Is there a role for the deputy chairman

Thursday, 01 November 2001

Ann-Maree Moodie photo
Ann-Maree Moodie

    Author Ann-Maree Moodie* examines the shadowy role of deputy chairmen on Australian boards

    Of the Top 100 companies in Australia, 20 percent of boards have a deputy chairman, each earning somewhere between 1.25 and 1.5 times the salary of a non-executive director. Yet it is unclear exactly what the role entails and why, therefore, the position is worth a special rate of remuneration. As a result, the position is subject to increasing scrutiny by Australian boards, their companies and their shareholders with the views of various stakeholders – including chairmen, deputy chairmen and non-executive directors – polarised on the issue. "I very seldom see the need for (a deputy chairman)," says Dick Warburton, chairman of David Jones, Caltex Australia and Goldfields Limited and a director of the Reserve Bank of Australia. "Unless there was a particular role for the deputy chairman to play, why have one?" says Ted Rofe, chairman of the Australian Shareholders' Association. "As long as the chairman is the chairman, there is really nothing for the deputy chairman to do." "The role of deputy chairman, which is in the constitution at Telstra, is an effective one, and the position is a valuable asset if it's utilised correctly," says Telstra chairman Bob Mansfield.

    David Pumphrey of executive search firm, Heidrick & Struggles, begs to differ. "There is only one position on a board that's worth having, and that's the position of the chairman," he says. According to Korn/Ferry International, only 20 percent of the Top 100 Australian public companies, (by revenue as at April, 2001), have a deputy chairman: BHP/Billiton, Telstra, Rio Tinto, Lend Lease, Commonwealth Bank, Pacific Dunlop, Brambles Industries Limited, Futuris Corporation, QBE Insurance, Leighton Holdings, Suncorp Metway, Wesfarmers, St George Bank, Goodman Fielder, BAT Australasia, AGL, Macquarie Bank, Transfield, Tabcorp Holdings and Sigma. It is understood that these companies have a deputy chairman (a position not recognised, or required by, Australian law) primarily to provide for a ready-made replacement if the chairman is absent, or has a conflict of interest which prevents him or her from chairing the meeting. "In such cases, having a deputy chairman means that there is somebody who is conscious of what is required as soon as the role devolves on them, they are conscious of the need to focus on the agenda, and they know what is required to get through the agenda in a way which brings out the best from those directors who are going to assemble," says Greg Bateman, a partner at law firm Abbott Tout and the author of the newly-published book, Company Meetings: What You Need to Know, (Butterworths).

    "Nevertheless, there is no legal distinction between the formally-appointed chair, the formally-appointed deputy chair or the person who just happens to be agreed upon by the board as somebody who should chair the meeting. Therefore the person who chairs the meeting, even on a temporary basis, (such as during the election of the chairman), has the same power as the full-time chair." A deputy chairman is also considered to be a senior director who can be a "sounding board" for the chairman and who can shoulder some of the chairman's workload, (especially on a large company board). "If I can't chair meetings, there is a format in which they can go on anyway, with (Telstra deputy chairman John Ralph), chairing them," says Bob Mansfield. "But the most valuable way in which I use the deputy chairman's role is as an 'independent bouncing board'. At times, John joins the CEO, (Dr Ziggy Switkowski), and myself in discussions in certain key areas in order for that independent view to be captured." Telstra non-executive director and newly-appointed chairman of the CSIRO, Catherine Livingstone, agrees: "I think there are times when you have to take a non-executive view as well as you have to take a 'whole board' view so I think it's important that a chairman has the ability to have that working relationship with someone on the board who is a non-executive director.

    "With a larger board it's harder to convene the whole board. If you want to have a discussion on a particular issue, having the CEO, the chairman and the deputy chairman as a sort of 'panel of three' if you like, is useful because they can work through issues and then bring them through to the board once more homework has been done on it. There are issues that need discussion at short notice when we think, 'well, how do we take this forward?', and it's more constructive if a smaller group looks at it and thinks about the mechanics and then it comes to the full board." The deputy chairman is also considered by some as a representative for the non-executive directors to the chairman, similar to the role of the "lead independent director" in the United States. "Without a deputy chairman it becomes very difficult for the non-executive directors to raise issues or deal with a poorly-performing chairman in a way that's not terribly detrimental to the interests of the company, because it ends up having all sorts of meetings behind people's backs and that kind of thing," says Diane Grady, a non-executive director on the boards of Woolworths and Lend Lease.

    "But if you have a deputy chairman whom people can go to and raise concerns with, and who can pass those concerns on, often the chairman can deal with the issues before they become too significant. But sometimes the deputy chairman is just needed to pull the other non-executive directors together and say, 'well, what do we want to do?'." Appointing a deputy chairman as part of a formal succession plan for the board is another reason for the role, but few agree that it works well. David Pumphrey says that a deputy chairman could be seen to be part of a board succession plan, but only when the changeover – and its timing – is made clear: "The major reason for having a deputy chair is usually to get somebody in the spot behind the chair to take over at some stage. This is probably a good idea for a short-term deal where perhaps the chair has only got another year or 18 months to go. Even so, this situation is fraught with danger because strategies and circumstances change and it is possible that you realise that you've got the wrong person as deputy chair."

    The ASA's Ted Rofe agrees: "If a deputy chairman is appointed as successor to the chairman, it immediately raises the question, 'well, when is he going to be (chairman)?'. Otherwise, you have a sort of 'Prince Charles situation' – when is Mummy going to move on?". The only instances where the ASA concludes that a deputy chairman could be useful are during the merger of two, similarly-sized companies where a chairman and a deputy chairman can represent the interests of both organisations. The other time is in the case of a dual listing, where the company's major offices are located in geographically distant centres, and a chairman and a deputy chairman can share the burden of travel commitments. (BHP/Billiton, with offices in Melbourne and London is a good example of this). But what role a deputy chairman plays beyond these board-specific duties is unclear, and is dependent of the individual company and the needs of the individual board. Dr John Schubert, for example, says his role as deputy chairman of the Commonwealth Bank includes standing in for the chairman when required, the most recent time being this year's CBA AGM when John Ralph was re-elected. "I'm not there to represent the non-executive directors – they can do that collectively or individually – and historically in the CBA, the deputy chairman also serves on the nominations committee," says Schubert.

    The deputy chairman of the Stockland Trust, Nick Greiner, says he has a different role, primarily being part of a "chairman's committee" comprising the chairman, the deputy chairman and the CEO as well as being a member of the remuneration committee. "I am effectively what the Americans would call a 'lead director'," says Greiner. "I'm the third member of the 'kitchen cabinet'." But those who question whether a deputy chairman is necessary say that all of these duties could be performed by any of the other directors on the board. "I don't think the deputy chair really means anything other than in some constitutions it says that the person will act in the chairman's absence and can be used in specific roles to help the chairman do things," says David Pumphrey. "Other than that, the deputy chairman doesn't really hold any more weight than any other director." As a result of views such as this, it is argued that the position of deputy chairman may be little more than a reward for loyal service to the company or the business community.

    "The position of deputy chairman is in part a way in which a long-serving director can receive a bit of public recognition for services rendered over a lengthy period of time, although I think there are other ways of doing this that have a more transparent and sensible justification" says Korn/Ferry International's Peter van de Velde. The lack of understanding about what a deputy chairman does, and therefore why they should be paid differently to other non-executive directors, is also an issue of contention. Korn/Ferry International says that a deputy chairman, on average, is paid a figure 1.25 to 1.5 times that of a non-executive director, but below that of the remuneration of the chairman. Some argue the higher rate is worth it. "Very often the deputy chairman will be a member of board committees, such as the nominations committee or the chairman's committee, and not be reimbursed for it," says John Schubert. "Likewise, there is a greater responsibility associated with being able to step in and chair meetings if it's needed. It means a greater level of preparation to be ready to do that at short notice. You basically have to be in a position where you could 'step up' if the chairman lost his voice or the plane didn't arrive in time. There are extra areas of responsibility; you do have to act as an alternate to the chair and you probably serve on other committees and spend more time (than the other directors)."

    Non-executive directors, Catherine Livingstone and Diane Grady agree: "In the experience that I have with the boards where there is a nominated deputy chairman I would say that they do put in extra time and I'm comfortable that there be financial recognition for the additional time that they spend," says Livingstone. Says Grady: "My belief is that there is a need for a deputy chair in most companies but whether they get paid more depends on whether they assume other duties on an ongoing basis. I don't think they should be paid more just (to handle) the occasional crisis. Nor should they be paid just for the title." Adds Bob Mansfield: "In the case of Telstra, I'd say the role of deputy chairman is more burdensome than that of an ordinary, non-executive director, and that's the reason why you're paying more money for it. The appointment of a deputy chairman can't just be for the sake of having a role that costs more money and doesn't add anything." Author and board commentator Henry Bosch says in his experience as a former deputy chairman he was paid "nearly twice" that of a non-executive director but felt that he didn't earn the money.

    For this reason, Bosch argues that deputy chairmen are "unimportant". "They don't do a lot of harm, but they don't do a lot of good, either," he says, but nonetheless argues that the extra money spent on a deputy chairman could be "good advertising". "The cheapest, quickest way of raising your share price is to demonstrate good governance to the institutional shareholders," he says. "And if you were on a board and you knew that a particular director was greatly favoured by the institutional shareholder community, and you brought that person on as deputy chairman and then went around the institutions saying 'look what we've done: we've made 'X' our deputy chairman', you can be quite sure that none of the institutional shareholders will know what it means, or really care terribly much, but they'll say, 'oh, that's a good thing to do', and the share price will go up a bit. "Now if you got that for $20,000 a year it would be a great deal."

    * Ann-Maree Moodie is the author of The Twenty First Century Board: Selection, Performance & Succession, available through AICD Publication Services (02) 8234 3333


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