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On February 2, 2021, Jeff Bezos announced that he would “transition to Executive Chair of the Amazon Board and Andy Jassy will become CEO.” While this change marked a major corporate governance shift for Amazon, executive board chairs have become increasingly common. According to Spencer Stuart, 15% of board chairs in the S&P 500 were designated as “executive chair” in 2021. Companies like Autodesk, Ford, Google, Iron Mountain, Occidental Petroleum, and Oracle have opted for an executive board chair in recent years.
Yet, to our surprise, few people understand what an executive board chair does, who tends to hold the position, and whether they benefit their company. To explore these questions, we identified 289 companies from the S&P 1500 index that had an executive board chair at some point between 2003 and 2017. Using data through 2020 from the BoardEx, Execucomp, Compustat, and SDC’s mergers and acquisitions databases, we compared these companies’ yearly performance with an executive chair to their performance with another type of board chair (i.e., non-executive chair or CEO-chair). To better understand this new position, we also examined the press releases of over 500 executive chair appointments by these companies. We discovered that the executive board chair has become an important board leadership innovation that has performance consequences for the organization.
A Hybrid Position
Board chairs typically have three main responsibilities: oversight, strategic advice, and board leadership. The degree of focus a chair commits to each will depend on the chair structure. A non-executive board chair, who is separate from the CEO position, performs a limited strategic role and is instead focused more on oversight and board leadership activities, such as director recruitment and board effectiveness. Conversely, a combined CEO-chair focuses on strategy development and implementation, thus playing little to no role in oversight, and a constrained role in board leadership duties. In this case, the oversight responsibilities fall to the independent directors on the board, now typically led by a lead independent director.
So, what role does an executive chair play in each of these responsibilities and what does it mean for the board and firm? To answer these questions, we examined the press releases of over 500 executive chair appointments. We found that the executive board chair is typically a former leader of the firm. In 35% of cases the executive chair was the firm’s founder (e.g., Jeff Bezos at Amazon), in 11% they were a member of the founding family (e.g., Bill Ford at Ford Motor Company), and in 40% they were the firm’s retired CEO (but not a founder or member of the founding family, e.g., Eric Schmidt at Google). Accordingly, executive board chairs hold considerable knowledge about their companies.
We also found that about 70% of press releases explicitly highlighted a focus on strategy. Corporate governance best practices typically prescribe a division between management and oversight. For that reason, companies have been moving away from a combined CEO-chair structure and toward an independent chair structure. The executive board chair position offers a middle-ground option, seeking to benefit from a chair’s strategic acumen and managerial experience while still remaining independent from management to provide effective oversight. And it is indeed effective: We found that when a company has an executive board chair, it has on average a 33% higher profitability than when it has another type of board chair.
However, having substantial oversight, strategic, and board leadership responsibilities at the same time might involve tradeoffs and blur the lines between the executive chair and CEO’s responsibilities. We found that the extent to which a company benefits from an executive board chair depends on its specific situation. Our research suggests that shareholders and boards should ask three questions before appointing an executive board chair.
1. How powerful is the CEO?
Because the executive chair is more involved in strategic decision-making, they are able to provide closer oversight of management. This can be a benefit if the board needs to more closely monitor the CEO. Research has demonstrated that, as CEOs become more powerful within their companies, their ability to make more unilateral decisions increases. While this has some stewardship benefits, it also requires greater monitoring to ensure these decisions are in the best interest of the company.
Our results demonstrate that as a CEO becomes increasingly powerful (indicated by ownership, tenure length, and compensation), the closer oversight provided by an executive chair becomes increasingly beneficial. Hence, if your company has a powerful CEO, appointing an executive chair may offer the extra oversight needed to ensure that the CEO best serves the company.
2. How complex is the organization?
When companies are more complex, they are harder to manage. Companies that are larger, more diversified, or that engage in more acquisitions, for instance, require clear lines of communication and delineation. In such a company, an executive board chair might seem a good thing.
However, an executive chair who plays a more involved role in strategy development and decision-making could pose a “too many cooks in the kitchen” danger to complex organizations, because it challenges the unity of command needed by CEOs. It may also result in tensions between the CEO and the executive chair, especially when the two disagree. Indeed, we found that the performance benefit that an executive chair offers a company diminishes in more complex organizations. Hence, when considering whether an executive chair is right for your company, consider its complexity and whether it will disrupt your CEO’s ability to be effective.
3. How demanding is board leadership?
The leadership demands of a board chair are constantly increasing. Board chairs are often responsible for director recruitment and development, board culture, diversity, equity, and inclusion (DE&I) initiatives, and overall board effectiveness. The best boards have chairs who manage these responsibilities effectively.
Because executive board chairs hold responsibilities for oversight, strategy, and board leadership, they can become overwhelmed. And because their focus is specifically on strategy, there is the danger that they neglect their board leadership duties. We found that, when a board’s leadership duties were greater (indicated by the size of the board, proportion of new directors, and proportion of busy directors – those who serve on three or more other boards of listed companies), the performance benefit of having an executive board chair diminishes. If your board requires considerable leadership duties from the chair, an executive board chair may not be the best option. In such a case, a non-executive board chair may be preferable.
Companies use the executive chair position in different ways. Some founders and family members, like Jeff Bezos, Larry Ellison, or Bill Ford, relinquish the CEO position but take on the executive chair role to remain closely involved in their companies’ strategies. Others use the executive chair position for a limited period during a CEO succession. Doing so promotes a smooth transition and the continued support of the outgoing CEO on difficult matters, such as during a major acquisition or transformation, and for onboarding the incoming CEO. We found that this is particularly beneficial. Companies that transitioned their CEOs to the executive chair position significantly outperformed those that did not. So, if your company has a successful and influential leader who will soon step down, there might be a further benefit of creating an executive board chair position.