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One of the core requirements for a U.S. corporation is that it has a board of directors that oversees business activities while protecting the interests of shareholders. A chairman, who in many cases is also the CEO, heads the board. Here are reasons why the CEO and chairman positions should be separate. 

Deciding Executive Pay

The board votes on executive pay, which allows CEOs who also serve as chairman to vote on their own compensation. Many professionals believe this is a conflict of interest and should not be permitted. Board members monitor corporate governance, which is how the CEO runs the company to meet the interests of shareholders. Again, this action can be viewed as self-serving by industry observers. 

These matters are important to shareholders who have been following the markets for decades. They’ve seen companies collapse due to mismanagement and CEOs taking more than their fair share without generating results for shareholders. Even though a board must include members who are outside of management, a chair can have a big impact on board decisions. The dual position of Chairman/CEO opens the door for abuse, which is why it’s become a growing concern in the financial world.

Addressing Abuse with Regulation 

One of the laws that tried to curb Chairman/CEO abuse was the Sarbanes-Oxley Act of 2002. This law was a response to a series of corporate giants such as Enron and WolrdCom melting down from executive abuse. One of the new rules requires that an audit committee must only use external board members. But this subgroup must still report to the chair, so this situation limits their influence of creating checks and balances in power.

Another problem with a chairman also serving as CEO is that it may discourage whistleblowers from reporting fraud. If the same person that runs the corporation also run the board, it’s possible that white collar criminals can shield themselves from internal scrutiny. 

Investors who are concerned about companies in which the chair is the same person as the CEO should look at the CEO’s salary and compare it with competitors. If the chairman/CEO is overpaid while the company is underperforming it could be an indicator of abuse. In the coming years there will likely be increased debate between corporate leaders and investors on whether or not a chairman/CEO combination allows for too much conflict of interest.