The debate over whether or not to separate the roles of the Board Chair and CEO is one that continues unabated. The Dodd-Frank Act requires companies to reconsider their governance structures, including the decision taken regarding the combination or separation of the Chair and CEO, encouraging companies to adopt the latter. In other regions of the world, such as the UK and continental Europe, it is almost always the case that an independent Chair will lead the board. The UK, for example, under the direction of the Financial Reporting Council, recommends as part of the corporate governance code that the Chair of the board be independent – expecting companies to comply or explain fully why they would opt for combining the roles. In continental Europe, the separation of the ‘supervisory board’ and ‘management board’ as the dominant governance structure, largely negates the Chair/CEO combination issue.
In 2019, in the US, there were a high number of shareholder resolutions against corporate boards which retained the Chair/CEO combination, signifying the growing opposition to this governance structure. This investor action is in line with the long-term trend of these two leadership positions separating. According to ISS, the number of S&P 500 companies with a Chair/CEO combination was 46% in 2019, down from 62% a decade ago.
These averages for multisector indices indicate a longer-term trend, but what of the pharma and biotech sector? We wanted to look at the governance structures of large pharma and biotech companies. Our 2020 analysis encompassed 45 companies, all of which were commercial-stage companies with 2019 revenues and market capitalisation of more than $1bn. It includes large pharma and big biotechs from across several countries.
Examining the 45 companies, we found that 19 companies (42%) have a combined Chair/CEO structure, whereas 26 companies elected to separate these roles. As there is a higher prevalence of companies with a combined CEO/Chair structure in the US, we looked at this group of companies and found that 17 of the 26 (65%) US companies have a combined Chair/CEO structure. Among the ex-US companies, all of the boards had chosen to go for a split Chair and CEO structure.
Across all 45 companies, we found that 40% of the Chairs are independent, and depending on which governance guidance you follow to classify independence, a strong case can be made to reduce this percentage further. The issue of independence also arises for elected board Chairs who previously had a tenure as CEO. Across the 45 companies in this analysis, we found that 22% of the current Chairs had previously held the CEO office.
Given many CEOs are also the Chair, we were keen to understand the origins of the CEO appointment. Are companies selecting CEOs from the external talent market, or are they internal appointments coming by way of succession planning?
We defined the ‘internal’ appointment as a person who has been with the company for more than two years before their CEO appointment, or where they have held at least two prior positions before being appointed to CEO. Additionally, we wanted to identify the predominant weighting of the function experience of the CEOs. One argument often put forward for a Chair/CEO combination is that the complexity and strategic demands of these large R&D driven businesses are better served by a Chair/CEO with the right understanding of the science and/or clinical development.
Across all the companies we examined, 66% of companies have CEOs who have been appointed internally. Analysing the currently serving CEOs, 53% of CEOs have progressed through commercial functions, 17% scientific and 11% finance. The companies with combined Chair/CEO have mostly appointed CEOs internally (76%). From this analysis, we can see that deep scientific or medical experience is not requisite for leading these large complex R&D companies.
In our 2017 published study of 177 biotech IPOs (here), we found a correlation between the governance structure and the gender diversity of the board. It was clear from that study that companies which had chosen to separate the Chair and CEO were much more diverse than those boards which hadn’t. The data was suggestive of a particular board culture that was excluding women and could be partly attributed to the male control of the Chair/CEO axis in those companies where the roles were combined.
There were only two (2) women CEOs across the entire 45 companies in our analysis, none of which were among US companies, and only two (2) women Chairs, one of which was in the US and one in Europe. In examining the 45 companies in this analysis, we found that across all companies with a combined structure, women represent 27.7% of the directors. All companies separating the Chair and CEO roles have 28.8% women directors on their boards. When splitting these out regionally, US and ex-US, 24.4% of directors are women at US companies with a separate Chair and CEO, whereas ex-US, 34% of directors are women.
Our analysis is not aiming to make a case for or against the benefits of a combined Chair/CEO. However, understanding the data reveals opportunities to monitor and challenge these structures going forward. Institutional investors will continue to oppose boards with a combined Chair/CEO structure, but perhaps in the pharma and biotech sector, we’ll begin to see a voluntary move by companies to introduce such structures as they catch up with the wider corporate landscape.