The Role of the Chair – Performance and Accountability
The role – and expectations – of the Chair have changed dramatically in the last decade.
“A Chairman’s job is [now] so much more than getting meetings done by lunch” wrote The Sunday Times recently.
The transformation of the Chair role from stately figurehead (or the much looked down upon German Frühstücksdirektor) has been driven by public anger at the failure of corporate governance resulting in the Financial Crisis.
Since then, the role of the Chair has moved into the foreground and when organisations fail to perform, the Chair, as well as the CEO, is held to account.
When problems arise, shareholders, regulators, legislators and the media have little patience with attempts to narrowly define the role of the Chair. As a leading Chair stated baldly in recent Fidelio research:
“The buck stops here”
The pressure on the Chair is compounded by disruption and change. How does the Chair prepare the Board for disruption? This is a question that Fidelio raised with leading international Chairs in 2018.
Building on this research, in 2019 Fidelio will be addressing two key questions relating to the role of the Chair:
- How should the performance and success of the Chair be judged?
- And how should we understand the accountability of this role?
To help us answer these central questions, Fidelio will be interviewing leading Chairs, major stakeholders and shareholders. Our primary research continues to underpin Fidelio’s Evaluation, Development and Search assignments and also informs the Fidelio’s Chair Masterclass on 28th March 2019.
The Role of the Chair – International Nuance
The formal obligations of the Chair typically have a statutory basis. This is often light on detail, which is more forthcoming in the respective Corporate Governance Code, or relevant regulatory missive.
“The chair leads the board and is responsible for its overall effectiveness in directing the company. They should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate.”
UK Corporate Governance Code, Financial Reporting Council, 2018
And while we all have standard assumptions about the role a Chair performs, we do see differences in emphasis emerging for example between the UK’s unitary Board structure and the two-tier governance structure in Germany.
“The Supervisory Board Chair is elected by the Supervisory Board from among its members. The Chair coordinates the activities of the Supervisory Board, chairs its meetings and saveguards [sic] the matters of the Supervisory Board externally.”
German Corporate Governance Code, Deutscher Corporate Governance Kodex, 2017
This shift in nuance is still more pronounced in the US where there is no consensus that the role of the Chair requires a standalone basis.
“The board’s independent directors should decide, based upon the circumstances at the time, whether it is appropriate for the company to have separate or combined chair and CEO roles. The board should explain clearly (ordinarily in the company’s proxy statement) to shareholders why it has separated or combined the roles.”
Commonsense Principles 2.0, Commonsense Principles of Corporate Governance, 2018
The Relative Burden of Governance
Corporate Governance, including the requirements of the Chair, is typically less onerous for smaller privately held companies. For public companies, and in particular those that are highly regulated, the expectations of the Chair increase substantially and explicitly. The Chair of a Systemically Important Financial Institution, for example, could well be devoting four days a week to this Chair role and will be limited as to other Board and, in particular, Chair mandates that can be held.
And while Chairs in other sectors will not be subject to the same level of regulatory scrutiny, there is a clear direction of travel. For example, in the UK a Corporate Governance Code has been published for privately held companies of a certain size and scale.
“The chair leads the board and is responsible for its overall effectiveness, promoting open debate and facilitating constructive discussion. The chair should ensure that all directors have appropriate information and sufficient time is made available for meaningful discussion.”
Wates Corporate Governance Principles for Large Private Companies, 2018
The Wates Principles recognise the importance of large companies for the economy and the community. More broadly, these principles also reflect the societal shift in thinking about the purpose of a company – from a narrow focus on delivering value for shareholders to a model taking much greater account of a broader range of stakeholder interests. This shift in our understanding of corporate purpose and how a company adds value inevitably has implications for the role of the Chair.
Key Challenges for the Chair
To our mind the Chair in 2019 faces three major challenges:
- The sheer volume of governance, regulation and guidance for Boards both public and private has grown to be very substantial and it requires great discipline on the part of the Chair to stay on top of the detail. It also requires strong chairing skills to ensure the Board retains its long-term and strategic focus and does not become bogged down in regulation and process.
- The competing demands of stakeholders. While all stakeholders presumably want the long-term, sustainable health of the company, in practice there are many instances of conflicting stakeholder interests; frequently shareholders are accused of putting short term financial gain ahead of the longer-term interests of other stakeholders. In extremis the Chair becomes the arbiter of competing interests.
- And is if there is not already enough on the plate of the Chair, to add insult to injury, business is facing unprecedented disruption – technological, political and societal.
Sources of Disruption
Recognising the extent of the challenge, in 2018 Fidelio interviewed 25 Chairs in depth about how they prepare their Boards for disruption. They represented a number of geographies from the UK, across Continental Europe, the US and Africa. The Chairmen brought extensive Board-level experience across a broad range of sectors from automotive and pharmaceuticals to financial services, manufacturing, technology, energy and engineering to retail, real estate and not-for profit.
The Chairs interviewed identified 5 major sources of disruption:
- Technology (45%)
- Regulatory / Political Landscape (24%)
- Consumer Behaviour (14%)
- Social Norms (12%)
- Board / Executive Dynamic (5%)
Disruption might be differently interpreted: for example, at the time of our 2018 report the French Chairs saw the primary source of disruption as technology, while UK chairs were also clear that political uncertainty could be a major risk. French chairs may well have evolved their view on political risk. And political risk has not abated for UK Chairs.
It was clear, however, from our Research that the pressures and challenges facing Chairs extend beyond sector and geography. Business certainly feels under immense pressure across most major countries:
- In both the UK and the US, the political environment is very unstable.
- Across Europe, Chairs of major corporates such as ThyssenKrupp and AkzoNobel have faced the sharp focus of activists with very public pressure for the Chair to resign. In 2018, both Chairs retired/stood down.
- The arrest of Carlos Ghosn, Executive Chairman of Nissan Motor Co., Ltd., in Japan suggests a profound culture clash which raises many questions for international Board Directors in this market.
While public company Boards are very much in the public eye, Chairs of non-profit Boards are also held to a very high level of accountability. Public scrutiny can be intense and charities such as Oxfam and Kids Company have shown how little patience the public and regulators have – however well-meaning the Board – when problems are unearthed.
Some sources of disruption – such as digital – are front and centre for the Chair; others can emerge with startling rapidity, for example the #MeToo Movement. And others are perhaps still too nascent or potentially cataclysmic that they barely registered in many Chairs’ analysis of potential disruption. Climate change is at the forefront here.
Performance and Accountability
The Chair is hardly standing on firm ground and the situation is unlikely to become markedly easier in 2019. Against this backdrop, Fidelio will focus on two specific questions in 2019:
1. What does success look like for the Chair? How can the performance of the Chair best be evaluated?
Certainly, much has been written about Board Evaluation and in that context, guidance is typically also provided on Evaluation of the Chair.
“There should be a formal and rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors. The chair should consider having a regular externally facilitated board evaluation.”
UK Corporate Governance Code, Financial Reporting Council, 2018
Provision is also increasingly being made in most corporate governance codes for a Deputy Chair or Senior Independent Director to lead the process of evaluating the Chair.
“Led by the senior independent director, the non-executive directors should meet without the chair present at least annually to appraise the chair’s performance”
UK Corporate Governance Code, Financial Reporting Council, 2018
But given that it is often the Chair who initiates and mandates Evaluation, the review of the Chair does not always receive the attention it deserves.
2. And closely linked to Evaluation is the question of accountability. How can the Chair meet often demanding, but also at times conflicting, stakeholder expectations? What frameworks can the Chair adopt to navigate this complexity?
The role of the Chair is clearly no longer ceremonial. In Financial Services, for example, there is a clear accountability to the regulator and Chairs cannot simply delegate. Chair and Board-level engagement with the regulator is required.
Institutional investors are also demanding greater accountability from and access to the Chair and, even in the two-tier German Board system where German Supervisory Boards have traditionally felt legally constrained from engaging with shareholders, the latest rendition of the corporate governance code provides an explicit requirement.
“The Supervisory Board Chair should be available – within reasonable limits – to discuss Supervisory Board-related issues with investors.”
German Corporate Governance Code, Deutscher Corporate Governance Kodex, 2017
And then, under The Companies Act in the UK, the Chairman, like all directors, must promote the success of the company with regard to:
- the likely consequences of any decision in the long term,
- the interests of the company’s employees,
- the need to foster the company’s business relationships with suppliers, customers and others,
- the impact of the company’s operations on the community and the environment,
- the desirability of the company maintaining a reputation for high standards of business conduct, and
- the need to act fairly as between members of the company.
Source: Section 172, Companies Act 2006
Understanding the Challenge; Developing the Response
To (i) take stock of current demands on the Chair and (ii) unravel the, at times, conflicting interests that the Chair needs to resolve, Fidelio will once again conduct primary research in 2019 with leading Chairs but also with shareholders and stakeholders including regulators.
The findings will be published and will, of course, continue to underpin Fidelio’s Evaluation, Development and Search assignments as we support Chairs with Board effectiveness and Board composition.
In addition, in 2019 Fidelio will host a “Chair Masterclass” for recently appointed and prospective Chairs, as well as those keen to hone their skills and effectiveness as a Chair. Taking place in central London, we will be joined by Chairs internationally from both public companies and private organisations. The Masterclass will draw upon the insight of highly experienced Chairs and Board experts, as well as Fidelio’s research and the highly acclaimed “A Seat at the Table” Board learning Programme.
In the programme, we will review the statutory requirements of the Chair, as well as the expectations set out in respective corporate governance codes. We will explore how Chairs navigate when expectations of shareholders and stakeholders clash.
Chairs are tasked with leading and building the Board, reviewing strategy and ensuring CEO succession and, therefore, a major theme of the Masterclass is the governance of search, including frameworks for diversity in making best in class board appointments, as well as promoting diversity and inclusion throughout the organisation.
A Programme for men and women, Fidelio’s “Chair Masterclass” will contribute to increasing diversity among the Chairs of our leading organisations.
And clearly, performance does matter. Shareholders and stakeholders are likely to be more supportive if the company is thriving. Setting expectations – including for the Chair – is critically important within the Board but also for shareholders and stakeholders.
When Grandees No Longer Suffice
Thus, we very much agree with Patience Wheatcroft in The Sunday Times that the role of the Chair has changed beyond recognition. Grandees may well still be appointed to the role of the Chair but just being a grandee no longer suffices. When change is in air, companies do well to understand clearly how to assess the effectiveness of the Chair, and how to unravel the Chair’s accountability.
Fidelio will support Chairs through Evaluation, Development and Search in 2019. Our focus on understanding accountability and performance will be valuable tools for Chairs looking to promote the long-term future of their organisation in these times of exceptional disruption – and possibly exceptional opportunity.
If you are a Chair, or shortly to assume a Chair role and wish to learn more about Fidelio’s forthcoming “Chair Masterclass” or for further details about Fidelio’s Search, Evaluation or Development capability, please contact info@fideliopartners.com.