2.5.7 Roles of chairman

Here, I would like to quote the Walker Review:

"In all this, the role of the chairman is paramount, calling for both exceptional board leadership skills and ability to get confidently and competently to grips with major strategie issues."1

In describing the paramount role of the chairman I will discuss the following matters below: why have a separate chairman?; his general role in leadership of the board; agenda setting and promotion of the contribution by NEDs; providing good governance, information for the board, proper evaluation; orderly succession; good relationship with the CEO; guarding reputation of the company and good representation; communication with shareholders; providing for a senior independent director (SID) and a job description of the chairman; appointment and limited period.

The basic reason for having a chairman separate from the CEO is to provide balance on the board and offset the "imperial CEO". Sir Adrian Cadbury, who gained experience of both positions over a period of many years, started the discussion and gives five good reasons for having a separate chairman:2

As mentioned earlier, the role of the chairman is not described in the Companies Act 2006. Before 1990 half of the CEOs combined the position of CEO with that of chairman. The Cadbury Code and subsequent codes as well as institutional investors have pushed for the separation of the roles and for the positions to be held by two different people. Now nearly all larger listed companies in the UK have separated these roles.

The chairman must fulfil the criteria of independence — inter alia not having been employee or CEO of the company — at the moment he is appointed, though he loses his independence as he becomes closer to the company every day. He is, on average, at the company about two days a week and has an office there. He works closely together with the CEO, the CFO, the company secretary and the deputy chairman or SID and with the other independent directors. He is not an executive director and also not an independent non-executive director. His function is to develop and maintain the board as an optimal team and to ensure that all aspects of corporate governance are performed as well as possible. These include communication within the board, timely information, induction or introduction programme, orderly succession of board members for a well balanced board, good meetings with time for discussion on strategy, and consistent communication with shareholders, analysts, financial institutions and the media. His role is complementary to that of the CEO, who runs the business.

The Higgs Review5 describes the roles of the chairman summarized as follows:

"The role of the chairman is that he leads the board, sets the agenda, provides timely information to directors and arranges for induction,6 ensures the provision of effective information to shareholders, arranges evaluation, facilitates effective contribution to board tasks by non-executive directors and ensures constructive relations between executive and non-executive directors and monitors an orderly succession of board members."

By setting the agenda and sitting at the head of the table the chairman leads and runs the board. In practice, the chairman will often set the agenda with the company secretary. He should delegate legal and compliance issues to the company secretary and the chairman should focus himself as much as possible on strategy.7

The main job of the chairman is to ensure that the board operates as an effective team.8 The meetings should have a good debate and draw out the differences in the opinions of its members, while maintaining their unity as a team. Chairmen should listen first. A telling example (see above in the history of banks) is that of Lord Alexander, chairman of Nat West, who listened to his NEDs, even when the majority disagreed with him.9 Lord Alexander was not in favour of being in the investment banking business, while the majority of the NEDs were in favour. They prevailed in the meeting. However, it later turned out that they did not succeed in pursuing that course, because their shareholders did not really support the idea and because Warburg's management preferred to join UBS. Later Nat West was taken over by the smaller RBS.

Sometimes it may seem that the chairman has become too powerful, which creates a distance between himself and the NEDs. Can the NEDs keep up with the chairman? This risk occurs when the relationship between CEO and chairman becomes too close.10 The International Underwriting Association of London Limited has commented that if a chairman spends too much time at the company he could become too dominant.11 If the chairman focuses on creating a good team and follows Sir Adrian Cadbury's advice to reach agreement through debate and argument, these risks will not occur and he will run the board properly. The chairman orchestrates, he does not talk too much, but gives others the freedom to speak.12 The chairman should regularly check informally, possibly over dinner, whether there is any unease or discontent among board members.13

The chairman should make sure that good standards of corporate governance are met,14 seeking the support of the company secretary.15 They must ensure that there are good induction programmes16 and that good and timely information is provided to the NEDs.17 The chairman should also ensure that the NEDs evaluate themselves and the executives each year.18 The SID arranges for separate meetings of NEDs to evaluate the chairman.

Succession is an important task of the board. The chairman should lead this process and, in most cases, chair the nomination committee.19

The volume of work for those who head a company is growing all the time. There is more than enough work for two at the top of a public company.20 The natural split is for the chairman to be in charge of the board and the way it functions and for the CEO to be responsible for in fact running the company. It is vital that they see their jobs as complementary and not as competing.21 There is a need for a well-defined division of labour, trust and avoidance of competition.22 The chairman should meet the CEO once a week. An important aspect of the role of the chairman is to support the CEO. He should be happy with the CEO's success. He should be the CEO's sounding board.

However, their relationship is part of a network of relationships between board members and senior executives and should not be to the detriment of those other links Their thoughts need to be openly shared with the other directors.23

In my view it is very important that the CEO and chairman share their thinking, including their dilemmas, with the other directors and not cover up any of their dilemmas or those of the other directors.

While the CEO runs the company and represents the company extemally, the chairman is also accountable for everything concerning the company.24

Chairmen usually prefer to keep a low public profile and leave their CEO in the spotlight. The focus has tended to shift from chairman to CEO.25 In times of crisis the chairman is likely to be a key player and the eyes are often on him. In practice the chairman should not be too visible at the start of external problems, such as in the case of Union Carbide's Bhopal drama or ICI's explosion at a factory in Peterborough.26

In the matter of BP's disaster in the Gulf of Mexico in 2010, the CEO was the face of the company and his US successor is as well. In one instance the negotiations with President Obama about an escrow account — the chairman of BP played an important role. It proved useful to have a second head.

However, if there is an intemal board crisis or a lack of trust in a director, the chairman should play an active role. BP had many separate sessions of NEDs. If there is lack of trust in the chairman or a dispute between the chairman and the CEO, the SID should be active and visible.27

The communication with shareholders is important and the chairman has an important role in this area.28

The annual report always contains a chairman's page, which tends to be the most read page in the UK29 because it describes the long-term strategy.

At the AGM, UK chairmen endeavour to answer questions of shareholders themselves. They make every effort to be well prepared. Sometimes they have to confer with a specialist board member or arrange for the shareholders to approach the specialist board member after the meeting.

Shareholders often write letters to the chairman marked "for the chairman's personal attention only". A good chairman is interested in all letters from shareholders and either deals with them personally or arranges for them to be answered by the person who knows most about the topic.

Outside financial analysts have started to wield considerable power. Whenever the annual or bi-annual results are published CEOs, CFOs and chairmen in the UK now meet first with the analysts and immediately thereafter with the press.30

CEOs, CFOs and chairmen meet and have contacts with larger institutional investors. The Combined Code and UK Corporate Governance Code set out the principle on which relations with institutional investors should be based: "There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place."31 The chairman should maintain sufficient contact with major shareholders to understand their issues and concems32 and he should communicate these to the whole board. He should discuss governance and strategy with major shareholders. Other NEDs should be offered the opportunity to attend some of these meetings. The SID should attend as much as possible.33 Therefore, the chairman has the role of listening to and sounding out major shareholders and passing their views on to the board.

In my view the Dutch would do well to follow the British example of listening quietly, without reacting, even by body language. On the other hand it may not go well with the Dutch practice to have a chairman discuss strategy with shareholders. Here the Dutch are closer to the US, where a chairman does not discuss strategy with shareholders.

It should be understood that many of these contacts with major shareholders are "one-on-ones" or "one-on-tens" (with a group of shareholders) and that there is the caveat that they are selective. The warring is that these meetings are usually over lunch. "These meetings came perilously close to passing price-sensitive information to selected investors."34 There are, however, two safeguards that make it less dangerous in practice. First, high level executives of the investors are more interested in longer term issues of strategy and board competence than pricesensitive short-term points. Second, they are normally willing to be included into the category of "insiders", i.e. confirrn that they will not trade or tip as long as the information is not known to all. For example, Hermes, the large UK pension fund often chooses this approach of a lock-up in accordance with the "Code of conduct in support of companies". The FSA has also issued helpful disclosure rules.35

This contact with major institutional shareholders is very important in the UK. A few years ago this was relatively easy as these major UK shareholders often jointly had a majority. Now, however, there are more foreign institutional investors and hedge funds. Contact with them is less easy. This is discussed further at 2.5.10 below.

The chairman should ensure that all of these communications are consistent.36

The senior independent director has the following roles to:

Although NEDs always have detailed 3- or 4-page contracts, it sometimes happens that a chairman does not have a job description.39 Nonetheless, it is very important for the chairman and the CEO to divide their responsibilities clearly.40

The board appoints the chairman upon the nomination by the nominations committee. The SID will play a role in this process, also of sounding out shareholders. It is advisable to appoint one, preferably two potential candidates for the position of chairman in advance on the board as NED, to find out how the candidate can get along with all board members.41 Upon appointment he should meet the independence criteria.42 See also sub-section 2.5.9 hereunder on succession.

There is a tendency to keep the period of tenure to a limited period of 6 years.43 The Walker Review proposes that chairmen should be up for re-election each year.44