Friday, August 06, 2004

McKinsey survey: Separate the roles of CEO and Chairman

According to a recent McKinsey survey at 150- US Directors and 44 US institutional investors, the direct impact of Corporate Governance reforms so far hasn't been particularly troublesome for executives and directors, although it has created more work for finance departments, as well as higher accounting expenses. But the reforms now being demanded by investors and activist advisory groups will be much more of a burden. The investors and directors McKinsey surveyed want companies to:
  1. Move toward separating the roles of CEO and chairman,
  2. Make directors more independent and accountable, and
  3. Scale back and restructure executive compensation so that it is aligned more closely with the creation of long-term value.

CEOs, though, are resisting the change. Yet given the growing demand for change, CEOs, directors, and investors must form a plan that works for everyone accoridng to Robert Felton from McKinsey. Since the topic of separating the roles of CEO and chairman can be highly charged and very personal, the board should discuss it solely as a business problem. Collectively, the board and the CEO need to come up with an approach that satisfies investors while retaining and motivating the CEO. At a minimum, a lead (or presiding) director should be appointed as an interim step. To bring more credibility to a role that many shareholders view as merely symbolic, however, the lead director must have clearly defined responsibilities and meaningful authority.
At the same time, the board should at least consider the idea of installing a nonexecutive chairman over time.