What is an Executive Chairman?
Updated: Jun 18, 2020
Recently I've been asked by a number of people about CEOs who are chair of the board retiring from the CEO post to become something called an "executive chairman." Kind of confusing given they were always executives. What does this title mean, and how common is it for boards to do this?
What Does This Title Mean?
What it means is that a new CEO will be taking over for the current CEO, and the current CEO will remain on the board of directors as the chairman. In most cases, that current CEO already holds the board chair title. The reason they are now adding the word "executive" in front of "chair" is to indicate the chair of the board will be a company employee and not an "independent" director. This type of leadership succession is actually fairly common, or at least not uncommon.
Why Do Boards Do This?
The reason usually given is that the board wants the outgoing CEO to stay for a limited period of time to ensure a smooth transition to the new CEO. Typically, it's 6-12 months, often with the end date coinciding with the end of the calendar year (e.g., Ginny Rometty at IBM) or the next annual shareholders meeting when directors are elected/re-elected.
There's not an established standard, but anything more than a year raises questions about why this overlap period has to be so long and what level of confidence the board really has in the new CEO they just chose. Bob Iger's plan stay on as chairman of Disney's board for another 22 months would be seen as excessive by most corporate governance experts and an indicator that he'll still have a lot of influence (especially during a crisis) and maybe even come back as CEO if Disney's board loses confidence in Iger's current successor before the end of 2021.
In some of these cases, the former CEO wants to get out of there immediately (no one likes being a "lame duck"), but the board insists that s/he stay for at least a little while longer, either for optics of a smooth transition or because they are insecure about all of that person's institutional knowledge walking out the door so quickly.
An Appointment for Life?
Sometimes, the company will not disclose an end date for the former CEO's executive chair stint (e.g., Marillyn Hewson at Lockheed Martin, Ajay Banga at MasterCard). In those cases, critics will say it's a red flag that the former CEO is not really giving up power and will continue to set the direction of the company for the foreseeable future. The more cynical ones will suspect that the outgoing CEO is trying to cling to power and has persuaded the board that they cannot lose his or her experience and knowledge, even though everyone wants him or her to move on.
The case of John Legere at T-Mobile is a bit different. He'll be giving up the CEO role and will stay on the board as a director, but not as executive chairman. However, Legere never was chairman of T-Mobile's board, so elevating him to that status would raise questions. (On the other hand, Banga will be elevated to become chairman of MasterCard's board when he wasn't before.) T-Mobile didn't indicate an end date for Legere's service as a board member, so that still raises some questions of why he needs to stay on the board that oversees his successor indefinitely, but being a regular board member as opposed to chairman is not as big a deal as far as corporate leadership goes.
In cases where the company does not announce an end date for the executive chair at the time of announcing the new CEO, you'll often see an announcement 3-9 months later about an end date. That's because it usually becomes apparent pretty quickly that there's really no need for the former CEO to stick around for much longer. S/he is not (and should not be) doing any heavy lifting or making major decisions. A lot of these former CEOs really do want to move on and get out of the way of their successors, who are oftentimes people they themselves groomed to take over.
Is It Problematic?
Based on what I've seen, moving the former chair-CEO to an executive chair position isn't really necessary, but not a huge concern, so long as it's going to be very brief and everyone knows that. It wouldn't be my first choice for mapping out a CEO succession, but it's usually a sign of a smooth, peaceful, and orderly leadership transition.
Actually, the more interesting part comes when you look at how the executive chair will be compensated for that role, but that's a subject for another day.
Tales of the Weird
One interesting permutation that was brought to my attention is Helios Technologies, which recently announced that its board tapped the company’s CFO to serve as interim president and CEO, and the current board chairman who is an outside director and not the CEO has been "transitioned from Chairman of the Board to the newly established position of Independent Executive Chairman." The board has begun a search for a permanent president and CEO. I'm guessing that adding "Executive" to the current chairman's title indicates that he'll be more involved in some of the day-to-day management than a typical independent chairman to assist the interim CEO, but won't actually be an employee, and "Independent" is also being added to emphasize that he'll still be an "independent" director under the company and NASDAQ's director independence standards. The related Form 8-K filing doesn't say anything about increasing the Independent Executive Chairman's pay, so presumably he won't be receiving anything more than he's receiving now in his plain Chairman role. That confirms he won't become a company employee. Interestingly, the press release does not use the word "Independent" while the 8-K filing does. Perhaps this is because people who read 8-K filings want to know whether there are independence consequences, while the general public doesn't care? It was clearly intentionally done this way, so there must be a reason.