family controlled companies. But in this
setting too the need for directors to have in minds
their duty to public share.
© Gurusonline.tv, 2003