Executive Leadership and Corporate Governance (Part Six)

As noted in my previous Blog, your company is proceeding with the governance process and the Board members have elected a fellow Board member who will serve as the Board’s independent Chairperson. This marks a positive step on the road to improving your company’s governance process, as now the inherent, unresolvable conflict that exists when the owner/CEO/President is also the Board Chair has been eliminated.

So at what monetary level should this individual be compensated for the services he/she performs?

First, I believe it’s important to note and to understand that the Chairperson assignment is time consuming, complex and requires a person with strong managerial skills, including an ability to “herd cats”. The cat herding skill is necessary because it is not the case that all directors (some of whom were elected at different times and under differing circumstances or who were “elected” because an equity investment/loan agreement specified that they would be) have the same agenda/reason for being on a company’s Board. So the management of what is likely to be a very diverse group is challenging on several levels to say the least.

Second, the fact that the Chair position IS time consuming should provide enough impetus to separate that responsibility from the CEO/President. I submit that a properly functioning Chair will spend on average three weeks a month in committee meetings, meeting with the CEO and other members of executive management on matters of strategy and execution, prepping for Board meetings, attending Board meetings, following up after Board meetings and doing external research/meeting with outsiders (e. g., audit firm, law firm, etc.). If the CEO is also the Board Chair, it is a given that one or both sets of responsibilities will not be effectively discharged. There simply is not enough time available for one individual to effectively discharge the requirements of both positions, no matter how good a manager or delegator he/she might be.

Many companies that have separated the CEO and Board Chair positions have experienced a failed governance process for a number of reasons. Those reasons include not electing the right person (e. g., the CEO of another company who will not have the time available to effectively discharge the responsibilities of the Chair (they have their own battles to fight!!), or a person who does not have the requisite background/skill sets) as Chair and undue attempts at influencing the Board’s governance process by management. There is a third reason that will create problems, and likely failure to do the job right, even if the above noted negatives do not occur, and that is inadequate compensation for the Chair.

So what’s the ideal situation? I believe the Board Chair should be an individual with broad business experience at a high organizational level who has the time to commit to the process requirements of being both an independent director and independent Board Chair – so not a high profile individual who is already committing 60 – 70 hours/week to his/her own company’s needs.

And what’s the ideal compensation for such a person? I believe (remember, cash only as stock should not be part of a director’s compensation package (see my last Blog)) this is a company’s investment in an asset that should create additional shareholder value, and this individual should be regarded as one of the most important positions in the company. Therefore the Board Chair’s compensation should be targeted at 75% of the CEO’s total compensation – assuming the CEO’s compensation is at least at market rate for a company in his/her industry.

This accomplishes several objectives. First it recognizes the value of the position in a company’s “pecking order”. Second, it may encourage the CEO to consider an appropriate level of compensation for the CEO position. And, finally, it properly compensates the Chair for the amount of time required to properly discharge the functions of the position.

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