| Sir George Adrian Hayhurst Cadbury, born into wealth built on chocolate, couldn't have asked for a sweeter gift from his countrymen on his 78th birthday. A recent survey found about 95 per cent of listed companies in the UK have separated the roles of the chairman and the chief executive, in line with the Cadbury Code, a code of Best Practices which served as a basis and inspiration for corporate governance reforms around the world. |
| Cadbury still practises what he preached. There are no longer any family members on the board of Cadbury-Schweppes and the man himself stepped down as chairman in 1989. His three children have moved into other lines of business. |
| Management consultants in the UK believe the Cadbury-recommended division of power between the chairman and the CEO has provided British companies the kinds of checks and balances that have prevented corporate scandals of the kind American companies such as Enron and Tyco have seen. |
| In the UK, about three-fourths of the chairmen are often a decade or so older than their CEOs, and this age gap seems to enhance their ability to serve as mentors. Also, the UK Combined Code (the successor to the Cadbury Code) states that a chairman should be independent at the time of appointment. As a result, more than three-fourths of the UK's largest publicly traded companies have a chairman who wasn't formerly the chief executive of the same company. |
| While it's a raging success in the UK, over 80 per cent of the US companies, however, don't seem to agree with the Cadbury formula of splitting the two roles. Many cite the example of Enron here. The CEO and the chairman's posts at Enron were in fact held by different people "" Kenneth Lay and Jeffrey Skilling "" in the months leading up to the disaster at the energy company. |
| As a result, a few companies that had initially followed the Cadbury model have gone back to the all-powerful chairman-led hierarchy. Take Hewlett Packard, for example. The company won plaudits from corporate governance activists in the US when it split the CEO and chairman's posts after Carly Fiorina was ousted as CEO and chairwoman in February 2005. However, in January this year, HP announced that CEO Mark Hurd would also become board chairman in January, replacing non-executive chairman Patricia Dunn. The reason: the board felt strongly that unifying the roles under Hurd was the most effective way of aligning the board with the company. |
| The sharp difference between the UK and US companies in their approach to the Cadbury formula on governance in the boardrooms has confused many. And there are no easy answers to what is right as there is no reliable research to support splitting or not splitting. While some management consultants embrace the notion of separating the roles of chairman and CEO, others reject the division of power. There are often contrasting views within the same consultancy firms. David Kimbell "" co-leader of executive search firm Spencer Stuart's board service practice in Europe "" for example, supports the idea of splitting the two roles. Kimbell's logic was that a non-executive chairman can act as an independent sounding board, mentor and advocate for the CEO. They can "form a dispassionate view of the CEO's performance." Kimbell's colleague in the US, Tom Neff, however, feels splitting the chairman and CEO roles is intuitively compelling, but it doesn't guarantee good governance. "What works in the UK does not necessarily work in the US," wrote Neff, who is the chairman of Spencer Stuart in the US. |
| So what's the model that India Inc should adopt? Consultants say a good idea for Indian companies would be to follow the model adopted by Hewlett Packard. While reverting back to the chairman-cum-CEO-led management, HP created a new position "" "lead independent director" "" that the company said will help the board keep the chairman's power in check. |
| It's an idea worth experimenting in India too. Although independent directors have increased in most firms, formal board leadership is far less independent, especially in companies which have an executive chairman. Spencer Stuart says the lead independent director serves as the voice of all other independent directors and acts as their focal point, thereby enhancing and clarifying the board's independence from management. |
| Giving one person the responsibility and authority to represent all the independent directors often improves the quality of communication with the CEO and the management. Many CEOs say they find it helpful to have someone unbiased with whom they can bounce ideas around. Even Sir Adrian wouldn't object to this compromise formula. |
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