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7.4 About Board Leadership Structures

The integration of board leadership and the leadership over the day-to-day management of the corporation has been identified as a "fault” in the classic governance structure in the UK (Boyd, 1996). According to Parker (1994:42): ”The main purpose of the proposals (of the Cadbury Committee, eds.) is to restore a healthier balance between quite different roles of an effective board of directors under the leadership of an independent chairman, and of the company’s management under the leadership of a capable CEO. Such a balance is difficult, if not impossible, to sustain if the chairmanship is combined in one person.” This opinion is also shared by the Institute for Chartered Accountants in England and Wales (ICA). In a report on the future of Britain’s boards of directors, the ICA indicates that too many boards are dominated by the chief executive of the company and that a split between the role of the chair and CEO could resolve problems associated with a concentration of power in the boardroom (see box 7.2).

The Cadbury Committee recognized the need to reconsider the leadership structure of corporate boards. The Cadbury Report recommended: “Given the importance and particular nature of the chairman’s role, it should in principle be separated from that of the chief executive. If the two roles are combined in one person, it represents a considerable concentration of power. We recommend, therefore,that there should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. Where the chairman is also the chief executive, it is essential that there should be a strong and independent element on the board” (Cadbury Code, § 4.9).

Box 7.2

A Weakness in the British System

 

“Too many British boards are dominated by the chief executive of the company. Even when non-executive directors account for a significant fraction of the board, they often lack the authority, motivation and access to information which they need if they are to do an effective monitoring job. Thus the accountability of the chief executive to the board is weak. The problem is reduced but not necessarily eliminated if the post of chairman and chief executive are separated; a great deal then depends on the chairman’s ability to lead the board, especially but not exclusively in its monitoring function, and on the relationship between him and the chief executive.”

 

Source: Institute of Chartered Accountants (1995:8).

 

The Cadbury Committee felt that a separation of CEO and chair positions would be desirable in principle. Yet, according to Charkham (1994:267-268), the Committee “. . . stopped short of making a firm recommendation because it felt that it would be excessively prescriptive to rule out having a concentration of power under any circumstances.” As such, the committee did not insist on a total separation of the chair and CEO roles. The Hampel committee also did not require the separation of the roles of chairman and CEO, although the committee prefers the separation of roles to the combination of these board roles.

According to Hampel (1998b): “There are two key tasks at the top of every public company – the running of the board and the executives responsibility for the running of the company’s business. There should be a clear division of responsibilities at the head of the company which will ensure a balance of power and authority, such that no one individual has unfettered power of decision” (Hampel, 1998b:14). This principle has resulted to the recommendation of Hampel that require corporations to publicly disclose the leadership structure of their boards. The Combined Code also requires corporations listed at the LSE to identify the chairman, the CEO and senior independent director(s) [33] in annual reports.


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