UK: The Art Of Successful Succession: Part 2

Last Updated: 25 April 2017
Article by Frank Curtiss

Unlikely to find favour with investors

Two governance experts debate whether CEOs should become their organisation's chairman

One of the central tenets of the UK Corporate Governance Code is the division of responsibilities, and the creation of a clear difference between the roles of chairman and chief executive. Principle A2 states: 'There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company's business. No one individual should have unfettered powers of decision.'

This is amplified in Code provision A.2.1. which says: 'The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board.'

"The separation of powers between chairman and chief executive is seen as an important safeguard of shareholder interests"

This is not new – the separation of the roles of chairman and CEO was first proposed in the original Cadbury Report of 1992 and soon took root in the UK. In contrast with some other countries, the separation of powers between chairman and chief executive, in order to avoid one all-powerful figure at the head of the company, is seen as an important safeguard of shareholder interests, and opposing the succession of a chief executive to the chairman role is regarded in a similar manner.

Research in 2012 from Booz and Company, now part of PwC's Strategy&, indicated that 29% of global CEOs go on to become chairman, but this model ranges in popularity from 69% in Japan to 15% in Europe.

Even here, anecdotal evidence is that the figure is higher in countries like France and Germany – although in the latter there is a two-year cooling-off period before members of the management board can join the company's supervisory board – and far lower in UK listed companies, where the assumption is that CEOs will step aside completely at the end of their term of office.

Exceptional circumstances

In addition to meeting the normal independence criteria, Code provision A.3.1 requires that a chief executive should only go on to be chairman of the same company in exceptional circumstances and that 'the board should consult major shareholders in advance and should set out its reasons to shareholders at the time of the appointment and in the next annual report.' Why is this important?

The rationale behind this approach is that a CEO who ascends to the chairmanship may find it difficult to relinquish the habit of power in the organisation, and this can not only inhibit his or her successor, but also be insufficiently objective, creating an environment in which the reassessment of past decisions is discouraged. This is not necessarily helpful to the succeeding CEO who may wish to do things differently.

"Permitted exceptions will be few and far between and it is important for a company not to assume just because it suits the board that investors will agree"

Of course, this not only applies to the chairman and CEO roles. Similar issues can apply wherever one individual hands over a role to another, especially if they will be the line manager for the new person in their old role, but this is exacerbated at the highest levels in an organisation.

Stepping up to chairman is acceptable in exceptional circumstances, such as the sudden loss of the chair, but will otherwise need to be justified to sceptical investors through prior consultation. Being a chairman, responsible for oversight rather than execution of the executive management, requires different skills from those of a CEO, and not all CEOs will be able to step up in that way.

Taking a step back

External investors are likely to expect the CEO to step aside, even in a private or founder-managed company. There is some track record here of CEOs transitioning to the chairman role, particularly where the CEO is a founder who wishes to step away from day-to-day operational management, perhaps for reasons of a move towards retirement.

Alternately, it may happen where the CEO feels the company has grown beyond his or her capabilities and wishes to bring in a CEO with more experience of the corporate world. Becoming chairman allows such individuals to step back, while still retaining control of the company's direction. This may suit some companies, particularly in the private equity context, but will not be appropriate for all.

In listed companies the position is far more likely to be seen as non-negotiable by investors, and not just because it is a Code requirement. Permitted exceptions will be few and far between and it is important for a company not to assume just because it suits the board to recommend a promotion that investors will agree to it. Investor consultation, as required under the Code, will be crucial. General de Gaulle is widely attributed with saying that 'graveyards are full of indispensable men' and in the same way, investors regularly meet companies who are in a 'unique situation'.

Poor planning

Although there are circumstances in which investors may approve a CEO taking over as chairman, this is usually only considered acceptable when a company is in a genuinely unusual position, for example the sudden loss of the chairman due to illness or unexpected resignation, or where the CEO's in-depth experience of the business is felt to be too valuable to lose.

"It is likely to be interpreted as evidence of poor succession planning, even where the CEO would make a great chairman for a different company"

Nevertheless, such a proposal is likely to be interpreted as evidence of poor succession planning, even where it is believed the CEO would make a great chairman for a different company. Succession planning, including succession planning for contingencies, is something investors are increasingly interested in. As Hermes EOS commented in its public report for the third quarter of 2016: 'As part of good stewardship, institutional investors have a significant role to play in holding companies to account on succession planning', which they see as a key board oversight responsibility.

Schroders

By way of example, in 2016 Schroders plc announced that its CEO of 15 years, Michael Dobson, would become chairman, arguing that the change was in the best interests of the company and its investors.

Dobson was quoted as saying that, as an investor, Schroders looked at such proposals on a case-by-case basis: 'Where this has happened in other companies, we've supported it on occasion, we've abstained on occasion, and we may have voted against on occasion, so we've taken a view which is very much tailored to the individual situation.'

Hermes reported that it had decided to recommend voting against the proposal and the senior independent director who had led the search for the new chairman, on the basis that: 'While we were supportive of the timing of the CEO succession process, the appointment of the new CEO and the commitment given to have a majority independent board, we could not justify the decision to appoint the incumbent CEO as chair and believe that a stronger succession planning process should have been in place.

'While we recognise some of the key customer, regulator and partner relationships he holds, these do not warrant a significant breach of best practice of UK corporate governance, as the chair, on appointment, should meet independence criteria'.

Schroders, of course, has a significant family investor base, which controls 47% of the company's shares and supported the proposal. Consequently, only 15% of the company's shareholders rejected the move. Hermes EOS said: 'We will continue our engagement with Schroders on its governance structure to ensure it allows for effective oversight and that the new CEO is able to act independently from the chair.'

Many investors are therefore keen that companies allow their senior executives, including their company secretaries, to be available for non-executive directorships at other companies as part of their personal development. Hermes say this 'helps to develop a pipeline of suitable candidates for companies to draw from when selecting candidates for board positions'.

Other major investors take a similar view. The message is clear – plan succession carefully and be aware that promoting the CEO to chairman is unlikely to find favour with investors other than in highly exceptional circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.