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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 costly.»

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)

Jorge 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 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: allenw@juris.law.nyu.edu

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 your comment?

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

 
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