boards / Chairperon / corporate governance / non-profit / state agency / state-owned enterprise

The Role and Importance of the Board Chairperson

The successful application by the Office of the Director of Corporate Enforcement(ODCE) to the High Court for the appointment of inspectors to Independent News and Media Group (INM) included evidence on the actions of the then Chairperson of INM, Lesley Buckley (Cantillon, 2018), highlighting the important role of the board Chairperson.  So what is the role of the board Chair and why is it so important?

The Chair has three main roles: Leadership, Linkages, and Resources. The UK Corporate Governance Code states the role as “leadership of the board and ensuring its effectiveness on all aspects of its role” (FRC 2016, sec.A.3). Duties  associated with this part of the role include: setting the agenda, ensuring sufficient time for discussion, facilitating contributions by non-executive directors, ensuring directors get accurate, timely and clear information, leading board evaluations and implementing the results  (FRC 2016, sec.A.3). As leader of the board, the Chair ensures its effectiveness playing a key role in ensuring effective board processes (FRC 2016; ICGN 2014; Solomon 2013).   This leadership role also has a collaborative aspect to it with research indicating that an overly dominating or powerful Chair can undermine the board as the more the Chair is involved in board discussion, the less other board members contribute  (Bezemer, Nicholson, & Pugliese, 2018).   A useful comparison is to the conductor of an orchestra, in that no matter how good the individual players, it is the conductor who must bring them together, lead and highlight their individual prowess against the full orchestral production  (Cadbury, 2002).

The Chair’s role of managing information puts the Chair in direct contact with the Executive Directors and CEO on an ongoing basis, and there may not be agreement with them on what is the necessary information for the board.  For example, the CEO has incentives to “capture” the board to retain his position, and is thus incentivised to supply information reflecting positively on his performance (Adams & Ferreira, 2009). Chairing thus requires a person with the characteristics to counter this managerial power.  To support the Chair in this role the Code recommends that at least once a year the Chairperson has meetings with the non-executives without the executives’ present, addressing these agency issues (FRC 2016).  CEO-Chairperson duality, that is combining the roles of CEO and Chairperson has been a focus of research, with governance codes generally discouraging role duality  (FRC, 2016; Solomon, 2013). For further discussion on CEO-Chairperson duality see my earlier post   Chairperson-CEO Duality

In addition to linking with management, the other part of the Chairs linkage role is to ensure effective communication with shareholders and other stakeholders (FRC 2016, sec.A.3).   The importance of shareholders and stakeholders access to the board is further highlighted by the Code’s recommendation for a Senior Independent Director, to give a second avenue of engagement for shareholders  (FRC, 2016). Of course not all shareholders are equal, larger shareholders have additional rights, however, it is important to remember a director’s and thus a Chairperson’s duty is to the company, and consequently the shareholders collectively.  This is the basis for the requirement of Chairperson independence, which includes independence from the company e.g. not a former employer, or representing a single shareholder (FRC 2016, sec.B.1).  Thus, in this role the Chair also needs the characteristics and skills to counter a demanding shareholder or stakeholder.

Finally, board Chairs can provide important resources including advice and counsel, legitimacy, information linkages, and preferential access to external commitments and support, to their CEOs, other top managers, and the organisation.   In turn, who the board Chair is and the individual’s ability (or lack thereof) to provide these resources may have a significant impact on firm performance.

Of course, departures from best practice and the Code’s guidance do occur, frequently for understandable, clearly articulated and accepted reasons.  However, it is a wise investor, stakeholder or board member who remembers the underlying rational for the best practice guidance and monitors the Chairperson to ensure that the Chairperson continues to fulfil the spirit of the guidance as the ability of the Chair to perform these roles may have a significant impact on firm performance, with one study finding that  separate board Chairs explained nine percent of the variance in firm performance (Withers & Fitza, 2017).

Board Chairs are recognised for these additional responsibilities frequently reflected in higher board fees for the Chair than the other non-executive directors in for-profit and state sectors. For example, the Chairperson in INM earned €165,000 in fees in 2017, with the other directors receiving under €55,000 (INM, 2017 p.80&85), and in the Irish Aviation Authority, an Irish state company, the Chair earned €22,000, versus the other directors who each earned €13,000 in directors fees (IAA, 2017, p.42). Non-profits directors are frequently unpaid, however, effective non-profit Chairs also take on extra duties to the other directors which contributes to the organisations success, for example, UK research in the healthcare sector found that Chairs of “low performing‟ healthcare organisations dedicated approximately a third of the time dedicated by Chairs of “high performers‟ outside board meetings (Kane, Clark, & Rivenson, 2009).

The Chairpersons role is a key pivotal role for the board and the company requiring a range of skills and characteristics.  However, it is also the full boards responsibility to ensure the appointment of an appropriate Chairperson and to monitor their effectiveness in their role.

References

Adams, R. B., & Ferreira, D. (2009). Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94(2), 291–309.

Bezemer, P.-J., Nicholson, G., & Pugliese, A. (2018). The influence of board chairs on director engagement: A case-based exploration of boardroom decision-making. Corporate Governance: An International Review, 26(3), 219–234.

Cadbury, A. (2002). Corporate governance and chairmanship: A personal view.

Cantillon (2018, September 8) INM has more to lose than DCC did from appointment of inspectors. Retrieved September 17, 2018 from https://www.irishtimes.com

FRC. (2016). The UK Corporate Governance Code Financial Reporting Council. London.

Independent News & Media Group (2017). Annual Report. Dublin, Ireland

Irish Aviation Authority (2017). Annual Report. Dublin, Ireland

Kane, N. M., Clark, J. R., & Rivenson, H. L. (2009). The internal processes and behavioral dynamics of hospital boards: An exploration of differences between high-and low-performing hospitals. Health Care Management Review, 34(1), 80–91.

Solomon, J. (2013). Corporate governance and accountability (Fourth Edi). John Wiley & Sons, Ltd.

Withers, M. C., & Fitza, M. A. (2017). Do board chairs matter? The influence of board chairs on firm performance. Strategic Management Journal, 38(6), 1343–1355.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s