Business

Wednesday October 21, 2009

Should chairman and CEO share the same hat?

Plain Speaking - By Yap Leng Kuen


IT is indeed true that the move to separate chairman and CEO is by no means a guarantee that everything will go well following that.

In the article “Someone to watch over them – One hat enough for (almost) any chief executive,’’ that appeared in The Economist over the weekend, the Schumpeter column wrote that companies needed to devote as much thought to the chemistry between the boss and the chairman as they do to getting the structure right.

True, the separation of roles is just one of the mechanisms that companies use to build in some form of corporate governance structures.

Nevertheless, it is a useful and dynamic move that should be implemented by all companies.

The article points out that in the US, about 55% of Standard & Poor’s top 1,500 companies combine the two jobs, and cites efforts by the Norges Bank Investment Management to persuade four US companies – Harris Corp, Parker Hannifin, Cardinal Health Inc and Chlorox – to separate these two posts when they next appoint chief executives.

“Splitting the two jobs (though) is commonplace in Canada, Australia and much of continental Europe,’’ the article said.

However, the global financial crisis has caught up with many large US banking groups, serving as a strong reminder of the need not just for financial discipline but also proper checks and balances in their lines of authority.

The trend is also changing in Malaysia although there are still companies where the two top positions are shared under the same hat.

Besides Petroliam Nasional Bhd (Petronas), this is predominant among companies with a strong entrepreneur background.

Genting Bhd has Tan Sri Lim Kok Thay as chairman and CEO; however, the board composition is varied with no other family presence apart from Lim.

According to Genting’s annual report, its board is mindful of that “dual role’’, however, it viewed that there was a sufficiently experienced and independent-minded board to provide the sufficient check and balance. Of Genting’s eight directors, half are independent.

As far as the Malaysian Code on Corporate Governance (March 2000) is concerned, “there should be a clearly accepted division of responsibilities at the head of the company which will ensure a balance of power and authority such that no one individual had unfettered powers of decision.”

“Where the roles are combined, there should be a strong independent element on the board and a decision to combine the roles of chairman and chief executive should be publicly explained,’’ according to the code.

Another trend among the top companies on Bursa Malaysia is the reduction in the number of executive directors and the increase in the number of independent directors.

Of Sime Darby Bhd’s 12 directors, 11 are non-executive, including the chairman.

The only executive director is the CEO while six are independent.

Sime’s annual report refers to a “distinct and clear division of responsibility between chairman and president and group CEO to ensure balance of power and authority.’’

CIMB Group Holdings Bhd has two executive and five independent directors out of its 10 directors.

Of Tenaga Nasional Bhd’s 11 directors, five are independent while only one (the CEO) is an executive director.

The ratio of non-independent to independent in these top companies is mostly 1:1 while boards with a ratio of 2:1 are seen to be “out of step’’ nowadays.

l Senior business editor Yap Leng Kuen wishes to highlight that companies with excellent results such as Petronas, and a few others of potential conglomerate stature, would do even better to enhance their corporate governance structure to be in line with new trends and meet greater challenges.

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