Posted by By Nick Sturge
Sir Stuart Rose incurred the wrath of Marks & Spencer shareholders last year when he appointed himself executive chairman, combining the roles of chairman and chief executive. This year he has appointed a new chief executive, with he staying on as non-exec chairman.
In that time, the M&S share price has doubled. So was that the right strategy for the company, ignoring established best practice and combining the CEO and chairman roles?
The Combined Code of Corporate Governance derives from the reports of Cadbury, Greenbury, Higgs and Hampel – all industry veterans who, using the wisdom of experience, have laid out principals of best practice for listed companies. Whilst not the law, it is a requirement of the London Stock Exchange that companies listed should comply with the Code or explain why they don’t comply.
Major corporate scandals, like Maxwell and Enron, and more recently the dotcom crash have triggered these and other reports but there is value in all companies – large, small, listed, unlisted – looking at the principles of good governance as set out in the Code.
I have written previously about the value that non-executive directors can bring to a business, but there is little point in taking on an NED and then not to use them, or to let their position be comprised by lack of independence or by poor management of the board.
The two key roles on the board, are the CEO (or MD) and Chairman.
The Chairman leads the board of directors and manages the board’s business. The CEO has responsibility to manage the company day to day, lead the senior management and employees and deliver the operating performance of the business.
The notion that the Chairman leads the company is wrong – he or she leads the board, and the CEO leads the company.
Many chairmen, like Sir Stuart, do combine their role with that of the CEO – some perhaps enjoying the kudos that the title of ‘chairman’ has while actually spending the bulk of their time on the CEO role. This can be confusing for the other directors – and inefficient for the board as a whole.
You can see why you should not combine the roles (concentration of power and workload, for example) but I think it is better to look at the value to be gained by separating them.
It is hard enough for an executive director to switch between executing the day-to-day and then on the board, setting corporate strategy and monitoring performance. The board must shape the destiny of the business, ensure its ongoing proper performance and safeguard its interests and reputation. These responsibilities are clearly separate from any that individual directors may have as managers or, indeed, as shareholders.
Similarly, leading the board and leading the company are two very different things.
A good CEO should be able to operate far more effectively if they have a good (non-executive) chairman to get the most out of the board and deal with some of the issues that the CEO could well do without – such as communicating with shareholders, chairing board sub-committees, setting the board agendas, time allocation for board discussions, inducting new and developing existing directors and evaluating the performance of individual directors and the board as a whole.
The opportunity for the chairman to help the CEO be more effective and in helping all the executive directors manage the director/manager split effectively is significant.
The 2009 Directors Rewards survey, carried out by Croner Reward in association with the IoD, states that 31% of non-executive directors are working unpaid, while the average fee paid to a non-executive director in a medium-sized company is £18,500.
You would expect to pay a chairman more than a non-exec as it can be a tough job and I am not suggesting that you can hire any non-exec and not to expect to pay a fee. It does suggest, however, that if you can find the right chairman to manage your board, they should be rewarded appropriately – but there is likely to be flexibility in the amount and structure of the fee paid, depending on the stage of your business. That said, don’t compromise on the quality and suitability of your chairman, just to save a few thousand pounds – it’s not worth it.
Going back to M&S. The board ignored best practice but delivered a strong shareholder return as a result, and then adopted best practice when that return had been generated.
This is why principles of best practice should be just that, and not laid down by law.
Nick Sturge is the Chairman of the Bristol branch of The Institute of Directors and Centre Director of SETsquared Business Acceleration at The University of Bristol
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