What does a non-executive chairman do anyway?

(Editor’s Note: This post by Francis H. Byrd first appeared as a Governance & Proxy Review Update.)

With the introduction of Senator Schumer’s Shareholder Bill of Rights there has been a great deal of discussion surrounding the role of the Non-Executive Chairman (NEC) versus that of the CEO. Discussion of this concept in the media would lead one to believe that the role of the NEC is to serve as a supervisor of the Chief Executive. Nothing could be further from the truth. In fact, it appears that this misconception of the role is the rationale behind Senator Schumer’s bill requiring mandatory NECs for all companies. Companies will lose not only the right to make decisions about their leadership structure but would then be forced to subscribe to a flawed notion of the NEC-CEO relationship that could lead to serious problems for the board and company.

U.S. companies, who have separated the positions of chair and CEO, are usually hoping to achieve three specific and important goals: (1) allow the CEO to focus exclusively on managing the enterprise; (2) create a director leadership position with a focus on board administration and communications between the independent directors; and (3) craft a defined director leadership position, codified within the firm’s governance guidelines, possessing the procedural authority to lead the board during an unexpected or forced CEO transition. Many firms utilizing this structure provide for a recombination of the roles when the board deems it appropriate.

In these instances the NEC is likely to be a director of long tenure with experience and understanding of the company. The NEC would be likely to maintain an office at the company, and spend more time with the CEO than other board members. His/her primary function would be to insure robust communications between and amongst board committee chairs and as needed with individual directors. Under this board leadership model, the CEO is relieved of the tasks of managing the intra-board relationship and can focus more attention on the competitive and regulatory and risk challenges facing the company. Leading the full board meetings, the important executive sessions of independent directors, and involvement in board, committee and director evaluations are key elements of the NEC role.

Mentor to the CEO, not manager of the Chief Executive

A common misconception that I fear is firing the call for change, is the belief that the NEC will or should serve as a supervisor of the CEO. That the NEC, who under this faulty scenario possesses industry knowledge equal to or greater than the CEO, is the Admiral to the Chief Executive’s captain, prepared at any moment to order a change of course or trim of sail. A relationship designed to these parameters would create serious disruptions for the board and confusion in the senior management ranks as to who is in charge.

In actuality, the split roles need to be handled with care. Done right, the NEC serves as a mentor and sounding board for the CEO on issues to be presented to the board, on feedback from the executive sessions of the independent directors, and on issues facing the enterprise. The CEO looks to the NEC for feedback and counsel on the board’s concerns, whether strategic planning or risk mitigation. The relationship is more Mentor to CEO than supervisor to manager – it can’t work any other way. If a company faces an unexpected CEO transition (due to death or resignation), a board with an NEC (or strong, active Lead Director) might be better positioned to act swiftly and deftly.

Given the sensitive nature of the NEC role, the selection, ability and willingness of the director who undertakes the position and the CEO who must work within this leadership structure are all of prime importance–which is why boards need to be free to choose the leadership structu re that works best for them, and not have it mandated by Washington.