RIM and the separate CEO myth

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Appeared in the Financial Post
As part of the change in leadership at Research In Motion Ltd., the positions of CEO and board chair have been separated. Hopefully, this change was done for the right reasons. A hasty separation of the dual CEO and board chair in the face of adversity is not necessarily a wise business strategy or the best fit for any individual company.

The difficulties that face RIM prompted corporate governance advocates to press for their Holy Grail - separation of the CEO and board chair positions. Champions of good governance continue to promote this strategy for individual companies and press for this reform to be adopted as a mandatory regulatory standard, despite the lack of conclusive evidence that shareholders would benefit.

RIM's management faced sustained pressure from investors concerned about weak performance. Its disappointing tablet and smartphone sales, resulting in dismal profit projections and severely depressed share price (down roughly 75% over the past year), led major shareholders such as mutual fund Northwest & Ethical Investments and investment firm Jarislowsky Fraser Ltd. to demand the separation of RIM's current joint CEO/ board chair positions.

Co-CEO and co-board chairmen Jim Balsille and Mike Lazaridis have now been replaced by Thorsten Heins as CEO and by Barbara Stymiest as chairwoman.

A compelling theoretical case can be made that separating the roles and responsibilities in the CEO and board chair positions may improve managerial oversight, transparency and corporate governance. The primary mandate of a board of directors is to ensure the prudent behavior of management and to protect shareholder interests.

Fulfilling these responsibilities requires that the board be independent from executive management. A board chair who simultaneously serves in a managerial capacity creates a conflict of interest whereby the executive is responsible for monitoring and evaluating his own behaviour.

Nevertheless, despite the apparent advantages to be realized by separating the positions, no existing evidence suggests that a formal separation increases share prices and returns for investors. In a study published in the Yale Journal of Regulation, Roberta Romano, Yale University Law School professor, reviewed earlier research on the economic impact of splitting the CEO and board chair on U.S.-based companies. Romano found no statistically significant impact on share price or accounting income.

Writing in the Academy of Management Executive journal, Jeffrey Sonnenfeld, Yale University business professor, referred to the benefit of having a split CEO/ Board Chairman as a myth. He wrote that there is no research that has established a link between the split leadership roles and firm performance. Similarly, based on the findings of several statistical studies Michael Useem, Wharton Business School professor, noted that separating the CEO and board chair positions has no bearing on corporate financial performance.

A poorly conceived or ill-timed forced separation of the CEO and board chair positions can actually have undesirable consequences. According to a Knowledge Wharton article, Robert E. Mittelstaedt Jr., Wharton Business School vicedean, notes this practice could weaken a company's ability to devise and implement successful operating strategies. Professor Mittelstaedt Jr. further notes that separation may decrease the probability of a scandal but that doesn't mean a company will have great business results. There are cases where firms with a separate CEO and board chair were still driven into the ground by bad leadership and poor corporate governance; consider Enron and WorldCom as cases in point.

Regulators of corporate governance have quite correctly declined to make separation mandatory for public companies. The decision to split the CEO and chair roles at RIM may have been the right one if the company's culture and other individual characteristics were taken into consideration. However, it would be regrettable if the change was made on the premise that dividing the CEO and board chair is the optimal structure for all public companies and therefore best suited to ensure a turnaround at RIM with respect to sales, profitability and share value.

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