In North America, chief executive officers are most often the official leaders of the boardroom.^[2] This is due in large part to the natural advantages of their position. As CEOs, they have far greater access to current and comprehensive information about the state of their companies. In contrast, given their part-time roles and “outsider” status (in large corporations, the vast majority of directors are not employees of the board’s organization), the typical director’s knowledge about company affairs is extremely limited. Most directors are all too aware of this gap in their own understanding and therefore concede authority to the CEO. In addition, most directors see their first role as serving the CEO and their secondary role as providing oversight. Many directors are CEOs themselves, and they share in an etiquette that suggests restraint from aggressively challenging a fellow CEO or from probing too deeply into the details of someone else’s business. All of these factors encourage directors under most circumstances to defer to the CEO when it comes to leading the boardroom. As a result, the CEO usually determines the agenda for meetings and controls what information directors receive. The CEO plays a highly influential role in selecting who sits on the board and who is a member of some of the board’s committees. If not the “official leader,” the CEO is usually the de facto leader of the board. The rare times when a board feels that it must assume a leadership role typically occur during the selection of a new CEO, when a change of company ownership is underway, or when a deep crisis grips the company and the CEO’s leadership is in question.

The CEO’s authority is further strengthened by the fact that many CEOs hold the board’s chair as well. From a CEO’s vantage point, there are clear advantages to serving in this role of chairperson.^[3] First of all, it centralizes board leadership into a single individual. There is no ambiguity about who leads the board. Accountability can be pinned on one person. Second, it eliminates any possibility of a dys-functional conflict between the CEO and a board chair. Rivalries that might produce ineffectual compromises or result in drawn-out decisions simply do not occur. Third, it avoids the possibility of having two public spokespersons addressing the organization’s stakeholders. Fourth, certain efficiencies are achieved by having the most informed individual be the board chair. Otherwise, the CEO might have to expend significantly greater time and energy updating the chair on issues before every meeting. In addition, it may be far easier to recruit CEO talent given the strong preference of most CEOs to hold both roles. Many CEOs strongly believe that the CEO should be the board’s chair.

Brewing for more than a decade, however, is a growing debate over whether this unity of command on the board best serves the company’s stakeholders or principally the CEO. It essentially lacks an effective system of checks and balances. An early catalyst for the debate was a highly publicized decision in November 1992 by General Motors to end the CEO’s role as the board chair. The impetus for the change was a crisis during which General Motors had losses approaching some $7.5 billion. Company officer John Smith was appointed CEO with a mandate of running the company’s day-to-day operations, while board member John G. Smale (former chairman and CEO of Procter & Gamble Co.) was chosen as board chair. At the time, there was an enthusiastic reception for the idea among shareholder activists and a great deal of favorable publicity from the media. Some three years later, CEO Smith, however, assumed the board chair position as the crisis subsided. The model of the nonexecutive chair was discarded. In recent years, the idea has returned following the highly visible corporate debacles of companies like Enron and WorldCom. In addition, other models of boardroom leadership are gaining in popularity.

In the discussion that follows, we examine the three principal alternatives to the CEO model of boardroom leadership: the nonexecutive chairperson, the lead director, and leadership in board committees. We discuss their individual advantages, implementation challenges, and the best practices that enhance their viability.

Though the idea of a separate or nonexecutive chair has been circulating for at least a decade, only recently has it gained momentum as a practice. For example, it is estimated that only approximately 16 percent of the United States’ largest 500 firms have separate chairpersons and CEOs.^[4] That said, this statistic is an increase from approximately 6.5 percent in 1998. The slow inroads made by the practice suggest strong resistance to the idea. This, however, has not stopped governance commissions and activist pension funds from promoting the idea. In its study of board best practices, the Blue Ribbon Commission on Director Professionalism, a prestigious twenty-eight-member group created by the National Association of Corporate Directors and headed by noted governance specialist Ira Millstein, concluded that boards should consider formally designating a nonexecutive chairman or other independent board leader. In the United Kingdom, all but a handful of the largest 100 firms have a separate CEO and chairperson. Approximately three-quarters have chairpersons who are nonexecutives or who serve part time. The CEO runs the company, while the chairperson runs the board.

The main arguments in favor of a separate or nonexecutive chair have to do with enhancing the ability of the board to monitor the CEO’s performance. It is assumed that directors will feel more at ease to raise challenges to the CEO if the board is led by a fellow nonexecutive director. In addition, mutual fund managers often assume that CEOs seek first to serve themselves and secondarily the shareholders. A nonexecutive chair whose mandate is to enhance shareholder value is less likely to be compromised, or so the belief goes. Moreover, to some extent, it frees the CEO to focus on leadership of the company rather than on the time-consuming demands of leading the board.

Two professors at Indiana University’s School of Business, Catherine Daily and Dan Dalton, have looked at the research to date on whether separate CEO and board chair roles do indeed produce better performance outcomes. Examining sixty-nine studies over a 40-year period, they discovered that organizations that separate the CEO and boardroom chairperson role do not perform at a higher level than those where the roles are combined.^[5] So it is clear from this research that the presence of a nonexecutive chairperson is not sufficient in itself to affect performance.

One of the core dilemmas the researchers have argued is that in many cases the separate board chair is a former CEO of the firm, which may explain why performance in many cases does not improve. In one case with which we are familiar, the son of the company’s founder sits as nonexecutive chairman and is described under the company’s governance information as a “nonemployee” chairman. In any case, there is no independent and objective counterbalance to the CEO given that the chairperson is likely to have been the one who chose the CEO and sometimes vice versa. A CEO whose board chair is the company’s former CEO describes the dilemma:

Interestingly, the rationale for keeping former CEOs on as board chairpersons is often not based on concerns of leadership. The closest argument made vis-à-vis leadership is that the arrangement will assist the incoming CEO in transition to the new role. The thinking goes that the new CEO’s predecessor is more available as a coach who can easily share wisdom and insight into company issues by virtue of holding the seniormost board role. Oftentimes, the role is bestowed out of a desire to reward or placate the former CEO. For example, many directors see the chairperson’s role as a “reward” for years of service, especially in the case of long tenured or highly successful CEOs or company founders. It is an honorarium for their years of contribution to the organization. Just as commonly, retiring CEOs simply do not want to let go. Reflecting on his own experiences, Denys Henderson, the former chairman and CEO of Imperial Chemical Industries (ICI), captured the dilemma: “In my own case [as a former CEO who becomes the board chair], it was difficult at first to give up day-to-day control because I was still very energetic, and it was clear that further change in the organization was required. I found it a considerable challenge to move from ‘energy mode’ to ‘wisdom mode.’”^[7] In summary, when boards find themselves creating separate chair positions for former CEOs either to reward or to placate them, they will have compromised the board’s leadership.

On the other hand, a nonexecutive chair who is not the former CEO is a preferred form of board leadership. That said, it must be an individual who is highly admired by the directors themselves and who has the self-confidence and industry knowledge to take a leadership role, especially during times of trouble. The chair must also be someone who can be dedicated to following both the company and the industry closely. In addition, the nonexecutive chairperson should not hold board directorships elsewhere, given the role’s potentially high demands. Some estimate that in large, diversified companies operating under normal conditions, a nonexecutive chairperson may need to spend up to 100 days a year keeping abreast of the company.^[8] In a crisis situation, however, this could easily be the minimum number of days required. As a result, standing CEOs of other companies are not appropriate board chairs given the demands on their time. On the other hand, a recently retired outsider CEO may make an ideal chairperson.

Since the board chair works closely with the CEO, the selection process itself should involve the CEO. At the heart of this model of dual board leadership is a balancing act between a chairperson and a CEO. There needs to be strong positive chemistry between the CEO and chairperson, but at the same time the chairperson must be unafraid to challenge the CEO. In the selection process, the chemistry issue is best determined by the two individuals themselves. On the other hand, the chairperson’s ability to challenge is best determined by the directors. The best selection model is to have the board nominating committee choose from a roster of candidates after having received input from the CEO.

Another critical factor determining the success of this leadership model of the nonexecutive chairperson is to develop clear and negotiated expectations about each other’s roles from the start. Denys Henderson of ICI outlines what must happen at the very beginning of the relationship: “It’s important that the chairman and the CEO agree from the beginning what each person’s role will be. The last thing you want is a fight over turf. The agreement should be put down in writing and eventually approved by the board. But the process of understanding each other’s viewpoint is more important than the final text.”^[9]

Some of these roles of the nonexecutive chair might include the following:

Despite growing support for nonexecutive chairpersons, they are likely to continue to be a rarity. There are a number of important hurdles to be faced in adopting this form of board leadership—all of which are significant. One is the potential for heightened legal liability for the nonexecutive chair. Beyond the legal risks is, of course, the issue of time, as noted earlier. The time investment on the part of a nonemployee chair is likely to be much higher than for the average board member. At a certain point, these investments become impractical for most directors. “You cannot be active in any other company or have any other activity because this [chair position] becomes a full time job. It almost has to be someone who is retired or unemployed,” explained one director very familiar with the nonexecutive chair model. Directly related to the time challenge is the issue of information. The chairperson who is or has been the company’s CEO has a much richer database to draw upon when contemplating the firm’s issues. In contrast, a nonemployee chair’s knowledge is often similar to that of any outsider director. A former CEO who has served in the chair’s role captures the dilemma: “A nonemployee chairman is a very stressful position. You have many of the responsibilities and accountabilities [of an employee chairperson]. But you are not in the network ... not in the day-to-day things that happen. You read about them in the newspaper because you don’t expect the CEO to call you every five minutes. Things that happen that you didn’t know about you probably would have challenged if they had been brought to your attention before they happened.”

In addition, research by Jay Lorsch at the Harvard Business School and Andy Zelleke at the Wharton School compared U.S. boards with British boards, where it is standard practice to separate the chairperson and CEO roles. In the United Kingdom, most of these nonexecutive chair positions are filled by former CEOs from different companies. They devote up to a 100 days a year to their boards. They typically have an office at the company’s headquarters and are there 2to 3 days a week. In terms of responsibilities, they help determine the board’s agenda and supply information for board meetings. They chair the nominations committee and serve on the compensation and audit committees. They see themselves as the representative of the nonexecutive directors and as the principal representatives of the shareholders. What Lorsch and Zelleke discovered in their research was that the nonexecutive chair was not a panacea to solving leadership imbalances in the boardroom. For example, they found that the lines of responsibility among the chairs and the CEOs and the board are not always clear. Sometimes the chair and CEO found themselves tussling over territorial issues and in the worst cases falling into power struggles. When the nonexecutive chairpersons have strong points of view, they may find themselves directly intervening in their CEOs’ decisions. What the research showed is that a nonexecutive chair must exercise a degree of self-restraint. The chair must not fall into management of the company but rather focus attention on only leading the board. As noted earlier, the boardroom roles and responsibilities of the chair and the CEO must be very well defined beforehand. Both individuals must be able to immediately address conflicting expectations.

The final hurdle to the nonexecutive chair role is the CEO. Most CEOs consider the idea of sharing leadership on the board cumbersome and inefficient. Their bias is toward a single leader—themselves. This view is perhaps the greatest single reason why it is unlikely that many boards will adopt the leadership model of a nonexecutive chair. One recent survey confirms that even directors on large U.S. corporate boards feel similarly—that a nonexecutive chairman would make it more difficult to attract good CEO candidates. Nonetheless, for boards who find themselves in a position where a nonexecutive chair seems impractical, there are other forms of board leadership. A lead director position and/or strong committee leadership vested in outside directors can be reasonable substitutions. Next we explore these two forms of board leadership.

A more acceptable form of board leadership to many CEOs is the concept of the lead director. The popularity of this alternative form of leadership has grown dramatically. In a 2004 survey of the boards of large U.S. firms, 84 percent of the directors responding said that their board had a lead director. This compares to 36 percent in 2003.^[10] Companies such as Intel, Merrill Lynch, Microsoft, Office Depot, and Raytheon have adopted lead directors.

While the lead director does not assume the role of chairperson, he or she is in essence the directors’ representative to the CEO. The lead director is both an ombudsman and a facilitator of the governance process. The role can include preparing the agenda for board meetings to chairing meetings of the independent directors to raising controversial issues one on one with the CEO. In the case of a management crisis, the lead director is likely to take over as the board’s formal chair. The more restricted role for the lead director recognizes two realities. One, the CEO is the boardroom leader, and two, all of the directors are responsible for the governance of the corporation.

In the ideal case, the lead director is a highly respected member of the board who also serves in another leadership capacity such as chair of a board committee. The lead director should naturally be an outside director whose strength of personality and background experiences can effectively challenge those of the CEO. Similar to the nonexecutive chairperson model, however, the lead director should also have significant executive experience but should not be chosen merely on the basis of seniority. For example, sometimes boards wish to honor a longstanding member or an “elder statesperson” with a lead director position, but this criterion determines little about the individual’s ability to lead. Moreover, longstanding members may have lost a measure of their objectivity given their long-term relationships with the CEO.

It is important to draw a clear distinction that the lead director “leads” in terms of boardroom process rather than in taking a stand on various issues. An effective lead director’s role in most cases is not to be a sparring partner. The role is to ensure that the board approaches its responsibilities in a manner that guarantees the board’s independence and provides a complementary source of leadership to the CEO’s. A number of the functions that a lead director might play in this regard include:^[11]

Some of the greatest emergence of boardroom leadership in recent years has come from boardroom committees—in other words, individual committees making decisions with a high degree of independence from company executives. This has been, in part, driven by the presence of a far greater number of outside directors who sit on board committees and act in the capacity of committee chairpersons. This is reinforced by one important by-product of governance reform: board committees now choose their chairpersons, whereas in the past CEOs often hand-selected the committee chairs.

In some ways, this shift in power is not entirely surprising. CEOs rarely have the time to be active members of all of their board committees. As a result, this is one of the boardroom activities in which CEOs feel comfortable playing more of a consultative or advisory role, allowing the committees to lead themselves. Reinforcing this is the fact that the board governance movement has discouraged CEOs from playing a directive role in committees and has placed a strong emphasis on outside directors assuming key leadership roles. This is also a by-product of the corporate scandals at Enron, Tyco, and WorldCom, where senior company leaders strongly shaped the agendas and decisions of board committees.

There are, however, a number of steps that board committees should proactively undertake to ensure they not only retain their leadership but enhance it. For example, in order for outsiders to take advantage of their majority positions in committees, they often need to develop action plans and positions of their own rather than be guided by those of the CEO. Since the outside directors may not have a reason to get together independently of their board activities, it is important that their board committee activities provide them with this opportunity. Meetings held without company executives, where directors can discuss sensitive issues concerning executive succession and corporate performance, need to become a norm. These may also be the only opportunity a committee has to develop strong positions that are contrary to the stated preferences of senior management. In addition, it is critical for committees to have the ability to meet when they feel that events call for it. They must be able to call these meetings on short notice when they feel that a crisis or rapidly developing change requires it. It is also critical that board committees have a vehicle for placing issues that they identify on the board’s agenda without significant advance notice. As well, board committees must be in a position to seek outside specialists who can make objective assessments about the company’s operations, and they must be able to do this without management’s prior permission.

One clear way that committees can hold a CEO accountable is through an annual review of performance. In essence, an effective evaluation process is an act of leadership on the board’s part. Such assessments should include goals for the annual performance of the CEO as well as the systematic evaluation of how well these goals have been accomplished. Goals need to include both the personal development goals for the CEO and the organizational performance targets that the board deems as critical for the year. They need to be clear and specific as well as challenging but realistic. Timelines, wherever possible, are important. The results of this annual review should be tied to determining the CEO’s total compensation level. It is very important that the evaluation include constructive and detailed feedback to the CEO concerning the outcomes of their objectives. The evaluation process itself is best controlled by the compensation committee.

The membership of committees is critical in determining the degree of leadership that independent directors can have over the operation of the corporation. One committee that should be completely made up of outside directors is the compensation committee. Beyond the compensation committee, the committee of the board (usually a nominating or corporate governance committee) responsible for selecting new directors should also be predominantly, if not exclusively, made up of outside directors. The historical norm has been for the CEO to be a very active participant in the selection of preferred directors. The concern here is that while the CEO may not be a member of the nominating committee, the CEO may essentially select the new directors with the committee then “rubber stamping” this choice. From the standpoint of best practices in corporate governance, the nominating committee should establish specific criteria for filling any board vacancies. These criteria are then submitted to the full board for approval before a search is undertaken. While the CEO is consulted during the process, the committee makes the final judgment on nominations, which are voted upon by the full board.

There is, however, one potential problem associated with a nominating committee composed of outsiders. By placing selection in the hands of a few, these directors can profoundly shape the makeup of the board itself. This might result in problems if this group had very strong biases about “appropriate” directors. One relatively easy way to overcome this problem is to set term limits on committee memberships and to rotate all the outside directors in and out of the committee.

In conclusion, strong committee leadership is where some of the greatest progress has been made to date in terms of corporate governance practices that balance out the CEO’s leadership and authority. This is also where we can expect the progress to continue given the many hurdles facing the alternative of instituting nonexecutive chairs. By relying solely on committee leadership, however, certain important trade-offs are made. For example, leadership is splintered across a number of individuals. No single director has overall responsibility for the board and for ensuring that its range of activities is both well coordinated and meets high standards of corporate governance. Given their more narrow focus, committees can at best only shape portions of the overall agenda. Under a system reliant upon committee leadership, there may be no central ombudsman to give the full board a collective voice. All of these factors suggest that committee leadership is only a partial solution to building truly effective board leadership.

In addition to the leadership roles described in this chapter, there are several additional governance practices that may facilitate a better balance of leadership in the boardroom. The most common practice is to ensure that the majority of directors are true outsiders—in other words, they hold no positions within the company nor possess any financial ties or consulting relationships with the company. Formal governance guidelines can also play an important role. In one study by researchers Edward Lawler and David Finegold, only the adoption of formal governance guidelines proved to be significantly related to board effectiveness and leadership.^[12] Guidelines essentially provide a structure for boards to make them more effective in their decision-making and leadership dynamics.

Several other practices can help in the leadership equation. For example, there should be two or more sessions of the board held annually with only outside directors present. The CEO would not attend these meetings. These sessions can encourage directors to speak candidly among themselves without the direct influence of the CEO. Regular channels of information to the board that are independent of management need to be in place—for example, direct communication links with employees, customers, suppliers, and investors. As mentioned earlier, the CEO typically controls the quality and quantity of the information that the board receives. Board directors need to be able to access information independently should the need arise. It is also important that the board has staff and an independent budget so that it can conduct its own analysis of issues where and when it feels the need. Finally, it is critical that boards promote an environment at meetings where discussion and debate are the norm, versus formal presentations by management and rigid and packed meeting agendas.

The foundation for a balance of leadership in boardrooms is a set of governance practices that provide the basis for a strong and independent board—one that provides a healthy counterbalance to the power and influence of the CEO. From this platform of independence, directors can exercise far greater leadership. The following will be the characteristics of well-led boards of directors as we move into the twenty-first century:

By following these types of boardroom governance practices, boards can ensure that they will possess the capability for greater leadership.