The board chair and executive director in corporate governance is one of the most important lines of communication in a company. So, what is the difference between these positions?
Board Chair vs. Executive Director: is there a difference?
In some countries, legislation requires the separation of the chairman of the board of directors and the general director. However, in many companies, the functions of ownership and management are concentrated in the hands of the first person. In developed countries, there is no agreement on this issue: if in the UK in almost all companies these functions are separated, then in the USA, on the contrary, they are most often combined.
The CEO leads the company, the chairman – the board of directors and carefully monitors the CEO’s activities. If following one of its functions, it must be the chairman of the board of directors and the general director; the same person performs, then it is much more difficult for the board to critically evaluate the work of the general director and express an independent opinion on this matter. On the other hand, the chairman of the board of directors, who does not perform the functions of the CEO, is more prone to analysis and is open to discussing sensitive issues at board meetings, not least because he evaluates management proposals without prejudice. When the functions are combined, management has more opportunities to hide information from the board of directors (we are talking mainly about negative information), depriving it of the chance to have a reliable idea of business performance. And, of course, no one controls the activities of the CEO except for himself.
In addition, the chairman of the board of directors may even try to usurp the functions of the CEO. It is sometimes argued that when both functions are combined, it is easier to make decisions, especially in critical situations, and the board of directors is usually more aware of the organization’s problems.
The executive directors need to understand the difference in the positions they hold:
- in a managerial position, the executive director is responsible for operations;
- during meetings of the board of directors, the executive director moves to the strategic management level and makes decisions, abstracting from his managerial position.
To divide or not to divide?
The separation of roles certainly makes it possible to assess the actual capacity of the CEO, but this increases the danger that he will concentrate entirely on short-term goals, especially when he is encouraged to do so by the incentive system in the company. In this situation, it depends on the independent chairman of the board of directors whether the company will also consider the long-term perspective.
The division of functions between a board chair and executive director creates a structural basis for the independent operation of the board of directors. Limiting the CEO’s power can often have a very positive effect. In most developed countries, power in corporations is divided, and the experience of the United States, where too much emphasis is concentrated in the hands of the first person, can hardly be called advanced. Moreover, the division of functions will not only not confuse with the division of responsibility but, on the contrary, will establish that the main task of the board of directors is to manage in a general sense, that is, to control management and thus protect the interests of shareholders, while the function of the general director – effective operational management of the company.