The Chair-CEO relationship: cognitive conflict, crisis management and organisational performance

 How similarities and differences between the Chair and CEO of an organisation can affect that organisation’s performance.

Mind the Gap: The Age Dissimilarity between the Chair and the CEO
European Corporate Governance Institute (ECGI) and Karlsruhe Institute of Technology, August 2015

Leaders' sensemaking under crises: Emerging cognitive consensus over time within management teams
The Leadership Quarterly, June 2015

Few studies have examined how similarities and differences between the Chair and CEO of an organisation can affect that organisation’s performance. A recent study of German listed companies has found that a substantial age difference between the Chair and CEO leads to more intensive board monitoring and higher firm value during non-crisis periods, but destroys firm value during times of crisis.

The study, released as a working paper, examined a sample of 150 German firms listed on the DAX, MDAX or SDAX over the period 2005 to 2010.

It found that substantial Chair-CEO age dissimilarity had a significant positive effect on firm value during non-crisis periods (as measured by Tobin’s Q), particularly where there is a generational age gap of at least 20 years. However, value only increased for firms that “rely more heavily on monitoring”, which it identified as those “with greater free cash flows, less concentrated controls and fewer intangibles”.

The study found that substantial Chair-CEO age dissimilarity corresponded with an increased number of board meetings, which it argued indicated increased monitoring intensity.

The researchers also investigated the effect of Chair-CEO age dissimilarity on firm value and board monitoring intensity during the financial crisis. They argued that the financial crisis was likely to have reduced the emphasis upon monitoring due to an increased need for fast decision making and managerial discretion.

The study found that "during the crisis substantial chair-CEO age dissimilarity destroys firm value, consistent with the increased need for managerial discretion and fast decision making during the crisis."

DOES COGNITIVE CONFLICT ENHANCE ‘SENSE MAKING’ BY THE CHAIR AND CEO IN TIMES OF CRISIS?

The German study raises interesting questions about the Chair-CEO relationship and how it may impact on board effectiveness and organisational performance.

One qualitative study titled “Chairman and chief executive officer (CEO): that sacred and secret relationship” emphasises that “professional integrity”, “mutual trust” and a “balanced exchange of information” are the most essential attributes of the Chair-CEO dynamic in enhancing board performance.

Another qualitative study by the same researchers argued that an effective Chair-CEO relationship required balancing of two key elements: “philos” (which it defined as “social bonding” or “friendship between two people who share a mutual, trusting relationship”) and “sense making” (which it defined as “analytical convergence” or a “shared interpretative capacity towards information and events”).

A recent longitudinal study from the UK further contributes to the understanding of how “sense making” occurs amongst boards and management when an organisation is faced with a crisis. Researchers used cognitive mapping and interviews to examine the similarities and differences among the Chair, CEO and top management teams of a single organisation over an 18 month period, during which a crisis had occurred.

It found that while there are considerably divergent perspectives among directors at the beginning of a crisis, there is greater consensus about the overall objectives and strategies as a crisis develops and resolves. 

HOW CAN AUSTRALIAN BOARDS AND DIRECTORS ENHANCE CHAIR-CEO RELATIONSHIPS?

“An effective Chair-CEO relationship is essential for good governance and organisational performance”, says Rob Elliott, Executive Director of the Governance Leadership Centre. “Trust, respect and openness between them sets the tone for the entire board and organisation as a whole”.

A recent interview in the Company Director Magazine with the Chair and CEO of the Silver Chain Group provides advice on how to build a strong working relationship between board chairs and CEOs.

“Sharing the same value set is a strong fundamental for the relationship”, said Anne Skipper AM FAICD, Chair of Silver Chair Group.

Skipper emphasises the importance of mutual recognition of roles, trust, respect, open communication and consensus building as essential to a positive Chair-CEO relationship.

The AICD has also recently released its Top Tips for Directors following a Directors’ Briefing titled “In sync: the CEO and chair relationship”.

Having clear roles and responsibilities, agreed communication protocols, and clearly articulated points of contention in responsibilities were some of the key tips for boards to enhance Chair-CEO relationships.