Tuesday, January 27, 2015

Cunningham on Corporate Leadership: A Few Additional Thoughts

Lawrence Cunningham has written an interesting piece for the Wall Street Journal, The Secret Sauce of Corporate Leadership: Splitting the CEO and chairman jobs is beside the point. What’s needed is a skeptical No. 2.

Cunningham argues that measures to split the role of board chair and CEO largely miss the point because such a move, and similar moves, don't clearly lead to the desired goal.  He explains:

Research on the effects of splitting the chief and chairman roles shows that results can depend on where the split takes place: It tends to improve performance at struggling companies—but it impairs prosperous firms. Yet exact effects vary depending on the circumstances, such as whether the switch happened with the appointment of a new CEO or with the demotion of an incumbent.

The movement to split the two roles is part of corporate America’s tendency to address problems with procedural remedies such as expanding board size, adding independent directors, adopting a new code of ethics, updating firm compliance programs, and appointing a monitor to oversee it all. While such steps get attention and can improve an organization’s health, the informal norms that define a corporate culture are more powerful, and Bank of America is right to examine itself in the light of basic principles.

There is a better way to foster excellence in chief executives: Appoint a noncombative but skeptical partner as second in command. This model has been the secret sauce in outstanding corporate cultures at dozens of America’s best companies.

I have a few thoughts to add to this.  First, I agree that whether to allow a single person to hold the chair and CEO position is case dependent. I am inclined to defer to the board of directors on that decision, but if enough shareholders want the positions separate (or combined), more power to them.  

Second, I think there is a bigger issue at play here in corporate (and other group) decision making. That is, as a general matter, rules and policies should be made based on the desired goals and the long-term plans, and not based on an individual.  Thus, deciding to never allow a combined CEO and chair position because we don't want a particular person to hold the role is silly.  Just don't let that person have both roles.  Any time we create rules designed to punish (or benefit) a particular person, we often create unintended consequences that punish or benefit others in ways that were not contemplated.  

Finally, Cunningham is certainly correct when he says, "Effective corporate leaders also stress that a strong culture matters because it translates into economic gain."  That said, sometimes its seems some boards (and other entities and institutions seeking leaders) believe a strong culture can be built overnight.  Tweaking rules and policies can sometimes help, but trying to rush that culture sometimes simply ensures mediocrity.  Just ask the New York Jets

https://lawprofessors.typepad.com/business_law/2015/01/cunningham-on-corporate-leadership-a-few-additional-thoughts.html

Corporate Governance, Corporations, Joshua P. Fershee | Permalink

Comments

You know, psychologists have often recommended as a remedy for "groupthink" that someone in the group officially be appointed Devil's Advocate - i.e., one person actually has the job to poke holes in the group consensus.

Posted by: Ann Lipton | Jan 27, 2015 9:34:32 AM

I may post on Cass Sunstein and Reid Hastie's WISER: GETTING BEYOND GROUPTHINK TO MAKE GROUPS SMARTER (2015). But for now, I will just say that it is worth reading. The book does mention appointing a devil's advocate, but says that involving someone who is naturally skeptical AND genuinely disagrees is better. They also drive home the importance of using statistics in decision making.

Posted by: Haskell Murray | Jan 27, 2015 10:09:20 AM

Thanks for this post, Josh. This debate has, of course, raged on for years. I am with you and Larry in believing that the answer is not a strict pro-or-con rule, but (rather) is case-dependent. You're also right, based on my practice experience, in noting that some boards just need to "man up" (sorry for the gendered expression!) and tell a CEO that he is not suitable or desired for the role of the board chair. That can be done professionally and courteously. And where the CEO's reaction is negative, that in-and-of-itself tells you something--probably confirming he's not the right person for both roles.

As to the comments raised so far by Ann and Haskell, I would assert that we must be careful about suggesting a formal Devil's Advocate in group decision-making without looking at the overall culture and process of decision-making--specifically, how individual inputs are incorporated and used by the board. Research on board diversity suggests that the number of diverse voices and the decision-making process also is important. Research on board diversity suggests that diverse directors who are, effectively, tokens may not impact board decision-making. It helps to have more than one "director of difference" and a process that gives effect to diverse viewpoints/inputs.

There's much more to write here. But thanks for generating the conversation. Well worth it.

Posted by: joanheminway | Jan 27, 2015 12:27:33 PM

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