The arguments about separating the roles of Chief Executive Officer and chairman at publicly-traded companies have generally centred around good governance practices. The firm GMI Ratings, however, has now thrown cost considerations into the pot.
GMI Ratings examined 180 “mega-capitalization” North American companies, and found that executives who combine the CEO and chairman titles earn median compensation of just over $16-million (U.S.).
At companies that have separated the roles, however, the CEO and chairman combined earn just $11-million at the median. If the chairman is an independent director, the sum shrinks to $9.3-million.
The public can request the report here. The highest-paid independent chairman in the survey, GMI Ratings says, is Canadian National Railway’s David McLean at $800,000.
To be clear, the “G” in GMI Ratings stands for “governance”. The firm says it is an advocate of separating the roles because not doing so creates a conflict of interest.
When the CEO is also a chairman, “all the authority is vested in one individual; there are no checks and balances, and no balance of power,” wrote GMI Ratings’ Paul Hodgson and Greg Ruel in their report.
So GMI Ratings can’t help but throw their own ESG Ratings into the analysis. ESG Ratings (for “environmental, social and governance”) dock companies for things like executive-pay problems and directors who serve on too many boards.
Less than one per cent of companies with a combined chair and CEO and a market capitalization in excess of $20-billion score an ESG rating of above average, GMI Ratings says. But nearly 20 per cent of companies with separate chairman and CEO roles have an above-average ESG rating.
“While the separation of the chairman and CEO role is one of the key metrics that influences scoring, its influence is nowhere near significant enough to create a differential of this kind,” Mr. Hodgson and Mr. Ruel wrote.
At the bottom of the scale, 31.74 per cent of companies with a combined chairman and CEO score an ESG rating of “F.” Just 15.87 per cent of companies with a separate CEO and chair get the “F” rating.
To their credit, GMI Ratings includes the bottom-line result that arguably undermines the message: the companies with the combined CEO/chairman produced a one-year return of 11.65 per cent, versus 2.27 per cent for companies that have separated the roles. The advantage narrows in the three-year period, to 103.5 per cent versus 94.9 per cent.
“One possible reason is that a CEO unopposed by an independent chairman may find more freedom to make decisions in a way that immediately benefit the company,” Mr. Hodgson and Mr. Ruel wrote.
“These aren’t always the decisions, however, that leads to a successful long-term model. While returns over the last year and over the medium term of three years certainly appear to favour companies with a combined CEO and chair, the picture changes over a longer time period.”
In the five-year period, the companies with separate CEO and chairman roles triumph, with a 40.0 per cent return versus 31.3 per cent for the companies where the jobs are combined. “This could be interpreted as indicative of a leadership structure built for the long-term sustainability of the company as opposed to short-term rewards,” they say.