Survival of the fittest or the last man standing

Wednesday, 01 October 2003


    The survival of chairmen and chief executives in times of increased shareholder and government scrutiny is variable and often hard to explain. Dr Michael Lawriwsky, from Terrain Capital Limited, looks some interesting research on this confused subject.

    In general, in Australia, chairmen are not out-lasting their chief executives. In widely held companies that under-perform, both chief executives and chairmen are much more likely to resign. In the case of chairmen, this may sometimes be too soon if they are to provide a stabilising influence between successive chief executives. However, in a significant group of under-performing companies, both chairmen and chief executives are surviving much longer than average.

    On February 1, 1935, at the age of 84 and less than a month prior to his death, Sir John Grice resigned from the board of the Melbourne's Metropolitan Gas Company Limited after 34 years as chairman and 44 years as a director.

    It was a great innings, and his departure was brilliantly timed, but such performances will be rare in a market obsessed by corporate governance issues.

    In view of the recent debates surrounding corporate governance, it is surprising that the question of how long a chairman should remain in the position has not been addressed systematically.

    This is in spite of the often highly emotive media reports about the resignation of chairmen in circumstances when companies are under financial pressure.

    For chief executives, the issue is much more clear cut, if the company under-performs and shareholder value is destroyed, barring extenuating circum-stances or a dominant shareholding, the chief executive is likely to go.

    What is the role of the chairman in such situations?

    The British Government commissioned Derek Higgs to report on the on the role and effectiveness of non-executive directors. A decade after the Cadbury Report, the Higgs Report reaffirmed the chairman's pivotal role in providing leadership of the company and the board, setting the agenda, establishment of a framework of values and succession planning for the rest of the board.

    OptiMum tenure

    For non-executive directors Higgs felt the optimum tenure was six years (two three-year terms). Given the central and over-arching role of chairmen, he didn't provide a view on optimum tenure, although he did recommend a series of three-year appointments for them also. Higgs examined the issue of resignation by non-executive directors as a final sanction in the event of irreconcilable differences, recommending that a "reasons for resignation" letter should be provided to the board. Yet he gave no specific guidance with respect to chairmen.

    Higgs emphasised that the foundations of an effective board rest on the establishment of a strong relationship between the chief executive and the chairman.

    In that case, it might be argued that when a chief executive resigns after poor performance, the chairman should resign as well

    However, this view ignores the role of the chairman in providing stability and acting as a bridge during difficult periods, which could involve senior management succession.

    If chairmen do provide stability for companies, it might be expected that their tenure would exceed that of chief executives.

    This proposition is tested with an investigation of board positions and financial performance in 223 listed Australian companies drawn from the Terrain Capital database.

    On average, Higgs found UK chairmen of listed companies have been in the job for seven years.

    This compares with an average of 6.4 years for Australian companies in the Terrain Capital database with a capitalisation exceeding $50 million at June 30, 2003. Australian chief executives in this group, by contrast, have been in their current job for an average of 6.8 years.

    But averages can be misleading when a few individuals have achieved double figures approaching Sir John Grice.

    Median tenures are 4.5 and five years for chairmen and chief executives respectively, which indicates that generally, chairmen are not out-lasting chief executives. But is this the case in periods of financial distress? As one would expect, the company's performance makes a big difference to tenure, for both chairmen and chief executives.

    Performance has been measured by the Jensen Index, on a risk-adjusted, capital contributions (and share buy-backs) adjusted basis, as the difference between a target total return, dividends and share price change, and the actual return earned. It measures actual performance relative to the opportunity cost of investing in a share portfolio of equivalent risk to the company. A company "creates value" by exceeding this target.

    Under-performers are defined as those displaying cumulative "shareholder value destruction" at 30 June 2001, or cumulative "shareholder value destruction" over the five years to 30 June, 2003. Eighty-five companies (38%) out of the total of 223 fell in this category.

    The individual year-by-year performance measured as the cumulative value ($ millions) of "shareholder value creation/destruction" is displayed in the accompanying table, together with the years in which the chairman, chief executive, or both chairman and chief executive resigned.

    The overall results show that median years-in-the-job for chairmen of "under-performing" companies was two, which is significantly lower than the 4.6 years for the incumbent chairmen of "shareholder value creating" companies. The corresponding figures for chief executives were two years in "shareholder value destructive" companies and 5.8 years in "value creating" companies.

    In addition to the 60 companies shown in the second table, there were 25 other "under-performing" companies with no change in the chairman or chief executive.

    Most of these companies either have a dominant owner-manager, such as the Seven Network, have created significant shareholder value in the past, like CSL, or are in the process of major restructuring, such as Fosters, under existing leadership.

    In these companies, the median tenure of chief executives is 11.9 years while the corresponding figure for chairmen is 8.4 years. Moreover, in "under-performing" companies where there have been no recent changes at the top, chief executives are out-lasting their chairmen by a median difference of 3.5 years.

    A closer analysis of the "under-performers" reveals that in 60% of cases the chairman resigned only after a new chief executive had been appointed.

    In these companies, chairmen were providing a bridge between successive leaders of the management team. In a significant number of instances, for whatever reason, this was not the case.

    Some resignations by chairmen and chief executives could have been for reasons such as retirement due to age, avoidance of perceptions of conflict of interest or simply the conclusion of a term of office. However, it would appear that company performance was the overriding factor.

    * Dr Michael Lawriwsky is a consultant at Terrain Capital Limited advising on senior management incentives. He is also an adjunct professor of finance at La Trobe University. He can be contacted at


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