What is the case for appointing an Executive Chair?
February 24, 2023
We received an interesting question recently. A large global firm was seeking advice on the pay relationship between a full-time (executive) Chair and a separate, full time CEO. They believed that situation might be common in the UK (or more common than in some jurisdictions) and asked for our views.
Whilst this situation is not unknown in the UK, it is not widespread. To add some context, in 2020 there was only one Executive Chair appointed in the FTSE350.
Lawrence Stroll was appointed Executive Chair of Aston Martin Lagonda, having taken a major role in rescuing the company. Aston Martin’s 2021 Annual Report discloses that Mr. Stroll’s salary was £1, whist the CEO’s salary was £850k.
The board of an AIM-traded client in the oil and gas sector includes an Executive Chair, who is also the founder, and a CEO. Both receive equal annual salaries and both are eligible for annual bonus and share options.
Another client, formerly FTSE250 but transferred to AIM (the UK’s junior market) to restructure following a major reorganisation and strategy change, appointed an Executive Chair to lead a turn-round. Following consultation, shareholders approved the appointment and a significant equity award, contingent on stretching growth targets. The salaries of the Executive Chair and an Executive Director, appointed with a view to becoming the next CEO, are broadly similar.
An unlisted client, which is a major global insurance business, had been managed by an Executive Chair and a CEO for many years. Each role is clearly defined. The Executive Chair has primary responsibility for a segment of the business on which the company was initially founded (and upon which it has built a leading global reputation) whilst the CEO has responsibility for the rest of the portfolio. Each received a similar base salary. They were, in effect, joint CEOs and when we last carried out a benchmarking exercise, we benchmarked them as such.
In three of the four cases referred to above, Executive Chair and CEO receive similar base salaries (Aston Martin was a special case). Variable pay may differ depending on the targets set for each role and the level of performance achieved against those targets.
Apart from pay, the question we were asked also touches corporate governance, board structure and composition and the respective roles of executive and non-executive directors. The unitary UK board structure differentiates between executive and non-executive directors. UK corporate governance codes state that the board Chair role should be non-executive and independent, whilst the CEO role is, clearly, executive. The Chair should not also be the CEO. Institutional investors in listed companies generally oppose board structures which include both a full-time (executive) Chair and a CEO.
The UK Corporate Governance Code defines the Chair’s role as follows: “The chair leads the board and is responsible for its overall effectiveness in directing the company. They should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In addition, the chair facilitates constructive board relations and the effective contribution of all non-executive directors, and ensures that directors receive accurate, timely and clear information.”
The facts of each case will be important:
- What is the rationale for having a full-time (executive) chair and CEO?
- What is the corporate governance story? – board composition and the role of the Senior Independent NED will be critical elements of the narrative.
- Are there clearly defined roles?
- Are they equal or is there a difference in scope/value to the business?
- How does reporting work?
Investors are likely to want to hear the answers to the above and a company proposing to appoint an Executive Chair (whether to operate alone or in conjunction with a CEO or MD) might wish to get its story straight in advance of the likely push-back. Comply or explain is the foundation of UK corporate governance. As is often the case in matters of board pay, clearly thought-through reasoning and investor engagement can help to clear the path.
For more information or to discuss any aspect of this article, please contact Paul Norris.