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Financial Times: The outsider at the controls

By Tom Kirchmaier and Geoffrey Owen
Published: March 16 2006 02:00 | Last updated: March 16 2006 02:00
Chairmen of large British public companies are often invisible to the outside world as long as things are going well. The chief executive has a higher profile, and usually takesthe lead in dealing with the media and the City.
But when a storm blows up, as it has around Vodafone in recent weeks, the spotlight suddenly falls on the chairman – in this case Lord MacLaurin, the former Tesco boss who has been in the post since 1997 and is due to hand over to Sir John Bond, retiring chairman of HSBC, in July.
Lord MacLaurin was obliged last Sunday to issue a strong statement of support for his embattled chief executive, Arun Sarin. The question now is whether the two men, acting together, can convince shareholders that the company is on the right track.
This boardroom drama, like the one at Marks and Spencer last year (which ended with the appointment of a new chairman, Lord Burns), draws attention to a distinctively British cor­porate governance structure, as yet unadopted by any other major industrial ­country. It is the requirement, laid down in the combined code which applies to all UK listed companies, that the posts of chairman and chief executive should be separate and that the chairman should be independent at the time of his or her appointment.
In most US companies the chief executive is also chairman, while in France the président-directeur généralreigns supreme.
Americans believe, with some dissenting voices, that an independent chairman from outside adds little value to the business and leads to confused responsibilities at the top.
The British view is that the objectivity and broad experience of an outsider make for a more effective board and provide a necessary balance to the power of the chief executive.
Which system is better? There is no conclusive evidence one way or the other, but, as we found in a study carried out for the Chairmen's Forum*, an association of chairmen, most British holders of the title have no doubt that the separation of roles is right. Moreover, many of those surveyed have experience of both arrangements, as the single chairman/chief executive was common in UK companies in the 1970s and 1980s.
In the old days, they argue, too much power was concentrated in a single individual. Today, with companies exposed to greater scrutiny from investors and the media, the tasks of running the board and running the company have become increasingly different from each other. One person is unlikely to have both sets of skills or sufficient time to do both jobs well.
What skills does the chairman need? Most of those interviewed felt that direct experience of the industry in which the company operates was not essential. Indeed, some felt that if the newcomer knew too much about the business – a top-class retailer, for example, moving to another retailing company – he or she would be inclined to interfere in operational decisions.
What matters more than industry knowledge is that the candidate has a solid record of corporate performance, probably as chief executive of a listed company. That was clearly the attraction for Shell, the energy group, of Jorma Ollila, the outgoing chief executive of mobile phone maker Nokia, when selecting its next chairman.
Another industry crossover is the former Renault boss, Louis Schweitzer, who now chairs the Anglo-Swedish pharmaceutical group, AstraZeneca; the fact that he is neither British nor Swedish may have boosted his appeal.
Some companies have picked former finance directors as their chairman. Philip Hampton, chairman of J Sainsbury and formerly finance director at British Steel, British Gas, British Telecom and Lloyds TSB, is a recent example. A minority of interviewees take this further, arguing that finance directors make better chairmen than chief executives because they are more analytical and less likely to want to run the business.
Former politicians and ambassadors are generally ruled out on the grounds, as one chairman put it, that “you must have people who have strong commercial instincts – people who have learnt to live or die by making money”.
Other criteria to consider when appointing new chairmen are:
*they should be young enough to serve at least two three-year terms (which means not much more than 60 years old at the time of appointment);
*they should have a re-cord of making good appointments;
*they should have served as a non-executive director in comparable companies;
*they should be sufficiently respected in the business community to attract other non-executive directors of high quality.
The newcomer's skills and those of the chief executive need to be mutually reinforcing. The two also need to be compatible in personality and style, which is difficult to predict. Because of this, many companies prefer their new chairman to come from the ranks of their existing non-executive directors. He or she will have built up an understanding of the business and a rapport with the management team.
One chairman describes his relationship with the chief executive as paternal rather than fraternal. That is not easy to achieve in companies where a long-serving, dominant chief executive is better known in the outside world, and carries more weight within the company, than an incoming chairman.
In such cases the chairman may become too passive – and, since the chairman sets the tone for the board as a whole, there is a danger that any unease an outside director might feel about the direction of the business will be stifled.
There is also the tricky question of how much weight the serving chief executive should have in the selection process. Everyone accepts that any objections from this source must be taken very seriously, since the two individuals have to work closely together.
But if the chief executive's influence is too dominant, the company could endup with a non-threatening chairman who will be inclined to defer to rather than challenge the chief executive. Not surprisingly, chief executives in companies that are looking for a new chairman look warily at candidates who are known to have fired chief executives elsewhere.
The study demonstrates an overriding need for clarity in the chairman's job description. Some chairmen have a more proactive conception of the job than others – perhaps influenced by such leaders as Sir Owen Green, under whose chairmanship BTR became one of Britain's most successful engineering groups. This version of the chairman's role is workable, but only if it is accepted and understood by the chief executive and supported by the board.
One image captures perhaps more than any other the common perception of role: the chairman as airline pilot. He may delegate the task of operating the aircraft to the first officer, but is always available to take over in an emergency and is ultimately responsible for the safety of the passengers.
The analogy may not be perfect, but it underlines the point that no chairman, whether he spends a day a fortnight or four days a week with the company, can afford for one moment to take his eye off the controls.
*”The Changing Role ofthe Chairman”, £25, is available from [email protected]
Geoffrey Owen is a senior fellow at the London School of Economics. Tom Kirchmaier is a lecturer at Manchester Business School

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