Debate on Unified CEO, Chair Roles Rages on
Starbucks is the latest company to appoint one individual to both positions, prompting governance-related concerns.
Global coffee chain Starbucks’ recent leadership shake-up has reinvigorated discussions among investors as to whether the positions of CEO and chair should fall to a single person within a company.
Last week, the US-headquartered company announced it had poached Brian Niccol from fast food chain Chipotle, appointing him to the roles of both CEO and Chairman, with the aim of turning the page on a period of underperformance.
While the news increased Starbucks’ share price by over 20%, industry pundits have expressed concerns that combining the two positions could open the door to several governance-related issues.
“Ultimately, shareholders appoint the board to protect their interests through the oversight of management – the best way to execute this is through a board that is led by an independent chair,” Andrew Spurr, Stewardship Manager at data and research provider Morningstar Sustainalytics, told ESG Investor. “When the roles of chair and CEO are combined, it presents a fundamental conflict of interest, whereby the body that is responsible for overseeing management is also led by it, which may lead to decreased oversight and accountability.”
In other words – an individual can’t objectively oversee themselves, Spurr explained.
In these situations, companies typically appoint a lead independent director – but this isn’t as impactful as having an independent board chair, he added.
“We generally think that the board should be chaired by a director who should be independent on the date of appointment,” agreed Jen Sisson, CEO of the International Corporate Governance Network (ICGN).
ICGN’s Global Governance Principles recommend a clear division of responsibilities between the roles of chair of the board and CEO to avoid attributing unfettered decision-making power to any one individual.
“The ever-increasing demands made on boards under federal securities laws, national stock exchange rules and state regulations mean that the separation of the positions allows the chair to focus on management of the board matters and the CEO to focus on managing the business,” said Spurr.
One-man band
While having separate chair and CEO roles is the optimal model in most situations, companies’ individual circumstances may sometimes justify combining the two.
“It’s important to remember that board members, whether at Starbucks or any other public company, likely have a deeper awareness of the company’s strategic position, direction and needs than [others],” said Glenn Davis, Deputy Director of the US-based Council of Institutional Investors (CII).
In Starbucks’ case, the company had been under increasing pressure from the likes of activist investor Elliott Investment Management – which holds a US$2 billion stake in the company – to improve its financial performance, following a period of sluggish growth.
Recent underperformance has been driven by mass boycotts of the chain’s coffee shops since last year, following the company’s decision to take legal action against US trade union Workers United over the use of a similar name and logo. This was after the union published a post on social media expressing solidarity with the Palestinian people.
During Niccol’s tenure at Chipotle, revenue almost doubled, profits increased almost sevenfold, and stock prices rocketed by nearly 800%. Originally only appointed as CEO, Niccol was subsequently made chairman of the board in 2020.
“If a company does choose to combine the roles of CEO and chair, it’s pivotal that it is transparent with shareholders as to the reasons why,” said Davis. “[It should explain] why this model was put in place, how long it is expected to be in place, and how the lead independent director will play a substantive role in the governance of the company.”
The company structure should also be kept under regular review, with the individual responsibilities of the chair, CEO, lead independent director and committee chairs clearly defined and disclosed, ICGN’s Sisson suggested.
Pushback on the horizon?
Starbucks isn’t alone in its decision to combine the two roles. US bank Goldman Sachs recently came under pressure from shareholders on the issue, with the positions of CEO and Chairman currently both held by David Solomon. Proxy advisers Glass Lewis and Institutional Shareholder Services (ISS) recommended that investors back a shareholder resolution calling for a job split.
Similar situations exist or have existed at bank JP Morgan Chase and the world’s largest asset manager BlackRock – as well as at Boeing, WeWork, and Facebook.
The percentage of S&P 500 companies with a unified CEO and chair has nonetheless decreased over time. Last year, 43% of S&P 500 companies were operating this way, compared to 56% in 2013.
An ISS report last year highlighted a 113% increase in the number of shareholder proposals filed at Russell 3,000 companies calling for an independent board chair. Despite this hike, average shareholder support levels have remained steady over a ten year period, with a range of 29-35%.
“We will continue to see a number of shareholder proposals on the issue,” said Spurr. “These will likely continue to get strong support, because the separation of chair and CEO roles is a governance best practice that many investors have in their proxy voting and corporate governance guidelines.”
Although Starbucks’ decision will have likely raised some eyebrows among governance-focused shareholders, any future pushback from investors will likely hinge on Niccol’s success in dual-wielding these roles.
“If the new CEO continues his strong record from Chipotle at Starbucks, I’m sure most shareholders won’t be bothered about whether the chair and CEO roles are separate,” suggested Lindsey Stewart, Director of Stewardship Research and Policy at Morningstar Sustainalytics. “But, if not, some may start asking questions.”
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